Crnogorski Telekom a.d. Podgorica2008 Annual Report

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ContentsOur Mission / Our Vision 3

Our Values 5

To our shareholders 6Letter to our shareholders Crnogorski Telekom‘s Board of Directors The Management Committee of Crnogorski Telekom

Introduction 16General informationCompetitionRegulatory environment

Our strategy 22

Human resources 26

Corporate social responsibility 28

Services 30

The financial year 2008 37Management report for the 2008 financial yearCrnogorski Telekom a.d. Financial statementsReport of independent registered public accounting firmBalance sheetsIncome statementsCashflow statementsStatements of changes in equityNotes to the consolidated financial statements

Further information 110

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Our MissionWe are the first choice for communication and infotainment. We guarantee persistent customer focus, reliability and continuous innovation. Crnogorski Telekom remains the best place to work at in Montenegro. We create an organization that encourages inno-vation and rewards performance. We build a company we are proud working for. We take our social responsibility seriously. We stretch boundaries, create and capture new opportunities and continuously strive for profitability and operational excellence.

Our Vision

We will become and remain market leader in whatever we do. We wish to be perceived as the most customer-oriented company in the country.We build a broadband society, delivering broadband products everywhere to everyone.We look after company’s money as if it was our own.We care and continuously strive for the satisfaction of our employees.We deliver quality and innovative services.We capture all growth opportunities.

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Our Values

Customer centricityCustomer needs and satisfaction drive CT business practice and development.

IntegrityWe follow the highest ethical standards in whatever we do.

SuccessWe continuously exceed expectations of our customers, employees and owners.

InnovationWe create an atmosphere that encourages change for the better.

TeamworkWe build the culture of an integrated company where every voice is heard and every person receives respect. We are making ourselves accountable for each other, commit-ting to high standards of performance in everything we do.

PassionWe do not run our business: we LIVE it. We are proud to work for the company where our dedication makes a difference.

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Dear Shareholders,

I am delighted to inform you about the main details of the business operations of Crnogorski Telekom in 2008. Despite significant changes in the regulatory and competitive environ-ment, our company has managed not only to maintain its overall leading position in the Montenegrin telecommunications sector, but also to improve it in certain segments. The key to our success lies in the customer focus and broad range of high quality telecommunica-tions products and services offered in the best networks.

2008 was a financially and operationally successful year and it was in line with expectations. In the fixed-telephony segment of our business, we maintained a stable customer base, almost doubling our ADSL customer number and had great sales success with our Extra TV service. In the mobile-telephony segment of our business, we maintained our leadership in the postpaid market, achieved higher market share and further improved coverage and network quality.

However, it was also a year of challenges and difficulties, especially in wholesale operations. Changes in the regulatory framework made it possible for our biggest customers to esta-blish direct links with their mother and sister companies in the neighboring countries and consequently dramatically reduce wholesale revenues, thus significantly contributing to an overall decrease in revenues of Crnogorski Telekom a.d. of 13% compared to 2007, which resulted in a drop of EBITDA without special impacts of €6.9 million. We experienced a reduction in mobile voice retail revenues and voice retail revenues in the fixed-telephony segment as a consequence of tariff rebalance in 2007 and fixed-to-mobile switching. It is very important to point out that we managed mainly to offset the aforementioned drop by a significant revenue increase in ADSL, Extra TV and data transfer (leased lines and Mipnet) as well as overall higher mobile segment revenues.

In 2008 we continued improving efficiency and increasing cost control, as we introduced changes in our organizational model and further reduced our headcount by 103 employees.

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As for T-Com, the customer number of 170,000 decreased only by 2.5% year-on-year which is a significantly lower figure than in other European countries. Thanks to the strong focus on our strategic broadband services, the number of ADSL customers reached almost 28,000, while Extra TV service had more than 17,500 customers at the end of the year.

In a year of intense competition, T-Mobile managed to increase its customer base, maintain leadership in the postpaid segment and increase SIM market share to 36.1% at the end of 2008 (33.8% in 2007). The total customer number increased by 24% compared to 2007, amounting to more than 506,000. Out of that figure, almost 90,000 relates to postpaid cu-stomers, enabling us to remain postpaid market leaders. During the same period, mobile penetration in Montenegro increased to a level of 185% at the end of 2008.

2008 will be remembered as the year in which we paid out the highest dividend in the histo-ry of our company and Montenegro, exceeding €22 million.

Crnogorski Telekom is well-known for its employees, their knowledge, expertise and dedica-tion. I would like to use this opportunity to thank them one more time for their hard work and contribution to the successes of the company.

Finally, I sincerely thank you, our shareholders, for the trust shown. We are going to continue striving for operational excellence and sustainable profitability through providing permanent innovations and keeping customer focus. We are convinced we will meet your expectations.

Daniel Szasz, Chairman of the Board of Directors

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Dániel Szász, Chairman of the Board of Directors of Crnogorski Telekom a.d.

Szasz Daniel, age 37, is an economist. He started his career at General Motors Group, where he held various managerial and treasury leadership positions since 1994 at Opel companies in Hungary and Germany. He delivered tasks of GM Daewoo Central and Eastern Europe managing director from 2002. He was appointed Chief Financial Officer of T-Online Hungary Plc. (former Axelero LLc.) effective of January 1, 2004. His treasury expertise benefited the profitability of Hungary’s leading Internet carrier, which has incessantly improved since 2004. Szasz Daniel contributed to the spiraling penetration of broadband internet, which constitutes one of Magyar Telekom Group’s business areas that demonstrate the most dynamic growth. In addition, he also played a major role in achieving and managing to keep a market leadership position of the Internet portal (origo) as well as in T-Online Hungary acquisitions like the iWiW community portal and Ad-network online marketing carrier. In 2007, he was appointed Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom.

Daniel Szasz Gereon Hammel Tripko Krgović Gabor Pal Hans-Peter Schultz Janos Szabo Denes Szluha

Gereon Hammel

Gereon Hammel was born in May 1968 and holds a business degree.In 1989 he started his professional career at the Bayer AG Group Germany in the Fast Moving Consumer Goods business unit. From 1992 he managed the Household Detergent business of Bayer Italy. In 1994 he moved back to Germany and was appointed as regional manager for the Bayer subsidiaries in Scandinavia, Poland and Africa. In 2000 he built up a Regional Financial Controlling and participated as a member of the management team in the development of a regional head office based in the UK for the UK, Scandinavia, Finland, France, Poland, Russia and Africa.In 2001 he moved to Michael Page Frankfurt an international recruitment consultancy and was responsible in advising companies in their job vacancies and the Executive Search of Finance positions.In August 2002 he joined T-Mobile International’s Joint Venture Management and was responsible for projects in the Cen-tral Eastern European region (CEE) and since 2006 he is Vice President for T-Mobile International’s Joint Venture Manage-ment in Hungary and Montenegro and responsible for projects in CEE.

Crnogorski Telekom‘sBoard of Directors

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Dénes Szluha

Dénes Szluha was born in Budapest in 1968. He qualified with a degree at the Szent István Universtity, Gödöllő in 1994, majoring in economics. His career started at the marketing department of Shell Gas Hungary than continued at the adviso-ry firm Deloitte. In 1998 he joined the leading Hungarian private equity fund manager with investors such as EBRD, Bank Vontobel, Dresdner Kleinwort Wasserstein. He was responsible as an investment manager for acquisitions, portfolio ma-nagement and sale of major investments in primarily the IT and telecommunications industry. In 2002 he joined Matáv (today Magyar Telekom or MT) as senior project manager. Currently he holds the position of International Portfolio Ma-nagement Director. In his current capacities his team is responsible for managing international portfolio companies. He is Board member in Makedonski Telekom, T-Mobile Macedonia, Crnogorski Telekom and is the Chairman of the Board in the Bulgarian Orbitel.

János Szabó

János Szabó was born in Hódmezovásárhely (Hungary) in 1961. He qualified with a degree at the Budapest University of Economics in 1986 majoring in international relations.

After working in foreign services for three years, he continued in various finance and consultant positions in the private business sector. He became Director Finance of Delco Remy Hungary (subsidiary of a US based automotive supplier) in 1995. Later he was deputy general manager of the operation, responsible for sales, purchasing and operations.

In 1998 he was moved to the position of Director Finance Europe in charge of the finance activities of the European opera-tions. Later he has become CFO and managing director of a joint venture between Delco Remy and Hitachi. Since April, 2003 he is the director finance of the Wireline Services LOB of Magyar Telekom. The role has been extended to network and IT operations in 2006. He is member of the BoD, and chairman of AC of MakTel.From January 2008 he is Director of Group Controlling Directorate.

Hans-Peter Schultz

Hans-Peter Schultz was born in 1958. He is married, with two children. He graduated as Electrical engineer in 1981.After joining Deutsche Telekom in 1985 he was working in different positions and projects in DT’s international business. Until 2001 he was responsible for both international affairs and projects mainly in South-East Europe. In 1996 he joined Deutsche Telekom’s Moscow Office where he managed the restructuring of DT’s satellite business, the integration of regional mobile businesses into DT’s affiliate “Mobile TeleSystems” and the introduction of Global One Russia.In 2002 Hans-Peter Schultz moved back to Deutsche Telekom in Bonn were he was responsible for DT’s business in Israel in the “Region CEE, Middle East”. In the new Headquarters of T-Home he manages T-Home’s business in Slovakia.

Gábor Pál

Born in Budapest, 1968. Earned his degree at the Finance and Logistics Management faculty of the Budapest University of Economics in 1993, followed by a second degree at the Programmer Mathematician faculty of Eötvös Lóránd University in 1994. He participated in the PhD program of the Budapest University of Economics from 1996.

He started to work for NN Hungary Insurance Company as insurance mathematician in 1993, followed by his employment by Westel Mobile Co. Ltd. from 1994 as financial analyst. In 2000 he was promoted director of finance of the company, and became executive director of finance as of January 1, 2004 at Westel and the renamed on May 3, 2004 company, T–Mobi-le Hungary Ltd. After the merge of T-Mobile Hungary with Magyar Telekom Plc. in March 1996, he is director of finance and controlling of the Mobile Services Line of Business at Magyar Telekom. Since January 2008 Strategy, Planning and Control director of Consumer Business Unit of Magyar Telekom Plc.

Participated in several Magyar Telekom acquisition projects in the region. Former member of the BoD of Mobimak in Macedonia, currently member of the BoD at Telekom Crna Gora, Makedonski Telekom. Member of the BoD of M Factory Zrt, Budapest.

Tripko Krgović

Tripko Krgović is born in 1977, in Belgrade. He is married, and has one child. He finished his basic and master studies on Faculty of Economics in Podgorica. His professional carrier began in 1996 in family business. From 2004 he works in Securities Commission, in market supervision department. In 2005 he holds position of Investment manager in Moneta Investment Fund. From 2006 he is Chief executive officer of Moneta Broker-Diler AD Podgorica. Beside Crnogorski Tele-kom, he is Board member of Otrantkomerc, AD Ulcinj. He is the member of Minority Shareholders Council and a represent of minority shareholders in several Montenegrin companies.

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Daniel Szasz, Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom

Szasz Daniel, age 37, is an economist. He started his career at General Motors Group, where he held various managerial and treasury leadership positions since 1994 at Opel companies in Hungary and Germany. He delivered tasks of GM Daewoo Central and Eastern Europe managing director from 2002. He was appointed Chief Financial Officer of T-Online Hungary Plc. (former Axelero LLc.) effective of January 1, 2004. His treasury expertise benefited the profitability of Hungary’s leading Internet carrier, which has incessantly improved since 2004. Szasz Daniel contributed to the spiraling penetration of broadband internet, which constitutes one of Magyar Telekom Group’s business areas that demonstrate the most dynamic growth. In addition, he also played a major role in achieving and managing to keep a market leadership position of the Internet portal (origo) as well as in T-Online Hungary acquisitions like the iWiW community portal and Ad-network online marketing carrier. In 2007, he was appointed Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom.

