acotel 2008 annual report

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CONTENTS

ANNUAL REPORT 2008 page 1

1. DIRECTORS REPORT ON GROUP OPERATIONS page 2

1.1 Principal factors that have influenced the results for the financial year page 3

1.2 Principal events in the Groups three areas of business page 8

1.3 Results of operations page 13

1.4 Financial position and cash flow page 16

1.5 Reconciliation with the Parent Companys financial statements page 17

1.6 Sources of funds page 181.7 Research and innovation page 18

1.8 Human resources page 19

1.9 Risks and uncertainties page 21

1.10 Strengths and resources not reflected in the financial statements page 22

1.11 Intercompany and related party transactions page 231.12 Shareholdings of management and supervisory bodies, general managers

and key managers page 23

1.13 Other information page 23

1.14 Events after 31 December 2008 page 24

1.15 Outlook page 24

2. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED

31 DECEMBER 2008 page 26

2.1 Corporate officers page 27

2.2 The Group page 29

3. CONSOLIDATED FINANCIAL STATEMENTS page 30

4. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS page 36

4.1 Principal activities page 37

4.2 Accounting standards used in preparation of the financial statements page 37

4.3 Basis of presentation page 39

4.4 Consolidation policies page 394.5 Financial highlights of companies consolidated using the proportionate method page 46

4.6 Critical accounting estimates and judgements page 47

4.7 Segment information page 48

4.8 Notes to the income statement page 50

4.9 Notes to the balance sheet page 59

4.9.1 Assets page 594.9.2 Liabilities and shareholders equity page 65

4.10 Net funds page 694.11 Additional disclosures on financial instruments and financial risk management page 70

4.12 Contingencies page 73

4.13 Commitments page 73

4.14 Third-party assets held by the group page 734.15 Related party transactions page 74

4.16 Compliance with Legislative Decree no. 196/2003 page 76


ANNEXES TO THE CONSOLIDATED FINANCIAL STATEMENTS page 78

PARENT COMPANYS REPORT page 80


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5. DIRECTORS REPORT ON THE PARENT COMPANYS OPERATIONS page 81

5.1 Financial review page 82

5.2 Sources of funds page 86

5.3 Research and innovation page 86

5.4 Human resources page 87

5.5 Financial risk management page 885.6 Strengths and resources not reflected in the financial statements page 89

5.7 Intercompany and related party transactions page 89

5.8 Shareholdings of management and supervisory bodies, general managers

and key managers page 89

5.9 Shareholder structure and corporate governance page 90


5.11 Events after 31 December 2008 page 90

5.12 Outlook page 90

5.13 Proposed appropriation of net profit for the year page 91

5.14 Shareholder resolutions page 91

6. PARENT COMPANYS FINANCIAL STATEMENTS page 92

7. NOTES TO THE PARENT COMPANYS FINANCIAL STATEMENTS page 98

7.1 Corporate information page 99

7.2 Accounting standards used in preparation of the financial statements page 99

7.3 Basis of presentation page 100

7.4 Accounting policies page 101

7.5 Critical accounting estimates and judgements page 105

7.6 Notes to the income statement page 105

7.7 Notes to the balance sheet page 110

7.7.1 Assets page 110

7.7.2 Liabilities and shareholders equity page 1167.8 Net funds page 120

7.9 Additional disclosures on financial instruments and financial risk management page 121

7.10 Contingencies page 124

7.11 Commitments page 1247.12 Shareholder pacts page 124

7.13 Compliance with Legislative Decree 196/2003 page 124

7.14 Related party transactions page 124


ANNEXES TO THE PARENT COMPANYS FINANCIAL STATEMENTS page 129

ATTESTATION OF THE CONSOLIDATED AND SEPARATE FINANCIAL

STATEMENTS PURSUANT TO ART. 81-TER OF CONSOB REGULATION NO.11971 OF 14 MAY 1999 AND SUBSEQUENT AMENDMENTS AND ADDITIONS page 131

REPORT OF THE BOARD OF STATUTORY AUDITORS

TO THE GENERAL MEETING OF SHAREHOLDERS page 134

REPORT OF THE INDEPENDENT AUDITORS page 139

ESSENTIAL INFORMATION ON SUBSIDIARIES AND JOINT VENTURES page 142


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ANNUAL REPORT 2008


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DIRECTORS REPORT

ON GROUP OPERATIONS


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1.1 PRINCIPAL FACTORS THAT HAVE INFLUENCED THE RESULTSFOR THE FINANCIAL YEAR

The Acotel Group achieved significant growth in 2008, increasing revenue by 26% to 88.7 millioneuros, compared with the 70.3 million euros of the previous year.

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Revenue (m)

The main contribution in terms of revenue generation comes from the Services business (74.1

million euros), followed by Mobile Messaging Solutions (12.7 million euros) and Security Systems(1.9 million euros).

Services: 83.5%

Security Systems:

2.1%

MobileMessaging

Solutions: 14.4% Revenue growth is primarily a result of the strategy adopted in 2005, which has seen the Grouptarget its services at the Consumer segment, offering its value added mobile services to endconsumers. This strategy led to the establishment ofFlycell Inc., with its operating headquarters inNew York, and the creation of a brand of the same name, with graphics designed specifically toattract younger customers, who represent the largest market for the type of mobile services offeredby the Group.


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The Flycell brand was created entirely in-house

and is protected by copyright in around 100 countries

Flycell operates websites in 5 languages: English, Portuguese, Turkish, Spanish and Italian

Launched in the United States at the end of 2005, Flycell branded services are now also available inBrazil, Turkey, Spain and Italy (the latter two being added during 2008) and contributeapproximately 58% of the Groups total revenue.

In the Network Operator segment of the Services business, December 2008 saw renewal of thelong-term contract between Telecom Italia and Acotel S.p.A.. The new agreement, which has aduration of 4 years, grants the Group exclusive rights to manage the information services providedunder the ScripTIM by Acotel brand. These services, launched for the first time in 1997, havebuilt up an extremely loyal customer base and are the pride of the value added services supplied by

Acotel S.p.A.. Whilst introducing a number of changes to the previous commercial agreementbetween the parties, the new contract continues to be of significant strategic and financial value forthe company.


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ScripTIM services have been developed jointly by Acotel and

Telecom Italia since the middle of the1990s.

Launched commercially in 1997, they were the first information services in the world to bedelivered by SMS

The second largest contribution to the Groups growth is the result of its internationalisationstrategy for its Mobile Messaging Solutions business (referred to in previous reports as the Designof ICT equipment), which consists of the design, development and sale of the network equipmentused by mobile operators in the provision of messaging, SMS, MMS, Voice and Video services.This area of business is managed by the Dublin-basedJinny Software Ltd, whose revenues for 2008amount to 13.3 million euros, having increased 49.7% with respect to the 8.9 million euros of 2007.

Jinnys expansion has been driven by its commercial offerings aimed at customers in emerging ordeveloping countries (for example, Africa and Central America) where, thanks to the still limitedpenetration of mobile phones, extremely high rates of growth have been achieved. This success iseven more significant if the economic downturn of 2008, resulting in generally weak demand forinvestment goods, is taken into account.


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The Jinny brand continues to expand its global footprint thanks to the companys range of

innovative products and the quality of its customer services

Over 350 million mobile users communicate thanks to

the messaging platforms produced by Jinny

Without going into too much detail regarding the geographical breakdown of the Groups revenues,a look at the continental macro-areas shows that North America remains the Groups principalmarket (32.1 million euros or 36.2% of total revenue), followed by Latin America (19.7 millioneuros or 22.2% of the total). Revenues generated in Africa, which represents a new market for the

Group, amount to 5.8 million euros, marking growth of no less than 46.6% on the previous year.


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The Acotel Group has offices in 12 countries.

Employing 421 people, of which 75% are foreigners, the Acotel Group

has one of the largest international footprints of any Italian company

One of the most important events for the Group from a strategic viewpoint took place in May 2008,when the Group concluded an agreement with the banking group, Intesa Sanpaolo S.p.A., regardinga new joint initiative in the field of mobile communications and value added services. Thisagreement led to:

Intesa Sanpaolos acquisition of a 4.75% stake inAcotel at a total cost of 12.3 million euros;

Intesa Sanpaolos acquisition of a 10% interest in Noverca S.r.l., previously a wholly ownedsubsidiary ofAcotel Group, via subscription of a capital increase of 3.6 million euros. At thesame time,Acotel Group subscribed a further tranche of the same capital increase, amounting to5.6 million euros;

the establishment of a new company named Noverca Italia S.r.l., which is 66% owned byNoverca S.r.l. and 34% owned by Intesa Sanpaolo S.p.A.. Noverca S.r.l. transferred 5 millioneuros in cash and has granted the new company exclusive rights to its Internet Protocol (IP)platform for the provision of value added services in the Italian market, whilst Intesa SanpaoloS.p.A. injected 13.3 million euros in cash.