Georg Mündl, Chief Executive Officer of T-Mobile Crna Gora and Chief Marketing Officer of Crnogorski Tele-kom Group

Born in 1965. He holds a Master of Science degree in Electrical Engineering from Technical University of Vienna. In 1991 he joined Siemens AG Austria, where he held various positions in different Company divisions. In 2006 he joined Max. Mobil.Telekommunikations Service GMBH, as Deputy Sales Director, and from 1998 as Director of Residential Sales. In 2000 he became Executive Director International Business, responsible for SE-Europe operations. In 2000 he moved to Croatia, joining HT Hrvatske Telekomunikacije d.d, where he was delegated by T-Mobile International to build the Mobile Business Unit of Croatian Telecom. In 2001 he became the Member of the International Marketing Board of T-Mobile International and later that year, the Executive Director and Member of the Board for the mobile Business & CMO. In 2004 he joined T-Mobile Austria GmbH as Member of Management Board and CMO. In 2007, he moved to Montenegro, where he was appointed CMO in Crnogorski Telekom. In 2008 he was appointed CEO of T-Mobile Crna Gora.

Slavoljub Popadić, Chief Executive Officer Crnogorski Telekom a.d.

Born in 1965. He holds a degree in electronic and telecommunication from University of Montenegro. He started his ca-reer in 1991 at Republic Secretariat for Development, Podgorica, first as a main network and system engineer and then as a Leader of development of network and IT systems of Governmental bodies in Montenegro. In 2001 he joined Crnogorski Telekom group as a CEO of Internet Crna Gora. In April 2005, after the acquisition of Crnogorski Telekom by the Magyar Telekom, he became a Group network development director and Management Committee member of Crnogorski Tele-kom. In August 2006 he was appointed as a CEO of Crnogorski Telekom responsible for fixed business in the Company (T-Com). As of December 2008 he is Vice chairman of the Management Committee.

The Management Committee of Crnogorski Telekom

Chairman of the Board of Directors, Daniel Szasz T-Com Chief Executive Officer, Slavoljub PopadićT-Mobile Chief Executive Officer /Marketing Chief Officer, Georg Mündl Strategy and Business Development Officer, Zoltan Pinkola Chief Human Resources Officer, Beata Prisztacs Chief Technical Officer, Eva Ulićević Chief Financial Officer, Ferenc VaczlavikRegulatory, Government Relations and Legal Officer, Tibor Vidos Chief Sales Officer, Milija Zeković

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From left to right: Daniel Szasz, Chairman of the Board of Directors and Chairman of the Management Committee, Georg Mündl, Chief Executive Officer of T-Mobile Crna Gora and Chief Marketing Officer, Slavoljub Popadić, Chief Executive Officer T-Com

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From left to right: Ferenc Vaczlavik, Chief Financial Officer, Zoltan Pinkola, Strategy and Business Development Officer, Beata Prisztacs, Chief Human Resources Officer

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Eva Ulićević, Chief Technical Officer, Milija Zeković, Chief Sales Officer, Tibor Vidos, Regulatory & Government Relations and Legal Officer

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Zoltan Pinkola, Strategy and Business Development Officer

Born in 1972. Holds a degree in economics. Started his career with an international audit and financial advisory firm, Mazars in Budapest where he managed statutory audits, due diligence reviews of privatized companies and lead miscella-neous financial consultancy assignments through four years. He joined HBO Europe in 1997, holding various managerial positions initially in the Finance area, successively transferring to Business Development, managing projects related to the territorial expansion of HBO in Central Europe and to the launch of new pay TV channels and services in the region.He has joined Magyar Telekom in March 2006, and Crnogorski Telekom in July 2006. He has been a member of the Ma-nagement Committee of the Group and has fulfilled various executive positions since then. He holds the position of Strate-gy and Business Development Officer since October 2007.

Beata Prisztacs, Chief Human Resources Officer

Beata Prisztacs was born in 1970 in Pecs, Hungary. She graduated in 1993 on the Economics Faculty of Pecs University. She started her career in the Tourist Office of County Baranya in Pecs, first as marketing manager and later as director of the company.

In 1998 she joined Magyar Telekom and while working in different areas of the company she gained experience in the field of Controlling, Sales and Human Resources. In 2003 she moved to Skopje, to the Macedonian subsidiary of Magyar Telekom as senior consultant to the CHRLO, later as director of the HR Area. In 2006 she was also appointed as CEO of the Macedonian consulting subsidiary of the Group. From 1st January 2008 she was appointed CHRO of Crnogorski Telekom.

Eva Ulićević, Chief Technical Officer of Crnogorski Telekom

Born in 1970. She holds a degree in Mathematical Science and Master of Mathematical Science. She started her career on 1993 at Mathematical Faculty of Montenegro University in Podgorica, as the Assistant to the Professor. From 1996 she worked in ProMonte GSM Podgorica as Deputy of CIO. In 2000 she was engaged as the Team Leader of Oracle Academic Initiative Project while 2001 she worked in SEMA (LHS) Communications Systems Inc, Miami Florida USA as Senior Soft-ware Analyst Engineer for BSCS. From 2002 she is working for Crnogorski Telekom Group at the several executive posi-tions: CIO of MONET (nowadays T-Mobile Montenegro), IT Director of Crnogorski Telekom Group (2005), current one is CTO of Crnogorski Telekom Group (2006).

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Ferenc Vaczlavik, Chief Financial Officer

Ferenc Vaczlavik was born in Budapest (Hungary) in 1974. He qualified with a master degree at the Budapest University of Economic Sciences in 1997 majoring in accounting.He started his career at Investel Zrt, the financial subsidiary of Magyar Telekom (at that time called Matav). After the merging of Investel’s staff into Magyar Telekom’s Finance Area, he continued working at the Treasury Department of Ma-gyar Telekom. In 2002, he joined the team of Magyar Telekom’s newly acquired subsidiary in Macedonia, as the senior consultant to the CFO. In 2005 he became the CEO of Magyar Telekom’s Macedonian consulting subsidiary. After his return to Hungary in 2006, he continued working at Magyar Telekom’s subsidiary for TETRA services, Pro-M Zrt., as a finance manager. From 1 February, 2007 he is the CFO of Crnogorski Telekom Group.

Tibor Vidos, Regulatory & Government Relations and Legal Officer

Born in 1954. He holds a degree in physics and a doctorate in biology from the Eötvös University of Sciences in Budapest. In 1989 after having spent several years in academic research he became the executive secretary of a political party duri-ng the democratic transition of Hungary. In 1991 he established the Hungarian subsidiary of the then market leading British lobby firm GJW Government Relations which he managed until 2000. Between 2000 and 2003 he assisted the democratic development of Indonesia by working there as the Director of Political Party Programs of the National Demo-cratic Institute (NDI). Between 2003 and 2004 he was the Chief External Relations Officer of Invitel; one of the incumbent fixed line telephone operators in Hungary. He joined Crnogorski Telekom in April 2005 as Regulatory and Government Relations Director. He holds his current position since January 2008.

Milija Zeković, Chief Sales Officer

Born in 1971. He holds a degree in Economics from University of Montenegro. After completing studies in 1995 he started his career at „Kartonka“, Podgorica, where he worked as production and sales manager, and under extremely difficult economic conditions in country, he founded the first Montenegrin manufacturing factory for the paper containers. When Monet (now T-Mobile Crna Gora) was funded in 2000, he started to work as Sales Manager. He has 9 years of experience within the Crnogorski Telekom group. In 2006 he became the Director of Sales for residential users and small and medium enterprises. In July 2008 he was appointed CSO of Crnogorski Telekom, responsible for development and creation of sales strategy, management and control of sales channels, presentation of all products and services to all existing and potential clients, and development and management of sales processes in company.

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Introduction

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General informationCrnogorski Telekom is the biggest telecommunication company in Montenegro. It provi-des full range of telecommunication services on the Montenegrin market, as it has two subsidiaries: T-Mobile CG, which is a mobile telecommunication service provider, and Internet Crna Gora, which is an Internet services provider.

Crnogorski Telekom is the principal fixed line service provider in Montenegro. Its exclu-sive rights in fixed line telecommunications services expired in December 2003. Crno-gorski Telekom provides local, national and international services, in addition to a wide range of telecommunications services involving leased line circuits, data networks.

Following a successful privatization tender, between March and May 2005, Magyar Tele-kom obtained 76.53 percent interest in Crnogorski Telekom and thus became the majo-rity owner of the Company.

Deutsche Telekom AG is the ultimate controlling owner of Magyar Telekom holding 59.21% of the issued shares. Deutsche Telekom (DT) Group and Magyar Telekom Group have a number of fixed line and mobile telecom service provider subsidiaries worldwide, with whom the Crnogorski Telekom Group has regular transactions. Related party transaction details are given in the note 31 of Crnogorski Telekom a.d. Financial Statements.

For the past four years, Crnogorski Telekom’s major operational goals were to further digitalize the fixed line network and to increase the capacity and reliability of data net-work, consequently creating conditions for increase of subscribers of broadband and voice services. The digitalization rate reached 100 percent by the end of 2007 and ADSL coverage exceeded 90% of PSTN customer base by the end of 2008.

In December 2007 Crnogorski Telekom started IPTV service and at the moment it is the sole provider on the Montenegrin market capable to offer a broad range of multimedia services and to start with 3Play and 4play services on the carrier grade level.On June 26, 2006 the Shareholders Assembly of Crnogorski Telekom approved the proposal of the Board of Directors to adopt the “T” brand in the Montenegrin market. On September 26, 2006, the fixed line operations became T-Com Crna Gora (“T-Com CG”) and the mobile business changed its name to T-Mobile Crna Gora (“T-Mobile CG”), while the fixed line parent company and the group was renamed to Crnogorski Telekom.

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In 2007, a new mobile and fixed line operator entered into the Montenegrin telecommunications market - the third mobile ope-rator and licensed operator for development and exploitation of WiMAX-based network, launched its WiMAX network.

In the third quarter of 2007 and the first quarter of 2008, eight licenses for VoIP operators were issued as well. Two of them signed agreements on interconnection and access with T-Com in July 2008. They are able to offer outgoing call services to our customers through carrier selection and freephone service, but they do not terminate international traffic.

Fixed-mobile service substitution is expected to become increa-singly significant. The high mobile penetration and the introduc-tion of a third mobile operator in 2007 have intensified this trend.

Nine Multichannel Multipoint Distribution Service (“MMDS”) and CATV licenses were awarded at the beginning of 2007. Some of the cable operators have declared their intention to provide Inter-net and telephony services. Terms and conditions for joint usage of our underground infrastructure have been published in 2008, but currently only three of them are using this possibility at five municipalities in Montenegro (in total length of less than 20 km). MMDS and satellite operators, who were able to start first with service provisioning and who are not dependant on our infra-structure, are currently market leaders in CATV segment.

Strong competition is developing in wholesale segment as well. It is expected that significant players like Telekom Srbija, National Broadcasting Company and Electricity Company will enter in Internet and data wholesale business after significant invest-ments in their communications infrastructure have been realized during 2008.

Competition

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Regulatory environment

Following the privatization of Crnogorski Telekom, the gradual liberalization of the telecommunications markets in Montenegro has started and this process has become more pronounced in recent years. The legal environment is rapidly changing. A new competition law came into force on January 1, 2006 and the consumer protection law was adopted in May 2007. The new law on Electronic Communications was adopted in Montenegro by the Parliament on July 29, 2008. The Government expects that the new EU conform law will speed up the development of electronic communications networks and services; stimulate competiti-on; provide open and equal access to networks and electronic communications services; improve efficiency and introduce new tech-nologies and services; provide efficient customer protection; provide easy access to information on tariffs and services; stimulate Inter-net usage and encourage investment in the telecommunications sector. The Agency for Electronic Communications shall conduct a market analysis and identify operators with SMP within one year from the day the law on Electronic Communications enters into force and to prescribe SMP operators to introduce remedies as defined by the relevant EU directives. Until SMP operators are identified it shall be considered that Crnogorski Telekom is an operator with SMP in the markets of fixed voice telephony network and services, including the market of access to network for data transfer and leased lines, while all telephone network operators (including T-Mobile Crna Gora) are operators with SMP in markets of termination of calls in their respective networks. The law on Electronic Communications however does not prescribe what obligations the SMP operators have to fulfill before the first market analysis is completed. The aim of these obligations is to significantly lower the market entry barriers for new providers in the telecommunications markets.

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Regulatory fees Under the new regulatory regime Crnogorski Telekom will have to pay a fee for market supervision, numeration fees and radio frequency fees. These fees shall be paid according to the previ-ous regulatory regime until December 31, 2008 and from Janua-ry 1, 2009 according to the new one if the Regulator adopts the related bylaws by the end of the year. The new fees might be higher than the ones paid under the previous law when a flat 1 percent gross revenue fee was paid.

Carrier selection New RIO of Crnogorski Telekom was published in April 2008. Carrier Selection was included in the new RIO. Currently, four operators (beside Crnogorski Telekom andT Mobile Crna Gora) have been assigned with Carrier Selection code, but only one of them signed interconnection agreement with Crnogorski Telekom in July 2008, with Carrier Selection included.

Sharing of infrastructure The RIO also defines terms and conditions of collocation, for the purpose of interconnection realized at Crnogorski Telekom’s premises. This includes renting of space at buildings, masts and ducts as well. RIO conditions are valid only for operators looking

for interconnection/access while usage of infrastructure by ope-rators for other purposes is subject to commercial negotiations.

Termination of calls Fixed termination fee (“FTR”) has been reduced by 10 percent from 1 July, 2008. National termination fee is now 0.027 EUR/min, while local termination is 0.0225 EUR/min. Termination of international calls in Crnogorski Telekom’s network transited by domestic operators is subject of commercial negotiations with competitors. Additional reduction of FTR and the intention to equalize fees regardless of traffic origin have been announced by the Agency for Electronic Communications together with the introduction of cost-based termination in the forthcoming period. Local authorities in Montenegro have the authority to levy munici-pal taxes on telecommunications equipment placed under roads, resulting in a high degree of uncertainty for Crnogorski Telekom with respect to the overall tax liabilities.

Montenegro and the European Union Montenegro became an independent state in 2006 and signed a Stabilization and Association Agreement with the European Uni-on at the end of 2007. The Interim Stabilization and Association Agreement came into force on January 1, 2008. Montenegro has submitted its application for membership in the EU in December 2008.

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Our strategy

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Evolving focus

2007 was the year where the foundations of long-term competitiveness were laid down with significant changes for Crnogorski Telekom both on the structural and technologi-cal level.The technological developments of 2007 (such as the launch of mobile broadband network as the first operator in Montenegro, and the Extra TV service providing a set of features and degree of interactivity unique in the broadcast market) have solidified the position of Crnogorski Telekom as the leading service company in the infotainment industry.

In 2008, we have strengthened our position in the broadband and broadcast markets. By the end of 2008, we have served over 27,800 customers with broadband access and connected more than 17,500 Extra TV homes. We have also launched best-in-class mobile broadband services, providing high-speed nomadic access to our customers in the country and abroad. O

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Four strategic goalsThe strategy of Crnogorski Telekom relies on four principal building blocks:

1. Operational efficiency 2008 was the year of organizational restructuring. This mani-fested in a significant headcount rationalization of 103 emplo-yees on Group level. Such headcount reductions would have been impossible without a major revision of the organization charts of Crnogorski Telekom. The changes included a simplifi-cation of reporting lines and the elimination of managerial layers – which made the organizational structure leaner and less hierar-chical.

The Group also executed a broad-scope business process reen-gineering project, where more than fifty business processes were redesigned or established as completely new processes to sup-port the growing need for performance and efficiency and to be able to provide even better customer experience.

2. Superior service experience The development of employees with an orientation on customer needs is playing a crucial role in the way we live our business. Technology is changing rapidly in the industry where we operate. Continuous and systematic investment into the development of our employees remains one of the highest priorities.

We are striving to get closer to our existing and future customers; we have continued expanding our sales network and have made additional steps towards guaranteeing the availability of our ser-vices either in our integrated T-Shop network or through high-quality partner shops in the country. The 14 shops operated by the Group are unique in terms of coverage and the availability of products compared to competitors. We have – as the first tele-communication operator in the country – launched a webshop, offering the convenience of ordering products and services to our customers – wherever they are.

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3. Service expansion The customers of Crnogorski Telekom have and will constantly benefit from the fact that their provider is the member of a highly recognized international operator.

These synergies guarantee that world-class service innovation is brought to Montenegro as they emerge internationally.Crnogorski Telekom is determined to constantly stretch the boundaries of its activities and will – through prudent innovation - enter new industry segments which have not been part of the traditional telecommunication activities. In 2008 we started esta-blishing our presence in the media segment and we will continue paving the road to the goal of becoming a veritable “Three Screen” company: the services and applications we deliver will be made available to our customers on each interface they use (mobile handsets, PC or television), wherever they are, whatever they do.

By putting our entertainment services to the service of the tou-rism industry, we have also brought unique, tailor-made products to our business customers.

4. Full broadband potential The expansion of services which rely on broadband technology is a core element of our business strategy.

The fixed line broadband access services offered by ADSL deli-ver the highest bandwidth and most reliable service available on the Montenegrin telecommunication market.

T-Mobile has launched in 2008 mobile internet packages which deliver world-class nomadic broadband experience on the whole territory of the country and worldwide.

Extra TV has become by the end of 2008 a product available for masses of customers - especially with the new entry-level pa-ckages launched in November 2008.

The broadband expansion strategy of Crnogorski Telekom deve-loped during 2008 identified certain barriers to the mass expan-sion broadband internet access services in the country. We have started the implementation of a program with the determination of systematically destroying those barriers. The program has been addressing the fields of education, infrastructure, financial constraints of end users and content and online application de-velopment, and will continue during the coming years.

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Human resources

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Main company focuses in 2008 related to human resources management in Crnogorski Telekom Group covered headcount efficiency increase, improvement of service culture and increase in employee satisfaction.

Headcount efficiency In October 2008, Crnogorski Telekom Group successfully com-pleted a program for headcount rationalization which resulted in efficiency increase of 11%. The company implemented several steps in an effort to streamline the Group`s operating structure and, with the re-organization of Technical Area, leaner and more flexible organizational structure was achieved. Apart from the achieved headcount efficiency, this headcount rationalization program will have a significant impact on the em-ployee related expenses in the coming years.

In 2008, the salaries of employees in Crnogorski Telekom Group were increased starting from June 2008. Considering that the cost of living was rapidly increasing in the last 5 years, manage-ment agreed to increase the salaries of employees in Crnogorski Telekom A.D. by 26,5% and T-Mobile Crna Gora and Internet Crna Gora by 13,4%. This adjustment reduced the differences in salaries of the same job positions within the group and resulted in a significant increase of the satisfaction of our employees.

Improvement of service culture and custo-mer satisfaction

Improvement of service quality, customer satisfaction and effici-ency was one of the key objectives of Service Culture program in 2008. In order to achieve these key objectives, customer orienta-tion trainings were organized for technical, sales and contact centre staffs that are in direct contact with the customers.

The project “Shop Day” was developed to enable the manage-ment to better get to know customers and their needs through direct shop experience. This was a great opportunity to raise the management’s awareness for customer issues and the opera-tions of the frontline. Received feedback, with proposals for im-provement of our sales and support processes, was positive.

Knowing that a great employee experience drives a great custo-mer experience, HR Area started with improvement of HR pro-cesses in the frame of the “Service DNA” project. The changes implemented with the aim the processes to be more customer oriented and the HR staff to demonstrate a convincing service attitude and consequently to become ambassadors of our company’s values and service culture.

Spirit@telekom Pulse Check Survey enables us to have an overview on the gene-ral atmosphere in the company in a frequent manner, every se-cond month. The survey provides the opportunity to systematical-ly support the change processes globally and at short intervals. The management receives up-to-date information on the status of current changes from employees’ perspective.

Spirit@telekom is supplemented by the bi-annual employee sur-vey, which goes in detail in terms of questions regarding emplo-yees’ direct working conditions and which is consequently analy-zed in greater depth. The employee survey was conducted during the fall of 2008 and the analysis of the results will be available at the beginning of 2009, building the basis for impro-vement actions during the year.

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Corporate social responsibility

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The concept of Corporate Social Responsibility has an important role in Crnogorski Telekom. Being a leading company in the country, Crnogorski Telekom is proactively involved in all areas important for Montenegrin society.

Following the codes of business ethics and corporate governance, as well as by understanding the needs of the community, Crnogor-ski Telekom gives its contribution to the development of Montenegrin society.

Special attention is dedicated to building relationships with employees, customers, shareholders and business partners. Numerous sponsorships and donations that bring additional investments in education, sports, culture and health prove that corporate social responsibility is treated with a strategic importance in Crnogorski Telekom.

Internet in schools Being the leading broadband provider in the country, Crnogorski Telekom is responsible to be the first partner of the country on its way to becoming an information society. In order to enable Inter-net to become a part of everyday lives of majority of Montenegrin citizens, together with the Government of Montenegro, the Com-pany initiated a project aiming to increase the level of informatics literacy and internet penetration in Montenegro.

Within this project, the company organized internet workshops in 40 schools, in 21 Montenegrin municipalities, with a motto »Inter-net is a game played your whole life«. The goal of this strategic project is to bring to attention the importance of Internet to the young population. The first phase of the project enabled all ele-mentary and high schools to have their own web presentation, whose content will further be developed by pupils and their te-achers.

In addition, for the second year in a row, Crnogorski Telekom enables free Internet access via ADSL to all elementary and high schools in the country. The project was implemented together with Ministry of Education and Science, and it started in 2006.

In order to increase the level of conciousness about the impor-tance of information technologies among young population, Crnogorski Telekom awarded 94 elementary and high school pupils with free Internet. The project was implemented in coope-ration with the Exam centre of Montenegro, and the pupils could choose whic type of connection they prefer – T-Com ADSL or T-Mobile Mobile Internet.

Sponsorships and donations

Sports, cuture, education, health and ecology were identified as five focus areas for sponsorship and donation activities. Beside stretegic partnerships that Crnogorski Telekom has with impor-tant institutions, the company cooperates with numerous NGOs that gather persons with dissabilities, as well as with organisa-tions that work on development of civil society in Montenegro.

In Company‘s sponsorship strategy, sports have a special place, since this is an important area for developing a healthy, modern and advanced society. In 2008 Crnogorski Telekom was a gol-den sponsor of Montenegrin Olympic Comitee, and hence, has been able to offer an important support in the first, historic ap-pearance of Montenegrin team on the Olympic games in Beijing.