From a commercial viewpoint, the most significant transaction is the establishment ofNovercaItalia S.r.l., which will act as a Mobile Virtual Network Operator (MVNO) in Italy and offerconsumers and business customers a vast range of value added mobile telecommunications services.These will include mobile payments and mobile banking, the latter jointly developed with Intesa

Sanpaolo. Noverca Italia will distribute SIM cards to its customers and use Telecom ItaliasGSM/GPRS and UMTS/HSPDA mobile networks, in accordance with a contract signed in 2008.


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As in the previous year, B2C operations once again proved to be the most important in terms ofrevenues, generating 52 million euros out of total service revenues of 74 million euros, and thusaccounting for 69.8% of the total for this area of business.

The next largest contribution in revenue terms was provided by the Network Operator segment,which generated turnover of 18 million euros, equal to 24.6% of total service revenues. The othertwo areas of activity, Corporate and Media, contributed 3 million euros (4.4% of the total) and 1million euros (1.2%), respectively.

The US subsidiary, Flycell Inc., made the largest contribution to service revenues, having beenassigned worldwide responsibility for B2C operations. This company, together with its directsubsidiaries, generated revenues of 51.6 million euros, marking an increase of 45.2% on the 35.5million euros of 2007, confirming its role as the Groups biggest source of revenue. Flycell Inc.,which operates in North America and Spain, is present in Turkey and South America via its directsubsidiaries, Flycell Telekomunikasion Hizmetleri A.S., based in Istanbul, Flycell Latin America

LTDA, based in Rio de Janeiro. Its Italian operations are managed by the newly established, Rome-based Flycell Italia S.r.l..

Flycell Inc. continued with its geographical expansion strategy in 2008, launching its services inSpain and Italy in July and increasing both investment in advertising and revenues generated inBrazil and Turkey. Its US operations were also a priority, benefiting from improvements to existingservices and the addition of new features capable of boosting the loyalty of customers alreadyacquired, and from the development of new services providing new revenue sources.

Management of the B2C business by Flycell Inc. aims to maximise ARPU (Average Revenue PerUser), increase redemptions, represented by the ability to attract new customers, and reduce thechurn rate.

In terms of ARPU, the company sells its services in the form of monthly or weekly subscriptions,offering prices in line with those of its main competitors in return for high quality content. Thisensures, as far as possible, stable cash flow generation from customers.

With regard to redemptions, given that the Internet is the channel used almost exclusively by FlycellInc. to acquire new customers, the company regularly updates all its websites - www.flycell.com forthe US market, www.flycell.brfor Brazil, www.flycell.trfor Turkey, www.flycell.sp for Spain andwww.flycell.it for Italy in order to improve navigation and content search, and simplify

subscription procedures and make them more secure.

In order to reduce the churn rate, new sections have been added to the companys websites, using aweb 2.0 approach in order to give customers the chance to publish self-produced content and joincommunities.

The second largest contribution to service revenues comes from Acotel S.p.A., with turnoveramounting to 12.9 million euros in 2008, marking a reduction of approximately 8% on the 14million euros of 2007.

The Company operates in Italy in the three B2B segments described above, and generates most of

its revenues from Network Operator services provided to Telecom Italia within the scope of apartnership that began over 10 years ago.


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As noted in the Groups previous reports, above all in the previous interim half-year report, thecontract between Telecom Italia andAcotel S.p.A. expired at the end of 2008. As mentioned above,whilst introducing a number of changes to the previous commercial agreement between the parties,the new 4-year contract signed in December continues to be of significant strategic and financial

value for the company. It grants the Group exclusive rights to manage the information servicesprovided under the ScripTIM by Acotel brand, since its initial launch in 1997, has built up anextremely loyal customer base.

2008 also saw a further increase in sales of games via the iGameStore platform, developed entirelybyAcotel S.p.A. and operated by the company, in ASP mode, on behalf ofTelecom Italia.

During the year the company embarked on an intensive renewal programme for its technologyinfrastructure, implementing a project that, during 2009, will lead to the migration of all services toa new platform named NSP New Service Platform. Like the previous one, this platform will alsobe owned entirely by the Group.

Acotel S.p.A. has also continued to operate in the Media segment, working primarily with the TVbroadcaster, RAI, and in the Corporate segment, expanding on its existing commercial agreementwith the Unicredit Banca Group, on behalf of which it sent approximately 24 million SMSinformation messages during 2008.

The subsidiary,Info2cell, which is based inDubai and has an operational support centre inAmman,operates in the Middle East, primarily in the B2B segment. This company generated revenues of 4.9million euros in 2008, marking an increase of 15% on 2007.

The company, which operates in 14 countries and has agreements with 32 operators (28 in 2007),representing almost all those present in the Gulf area, is the undisputed leader in terms ofcompetitive position. A description of key events in each country during 2008 is provided below.

Jordan: over 10 new SMS services (news, entertainment and Islamic content) were createdand sold to all four operators in the country, whilst a Java application was launched forZainin order to manage two competitions held to markMothers Day andRamadan;

Palestine: the main development regarded the RBT (Ring Back Tone) services managed onbehalf ofJawwal, which registered a 50% increase in the number of subscribers. In terms ofSMS, the company managed the launch of information services for the BBC and Al-Arabia.

Syria: the company completed the interconnection with Syriatel (the countrys leading

operator), launching various MMS-based services and initiating the distribution of SMSwith Islamic content.

Iraq: during 2008 the company began operating under two new agreements, one withZainIraq and the other withItisaluna, regarding the supply of content and value added services,including Ring Back Tone.

UAE: several new services were developed for Etisalat (the Euro 2008 SMS, MMS andJava application), a contract was signed with the operator, DU, and services developed forfirms such asI, Gillette,Al AIN TVandModus.

Kuwait: 2008 saw the successful launches of the Java application for Euro 2008 developedfor the operator,Zain, and of a range of RBT services for Watanyia.

Bahrain and Qatar: SMS and MMS services focusing on Euro 2008 were provided for

Batelco and on the Gulf Cup for Qtel.


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Oman: the operator,Nawras, entered into a contract with Info2cell for the development andmanagement of its WAP portal and of other services and content.

Yemen: a competition linked to Euro 2008 was launched with the operators, MTN andYemen Mobile, whilst a content distribution service, again linked to Euro 2008, was

provided to Sabafon. Sudan: Info2cell developed several services on behalf ofZain to coincide with the African

Nations Cup 2008, and was the first service provider to launch an MMS service, namedMajalaty, for the same operator.

Tanzania: entry into this market in 2008 represents an enormous success for Info2cell,which satisfactorily launched services with Islamic content.

The subsidiary, Acotel do Brasil, which also operates in the B2B segment, generated revenues of4.6 million euros during the year, marking a reduction of 22.6% on the 5.9 million euros of 2007.The decrease reflects a fairly general slowdown in demand for services from customers of theoperators, TIM Celularand TIM Nordeste Telecomunicaoes, with which the company has long-standing commercial relationships.

The company manages a technology platform in ASP mode for the download of games, videos,information, wallpapers and ringtones, and operates as a Centro Stella, functioning as a gatewaybetween operators and a certain number of smaller service providers. At the end of 2008 over 70service providers were connected with TIM Brasil via Acotel do Brasil, including Universal,Warner, Globo, SBTandBand.

MOBILE MESSAGING SOLUTIONS

The Mobile Messaging Solutions business (previously referred to as the Design of ICTequipment), in which the subsidiary, Jinny Software Ltd, operates, continued the positive trendrecorded in 2007. The company acquired orders from 13 new customers in 2008, increasing its totalcustomer base to over 70.

Revenues for the period, after adjusting for an intercompany sale eliminated during theconsolidation process, amount to 12.7 million euros, marking growth of 44% with respect to the 8.8million euros of 2007. This reflects the positive results achieved in Africa and Central America,markets that the company had correctly predicted would be less exposed to the effects of theeconomic crisis that began in 2008.

In addition to its core activity, represented by the development and worldwide marketing ofmessaging platforms, in 2008 the company also focused on the development of mobile marketingand advertising platforms, currently considered one of the most important growth areas in themobile services market. As part of this new activity, the company has entered into partnership with

MCN, a leading Middle-eastern advertising agency and media centre.

A key project completed in 2008 regards the supply of a series of Ring Back Tone (RBT) platformsfor operators in theZain/Celtel group, in execution of a framework agreement signed at the end of2007. In addition to the importance of the commercial relationship established with theZain/Celtelgroup, this project confirms the validity ofJinnys RBT offerings, which are proving to be a great

success, above all in Middle-eastern and African markets.


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Finally, the company has strengthened its overseas presence by converting its existing offices inBrazil and Panama into local companies and opening a new office in Kenya.

SECURITY SYSTEMS

The Italian subsidiary,AEM S.p.A., which operates in this business segment, generated revenues of1.9 million euros in 2008, marking a 23% increase on the 1.5 million euros of 2007.

The company has long-standing relationships with the Bank of Italy and Telecom Italia, whichcontribute the majority of its revenues and regard both the maintenance and improvement ofexisting security systems. Within the context of relations with Telecom Italia, the company wasawarded a contract to provide maintenance for the telecommunications companys Contact Centre.The contract, worth 550 thousand euros, has a duration of five years.