In accordance with the Hybrid Sponsorship Strategy of Deutsche Telekom, in 2008 the company introduced football as a strate-gic area for sponsoring activities. T-Com became the golden sponsor of Montenegrin Football Association, Football Club Bu-ducnost and the general sponsor of T-Com First Montenegrin Football League. Besides, T-Com brand was linked to University league in indoor football and football league for elementary school pupils called T-Com Kids Cup.

T-Mobile was, traditionally for the sixth year in a row, the sponsor of Woman‘s Handball Club Buducnost T-Mobile, one of the most successfull sports clubs in the country.

In 2008, Crnogorski Telekom continued its support to health institutions in Montenegro. On the occasion of New Year and Christmas holidays, the company donated 30 000 euros to the Health institution »Dom Zdravlja Podgorica«. This institution, that takes care abouth the health of 200 000 habitants of Podgorica, used this donation for the purchase of ultrasound equipment.

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TelephonyOn the September 1st 2007 Crnogorski Telekom introduced the tariff rebalancing in fixed line prices which targeted equalizing of the prices for business and residential segment. Rebalancing targeted decreasing of gap between domestic traffic tariffs and international tariffs. That was a one of tools preventing potential actions of competitors in fixed line of business. Results were expected revenue decrease in Business segment with almost the same structure of MOU. In residential segment there is higher traffic towards internatio-nal destinations, with expected decrease in dial up traffic.During 2008 number of residential customers decreased for 2,4% while number of business customers decreased by 2,9% resulting in total customer number decrease of 2,5%, which is significantly lower churn than in other European countries. Decrease in residenti-al segment is mainly caused by bad debt disconnections.

Loyalty program

In August 2008, “Ritam Klub” was introduced, the first joined fix and mobile loyalty program. This program was specifically difficu-lt and challenging from both technical a marketing point of view. In this loyalty program customers are collecting points - dukati and can exchange them for 3 types of prizes:

1. Traffic and subscription (minutes, SMSs, prepaid refills, ADSL subscriptions, IPTV subscription, etc.); 2. Internal goods (handsets, ADSL Modems, etc.); 3. External goods (video cams, mp3, keyboards, DVDs, etc).

Also, thanks to the fact it is a joint loyalty program of T-Com and T-Mobile, customers can collect and join dukati (points) of both T-Com and T-Mobile and exchange it for the prizes of both opera-tors.

OCPs and Flat packages

Alternative fixed voice technologies (4 WiMax licensed operators and 8 licensed VoIP operators) increased competition in fixed voice retail. Thus, T Com introduced International OCPs – Ino and Ino Favorit packages (focus on top 20 international calling directions for additional payment and free minutes or discounted prices, competitive to VOIP prices) in October 2008 in order to prevent potential churn and to sustain international revenue. This offer represented competitive advantage and would allow us to react in accordance with market needs. In case that International traffic of T-Com starts to drop suddenly due to impact of competi-tion, we will be prepared to refresh our OCP offer and start ag-gressive campaign.

T Com introduced flat fixed packages – Komfor and Komfor+ packages - offering unlimited calls towards the T-Com fixed net-work in Montenegro (local and long distance) 100 extra minutes for calls within the fixed network in Serbia (Komfor+ ). These packages were planned to be churn prevention for 2009 and to represent milestone that our competition will have to achieve.

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InternetIn 2008, the main focus of our marketing activities was to incre-ase ADSL sales and to successfully introduce IPTV service (un-der brand name Extra TV). In order to profit from our market posi-tion and to stimulate growth of non-voice revenues, several actions and promotions have been implemented. Customer number has grown almost double. In order to achieve that growth in Broadband segment we introduced new restructured ADSL offer with affordable Flat packages in September 2008 with great success, reaching almost 28 thousand customers at the end of the year.

Extension of ADSL access network was performed in 2 phases with internal resources engaged on implementation. The co-verage was extended to 93% until EOY 2008 and continued without interruption. Capacity was extended to 52 thousand ADSL ports (used for broadband Internet and IPTV). All DSLAMs are ADSL2+ capable and IPTV ready. Also, as result of 2008 roll-out 17 new locations were introduced, totaling in 139 loca-tions. Crnogorski Telekom intends to deploy a software platform for remote management of xDSL CPE (Auto-Configuration Server – ACS) with main functions: auto-configuration and dynamic service provisioning, software/firmware image management, status and performance monitoring and diagnostic.

TelevisionDuring 2007 T-Com started with IPTV service, named “Extra TV”, as answer to competitive environment on Montenegrin market. The aim of the project was to implement MSTV system including major IP network upgrade extensively exploring DT Group syner-gies. Commercial launch of ExtraTV service was in November 2007 with IPTV platform capacity to support 13.000 customers. During 2008, upsizing of Microsoft IPTV platform was successful-ly finished. Platform now can support up to 38.000 customers. Extra TV launch was the most successful one in DT Group. At the end of 2008 17.531 customers were connected.

For load sharing of unicast traffic, D-servers are now implemen-ted on few new locations (till now D-Servers were only on central location in Podgorica). One location (Bijelo Polje) is dedicated for users in north region of country and two locations (Kotor and Bar) are dedicated for users in south region of country. Users from central part of country are guided to existing D-Servers in Podgorica. As a very important service quality indicator, D-server logging is also successfully implemented parallel with platform upsizing project. Thanks to this, we now have very useful system for user problem identification. Error logs classified on many parameters help us to locate and identify problems on user or IPTV location level.

In September we implemented IPTV reporting system. Reports are divided in few categories: Live TV reports, VoD reports, DVR reports, STB reports and Menu Usage reports. Parallel with re-porting system, project of creating professional backup and recovery system is successfully finished.

There is a long list of ExtraTV additional features implemented through developed applications in 2008. (Billing information, package changer, stock exchange reports, Ritam klub, game portal, remote recording & mobile EPG, TV web portal, weather forecast, etc…).

Several pilot projects started in 2008.

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OtherImplementation of new Montenegrin numbering plan was suc-cessfully finished this year. Parallel usage of new and old national area and short codes was implemented in all relevant systems.

Implementation of new national Internet domain (.me) was suc-cessfully implemented during 2008. Also, we started with imple-mentation of parallel usage (12 months) of public mail addresses and web domains.

Sales channelsCrnogorski Telekom has developed different sales channels in order to provide best services to residential and business custo-mers. Crnogorski Telekom’s direct sales channels consist of own shop network (14 joint T-Mobile and T-Com shops), Key Account Managers and SME Coordinators. Crnogorski Telekom’s indirect sales channels include the partner shop’s network, dealers, web sales, “door to door” sales and Call Center. Business customers are served by Key Account Managers taking care of the top 300 clients and SME Coordinators who are in charge for SME and SOHO companies. Top clients are divided by industries (e.g. banks, hotels, large manufacturers, government, etc.) and small companies are divided by regions.

Extra TV service for hotels.

First phase of this project is implemented in Hotel City in Podgori-ca. The hotel guests have live TV stream with hotel channel list (28 channels available). Also, small customization of user inter-face (new channel list, hotel logo, one free of charge sample of VoD content) was part of this first phase. In the second phase, VoD content delivering and charging will be enabled. In the third phase, we plan to integrate hotel management system with our IPTV system.

Mobile TV

Testing period started in June as a free service to all T-Mobile postpaid customers. This project is result of synergy between T-Com and T-Mobile (channel acquisition headend system is used from T-Com Extra TV system, Streaming and VoD servers are implemented in service part of T-Mobile network).

VDSL pilot project

Pilot project of VDSL2 access technology started in July of 2008 in order to introduce higher speed for customers with copper wire lines. First test users in two areas of Podgorica are con-nected to VDSL access equipment. Available bandwidth confi-gured for end users is 30 Mbps in downstream and 10 Mbps in upstream, which is enough to give customer possibility for two STBs (with HD streams) and 10 Mbps of Internet (up to 30 Mbps in case of not using TV service).

HDTV pilot project

HDTV pilot project started in September 2008. On 10th Septem-ber first free-to-air channel Arte HD transmitted over IPTV test platform using Motorola’s encoder.

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The financial year 2008

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Management report for the2008 financial year2008 was financially and operationally successful year. In fix segment of business we kept stable customer base, achieving almost double ADSL internet customer number (compared to previous year) and had great sales success with our Extra TV service. We also experienced customer number increase of our data services (Mipnet and Leased lines).

It was also a year of challenges and difficulties, especially in wholesale operations. Voice retail revenues in fix segment decreased significantly as a consequence of 2007 Rebalance and fix-to-mobile services substitution. It was also a year of further operational consolidation, as 97 employees left the company.

Highlights

Revenues decreased by 13%, mainly due to changes in wholesale business, which was partly compensated by higher internet and data revenues

EBITDA decreased by 28%, to 19,6 million, with an EBITDA margin of 26%. EBITDA before special influ-ences (excluding severance payments) decreased by 23%, to 23,3 million, with margin of 31%

Capital expenditure was 9,4 million, out of which 5,4 million relate to IPTV

Dividend for 2007 paid out amounting to 22 million, which was the highest amount ever paid in Montenegro

Biggest and most significant changes affected wholesale business, as our major customers rerouted their outgoing international traffic through direct link with their mother and sister companies in the neighbouring countries at the begining of year, which had huge impact on our revenue stream and EBITDA performance. Voice retail revenues declined 7% year over year, due to rebalance of 2007 and fix-to-mobile services substitution. We managed to mainly offset this shortfall with higher internet (ADSL and IPTV), data (Mipnet and Leased lines) and other revenues. Decrease in revenues, compared to 2007, was partly covered by lower revenue related pay-ments. EBITDA excluding one-off items (severance payments of 3,7 million) decreased by 23%, to 23,3 million in 2008. EBITDA excluding one-off items margin was 31%.

Reported and underlying EBITDA

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Customers number of 170 thousand decreased only 2,5% year over year. Thanks to the strong focus on broad-band services, the number of ADSL internet customers reached almost 28 thousand, while Extra TV service counted more than 17,5 thousand customers.

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International Financial Reporting StandardsFinancial Statements andIndependent Auditor’s Report

For the year ended 31 December 2008

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39

Contents

Independent Auditor’s Report 40

Standalone Financial Statements:

Balance Sheet 43

Income Statement 44

Statement of Changes in Equity 45

Cash Flow Statement 46

Notes to the Financial Statements 47

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INDEPENDENT AUDITOR’S REPORT

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INDEPENDENT AUDITOR’S REPORT

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BALANCE SHEET

ASSETS (in EUR)

As at December 31,

Note 2007 2008

Non current assets

Property, plant and equipment 5 90.114.835 88.485.089

Intangible assets 4 8.086.609 7.890.156

Investments in subsidiaries and associates 6 21.855.370 21.855.370

Long term loans and other receivables 8 6.130.599 5.603.427

Available for sale financial assets 7 24.371 25.374

Total non current assets 126.211.784 123.859.416

Current assets

Inventories 9 2.057.730 1.597.100

Trade and other receivables 10 11.189.778 15.398.737

Current income tax prepayments - 928.583

Short term financial placement 11 20.500.000 30.000.000

Advances and prepaid expenses 12 4.920.008 4.687.361

Cash and cash equivalents 13 26.014.007 5.630.418

Restricted cash 14 299.630 312.265

Total current assets 64.981.153 58.554.464

Total assets 191.192.937 182.413.880

EQUITYShareholders’ equity

Share capital 16 140.996.394 140.996.394

Retained earnings 23.733.086 10.898.899

Statutory reserves 17 684.256 1.984.002

Total shareholders’ equity 165.413.736 153.879.295

LIABILITIESCurrent liabilities

Trade and other payables 20 8.248.514 10.285.871

Accrued liabilities and advances 21 7.894.785 9.872.484

Provision for liabilities and charges 18 5.175.445 5.181.172

Current income tax payable 1.632.548 -

Total current liabilities 22.951.292 25.339.526

Non current liabilities

Deferred income tax liability 19 2.297.979 2.393.509

Provision for liabilities and charges 18 529.930 801.550

Total non current liabilities 2.827.909 3.195.059

Total liabilities 25.779.201 28.534.585

Total liabilities and equity 191.192.937 182.413.880

The accompanying notes on pages 47 to 109 are an integral part of these financial statements.

These financial statements have been approved for issue by the Board of Directors of Crnogorski Telekom A.D. on 24 March 2009 and are signed on their behalf by

________________________ ______________________ ________________________ Slavoljub Popadić Dragan Mićović Slaviša JovanoviċChief Executive Officer Accounting Director Accounting Manager

This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation

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INCOME STATEMENT

(in EUR)

For the year ended December 31,

2007 2008

Notes

Revenues 22 86.788.557 74.992.460

Other operating income 23 2.086.023 26.449

Employee related expenses 24 (14.860.008) _(19.122.207)

Depreciation and amortization 4,5 (9.885.383) (11.208.859)

Payments to other network operators 25 (24.527.937) (17.241.919)

Cost of telecommunications equipment sales (738.949) (457.018)

Other operating expenses 26 (16.163.446) (18.848.717)

Total operating expenses (66.175.723) (66.878.720)

Operating profit 22.698.857 8.140.189

Financial income 27 3.517.013 3.766.380

Financial costs 28 220.936 197.291

Financial income/(costs) - net 3.296.077 3.569.089

Profit before income tax 25.994.934 11.709.278

Income tax expense 19 (2.356.748) (1.243.719)

Profit for the year 23.638.186 10.465.559

Earnings per share for profit attributable to the equity holders of the Company during the year, (expressed in EUR per share)

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-basic 0,5000 0,2214

-diluted 0,5000 0,2214

The accompanying notes on pages 47 to 109are an integral part of these financial statements.

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STATEMENT OF CHANGES IN EQUITYFor the year ended December 31, 2008

(In EUR)

Share capital Statutory reserves Retained earnings Total

Balance, January 2007 140.996.394 - 9.079.156 150.075.550

Dividends - - (8.300.000) (8.300.000)

Allocation of retained earnings - 684.256 (684.256) -

Profit for the year - - 23.638.186 23.638.186

Balance, December 31, 2007 140.996.394 684.256 23.733.086 165.413.736

Balance, January 2008 140.996.394 684.256 23.733.087 165.413.736

Dividends - - (22.000.000) (22.000.000)

Allocation of retained earnings - 1.299.747 (1.299.747) -

Profit for the year - - 10.465.559 10.465.559

Balance, December 31, 2008 140.996.394 1.984.002 10.898.899 153.879.295

The accompanying notes on pages 47 to 109are an integral part of these financial statements.

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CASH FLOW STATEMENTFor the year ended December 31, 2008

(In EUR)

Notes 2007 2008

Cash flows from operating activities

Cash generated from operations 36 23.393.101 18.537.665

Income tax paid (1.207.062) (3.709.318)

Interest paid (10.816) (1.931)

Net cash flows from operating activities 22.175.223 14.826.415

Cash flows from investing activities

Purchase of tangible and intangible assets 4,5 (8.650.365) (9.383.664)

Short term financial placement (20.500.000) (9.500.000)

Interest received 2.837.670 3.258.017

Proceeds from disposal of non current assets 1.116.898 -

Release of deposit for sold investment in Crnogorska Komercijalna Banka 12 - 1.856.059

Net cash flows from investing activities (25.195.797) (13.769.589)

Cash flows from financing activities

Dividends paid to shareholders and minority interest (8.066.315) (21.440.415)

Repayment of loans and other borrowings (526.680) -

Net cash flows from financing activities (8.592.995) (21.440.415)

Change in cash and cash equivalents (11.613.569) (20.383.589)

Cash and cash equivalents, beginning of year 13 37.627.576 26.014.007

Cash and cash equivalents, end of year 13 26.014.007 5.630.418

The accompanying notes on pages 47 to 109are an integral part of these financial statements.

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1. FOUNDATION AND ACTIVITIESTelekom Crne Gore A.D., Podgorica (“Telekom” or the “Company”) was founded and registered with the Commercial Court of Podgorica under Decision numbered Fi. 5490/98 of December 31, 1998, subsequent to the completion of the ownership transformation and separation processes of the telecommunication and postal businesses of the Public Enterprise of Post, Telegraph and Telecommunications of the Republic of Montenegro (“JP PTT Crna Gora”).

In accordance with the Republic of Montenegro Company Law, the Company was newly registered on November 6, 2002 into the Central Registry of the Commercial Court of Podgorica under registration inscription numbered 4-0000618/001.

The Company’s principal activities are involved in: the maintenance and utilization of the Republic of Montenegro telecommunication system, the development of telecommunication technologies, and in the provision of telecommunication services.

The Company is the principal provider of fixed telephony services in the Republic of Montenegro, as well as of the local, national and international telephony services, in addition to a wide range of other telecommunication services involving leased circuits, data networks, telex and telegraph services. In accordance with the Republic of Montenegro Telecommunications Law, the Company’s market position as an exclusive supplier of fixed-line telephony services was officially suspended on December 31, 2003.

During 2000, Telekom rolled out a GSM 900 mobile network and in the May 2000 launched its commercial operation as a provider of mobile telephony. On July 28, 2000 Telekom registered Monet D.O.O. (“Monet”) as it’s fully owned subsidiary and subsequently transferred the mobile telephony business to Monet. The Montenegro mobile telephony market is liberalized and Monet (present name T Mobile Crna Gora d.o.o., Podgorica) competes with another operator “Pro Monte” D.O.O.

Following the decision of Deutsche Telekom and Magyar Telekom, on May 23, 2006 the General Assembly of Telekom Crna Gora A.D. approved the introduction of the „T“ brands in Montenegro. On July 3, 2006 the General Assembly of „Telekom Crna Gora A.D.“ approved the change of the Company’s name to „Crnogorski Telekom A.D.“. The new Company name was registered on September 25, 2006 at the Court of Registrar of the Republic of Montenegro under registration number 4-0000618/14.

Following a successful privatization tender Crnogorski Telekom A.D., Podgorica (former Telekom Crna Gora A.D.) was acquired by Magyar Telekom NyRt. (hereinafter referred as to Magyar Telekom). Magyar Telekom obtained control of Crnogorski Telekom A.D., Podgorica on March 31, 2005 and by the end of 2005 it had a 76.53% stake.. The Company owns 100% of the capital of T Mobile Crna Gora d.o.o. (former Monet d.o.o.), the Montenegrin mobile company and 100% of the share capital of Internet Crna Gora . On 7 March, 2005 Telekom acquired additional 15% shares. Deutsche Telekom AG is the ultimate controlling owner of Magyar Telekom holding 59.21% of the issued shares.

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1. FOUNDATION AND ACTIVITIES (Continued)Telekom is domiciled in Podgorica, in the Republic of Montenegro at the following street address: Moskovska 29. at December, 2008, Telekom had 697 employees (December 31, 2007 – 706 employees).

Investigation into certain consultancy contracts

As previously disclosed, in the course of conducting their audit of Magyar Telekom’s 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PWC”) identified two contracts the nature and business purposes of which were not readily apparent to them. In February 2006, Magyar Telekom’s Audit Committee retained White & Case (the “independent investigators”), as its independent legal counsel, to conduct an internal investigation into whether the Company had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including the Foreign Corrupt Practices Act (“FCPA”), or internal Company policy. The Audit Committee also informed the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”), and the Hungarian Supervisory Financial Authority of the internal investigation.

Based on the documentation and other evidence obtained by it, White & Case preliminarily concluded that there was reason to believe four consulting contracts entered into in 2005 were entered into to serve improper objectives, and further found that, during 2006, certain employees had destroyed evidence that was relevant to the investigation. The internal investigation is continuing into these and other contracts identified by the independent investigators.

In 2007 the Supreme State Prosecutor of the Republic of Montenegro informed the Board of Directors of Crnogorski Telekom, of her conclusion that the contracts subject to the internal investigation in Montenegro included no elements of any type of criminal act for which prosecution would be initiated in Montenegro.

Hungarian authorities also commenced their own investigations into Magyar Telekom’s activities in Montenegro. The Hungarian National Bureau of Investigation has informed Magyar Telekom that it closed its investigation as of May 20, 2008 without identifying any criminal activity.

United States authorities commenced their own investigations concerning the transactions which are the subject of our internal investigation, to determine whether there have been violations of U.S. law. During 2007, the U.S. authorities expanded the scope of their investigations to include an inquiry into our actions taken in connection with the internal investigation and our public disclosures regarding the internal investigation.

We cannot predict when the internal investigation or the ongoing Government investigations will be concluded, what the final outcome of those investigations may be, or the impact, if any, they may have on our financial statements or results of operations. Government authorities could seek criminal or civil sanctions, including monetary penalties, against us or our affiliates, as well as additional changes to our business practices and compliance programs.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1. Basis of Preparation and Presentation of the Financial Statements

The financial statements of Crnogorski Telekom A.D., Podgorica, have been prepared in accordance with the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and effective at the time of preparing the financial statements and with the requirements of the Law on Accounting and Auditing of Montenegro. The financial statements have been prepared under historical cost convention, except for fair value of available for sale investments as disclosed in the accounting policies below.

The Company maintains its accounting records and prepares its statutory financial statements in conformity with the Accounting and Auditing Law of the Republic of Montenegro (Official Gazette of the Republic of Montenegro numbered 69/2005) and specifically, in accordance with the relevant decision pertaining to the application of International Accounting Standards in the Republic of Montenegro (Official Gazette of the Republic of Montenegro numbered 69/2002). Pursuant to the aforecited provisions, the International Financial Reporting Standards (IFRS) were applied for the first time as the Company’s primary basis of accounting for the reporting year commencing on January 1, 2003.

The official currency in the Republic of Montenegro and the Company’s functional currency is Euro (EUR).

The Company has also prepared consolidated financial statements in accordance with IFRS for the Company and its subsidiaries (the “Group”). In the consolidated financial statements, subsidiary undertakings - which are those companies in which the Company, directly or indirectly, has an interest of more than half of the voting rights or otherwise has power to exercise control over the operations - have been fully consolidated.

Users of these stand-alone financial statements should read them together with the Group’s consolidated financial statements as at and for the year ended December 31, 2008 in order to obtain full information on the financial position, results of operations and changes in financial position of the Group as a whole.

Initial application of standards interpretations and amendments to standards and interpretations in the financial year

In the current year, the Company has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2008. The initial application of these pronouncements did not have a material impact on the presentation of the Company’s results of operations, financial position or cash flows. Listed below are those new or amended standards or interpretations:

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IAS 39 (Amended) - Financial Instruments: Recognition and Measurement. The IASB published on October 14, 2008 amendments to IAS 39

and IFRS 7 - Financial Instruments: Disclosures. The amendments relate to the possibility to reclassify financial instruments measured at fair value through profit of loss. So far, reclassifications in and out of this category were not allowed. The amendment now enables under certain circumstances a reclassification. If based on the new rules a reclassification is done, the amended IFRS 7 demands additional disclosures. The amendments had no effect on Crnogorski Telekom’s equity or Net income or implications for reporting. As the Company did not make and does not intend to make such reclassifications. The amendment is effective from July 2008.