Installation of the new video-surveillance system for the ACEA Group in Rome, which began in2007, was also completed. This project has been extended following the ACEA Groups decision toassign AEM responsibility for further work with a value of 230 thousand euros. This regards thedesign and production of two new electronic boards to decode the protocols used in old equipment,some of which has remained in operation, and render it compatible with the new system.

As a result of its experience in the video-surveillance sector, AEM is offering its solutions to othercustomers with similar needs to those it already serves, whilst at the same time developing newproducts for the banking sector that are expected to be released next September.


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Gross operating profit amounts to 2,343 thousand euros, representing a margin of 2.6%, while theGroup reports operating profit, after amortisation and depreciation and impairment charges on non-current assets, of 940 thousand euros (a margin of 1.1%). After income from investments,commented on below, and net finance income, pre-tax profit is 10,063 thousand euros (a margin of

11.3%). The Groups after-tax profit of 6,564 thousand euros marks a significant improvement onthe loss of 1,278 thousand euros recorded in 2007.

Revenue

In terms of business segment, 83.5% of revenue was earned from the supply of services, 14.3% wasgenerated by mobile messaging solutions and the remaining 2.2% by the design of security systems:

Turnover by business segment

(000) 2008 % 2007 %

Services 74,066 83.5% 59,968 85.3%

Mobile Messaging Solutions 12,728 14.3% 8,850 12.6%

Security Systems Design 1,904 2.2% 1,483 2.1%

Total 88,698 100% 70,301 100%

When compared with the results for 2007, turnover in all the Acotel Groups areas of businessshowed growth: Service revenues are up 23.5%, revenues from Mobile Messaging Solutions are up44%, and turnover generated by the Security Systems segment has risen 28.4%.

A breakdown of the Groups revenue by geographical segment is as follows:

Turnover by geographical segment

(000) 2008 % 2007 %

North America 32,123 36.2% 34,037 48.4%Latin Amercia 19,688 22.2% 7,756 11.0%

Italy 15,741 17.7% 15,684 22.3%

Other European countries 6,878 7.8% 1,327 1.9%

Middle East 6,872 7.8% 5,599 8.0%

Africa 5,760 6.5% 3,930 5.6%

Asia 1,636 1.8% 1,968 2.8%

88,698 100% 70,301 100%

The geographical breakdown of revenue in 2008 shows both an apparent slowdown in turnover

generated in the United States by the subsidiary, Flycell Inc.,due exclusively to the effect of thedepreciation of the dollar against the euro (turnover is up 7.5% in dollar terms), and growth in


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revenues generated in Latin America and Europe, thanks above all to the B2C activities of FlycellInc. and its direct subsidiaries, Flycell Latin America Ltda and Flycell Telekomnicasyon HizmetleriA...

Finally, revenue growth in the Middle East (up 22.7%) and Africa (up 46.6%) was achieved thanksto the commercial success of the subsidiaries,I2CandJinny Software.

Earnings

Gross operating profit of 2,343 thousand euros for the year ended 31 December 2008 is down 17%on the previous year, mainly due to the decision to accelerate the pace of expansion and entry intonew countries, which has entailed:

a substantial increase in advertising costs (up 16%), essentially with regard to the companiesthat provide B2C services in the United States, Turkey, Latin America and Italy;

increased staff costs (up 22%); increased purchases of content from external providers (up 17%), and rises in the cost of

professional consultants (up 55%) and travel expenses (up 44%).

After amortisation and depreciation of 1,401 thousand euros and impairment charges on non-currentassets of 2 thousand euros, operating profit is 940 thousand euros, compared with a profit of 1,680thousand euros for 2007.

After income from investments of 7,940 thousand euros, net finance income of 1,183 thousandeuros and taxation for the year of 3,499 thousand euros, net profit for 2008 amounts to 6,564

thousand euros, marking a significant improvement (614%) on the loss reported for 2007.

This result primarily reflects the expansion of the Groups businesses, an improvement in financeincome and the agreement between Acotel Group S.p.A. and the Intesa Sanpaolo banking group,which, among other things, has led to the recognition of income from investments in the AcotelGroups consolidated income statement. This derives from:

Intesa Sanpaolo S.p.A.s acquisition of a 10% interest inNoverca S.r.l.;

Noverca S.r.l.s transfer to the newly established Noverca Italia S.r.l. of exclusive rights touse its IP platform for the provision of value added services in the Italian market.


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1.4 FINANCIAL POSITION AND CASH FLOW

RECLASSIFIED CONSOLIDATED BALANCE SHEET

(000) 31 Dec 2008 31 Dec 2007 Increase/(Decrease) % inc./(dec.)

Non-current assets:

Property, plant and equipment 4,084 3,221 863 27%

Intangible assets 12,379 12,464 (85) (1%)

Financial assets - 2 (2) 100%

Other assets 481 273 208 76%

TOTAL NON-CURRENT ASSETS 16,944 15,960 984 6%

Net current assets:

Inventories 396 642 (246) (38%)

Trade receivables 22,220 18,620 3,600 19%

Other current assets 2,340 3,442 (1,102) (32%)

Trade payables (9,404) (9,526) 122 1%

Other current liabilities (4,319) (4,020) (299) (7%)

TOTAL NET CURRENT ASSETS 11,233 9,158 2,075 23%

STAFF TERMINATION BENEFITS AND

OTHER EMPLOYEE BENEFITS (1,146) (947) (199) (21%)

NON-CURRENT PROVISIONS (294) (318) 24 8%

NET INVESTED CAPITAL 26,737 23,853 2,884 12%

Shareholders' equity:

Share capital 1,084 1,084 - -

Reserves and retained earnings/(accumulated losse 57,522 48,469 9,053 19%

Net profit/(loss) for the year 6,564 (1,278) 7,842 614%

Minority interests 30 30 - -

TOTAL SHAREHOLDERS' EQUITY 65,200 48,305 16,895 35%

MEDIUM/LONG-TERM DEBT 101 133 (32) (24%)

Net cash and cash equivalents:

Current financial assets (18,764) (12,702) (6,062) (48%)

Cash and cash equivalents (23,439) (12,178) (11,261) (92%)

Current financial liabilities 3,639 295 3,344 1134%

(38,564) (24,585) (13,979) (57%)

NET FUNDS (38,463) (24,452) (14,011) (57%)

TOTAL SHAREHOLDERS' EQUITY AND

NET FUNDS 26,737 23,853 2,884 12%


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The Acotel Groups net invested capital at 31 December 2008 is 26,737 thousand euros, made up ofnon-current assets of 16,944 thousand euros, net current assets of 11,233 thousand euros, stafftermination benefits of 1,146 thousand euros and other non-current provisions of 294 thousandeuros.

Net invested capital is financed by shareholders equity of 65,200 thousand euros and net funds of38,463 thousand euros.

A detailed analysis of changes in the principal balance sheet items shows that:

non-current assets are 16,944 thousand euros, marking an increase of 984 thousand euroscompared to the end of the previous year, primarily due to investment in the development ofthe VoIP platform owned by the subsidiary, NovercaS.r.l., and to be used in the provision ofthe Mobile Virtual Network Operatorservices that the Group is to launch in 2009;

the changes to net current assets derive from growth in turnover, which has generated anincrease in trade receivables;

in addition to the effect of net profit for the period, consolidated shareholders equity rose as aresult of Intesa Sanpaolos acquisition of a 4.75% stake in Acotel Group via the purchase of198,075 treasury shares at a total cost of 12.3 million euros (62 euros per share); this operationgenerated an increase of 9.1 million euros in consolidated shareholders equity, after the relatedtax effect;

net funds at 31 December 2008 amount to 38,463 thousand euros, marking an increase of14,011 thousand euros on 31 December 2007, primarily due to the following transactionscarried out withIntesa SanPaolo S.p.A.:

the sale of treasury shares byAcotel Group S.p.A.;

Intesa Sanpaolo S.p.A.s acquisition of a 10% interest inNoverca S.r.l.;

the establishment of a new company named Noverca Italia S.r.l., which is 66% owned by

Noverca S.r.l. and 34% owned byIntesa Sanpaolo S.p.A..

1.5 RECONCILIATION WITH THE PARENT COMPANYS FINANCIALSTATEMENTS

Pursuant to CONSOB Resolution no. DEM/6064293 of 28 July 2006, the reconciliation betweenthe net result and shareholders equity ofAcotel Group S.p.A., and the corresponding consolidateditems is as follows:


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(migliaia di euro)Net result 2008

Shareholders' equity at

31 Dec 2008

profit / (loss) positive/(negative)

Shareholders' equity and net result reported in the Parent Company's

financial statements4,123 73,443

Effect of consolidation of Group companies 2,441 (923)

Accumulated amortisation and impairment of goodwill - (5,872)

Consolidation reserve - 909

Cash flow hedge and currency translation reserve - (2,387)

Shareholders' equity and net result for the year attributable to the Parent

Company6,564 65,170

Shareholders' equity and net result for the year attributable to minority interests-

30

Shareholders' equity and net result reported in the consolidated financial

statements6,564 65,200

1.6 SOURCES OF FUNDS

The Group reports a very strong balance sheet at the end of 2008, with net cash and cashequivalents of 38,564 thousand euros and net funds of 38,463 thousand euros.