- IFRIC 11 Interpretation to IFRS 2 - Company and Treasury shares transactions. Under IFRS 2 it was not defined exactly how it should be calculated where the employees of a subsidiary received the shares of a parent. IFRIC 11 clarifies that certain types of transactions are accounted for as equity-settled or cash-settled transactions under IFRS 2. It also addresses the accounting for share-based payment transactions involving two or more entities within one company. The Company applied this Interpretation from January 1, 2008, but as no such transactions have happened so far, it did not have an impact on the Company’s accounts.

- IFRIC 14 Interpretation on IAS 19 - The Limit on Defined Benefit Assets, Minimum Funding Requirements and their Interaction. IFRIC 14 provides general guidance on how to assess the limit in IAS 19 Employee Benefits on the amount of the surplus that can be recognized as an asset. It also explains how the pensions asset or liability may be affected when there is a statutory or contractual minimum funding requirement. This Interpretation is not applicable to the Company as the Company has no funded defined post-retirement benefit schemes.

Standards, interpretations and amendments issued that are not yet effective

The Company has chosen not to early adopt the following standard and interpretations that were issued but not yet effective for accounting periods beginning on 1 January 2008. Listed below are those new or amended standards or interpretations:

- Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures (effective from 1 January 2008). The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital in accordance with internal and external (regulatory) requirements.

The Company assessed the impact of the amendment to IAS 1, and concluded that no additional disclosures are necessary in the financial statements as the Company does not have any specific internal and external requirements related to capital management.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IAS 27 (Amendment), ‘Consolidated and separate financial statements’ (effective from 1 January 2009). The amendment is part of the IASB’s

annual improvements project published in May 2008. Where an investment in a subsidiary that is accounted for under IAS 39, ‘Financial instruments: recognition and measurement’, is classified as held for sale under IFRS 5, ‘Non-current assets held-for-sale and discontinued operations’, IAS 39 would continue to be applied. The amendment will not have an impact on the Company’s operations because it is the Company’s policy for an investment in subsidiary to be recorded at cost in the standalone accounts of each entity. IAS 28 (Amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’) (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where an investment in associate is accounted for in accordance with IAS 39 ‘Financial instruments: recognition and measurement’, only certain rather than all disclosure requirements in IAS 28 need to be made in addition to disclosures required by IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7 ‘Financial Instruments: Disclosures’. The amendment will not have an impact on the Company’s operations because it is the Company’s policy for an investment in an associate to be equity accounted in the Company’s consolidated accounts.

- IAS 31 (Amendment), ‘Interests in joint ventures’ (and consequential amendments to IAS 32 and IFRS 7) (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where an investment in joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, ‘Financial instruments: Presentation’, and IFRS 7 ‘Financial instruments: Disclosures’. The amendment will not have an impact on the Company’s operations as there are no interests held in joint ventures.

- IAS 38 (Amendment), ‘Intangible assets’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment deletes the wording that states that there is ‘rarely, if ever’ support for use of a method that results in a lower rate of amortisation than the straight-line method. The amendment will not have an impact on the Company’s operations, as all intangible assets are amortised using the straight-line method.

- IAS 20 (Amendment), ‘Accounting for government grants and disclosure of government assistance’ (effective from 1 January 2009). The benefit of a below- market rate government loan is measured as the difference between the carrying amount in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’, and the proceeds received with the benefit accounted for in accordance with IAS 20. The amendment will not have an impact on the Company’s operations as there are no loans received or other grants from the government.

- IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Company’s operations because it does not distribute non-cash assets to owners.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the

accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Company’s financial statements.

Standards, interpretations and amendments issued, but not adopted by the Company

- IFRS 8, ‘Operating Segments’, effective for annual periods beginning on or after 1 January 2009. Under IFRS 8, segments are components of an entity regularly reviewed by an entity’s chief operating decision-maker. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented. In addition, the segments are reported in a manner that is more consistent with the internal reporting provided to the chief operating decision-maker. IFRS 8 also sets out requirements for related disclosures about products and services, geographical areas and major customers.

- IAS 27 (Revised), ‘Consolidated and separate financial statements’, (effective for annual periods beginning or after 1 July 2009).The revised standard requires the effects of all transactions with non- controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The Company will apply IAS 27 (Revised) prospectively to transactions with non-controlling interests from 1 January 2010.

- IFRS 3 (Revised), ‘Business combinations’ combinations’ (effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Company will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IFRS 5 (Amendment), ‘Non-current assets held-for-sale and discontinued operations’ (and consequential amendment to IFRS 1, ‘First-time

adoption’) (effective for annual periods beginning on of after 1 July 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that all of a subsidiary’s assets and liabilities are classified as held for sale if a partial disposal sale plan results in loss of control. Relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. A consequential amendment to IFRS 1 states that these amendments are applied prospectively from the date of transition to IFRSs. The Company will apply the IFRS 5 (Amendment) prospectively to all partial disposals of subsidiaries from 1 January 2010.

- IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). This Interpretation addresses accounting by entities that grant loyalty award credits to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services to customers who redeem award credits. The Company will apply this Interpretation from January 1, 2009. We do not expect that IFRIC 13 may cause material changes in the Company’s accounting treatments.

- IAS 1 (revised) - Presentation of Financial Statements (effective from annual periods beginning on or after 1 January 2009). Revised IAS 1 introduces overall requirements for the presentation of financial statements, guideline for their structure and minimum requirements for their contents. The revised standard will prohibit the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Company will apply this Interpretation from January 1, 2009. The Company does not expect the revised IAS 1 to cause significant changes in the presentation of the Company’s financial statements.

- Revised IAS 23 Borrowing costs. On March 29, 2007, the IASB issued the revised version of IAS 23 “Borrowing Costs”. The main change from the previous version is the removal of the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalize borrowing costs as part of the cost of such assets. The revised Standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January 2009. Earlier application is permitted. When application of this Standard constitutes a change in accounting policy (which is the case for the Company), an entity shall apply IAS 23 (revised) to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after the effective date. However, an entity may designate any date before the effective date and apply the Standard to borrowing costs relating to all qualifying assets for which the commencement date for capitalization is on or after that date

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IAS 23 (Amendment), ‘Borrowing costs’ (effective for annual periods beginning or after 1 January 2009). The amendment is part of the IASB’s

annual improvements project published in May 2008. The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 ‘Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. The Company will apply the IAS 23 (Amendment) prospectively to the capitalisation of borrowing costs on qualifying assets from 1 January 2009.

- IAS 28 (Amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’, and IFRS 7, ‘Financial instruments: Disclosures’) (effective for annual periods beginning or after 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. An investment in associate is treated as a single asset for the purposes of impairment testing. Any impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. The Company will apply the IAS 28 (Amendment) to impairment tests related to investments in subsidiaries and any related impairment losses from 1 January 2009.

- IAS 36 (Amendment), ‘Impairment of assets’ (effective for annual periods beginning or after 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company will apply the IAS 28 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009.

- IAS 38 (Amendment), ‘Intangible assets’ (effective for annual periods beginning or after 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. A prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Company will apply the IAS 38 (Amendment) from 1 January 2009.

- IAS 39 (Amendment), ‘Financial instruments: Recognition and Measurement (effective for annual periods beginning on or after 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. This amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge. The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading is also amended. This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit- taking is included in such a portfolio on initial recognition. The Company will apply the IAS 39 (Amendment) from 1 January 2009. It is not expected to have an impact on the Company’s income statement.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)

- IAS 1 (Amendment), ‘Presentation of Financial Statements’ (effective for annual periods beginning on or after 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that some rather than all financial assets and liabilities classified as held for trading in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’ are examples of current assets and liabilities respectively. The Company will apply the IAS 39 (Amendment) from 1 January 2009. It is not expected to have an impact on the Company’s financial statements.

Standards, amendments and interpretations that are not yet effective and not relevant for the Company’s operations

- IAS 32 (Amended) ‘Financial Instruments: Presentation’ (effective for annual periods beginning or after 1 January 2009). In February 2008, the IASB amended IAS 32 with respect to the balance sheet classification of puttable financial instruments and obligations arising only on liquidation. The amended standards require entities to classify puttable financial instruments and instruments, or components of instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation as equity, provided the financial instruments have particular features and meet specific conditions. The amendments have detailed criteria for identifying such instruments. The amendments of IAS 32 are applicable for annual periods beginning on or after January 1, 2009. As the Company currently does not have such instruments that would be affected by the amendments, the amendments to the standard are not expected to have any impact on the Company’s financial statements.

- IFRS 1 (Amendment) ‘First time adoption of IFRS’, and IAS 27 ‘Consolidated and separate financial statements’ (effective from 1 January 2009). The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. The amendment is nor relevant for the Company’s financial statements.

- IAS 39 (amended) - The IASB published an amendment in August 2008 to IAS 39 with respect to hedge accounting. The amendment “Eligible Hedged Items” allows to designate only changes in the cash flows or fair value of a hedged item above or below a specified price or other variable (IAS 39.AG99BA). The amendment of IAS 39 shall be applied retrospectively for annual periods beginning on or after July 1, 2009, but are not yet endorsed by the EU. The amendment will not have any impact on the Company’s accounts as the Company does not apply hedge accounting.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IAS 19 (Amendment), ‘Employee benefits’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project

published in May 2008. The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. IAS 37, ‘Provisions, contingent liabilities and contingent assets, requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent.

- IFRIC 15 Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). IFRIC 15 refers to the issue of how to account for revenue and associated expenses by entities that undertake the construction of real estate and sell these items before construction is completed. The interpretation defines criteria for the accounting in accordance with either IAS 11 or with IAS 18. IFRIC 15 shall be applied for annual periods beginning on or after January 1, 2009. As the Company is not involved in such constructions, IFRIC 15 is not relevant for the Company.

- IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). IFRIC 16 refers to the application of Net Investment Hedges. Mainly, the interpretation states which risk can be defined as the hedged risk and where within the Company the hedging instrument can be held. Hedge Accounting may be applied only to the foreign exchange differences arising between the functional currency of the foreign operation and the parent entity’s functional currency. A derivative or a non-derivative instrument may be designated as a hedging instrument. The hedging instrument(s) may be held by any entity or entities within the Company (except the foreign operation that itself is being hedged), as long as the designation, documentation and effectiveness requirements of IAS 39.88 that relate to a net investment hedge are satisfied. IFRIC 16 shall be applied for annual periods beginning on or after October 1, 2008. As Magyar Telekom does not apply such hedges and does not apply hedge accounting, IFRIC 16 will have no impact on the Company’s accounts.

- IAS 29 (Amendment), ‘Financial reporting in hyperinflationary economies’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company’s operations because the Company does not operate in a hyperinflationary economy.

- IAS 41 (Amendment), ‘Agriculture’ (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. It requires the use of a market-based discount rate where fair value calculations are based on discounted cash flows and the removal of the prohibition on taking into account biological transformation when calculating fair value. The amendment will not have an impact on the Company’s operations as no agricultural activities are undertaken.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1. Basis of Preparation (continued)- IFRS 2 (Amended) effective for annual periods beginning on or after 1 January 2009. In January 2008 the IASB published the amended Standard IFRS 2 - Share-based Payment. The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The changes to IFRS 2 must be applied in periods beginning on or after January 1, 2009. The Company has no share based compensations, therefore, we do not expect the amended standard to have an effect on the Company when applied.

2.2. Comparative data

Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. The effects of reclassifications are not material to the Company’s financial statements.

2.3. Use of Estimates

The presentation of the financial statements in accordance with IFRS requires the Company’s management to make best estimates and reasonable assumptions that affect the assets and liabilities’ amounts, as well as the disclosure of contingent liabilities and assets as of the date of the preparation of the balance sheet, and income and expenses arising during the accounting period. These estimates and assumptions are based on information available as of the date of the balance sheet preparation; however the Company’s future operating results may differ from the estimated values.