As in the past, the Group did not resort to external sources of funding, other than to a limited extent.It is able to finance investment, above all by its foreign subsidiaries during the start-up of theirrespective businesses, from operating cash flow and its own funds.

Current financial assets not used to finance operations are invested in low-risk financialinstruments.

1.7 RESEARCH AND INNOVATION

SERVICES

Noverca S.r.l.s efforts with regard to innovation were aimed at equipping the pre-existing platform,which is already operative for VoIP (Voice over Internet Protocol) services, with all the functionsneeded to support the joint venture company,Noverca Italia S.r.l., in its role as an MVNO (MobileVirtual Network Operator). These include Intelligent Network functions and the signals using theSS7 standard necessary for the interconnection with Telecom Italia, the network operator hosting

Noverca Italia S.r.l.. Thanks to these functions the platform is in full control of customers traffic(voice, SMS, data, MMS, WAP, etc.) for both billing and quality control purposes.

In the second half of 2008Acotel Group S.p.A. began development of a new platform, dubbed NSP

(New Service Platform), which, during 2009, will replace the old infrastructure that entered serviceover 10 years ago. The NSP has been designed to ensure maximum flexibility in the configurationof services and offer additional functions with respect to those previously offered in terms of


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service quality control. The NSP will enable the companys marketing personnel to obtain keybusiness intelligence.Other Group companies also concentrated their research and development activities on improvingthe performance and functions of the platforms used in their respective markets to provide value

added services.

Its technological independence represents one of the Groups competitive advantages. Developmentand operation of the various platforms continue to be conducted by resources from within theGroup, in such a way as to guarantee ongoing increases in corporate know-how.

PRODUCTS

The research and development carried out by Jinny Software Ltd is key to the success of thecompanys products in its chosen market, which consists entirely of mobile operators. These

customers are large industrial concerns, well-known for imposing strict technical requirements onand having extremely high expectations of their suppliers. Over 30% of the companys staff areemployed at the research and development centres in Beirut and Bucharest, working on the design,production and testing of products and solutions that will subsequently form part of the commercialoffering.

During 2008 the company rolled out a number of new products and released advanced versions ofthose already on the market. In particular, the company has released a Mobile Advertising platform,which has attracted significant interest, and solutions enabling the interconnection of billingsystems used by MVNOs (Mobile Virtual Network Operators) and MVNEs (Mobile VirtualNetwork Enablers).

SECURITY SYSTEMS

As in 2007, the Groups commitment to developing new products and systems for the securitymarket saw it engaged in the study and experimentation of remote video-surveillance solutions forsmall spaces (homes, shops, small offices, etc.).

1.8 HUMAN RESOURCES

At 31 December 2008 the Group employs 421 people, compared with 350 at the end of 2007. TheGroup recruited 156 new staff during the year, whilst 85 left its employ.

The following tables show key information about the Groups staff at 31 December 2008:


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Staff by category at 31 December 2008

Category Number %

Managers 28 7%

Supervisors 62 14%

White- and blue-collar staff 331 79%Total 421 100%

Staff by geographical area at 31 December 2008

Geographical area Number %

Middle East 164 39%

Europe 151 36%

North America 65 15%

South America 32 8%

Asia 7 2%

Africa 2 -

Total 421 100%

Staff by gender at 31 December 2008

Gender Number %

Male 309 73%

Female 112 27%

Total 421 100%

Staff by age range at 31 December 2008

Age range Number %

under 25 69 16%

25-35 248 59%

35-45 78 19%

45-55 18 4%

older 8 2%

Total 421 100%

Staff by seniority at 31 December 2008

Seniority Number %

0-2 242 58%

2-5 111 26%

5-10 59 14%over 9 2%

Total 421 100%

Staff by qualification 31 December 2008

Qualification Number %

Degree 325 77%

High-school diploma 96 23%

Total 421 100%


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Continued expansion into new countries brings ongoing challenges for the management of humanresources, as well as opportunities for gaining new skills and for individual development.

The average age of the Groups staff, at just under 32, and their high level of education (with 77%

of staff having a degree or a university qualification) helps to create a youthful and dynamicenvironment, continuously open and receptive to new professional challenges, whilst also ensuringa strong ability to innovate, to be flexible and to effectively understand the market for the Groupsservices.

The Group aims to attract young staff with high potential. After a period working alongsideexperienced managers, new recruits are immediately involved in innovative projects and given thechance to put the knowledge acquired during their education to the test. This approach boosts themotivation of new staff, speeds up their integration into the organisation and facilitates the sharingof know-how.

1.9 RISKS AND UNCERTAINTIES

Credit risk

40% of total trade receivables relates to amounts due from the mobile transaction network provider,mBlox (19%), which supplies Flycell Inc. with operator connectivity in the US, and Telecom Italia(21%). At the date of publication of this report, around 22% of these receivables, amounting toapproximately 2 million euros, have yet to be collected.Group companies are not involved in significant disputes with customers.

Liquidity risk

The Group does not resort to external sources of funding, being able to meet its cash requirementsfrom operating cash flow.

The cash flows, borrowing requirements and liquidity of Group companies are monitored andmanaged centrally by the Parent Company, with the aim of ensuring effective and efficientmanagement of the Groups financial resources.

Foreign exchange risk

The Group is not exposed to any significant extent to foreign exchange risk, which is mainlylimited to foreign exchange exposures deriving from intercompany loans, which, whilst beingeliminated from the consolidated financial statements, generate foreign exchange gains or lossesfor subsidiaries whose functional currencies are different from the euro. In addition, with theexception ofJinny Software Ltd., the foreign operating companies report substantial convergencebetween the currencies used for receivables and payables.

Interest rate risk

As the Group does not rely on external sources of funding, it is not exposed to interest rate risk toany significant extent.


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Operational risks and uncertainties

All Group companies are undoubtedly affected by the overall economic environment, which isclearly heading towards recession.

End consumers that use value added services, including those provided by the Group, may cut theirspending, which could translate into an increase in the churn rate.In the Mobile Messaging Solutions segment, the economic slowdown could lead mobile operatorsto put off investment in network equipment for a number of months.The B2C business may be affected by increased regulation of the supply of value added services inall countries. Particularly aggressive behaviour by other market players has led regulators tointroduce tougher rules and greater restrictions in order to protect consumers, thus reducing theroom to manoeuvre for marketing and commercial initiatives. With particular regard to the UnitedStates, a number of class actions that have been launched may involve Flycell Inc..The decision to invest heavily in the launch ofNoverca, in both financial terms and in terms of thenumber of staff employed, will face its first test with the commercial launch of the service. In order

to be successful as a new MVNO, the company will have to take customers away from other mobilenetwork and virtual network operators, differentiating its commercial offerings from theirs.Although all the companies in the Group operate in highly competitive markets, the Group believesit has the technological and commercial expertise and financial strength necessary to compete on adaily basis.

1.10 STRENGTHS AND RESOURCES NOT REFLECTED IN THEFINANCIAL STATEMENTS

This section provides a brief summary of the strengths that the Acotel Group considers it has andthat are not sufficiently evident from the data in the financial statements.

Technological independence: All the technology platforms used by the Group are developed in-house. This long-standing approach allows the Group, particularly in the Services segment, toreplicate its commercial strategy and enter new countries at extremely low costs.

Strong business relations: the greater part of the commercial B2B (Business to Business)relationships between Acotel Group companies and their customers are based on long-termpartnerships, which help to increase the Groups economic stability.

Stable shareholder structure: 57.4% of the share capital ofAcotel Group S.p.A. is held by membersof the founders family. This concentration of ownership ensures continuity in the management ofthe Group, which aims to create value over the medium/long-term.

Financial independence: as previously indicated, the Acotel Group, both through its operatingactivities and shrewd management of its financial resources acquired as a result of the flotation, hasthe necessary financial resources to finance its development without having to resort to bankborrowings.

Geographical diversification: during 2008, 36.2% of the Acotel Groups total turnover wasgenerated in North America, 22.2% in Latin America, 17.7% in Italy, 7.8% in other Europeancountries and in the Middle East, 6.5% in Africa and the remainder in Asia. This distribution


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supports the strategy of diversification into various geographical areas pursued by the Group with aview to minimising the impact of any local problems.

1.11 INTERCOMPANY AND RELATED PARTY TRANSACTIONS

There are no related party transactions, including intercompany transactions, that may becategorised as atypical or unusual, given that any such transactions form part of the normalactivities of Group companies. These transactions are conducted on an arms length basis.

Disclosures regarding related party transactions are provided in Section 4.15 of the notes to theconsolidated financial statements.

1.12 SHAREHOLDINGS OF MANAGEMENT AND SUPERVISORY BODIES,GENERAL MANAGERS AND KEY MANAGERS (art. 79, CONSOB

Regulation no. 11971/99)

NAME GROUP COMPANYNO. OF SHARES HELD

AT 1 JAN 2008

NO. OF SHARES

PURCHASED

NO. OF SHARES

SOLD

NO. OF SHARES HELD

AT 31 DEC 2008

PERCENTAGE

INTEREST AT 31 DEC

2008

Claudio Carnevale (a) Acotel Group S.p.A. 664,980 - - 664,980 15.95%

Claudio Carnevale Acotel S.p.A. 20,000 - - 20,000 0.48%

Claudio Carnevale AEM S.p.A. 2,366 - - 2,366 0.06%

(a) Ownership is exercised via Clama S.A. of which Claudio Carnevale owns 93% of the share capital.

Claudio Carnevale and Margherita Argenziano each hold 25% of the share capital of Clama S.r.l.,which in turn holds 1,727,915 shares ofAcotel Group S.p.A. at 31 December 2008.Andrea Morante, who at 31 December 2007 held 36,287 shares ofAcotel Group S.p.A., resigned hispost as a Director of the Company with effect from 9 May 2008.

1.13OTHER INFORMATION

No transactions took place between the parent, Clama S.r.l., Acotel Group S.p.A. and other Groupcompanies during the financial year.

At 31 December 2008 the Company holds 56,425 treasury shares, which are accounted for as an871 thousand euro reduction in shareholders equity, representing the average cost of 15.44 eurosper share and a total par value of 14,671 euros. In accordance with the agreements between AcotelGroup S.p.A. andIntesa Sanpaolo S.p.A., the Company sold the bank 198,075 treasury shares, equalto 4.75% of its issued capital, during the year.

Acotel Group S.p.A. does not possess shares or units of holding companies, either directly or

through fiduciary companies or proxies, nor has it acquired or sold such shares during the financialyear.


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Other Group companies do not possess Acotel Group S.p.A. shares, either directly or throughfiduciary companies or proxies, nor have they acquired or sold such shares during the financialyear.

At 31 December 2008Acotel Group S.p.A. has not established any branch offices.

1.14 EVENTS AFTER 31 DECEMBER 2008

There have been no material events involving Acotel Group companies during early 2009.

1.15 OUTLOOK

The most important event due to take place in 2009 is the Italian commercial launch of the virtualmobile operator,Noverca. Although related to the Groups existing businesses, the launch will marka major diversification of the Groups activities, leading it to effectively become a mobiletelecommunications provider.

ViaNoverca, the Group will no longer be a provider of value added services or of equipment, butwill be responsible for all technical and commercial aspects of the supply of services to mobileusers, whether consumers or businesses. This will range from definition of its offerings, includingvoice and text messaging, the carrying out of advertising campaigns, the direct distribution of SIMcards and customer care. In common with all mobile virtual network operators, Noverca will behosted on the network owned by a network operator, in this case

Telecom Italia.

As previously mentioned in other announcements and in other sections of this report, the strategybehind the establishment ofNoverca is based on exploitation of synergies between the AcotelGroup, with its experience and technological expertise in the provision of value added mobileservices, and a major bank, Intesa Sanpaolo, which has a large customer base and enormouspotential for promoting and successfully launching banking-related services, such as mobilebanking and mobile payments.

Further expansion of the Services business is planned, above all in relation to the B2C servicesoperated by Flycell, which from January 2009 has begun operating in Mexico. The company also

aims to roll out its services in South Africa and Argentina during the year.

In the Network Operator segment, on the other hand, within the scope of its new contract withTelecom Italia for the provision of ScripTIM by Acotel services, giving Acotel S.p.A. greaterindependence with regard to marketing and commercial policies, the company will launch a seriesof promotions aimed at increasing the customer base.

With regard to Mobile Messaging Solutions, in response to the current market environment theGroup will proceed with the strategy embarked on by Jinny Software in 2008. This involvesfocusing primarily on emerging markets in Africa and Central America and developing a series ofmobile advertising products. It is hoped that this new product line, which enables mobile operators

to develop new sources of revenue, will revitalise sales to existing customers. In any event, in part


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thanks to the companys order book at the end of 2008, Jinny Software is expected to continue tosee a good rate of growth in 2009.

In the security systems segment, the subsidiary, AEM, will continue to operate in the Italian market,

exploiting its customer portfolio and technological expertise in the video surveillance field.


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CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

Acotel Group S.p.A.

Registered offices at Via della Valle dei Fontanili 29/37 00168 Rome, ItalyShare capital: 1,084,200.00, fully paid-inRome Companies Register,

Tax and VAT number: 06075181005


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2.1 CORPORATE OFFICERS

BOARD OF DIRECTORS

Claudio CarnevaleChairman and CEO

Francesco Ago (1), (2), (3)Director

Margherita ArgenzianoDirector

Luca De Rita

Director

Giovanni Galoppi (1), (2)Director

Giuseppe Guizzi (1), (2)Director

Luciano Hassan (4)Director

(1) Member of the Remuneration Committee(2) Member of the Internal Audit Committee(3) Lead Independent Director(4) Appointed on 9 May 2008 to replace the outgoing Director, Andrea Morante.

BOARD OF STATUTORY AUDITORS

Antonio MastrangeloChairman

Maurizio SalimeiAuditor

Umberto Previti FlescaAuditor

INDEPENDENT AUDITORS

Deloitte & Touche S.p.A.


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The Board of Directors and the Board of Statutory Auditors of Acotel Group S.p.A. were elected on28 April 2006 by the General Meeting of Shareholders, which also elected Claudio Carnevale asChairman.

The General Meeting of 28 April 2006 also appointed Deloitte & Touche S.p.A. to audit theconsolidated and separate financial statements for the financial years from 2006 until 2011.

With a resolution of 10 May 2006 the Board of Directors elected Claudio Carnevale as CEO,granting him all the powers of routine and extraordinary administration to be delegated inaccordance with the law and the articles of association.

At the same board meeting of 10 May 2006 Francesco Ago, Giovanni Galoppi and ProfessorGiuseppe Guizzi were elected members of the Remuneration Committee and of the Internal AuditCommittee. Francesco Ago was elected as Chairman of both committees.

During the board meeting of 8 August 2007, Francesco Ago was elected Lead IndependentDirector.

During the board meeting of 9 May 2008, Andrea Morante, partly in view of the Companysundertakings to Intesa Sanpaolo S.p.A., resigned as a Director of Acotel Group S.p.A.. LucianoHassan was appointed on to the Board of Directors at the same meeting.


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2.2 THE GROUP

The parent of Acotel Group S.p.A. is Clama S.r.l., which at 31 December 2008 holds 1,727,915ordinary shares, representing 41.4% of the share capital.

Clama S.r.l. does not carry out management and coordination activities pursuant to art. 2497 of theItalian Civil Code.


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CONSOLIDATED FINANCIAL STATEMENTS


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CONSOLIDATED INCOME STATEMENT

(000) Note 2008 2007

Revenues 1 88,698 70,301Other income 211 2

Total revenue 88,909 70,303

Movement in work in progress, semi-finished and finished goods 10 24

Raw materials 2 (2,732) (2,071)

External services 3 (63,332) (47,569)

Rentals and leases 4 (1,593) (1,541)

Staff costs 5 (18,462) (15,187)

Amortisation and depreciation 6 (1,401) (1,126)Internal capitalised costs 7 1,257 79 3Impairment charges/reversal of impairment charges on non-current

assets (2) -

Other costs 8 (1,714) (1,946)

Income from investments 9 7,940 -

Finance income 10 1,662 1,263

Finance costs 10 (479) (970)

PROFIT/(LOSS) BEFORE TAX FROM CONTINUING

OPERATIONS 10,063 1,973

Taxation 11 (3,499) (3,251)

NET PRO FIT/(LOSS) FROM CONTINUING OPERATIONS 6,564 (1,278)

Net profit/(loss) from discontinued operations - -

NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS 6,564 (1,278)

Net profit/(loss) attributable to minority interests - -

NET PROFIT/(LOSS) FOR THE YEAR ATTRIBUTABLETO PARENT COMPANY 6,564 (1,278)

Earnings per share 12 1.62 (0.33)

Diluted earnings per share 12 1.62 (0.33)


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CONSOLIDATED BALANCE SHEETASSETS

(000) Note 31 Dec 2008 31 Dec 2007

Non-current assets:

Property, plant and equipment 13 4,084 3,221

Goodwill 14 11,531 11,531

Other intangible assets 15 848 933

Non-current financial assets - 2

Other non-current assets 116 49

Deferred tax assets 16 365 224

TOTAL NON-CURRENT ASSETS 16,944 15,960

Current assets:

Inventories 17 396 642

Trade receivables 18 22,220 18,620

Other current assets 19 2,340 3,442

Current financial assets 20 18,764 12,702

Cash and cash equivalents 21 23,439 12,178

TOTAL CURRENT ASSETS 67,159 47,584

NON-CURRENT ASSETS HELD FOR SALE - -

TOTAL ASSETS 84,103 63,544


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CONSOLIDATED BALANCE SHEETLIABIITIES AND SHAREHOLDERS' EQUITY

(000) Note 31 Dec 2008 31 Dec 2007

Shareholders' equity:

Share capital 1,084 1,084

Share premium reserve 55,106 55,106

- Treasury shares (871) (3,873)

Cash flow hedge and currency translation reserve (2,387) (567)

Other reserves 9,538 342

Retained earnings/(accumulated losses) (3,864) (2,539)

Net profit/(loss) for the year 6,564 (1,278)

Shareholders' equity attributable to the Parent Company 65,170 48,275

Minority interests 30 30

TOTAL SHAREHOLDERS' EQUITY 22 65,200 48,305

Non-current liabilities:

Non-current financial liabilities 23 101 133

Staff termination benefits and other employee benefits 24 1,146 947

Deferred tax liabilities 25 294 318

TOTAL NON-CURRENT LIABILITIES 1,541 1,398

Current liabilities:

Current financial liabilities 26 3,639 295

Trade payables 27 9,404 9,526Tax liabilities 28 937 1,343

Other current liabilities 29 3,382 2,677

TOTAL CURRENT LIABILITIES 17,362 13,841

NON-CURRENT LIABILITIES HELD FOR SALE - -

TOTAL LIABILITIES 18,903 15,239

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 84,103 63,544


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(000)Share

capital

Share

premium

reserve

- Treasury

shares

Cash flow

hedge and

currency

translation

reserve

Other

reserves

Reserves

and

retained

earnings

Net profit for

the yearTOTAL

Balances at 1 January 2007 1,084 55,106 (3,873) (279) 298 (3,726) 1,231 49,841

Appropriation of net profit for 2006 44 1,187 (1,231) -

Other movements (288) (288)

Net result for 2007 (1,278) (1,278)

Balances at 31 Dec 2007 1,084 55,106 (3,873) (567) 342 (2,539) (1,278) 48,275

Appropriation of net profit for 2007 47 (1,325) 1,278 -

Sale of treasury shares 3,002 9,149 12,151

Other movements (1,820) (1,820)

Net result for 2008 6,564 6,564

Balances at 31 Dec 2008 1,084 55,106 (871) (2,387) 9,538 (3,864) 6,564 65,170

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

The portion of shareholders equity attributable to minority interests at 31 December 2008 amountsto 30 thousand euros and has not changed over the years shown in the above statement.


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CONSOLIDATED CASH FLOW STATEMENT

(000) 2008 2007

A. NET CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,585 25,610

B. CASH FLOWS FROM (FOR) OPERATING ACTIVITIES (2,016) 645

Cash flows from operating activities before changes in working capital 126 260

Net profit/(loss) for the year 6,564 (1,278)

Amortisation and depreciation 1,401 1,126

Income from investments (7,940) -

Impairment of assets 67 205

Net change in staff termination benefits 199 (84)

Net change in deferred tax liabilities (165) 291

(Increase) / decrease in receivables (2,565) (1,003)

(Increase) / decrease in inventories 246 (164)

Increase / (decrease) in payables 177 1,552

C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES 5,696 (1,352)

(Purchases)/disposals of fixed assets:

- Intangible assets (216) (475)

- Property, plant and equipment (1,963) (1,134)

- Financial assets (65) 257

Income from investments 7,940 -

D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES 10,299 (318)

Increase/(Decrease) in medium/long-term borrowings (32) (30)

Sale of treasury shares 12,151 -

Other changes in shareholders' equity (1,820) (288)

E. CASH FLOW FOR THE YEAR (B+C+D) 13,979 (1,025)

F. NET CASH AND CASH EQUIVALENTS AT END OF YEAR (A+E) 38,564 24,585


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NOTES TO THE CONSOLIDATED

FINANCIAL STATEMENTS


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4.1 PRINCIPAL ACTIVITIES

Acotel Group S.p.A. is the leader of a Group of companies operating in the ICT sector, based on a

single business project.The main companies in the Acotel group of companies of companies, in addition toAcotel GroupS.p.A., which basically performs management functions and manages the Acotel Platform, throughwhich it operates directly on the market as an Application Service Provider, are:- Acotel S.p.A., which markets the multimedia services for Italy;- A.E.M. S.p.A., which deals with the design and production of security systems exclusively in

Italy;- Acotel Participations S.A. which acts as a sub-holding and controls the majority of the Groups

foreign companies responsible for business development in their local markets;- Jinny Software Ltd, deals with the design, production and development of high-technology ICT

equipment;

- Info2cell.com FZ-LLC, which operates as a Wireless Application Services Provider inpartnership with leading Middle-eastern mobile telephone operators;

- Acotel do Brasil Ltda, which markets multimedia services to Brazilian operators;- Flycell Inc., which provides consumer services to the US and Spanish markets;- Flycell Telekomunikasyon Hizmetler A.S., which supplies consumer services in Turkey;- Noverca S.r.l., which manages the Noverca platform used in providing integrated

communications services;- Flycell Latin America Contedo Para Telefonia Mvel LTDA, which supplies consumer

services in Brazil;- Noverca Italia S.r.l., which supplies integrated communications services (data, audio, video)

based on IP Protocol (Internet Protocol);

- Flycell Italia S.r.l., which supplies consumer services in Italy.

These financial statements have been drawn up in thousand of euros, the Parent Companysaccounting currency. The foreign companies are included in the consolidated financial statementsaccording to the accounting standards indicated in the following notes.

4.2 ACCOUNTING STANDARDS USED IN PREPARATION OF THECONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements for the year ended 31 December 2008 have been prepared inaccordance with the international financial reporting standards (IFRS) issued by the InternationalAccounting Standards Board(IASB) and approved by the European Union, and effective at the dateof preparation of the financial statements. The financial statements also comply with the measuresissued in implementation of art. 9 of Legislative Decree 38/2005. IFRS also includes all the revisedInternational Accounting Standards (IAS) and all the interpretations of the International FinancialReporting Interpretations Committee (IFRIC), which was previously called the StandingInterpretations Committee (SIC).

Accounting standards and interpretations effective as of 1 January 2008

The new standards and interpretations regard:


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IFRIC 14 on IAS 19 The Limit on a Defined benefit Asset and Minimum Funding;

Changes to IAS 39 Financial Instruments: Recognition and Measurement;

IFRIC 12 Service Concession Arrangements;

Changes to IFRS 7 Financial Instruments: Disclosures.

Adoption of these standards and interpretations has had no effect on the consolidated financialstatements.

New standards and interpretations not yet effective

This section shows a list of standards, interpretations and updates to previously published standards,or to those yet to be approved by the European Union, whose application will be obligatory infuture periods and whose adoption it was decided not to bring forward:

IFRS 8 Operating Segments;

IFRIC 13 Customer Loyalty Programmes;

IFRIC 15 Agreements for the Construction of Real Estate;

IFRIC 16 Hedged of a Net Investment in a Foreign Operation;

Revised version of IAS 23 Borrowing costs;

Changes to IAS 1 Presentation of Financial Statements;

Changes to IAS 16 Property, Plant and Equipment;

Changes to IAS 19 Employee Benefits;

Changes to IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance; Changes to IAS 23 Borrowing Costs;

Changes to IAS 27 Consolidated and Separate Financial Statements;

Changes to IAS 28 Investments in Associates;

Changes to IAS 29 Financial Reporting in Hyperinflationary Economies;

Changes to IAS 31 Interests in Joint Ventures;

Changes to IAS 32 Financial Instruments: Presentation;

Changes to IAS 36 Impairment of Assets;

Changes to IAS 38 Intangible Assets;

Changes to IAS 39 Financial Instruments: Recognition and Measurement;

Changes to IAS 40 Investment Property; Changes to IFRS 2 Share-based Payment;

Changes to IFRS 3 Business Combinations;

Changes to IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations;

Changes to IFRS 7 Financial Instruments: Disclosures.

The Group is evaluating the eventual impact that adoption of these changes may have on theconsolidated financial statements.


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4.3 BASIS OF PRESENTATION

The financial statements were drawn up on the basis of the historical cost principle modified, asrequired, for the measurement of certain financial instruments, and on a going concern basis. In thisregard, the Groups management believes that, despite the difficult economic and financialenvironment, there are no material uncertainties (as defined by section 25 of IAS 1) regarding itsability to continue as a going concern, above all in view of the Groups operational flexibility andfinancial strength.

Acotel Group companies have prepared the income statement on the basis of the nature of expensesformat, which is considered more representative of the Groups approach to management of thebusiness and is utilised for internal reporting.The form of presentation used for the balance sheet distinguishes between current and non-current

assets and liabilities, as allowed by section 51 et seq of IAS 1.Shareholders equity is presented in columns that reconcile the opening and closing balance of eachitem that is part of the schedule.The statement of cash flows was prepared in accordance with the indirect method.