Critical accounting estimates and assumptions

The Company makes estimates and assumptions concerning the future. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In some cases the Company relies on independent expert opinion. The most critical estimates and assumptions are discussed below.

a) Useful lives of assets

The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. We believe that the accounting estimate related to the determination of the useful lives of assets is a critical accounting estimate since it involves assumptions about technological development in an innovative industry. Further, due to the significant weight of long-lived assets in our total assets, the impact of any changes in these assumptions could be material to our financial position, and results of operations. As an example, if the Company was to shorten the average useful life by 10%, this would result in additional annual depreciation and amortization expense of approximately EUR 0.9 million (0.8 million at December 31, 2007.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.3. Use of Estimates (Continued)

b) Potential impairment of property, plant and equipment and intangibles

We assess the impairment of identifiable property, plant, equipment and intangibles whenever there is a reason to believe that the carrying value may materially exceed the recoverable amount and where impairment in value is anticipated. The Company’s policy considers that the recoverable amounts are determined by value in use calculations, which use a broad range of estimates and factors affecting those. Among others, we typically consider future revenues and expenses, technological obsolescence, discontinuance of services and other changes in circumstances that may indicate impairment. As this exercise is highly judgmental, the amount of potential impairment may be significantly different from that of the result of these calculations.

c) Impairment of trade and other receivables

We calculate impairment for doubtful accounts based on estimated losses resulting from the inability of our customers to make required payments. We base our estimate on the aging of our account receivables balance and our historical write-off experience, customer credit-worthiness and changes in our customer payment terms when evaluating the adequacy of the impairment loss for doubtful accounts. These involve assumptions about future customer behavior and the resulting future cash collections. If the financial condition of our customers were to deteriorate, actual write-offs of currently existing receivables may be higher than expected and may exceed the level of the impairment losses recognized so far.

Included in long-term receivables are specific receivables from the Government of the Republic of Montenegro (Note 8) which the Company estimates that are entirely recoverable and where impairment in value was not anticipated. This estimate is based on a past history of repayments.

d) Provisions

Provisions in general are highly judgmental, especially in the cases of legal disputes. The Company assesses the probability of an adverse event as a result of a past event to happen and if the probability is evaluated to be more than fifty percent, the Company fully provides for the total amount of the liability. Due to the high level of uncertainty, in some cases the evaluation may not prove to be in line with the eventual outcome of the case.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1. Foreign Exchange Gains and Losses

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. These financial statements are presented in official currency of the Republic of Montenegro (EUR) which is functional currency of the Company. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

3.2. Cash and cash equivalents short term financial placement

Cash and cash equivalents include cash on hand and in banks and all highly liquid deposits and securities with original maturities of three months or less.

3.3. Short term financial investments

Short term financial investments are investments with a maturity of more than three month up to twelve months at their amortized costs. Interest receivables on investments are presented separately within the balance sheet as other receivables. The associated interest revenues are presented in the income statement within other operating income as incurred.

3.4 Trade and other receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within ‘other operating expenses’. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against ‘other operating expenses’ in the income statement.

3.5. Inventories

Inventories are stated at the lower of cost or net realizable value using the historical cost method of accounting, and are valued on a weighted average method.

Net realizable value represents the amount at which inventories can be realized in the ordinary course of business, less applicable variable selling expenses.

Provisions that are charged to “Other operating expenses” are made where appropriate in order to reduce the carrying value of such inventories to their net realizable values.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3.6. Intangible Assets Intangible assets are stated at cost less accumulated amortization and impairment losses.

As of the balance sheet date, intangible assets include: telecommunication licenses, other licenses and acquired computer software rights provided these costs do not form part of the hardware acquisition costs.

Costs associated with developing internal computer software that has a probable benefit exceeding one year are to be recognized as intangible assets. Expenditures that enhance and extend the benefits of computer software programs beyond their original specifications and useful lives are to be recognized as a capital improvement and added to the original cost of the software. Costs associated with the maintenance of existing computer software programs and annually paid license fees are expensed as incurred.

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives.

The Agency for Telecommunications of the Republic of Montenegro issued to Telekom, a Fixed-Line License that is valid as of January 1, 2002 for a period of twenty-five years. Pursuant to the Guidelines on the Changes and Amendments to the Rules on the Determination of Registration and Licensing Fees for Telecommunication Operators and Service Providers dated November 5, 2004, the Government of Montenegro, Ministry of the Economy prescribed a special one-time fee for the provision of international traffic services, to be assessed for each year comprising the entire validity period of the telecommunications license. The aforementioned fee was to be paid in one installment in the amount determined by the Agency for Telecommunications of the Republic of Montenegro. License for provision of international traffic services is granted for a period of twenty-three years.

The expenditure to acquire the telecommunication licenses has been capitalized and amortized on a straight-line basis over its estimated useful life.

In October 2007, Broadcasting agency of the Republic of Montenegro issued to Telekom a license for building and usage of distribution radio and TV program to customer (IPTV license) for a period of ten years. According to Rules about issuing and condition for usage license for distribution radio and TV programs the Company is obliged to pay one-time fee for registration. The expenditure to acquire the IPTV license has been capitalized and amortized on a straight-line basis over its estimated useful life.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3.7. Property, Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Additions of property and equipment are recorded at cost which represents the prices billed by suppliers, together with all directly attributable expenses incurred in bringing the new assets into use.

Subsequent costs are included in the assets carrying amount or recognized as a separate assets, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliable. All other maintenance and repairs are charged to the income statement during the financial period in which they are incurred.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts and any related gain or loss is recognized in the income statement.

3.8. Depreciation and Amortization

a) Amortization of Intangible AssetsIntangible assets are amortized over their respective economic useful lives.

The amortization of intangible assets is computed on a straight-line basis in order to fully write off the cost of the assets over their estimated useful lives.

The assets useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

The useful lives of intangible assets acquired during the year are determined in accordance with the usage agreement on intangible assets. When there is no agreement which established the useful life of the asset, which is in case of software, the Company estimated the useful life to be 5 years. The applicable rates are summarized below:

Intangible AssetsEstimated Useful Life

(Years)

Telecommunication license- (public fixed telephony services) 25

Telecommunication license - (international traffic) 23

Microsoft license 5

IPTV license 10

Purchased computer software 5

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3.8. Depreciation and Amortization (Continued)

b) DepreciationLand is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost less residual values over their useful lives.

The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate and calculation of depreciation costs for the current and the forthcoming period is properly adjusted.

As a result of an expert review, the Company in 2006 adjusted useful lives of certain assets as presented below:

Major Categories of Property and Equipment

Estimated Useful Life (in years)

Access networks 20

Optical connectors 20

Exchanges 7

Transmission system equipment 10

Computer equipment 3

Mipnet network 5

Routers and switches 5

3.9. Impairment of non-financial assetsNon – financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash – generating unit).

Crnogorski Telekom performed impairment test for the whole Company as Cash generating unit. CGU is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.9. Impairment of non-financial assets (continued)The recoverable amount is calculated based on fair value less cost to sell determined by the discounted projected cashflows of the Company over the next ten years with a terminal value. This is highly judgmental, which carries the inherent risk of arriving at materially different recoverable amounts if estimates used in the calculations would prove to be inappropriate. The Company has an implemented policy to make the impairment test based on a 10-year cashflow projection on reasonable and supportable assumptions that present the management’s best estimate on market participants’ assumptions and expectations considering recent similar transactions and industry benchmarks.

In order to determine the recoverable amount, the Company calculates the Company’s fair value less cost to sell. In the calculations, Crnogorski Telekom uses a range of weighted average cost of capital (WACC) before tax depending on the country of operations and the sub-sector of telecommunications. Perpetual growth rate (PGR) estimates used also depend on the country of operations and the sub-sector of telecommunications. The WACCs are determined based on CAPM (capital asset pricing model) using the average betas of the peer group, 10 year zero coupon yields and a debt ratio in line with the usual indebtedness of listed peer telecommunications companies, while the PGRs used are in line with the long-term average growth rate for the telecommunications sector.

The table below summarizes the WACCs and PGRs used in the fair value calculations of the National operations of the Company in order to determine whether the Company has been impaired.

Cash generating unitWACC (%) PGR (%)

2007 2008 2007 2008

Crnogorski Telekom 10.41 10.74 -1.0 -1.0

The Company assesses at each reporting date whether there is any indication that an impairment loss recognized in prior periods for an asset may no longer exist or may have decreased. If any such indication exists, the Company estimates the recoverable amount of that asset. An impairment loss recognized in prior periods for an asset is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. That increase is a reversal of an impairment loss. A reversal of an impairment loss for an asset is recognized immediately in profit or loss.

Due to turbulences on the financial markets the Company performed impairment test for the real estates and concluded that no impairment existed as of 31. December 2008. External expert named American Appraisal was engaged. The appraisal was made to express an opinion of the fair market value of the fee simple interest in the subject property as if available for sale in open market. Fair market value is defined as estimated amount at which the property might be expected to exchange between a willing buyer and a willing seller, neither being under compulsion, each having reasonable knowledge of all relevant facts, with equity to both. The property was valued using three approaches: discounted cash flow, sales comparison approach and income capitalization cost. Based on the assessment, it is concluded that the fair market value of the fee simple interest in the property appraised as if available for sale in the open market is higher then its carrying amount.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.10. Financial assetsThe Company classifies its financial assets in the two categories: loans and receivables and available-for-sale. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Impairment losses of other non current financial assets are included in the operating expenses.

(a) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.

Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the income statement.

Long-term loans to employees for residential housing purposes, which bear an interest rate significantly below the prevailing market rates of interest, are presented at fair value, being determined as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. Discount is treated as employee remuneration recognized in Income Statement over the shorter of the term of the loan and the expected service life of the employee.

The amount of provision for impaired loans is based on management’s appraisals of these assets at the balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Montenegro for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.10. Financial assets (Continued)

(b) Available for Sale Financial Assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Available for sale financial assets (current and non-current) consist of the Company’s participation in the capital of foreign entities.

Purchases and sales of investments are recognized on the trade-date – the date on which the Company commits to purchase or sell the asset.

Subsequent to initial recognition all available-for-sale assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost , including transaction costs, less impairment losses.

Gains and losses arising from changes in fair value are recognized directly in equity in the investments revaluation reserve with the exception of impairment losses which are recognized directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the investments revaluation reserve is included in profit or loss for the period.

The fair value is determined on an actively traded market (current bid prices), or otherwise in the absence of an active market, by Telekom’s best estimate of the investment’s fair value using the discounted cash flow model or by relying on independent expert opinion.

(c) Long-Term Investments in Subsidiaries

Subsidiaries are companies in which Telekom possesses a stake of more than 50 percent, or otherwise holds more than half of the voting rights, thereby being able to exercise control of the related entities. Long-term financial investments in subsidiaries are stated at historical cost.

(d) Long-Term Investments in Associates

Associates are companies in which Telekom owns a stake equaling between 20% and 50%, or in which it exerts significant influence, but not control. Long term financial in associated are stated at historical cost.

(e) Impairment

The Company assesses at each balance sheet date whether there is objective evidence that a financial assets or a group of financial assets is impaired. In the case of investment in subsidiaries and associates, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the securities are impaired. If any such evidence exists for investment in subsidiaries and associates, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the income statement.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.10. Financial assets (Continued)

(f) Provisions for Accounts Receivable

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in profit or loss.