Finally, with reference to CONSOB Resolution no. 15519 of 27 July 2006, relating to financialstatement presentation, specific additional information on the income statement, balance sheet andcash flow statement, showing related party transactions, has not been included, as such transactionsare not of a material nature.

4.4 CONSOLIDATION POLICIES

Basis of consolidation

At 31 December 2008, in addition to the Parent Company, Acotel Group S.p.A., the following director indirect subsidiaries ofAcotel Group are consolidated:

Companies consolidated on a line-by-line basis

Company Date of acquisition

Groups

interest (%)

Registered

office Share capital

Acotel S.p.A. 28 April 2000 99.9% (3) Rome EURO 13,000,000

AEM Advanced Electronic Microsystems S.p.A. 28 April 2000 99.9% Rome EURO 858,000

Acotel Participations S.A. 28 April 2000 100% Luxembourg EURO 1,200,000

Acotel Chile S.A. 28 April 2000 100% (4) Santiago, Chile USD 17,330

Acotel Espana S.L. 28 April 2000 100% (4) Madrid EURO 3,006

Acotel Do Brasil LTDA 8 August 2000 (1) 100% (4) Rio de Janeiro BRL 1,868,250

Jinny Software Ltd 9 April 2001 100% (4) Dublin EURO 2,972

Millennium Software SAL 9 April 2001 99.9% (5) Beirut LPD 30,000,000Info2cell.com FZ-LLC 29 January 2003 (2) 100% (4) Dubai DH 18,350,000


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Emirates for Information Technology Co. 29 January 2003 100% (6) Amman JD 710,000

Flycell Inc. 28 June 2003 (1) 100% (4) Wilmington USD 10,000

Acotel Group (Northern Europe) Ltd 27 May 2004 (1) 100% Dublin EURO 101,000

Flycell Telekomunikasyon Hizmetleri A.S. 2 July 2005 (1) 99.9% (7) Istanbul TRY 50,000

Flycell Latin America Contedo ParaTelefonia Mvel LTDA

6 June 2006 (1) 100% (7) Rio de Janeiro BRL 250,000

Jinny Software Romania SRL 26 June 2007 (1) 100% (5) Bucharest RON 200

Yabox LLC 24 October 2007 (1) 100% (7) Wilmington USD 1

Jinny Software Latin America Importao eExportao LTDA

11 February 2008 (1) 100% (5) Sao Paolo BRL 250,000

Rawafid Information Company LLC 24 February 2008 (1) 51% (6) Riyadh SAR 500,000

Jinny Software Panama Inc. 1 July 2008 (1) 100% (5) Panama City USD 10,000

Flycell Italia S.r.l. 10 July 2008 (1) 100% (7) Rome EURO 10,000

(1) The date of the companys entry into the Group coincides with its incorporation.(2) Prior to such date the Group held 33% of the companys share capital, posted to investments in associates.(3) AEM owns 1.92% of the share capital.(4) Controlled via Acotel Participations S.A.(5) Controlled via Jinny Software Ltd.(6) Controlled via Info2cell.com FZ-LLC.(7) Controlled via Flycell Inc.

The basis of consolidation changed during the financial year due to the incorporation of:

the companies, Jinny Software Latin America Importao e Exportao LTDA and JinnySoftware Panama Inc., byJinny Software Ltd;

the company,Rawafid Information Company LLC, byInfo2cell.com FZ-LLC;

the company, Flycell Italia S.r.l., by Flycell Inc..

Jointly controlled companies (joint ventures) consolidated using the proportionate method

Company Date of acquisitionGroups

interest (%)

Registered

officeShare capital

Noverca S.r.l. 10 July 2002 (1) 90% Rome EURO 2,949,289

Noverca Italia S.r.l. 9 May 2008 (2) 59.4% (3) Rome EURO 120,000

(1) Between 10 July 2002 and 9 May 2008 the Group held 100% of the company. As of 9 May 2008 the Group holds a 90% interestin the company.

(2) The date of the companys entry into the Group coincides with its incorporation.(3) Investment held through Noverca S.r.l.

On 9 May 2008 all the corporate transactions envisaged in the Investment Agreement signed byAcotel Group S.p.A. andIntesa SanPaolo S.p.A. on 28 December 2007 were executed, including:

Intesa Sanpaolo S.p.A.s acquisition of a 10% interest in Noverca S.r.l., which waspreviously a wholly owned subsidiary ofAcotel Group S.p.A.;

the establishment of a new company named Noverca Italia S.r.l., which is 66% owned byNoverca S.r.l. and 34% owned byIntesa Sanpaolo S.p.A..


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In both cases the changes made to the articles of association delineate a Joint Venture Agreement,as they envisage that the key strategic decisions regarding Noverca S.r.l. and Noverca Italia S.r.l.should be approved by both shareholders (Acotel Group S.p.A. and Intesa SanPaolo S.p.A. in thefirst case, andNoverca S.r.l. andIntesa SanPaolo S.p.A. in the second case).

Therefore, unless otherwise indicated, all amounts relating to Noverca S.r.l. and Noverca ItaliaS.r.l. reported in these consolidated financial statements relate to and are based on the percentageinterests held directly and indirectly by Acotel Group S.p.A., amounting to 90% and 59.4%,respectively.

Consolidation principles

The consolidated financial statements include the financial statements ofAcotel Group S.p.A. andthose of its subsidiaries and joint ventures, as prepared at and for the year ended 31 December 2008.

The net profit or loss of subsidiaries and joint ventures acquired or sold during the period isincluded in the consolidated income statement from the effective acquisition date until the effectivedisposal date.

Where necessary, adjustments are made to the financial statements of subsidiaries and joint venturesin order to bring their accounting policies into line with those adopted by the Group.

The financial statements of Group companies are prepared in the functional currency of eachcompany. For the purposes of the consolidated financial statements, the financial statements of eachcompany are translated into the Groups functional and presentation currency: the euro.The assets and liabilities of overseas subsidiaries are translated into euros at closing exchange rates.Revenues and costs are translated at average rates for the period. Any translation differences arerecognised in shareholders equity in the currency translation reserve. This reserve is recognisedin the income statement as a gain or a loss in the period in which the related subsidiary is sold.

Line-by-line consolidation

Subsidiaries are defined as entities over which the Group has the power to govern the financial andoperating policies.

The assets and liabilities and the revenues and expenses of consolidated companies are recorded on

a line-by-line basis. The carrying amount of investments is eliminated against the correspondingshare of the investee companies shareholders equity and the individual assets and liabilities arerecognised at fair value at the date control was obtained. Any positive difference is recognised innon-current assets as Goodwill arising from consolidation, while negative differences arerecognised in the income statement.

Intercompany receivables and payables, including dividends distributed within the Group, areeliminated. Profits, losses, revenues and expenses arising from intercompany transactions, and thathave yet to be realised on transactions with third parties, are eliminated.

Minority interests in shareholders equity and in net profit for the period is shown in the specific

items in the consolidated balance sheet and income statement.


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Proportionate consolidation

A joint venture is a contractual arrangement in which a party undertakes an economic activity withother participants, thereby subjecting it to joint control.

Joint venture agreements that entail the establishment of a separate entity in which each participanthas a share in the investment are called jointly controlled entities.Joint ventures are defined as entities in which, on a contractual basis, several participants sharecontrol of an economic activity, and therefore decisions regarding financial and operating policiesrequire the unanimous consent of the parties sharing control.

The Acotel Group reports jointly controlled entities using the proportionate method ofconsolidation, by which the Groups share of the assets and liabilities and the revenues andexpenses of jointly controlled entities are recorded on a line-by-line basis in the consolidatedaccounts.

In transactions carried out between a Group company and a jointly controlled entity, unrealisedgains and losses are eliminated in proportion to the Groups interest in the jointly controlled entity,except for when unrealised losses are evidence of a reduction in value of the asset transferred.

Accounting policies

The following is a summary of significant accounting policies used in the preparation of theconsolidated financial statements:

Property, plant and equipment

Property, plant and equipment used to manufacture or supply goods and services is recognised athistorical cost, inclusive of any incidental expenses and the direct costs incurred to make the assetready for use.

Property, plant and equipment is accounted for less accumulated depreciation and any impairments,determined in accordance with the criteria provided for by IAS 36 and described in the sectionImpairment of assets below. Depreciation is applied on a straight-line basis each year, based onthe estimated useful life of the asset and applying the following rates:

ICT platform 50%

VoIP platform 25%

Specific plant 10-20%

Other plant and machinery 15-20%

Computers 20%

Other industrial equipment 15-25%

Vehicles 25%

Furniture, fixtures and fittings 12%


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Gains and losses on disposals are calculated as the difference between the proceeds from asset salesand the carrying amount of such assets and are recognised in the income statement for the period.

Ordinary maintenance and repair costs are recognised in full in the income statement.

Improvements designed to increase the future economic benefits of property, plant and equipmentare capitalised and depreciated in accordance with their estimated useful lives.

Leasehold improvements that qualify for recognition are recognised as property, plant andequipment and depreciated on the basis of the shorter of the residual lease term and the residualuseful life of the asset.

Intangible assets and goodwill arising from consolidation

Intangible assets are recognised at purchase or production cost, inclusive of any direct incidental

expenses incurred to make the asset ready for use. These assets are accounted for less accumulatedamortisation and any impairments, determined in accordance with the criteria provided for by IAS36 and described in the section Impairment of assets below.

Intangible assets are amortised systematically, as of the moment the asset is ready for use, on thebasis of their expected useful lives.

Research and development costs are recognised in full in the income statement.

Patents and software are recognised at cost and amortised on a straight-line basis over the residualuseful life of the asset.

Goodwill arising from consolidation and other intangible assets with an indefinite useful life are notamortised on a regular basis, but are tested for impairment at least once a year at the level of thecash generating unit that has benefited from the synergies deriving from the acquisition. Theseimpairments are not reversed.

Internally generated intangible assets

Internally generated intangible assets deriving from the development of software used by Groupcompanies are accounted for in the balance sheet, only if all the following conditions are met:

the asset may be identified;

the asset created is likely to generate profits in the future;

the assets development costs may be reliably measured.

These intangible assets are amortised on a straight-line basis, as of the date on which the outcome ofthe project is available for use, based on the estimated useful life of the capitalised costs.

When internally generated assets may not be accounted for in the balance sheet, development costsare recognised in the income statement for the year in which they are incurred.

When the internally generated intangible assets regard the development of software that may beconsidered an integral part of the hardware to which it is connected, such assets are treated as itemsof property, plant and equipment and included in this asset category.


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Impairment of assets

Property, plant and equipment and intangible assets are analysed at least once a year to determinewhether there are any indications of impairment. In the presence of such indications, the

recoverable amount of these assets is estimated to calculate impairment charges. If the recoverableamount of an individual asset cannot be estimated, the Group estimates the recoverable amount ofthe cash generating unit to which the asset belongs.

Recoverability of the carrying amounts of intangible assets with an indefinite useful life andgoodwill arising from consolidation is verified each year or whenever there is an indication of apossible impairment.The recoverable amount is the higher of an assets fair value less costs to sell and value in use. Indetermining value in use, estimated future cash flows are discounted using a discount rate thatreflects the current market value of money and the risks specific to the activities of each cashgenerating unit.

If the recoverable amount of an asset (or of a cash generating unit) is estimated to be lower than therelevant carrying amount, then it is reduced to this lower recoverable amount. This impairmentcharge is immediately recognised in the income statement, being first accounted for as a reductionin the carrying amount of goodwill arising from consolidation and, then, as a reduction in otherassets in proportion to their carrying amount.

When an asset is no longer impaired, the carrying amount of the asset (or of the cash generatingunit), except in the case of goodwill, is increased to reflect the estimated recoverable amount, butonly to the extent of the carrying amount of the asset had there not been any impairment charge.The reversal is immediately recognised in the income statement.

Inventories

Inventories are entered at the lower of cost and net realisable value. Cost includes direct materialsand direct staff costs, where applicable, and production overheads, in addition to other costsincurred in bringing the inventories to their present location and condition. Cost is calculated usingthe weighted average cost method. Net realisable value reflects the selling price less any estimatedcompletion costs and costs to sell.

Receivables

Receivables are recognised according to their estimated realisable value. Receivables denominatedin currencies other than the euro are translated at closing exchange rates.

Financial instruments

Financial assets are recognised and derecognised at the trade date and are initially accounted for atcost, including any transaction costs. Subsequent measurement depends on the type of instrument,as follows:

- financial assets held for trading are measured at fair value, with any fair value gains orlosses recognised in the income statement for the period;

- loans and receivables, consisting of financial assets that are not listed on an active market,and held-to-maturity financial assets are accounted for at amortised cost using the effectiveinterest method, less provisions for impairment charges;


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- available-for-sale financial assets are measured at fair value, with any fair value gains orlosses recognised in a specific reserve in shareholders equity until they are sold orimpaired; at this time, the total gains and losses previously recognised in equity are recycledthrough the income statement for the period.

Cash and cash equivalents

This item includes cash in hand and at bank, other demand deposits and highly liquid short-terminvestments that may be readily converted into cash and are not subject to significant risk ofchanges in value.

Treasury shares

Treasury shares are measured at cost and deducted from shareholders equity. Proceeds from thesale, issue or cancellation of treasury shares is accounted for as a change in shareholders equity, net

of the related tax effect.

Employee benefits

Under IAS 19, staff termination benefits are classifiable as post-employment benefits equivalent toa defined-benefit plan. The amount accrued under this plan has to be projected to estimate the futureliability at the time of termination of employment and then discounted to present value using theprojected unit credit method. This is an actuarial method based on demographic and financialassumptions, designed to arrive at a reasonable estimate of the benefits vested in employees fortheir years of service.

Actuarial calculations determine current service cost, reflecting the benefits accrued to employeesduring the year, which is reported in the income statement as a staff cost, and interest cost,representing the imputed interest that the Company would have paid to lenders had it borrowed anamount equivalent to the benefits. This cost is recognised as a finance cost.

The unrealised gains and losses arising from changes in actuarial assumptions are recognised in theincome statement, to the extent that their value not recognised at the end of the previous year is inexcess of 10% of the present value of the defined-benefit obligation at such date (the so-calledcorridor method).

Payables

Trade payables are accounted for at nominal value. Payables denominated in currencies other thanthe euro are translated at closing exchange rates.

Revenues

Sales and service revenues are recognised upon transfer of the risks and benefits of ownership orupon performance of the service.In particular:

revenues from services rendered are recognised on the basis of the actual service performed

during the year; revenues from software licensing to third parties are recognised upon transfer;


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revenues from design, production and installation of electronic systems are recognised uponperformance of the service and delivery of the relevant products to, and acceptance by, thecustomer.

Income taxes

Current income taxes are recognised, for each Group company, on the basis of their estimatedtaxable income in accordance with tax rates and rules in force, or as substantially approved at theclose of the financial year in each country, taking account of applicable exemptions and tax credits.

Deferred tax assets and liabilities are calculated on temporary differences between the carryingamount of assets and liabilities and their tax bases, in accordance with the tax rates in force whenthe differences will reverse. Current and deferred tax assets and liabilities deriving fromtransactions whose results are recognised directly in shareholders equity are likewise accounted forin shareholders equity. In the event of a change in the above tax rates, the carrying amount of

deferred tax assets and liabilities is adjusted, and the adjustment recognised in the income statementand shareholders equity in line with the underlying transaction. Deferred tax assets are recognisedto the extent that it is probable that future taxable profit will be available against which thetemporary difference can be utilised.

Earnings per share

Earnings per share is calculated by dividing net profit by the average weighted number of sharesoutstanding in the period, less treasury shares. Diluted earnings per share is calculated by adjustingthe weighted average number of ordinary shares outstanding to assume conversion of all dilutivepotential ordinary shares.

Foreign currency translation

Foreign currency transactions are translated using the exchange rates prevailing at the date of thetransaction. Monetary assets and liabilities denominated in foreign currency at the balance sheetdate are translated at closing exchange rates. Any foreign exchange differences resulting from thesettlement of monetary items or their translation at rates different from those applied at the time ofinitial recognition are recognised in the income statement.

4.5 FINANCIAL HIGHLIGHTS OF COMPANIES CONSOLIDATED USINGTHE PROPORTIONATE METHOD

The following table shows income statement and balance sheet data at and for the year ended 31December 2008. The amounts are consistent with those included in the consolidated financialstatements with regard to joint ventures consolidated using the proportionate method.


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(000)

Noverca S.r.l. Noverca Italia S.r.l.

Total revenues 48 141

Costs (1,036) (468)

Current assets 576 219

Non-current assets 3,132 73

Current liabilities 727 219

Non-current liabilities - -

4.6 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The Group was required to make estimates and assumptions during preparation of the financialstatements and the related notes in application of IFRS. The actual values of the related revenues,costs, assets and liabilities could differ from these estimates.

The estimates were primarily used to record revenues and costs that have yet to be confirmed bycustomers and suppliers, adjustments to revenues fromB2Cservices, as explained below, as well asthe related direct costs, and any impairments of goodwill arising from consolidation and provisionsfor bad debts and taxation. The estimates and assumptions are periodically reviewed and the effectsof any change are immediately reflected in the income statement.

In this regard, the situation caused by the current economic and financial crisis has rendered it

necessary to make assumptions about future performance that are subject to significant uncertainty.It is, therefore, not impossible that the actual results for the subsequent financial year may differfrom any estimates and, as a result, require adjustments to the carrying amounts of the related items.These adjustments, which are currently impossible to estimate or predict, may be material. Thebalance sheet items primarily affected by these situations of uncertainty are provisions for bad debtsand goodwill.

In particular, with regard to revenues and costs yet to be confirmed by customers, turnovergenerated by B2C services in the month of December and a number of related cost items includepreliminary figures, deriving primarily from internal reporting systems, and estimates not yetconfirmed by mobile transaction network providers and/or o

acotel 2008 annual report

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