3.11. Loans and other borrowings

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

3.12. Loans and other borrowings

Loans and other borrowings are recognized initially at fair value, net of transactions costs incurred. Borrowings are subsequently stated at amortized cost, any difference between the proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

3.13. Trade and other payables

Trade and other payables are carried at amortized cost using the effective interest method. On initial recognition they are accounted at fair value.

3.14. Provisions and contingent liabilities

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognized for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

3.15. Employee Benefits

a) Employee Taxes and Contributions for Social Security

Payments to defined contribution pension and other welfare plans are recognized as an expense in the period in which they are earned by the employees.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.15. Employee Benefits (Continued)

a) Employee Taxes and Contributions for Social Security (Continued)In accordance with the regulations prevailing in the Republic of Montenegro, the Company has an obligation to pay contributions to various State Social Security Funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Company is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of the employees, to transfer the withheld portions directly to government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise, and have been included under “Employee related expenses”.

The Company has no further obligation towards the employees apart from the payment of the monthly pension contributions.

b) Termination benefitsTermination benefits are payable when employment is terminated by the Company before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value.

c) Obligations for Retirement BenefitsThe defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate of high-quality corporate bonds of 3% p.a. (2007: 3% p.a.).

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the grater of 10% of the value of plan assets or 10% of the defined benefit obligations are charged or credited to income over the employees’ expected average remaining working lives. Past service cost is recognized immediately to the extent that the benefits are already vested, and otherwise is amortized on a straight-line basis over the average period until the benefits become vested.

d) Obligations for Jubilee AnniversaryPursuant to the Company’s signed collective bargaining agreements (CBAs), the Company is obliged to pay a severance payment in an amount equal to ten minimal, monthly salaries earned in the Company, and between three and nine minimal, monthly salaries to be paid out as a jubilee anniversary award.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.15. Employee Benefits (Continued)

d) Obligations for Jubilee Anniversary (Continued)

The number of minimal monthly salaries for jubilee anniversary awards corresponds to the total number of years of service of the employee as presented in the table below:

Total Number of Service Years

Number of MinimalWages

10 3

20 5

30 7

34 (women) 9

39 (men) 9

Obligations for jubilee anniversary are accounted for in the same manner as defined benefit plans (as disclosed in 3.13. c)), except that any actuarial gains and losses on jubilee payments as well as past service cost are recognized directly in the income statement in the period in which they occurred.

3.16. Current income tax

Taxes, contributions and other duties not related to operating results

Taxes, contributions and other duties that are not related to the Company’s operating results, include property taxes, employer contributions on salaries, and various other taxes and contributions paid pursuant to republic and municipal regulations. All of the aforementioned types of taxes and contributions are included in the income statement under “Other operating expenses.”

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted by the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

The Company’s uncertain tax positions are reassessed by the Company’s management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the balance sheet date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the balance sheet date.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.17. Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

3.18. Revenues

Revenues are presented at fair values of consideration received or receivable. Revenues are shown net of VAT and discounts. Income is recognized and recorded at the moment of the provision of the contracted services when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity.

3.19. Income from Telecommunication Services

a) Outgoing Domestic and International Calls

Income from calls within Montenegro, and from outgoing international calls are collected from the Telekom’s customers, and is recorded at its invoiced value less any effective discounts and VAT, at the moment of the provision of the contracted services.

b) Telecommunication Subscription

The telecommunication subscription is a fee charged for telephone line usage. Monthly subscription fees are charged to the Company’s customers and recognized as revenue irrespective of their use of the Telekom network.

Since January 1, 2008 the Company have been implemented new service called IPTV. For this service, customers are charged monthly for IPTV subscription. Revenue of IPTV are charge and recognize irrespective of their use.

c) Monthly Radio Diffusion SubscriptionFrom January 1, 2004 to August 31, 2007 the monthly radio diffusion subscription fees (i.e., the RTV subscription, which is the subscription for general radio-television broadcasts) have been invoiced by Crnogorski Telekom on behalf of the Broadcasting Agency, but have not been included in the Company’s income. The Broadcasting Agency has borne the full risk of exposure of such receivables since January 1, 2004. The Company is not the provider of those broadcasting services, it does not have any credit risk associated and it does not influence the pricing of the service. Revenues are recognized for the commission only.

Since September 1, 2007, RTV subscription has not been invoiced by Crnogorski Telekom any longer as the relevant obligation expired and no new contract was concluded for this purpose. Collection of previously invoiced amounts has continued based on concluded contract.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.19. Income from Telecommunication Services (continued)

d) Other revenues from Telecommunication ServicesOther income primarily includes the lease of telephony capacities, i.e., telephone lines, MPLS networks, voice machines, call listings, voice mail, telegram and other services. The aforementioned income is recognized and recorded in the accounting period when the related services are performed. The bills for new customer connections are recorded in the period in which the user is connected.

3.20. Revenues and Expenses from Direct International Traffic and AccountingIncome and expenses from direct international traffic and accounting include the income and expenses generated from all incoming and outgoing international calls realized in countries having direct international traffic and accounting. A portion of such income earned and expenses incurred is measured and recorded at an estimated value arrived at based on the internal settlement accounting of telephony traffic.

3.21. Interconnection Revenue and ExpensesInterconnection revenue includes revenue earned on incoming telephone traffic originated via the mobile networks (T-Mobile d.o.o., Podgorica and ProMonte GSM d.o.o., Podgorica and since July 2007 M:tel d.o.o. ), and via Telekom Srbija, but specifically those that have been transmitted through, or terminated on the Crnogorski Telekom’s network. The interconnection expenses include expenses from outgoing telephone traffic that is routed from the Company to the individual mobile companies and to Telekom Srbija on the territory of the Republic of Serbia.

Since the Company is only terminating and initiating traffic in and from its network, it is acting as a principal, and therefore the revenues and costs of these traffics are stated gross in these financial statements. Interconnection income and expenses are recorded at the moment in which the contracted services have been provided.

3.22. Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating leases relate to the rental of internet, lines, premises, warehouses and other rental expenses. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

3.23. Interest Income/Expense and Other Borrowing Costs

Interest income and expense and other costs arising on borrowings, are credited or debited in the accounting period in which they arise and are recognized using effective interest method.

3.24. Income from Long-Term Investments

Dividends are recognised when the Company’s right to receive payment is established.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.25. Fair Value

It is a policy of the Company to disclose the fair value information of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their recorded amounts. In the Republic of Montenegro, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. As a result of this, fair value cannot readily or reliably be determined in the absence of an active market. The Company’s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may have not been realized, it recognizes a provision. In the opinion of management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values, based on historical data on charging rate of mentioned receivables in previous period. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments.

3.26. Segmental disclosure

A business segment is a group of assets and operations engaged in providing products and services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environment. Management considers that Company operates as one business and geographical segment.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.27. Financial risk management

a) Financial risk factors

The Company’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, foreign currency exchange risk and interest rate risk. The Company does not use derivative financial instruments or any other form of hedges against these risks.

There is no formal risk management framework implemented in Crnogorski Telekom. The Board of Directors focuses mainly on credit risk and liquidity risk and acts on a case basis to mitigate risks and minimize losses.

Recent volatility in global and Montenegrin financial markets: The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times, higher interbank lending rates and very high volatility in stock markets. The uncertainties in the global financial markets have also led to bank failures and bank rescues in the United States of America, Western Europe, Montenegro and elsewhere. Indeed the full extent of the impact of the ongoing financial crisis is proving to be impossible to anticipate or completely guard against. Management is unable to reliably estimate the effects on the Company’s financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Company’s business in the current circumstances.

b) Credit risk

Credit risk arises from cash and cash equivalents and deposits with banks, as well as credit exposures to customers.

The Board of directors of the Company decided which commercial bank will be a partner of the Company, taking into consideration the following risk aspects: evaluation factors, total assets, market share, and safety of funds. Credit risk management principles are reconciled with the risk policy of the Company’s parent company. In order to avoid credit risk concentration, cash and cash equivalents and short term investments are placed in five different banks. According to risk policy of the parent company, deposits in banks are additionally guaranteed by bank guarantees given by foreign banks in order to provide appropriate safety of funds. Management of credit risk includes detailed monthly treasury reporting to senior management with all necessary information about cash and short term investments.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.27. Financial risk management (continued)

If customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account past experience in collection and other factors. The Company has no significant concentrations of credit risk due to its diverse customer base save for cumulative exposure the Company uses a system of reminders leading to discontinuance of its service as the main tool to collect overdue receivables. Also, according to balance and number of outstanding bills, the Company uses instruments of litigation of customers. However, debtors of the Company may be affected by the lower liquidity situation due to the recent volatility in the global and Montenegrin financial markets, which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for customers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management have properly reflected revised estimates of expected future cash flows in their impairment assessments.

In order to manage credit risk related to collection, senior management on twice monthly basis consider reporting prepared by Treasury, and according to reporting results decide to take action for the future. Maximum exposure to credit risk related to customers amounts 9,75 million EUR.

c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close our market position. The volume of wholesale financing has significantly reduced recently. Such circumstances may affect the ability of the Company to obtain new borrowings if the need would arise for that. Capital expenditure projects are often undertaken with the assistance of supplier credits to manage liquidity. The Company has no extarnal loans and borrowings. Further more, all liabilities which require cash flow are matured maximum up to one year. The Company has limited exposure to liquidity risk because it posses significant amount of cash and cash equivalents. Additionally, according to contracts for short term investments, any time, short tem investments can be withdrawn and used for payments of liabilities. On monthly basis, senior management considers liquidity reporting prepared by Treasury, comparing to planned and realized cash flow activities and takes decisions for future actions.

d) Foreign exchange risk

The Company operates internationally and is exposed to some foreign exchange risk arising from various currency exposures primarily with respect to Special Drawing Rights and US dollars used to settle its international traffic revenue and expenses.

At December 31 2008, if EUR had weakened /strengthened by 20% against the SDR with all other variables held constant, post-tax profit for the year would have been EUR 125.766 (2007: EUR 67.918) higher /lower, mainly as a result of foreign exchange gains /losses on translation of SDR denominated trade receivables and trade payables. At 31 December 2008, if EUR had weakened /strengthened by 20% against the USD with all other variables held constant, post-tax profit for the year would have been EUR 63.216 (2007: EUR 59.926) higher /lower, mainly as a result of foreign exchange gains /losses on translation of USD denominated bank deposits.

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3. SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.27. Financial risk management (continued)

e) Interest rate risk

The Company has limited interest bearing borrowings. Its interest bearing assets include deposits and loans provided to other companies and to banks on a fixed interest rate basis. As an example, if the Company applied increased discount interest rate amount of 9%, on long term receivables and employee loans this would result in additional annual expense of approximately EUR 0.315 million (2007: EUR 0.324 million).

f) Capital risk management

The Company manages its equity as capital. Total equity amounted to EUR 153.879.295 as at 31 December 2008 (EUR 165.413.736 as at 31 December 2007).

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Also, the Company monitors that its capital is kept above minimum legal requirement. Because the Company has been profitable, there is no risk that its capital may fall below minimum legal requirement. The Company does not have borrowings and therefore does not monitor gearing ratio.

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4. INTANGIBLE ASSETS

Construction

Licenses Software in Progress Total

Cost

Balance at January 1, 2007 8.884.630 2.722.612 - 11.607.242

Additions 75.000 52.262 - 127.262

Transfers - 63.080 - 63.080

Balance at December 31, 2007 8.959.630 2.837.953 - 11.797.583

Accumulated Depreciation

Balance at January 1, 2007 1.458.228 1.315.532 - 2.773.760

Charge for the year 402.916 534.298 - 937.214

Balance at December 31, 2007 1.861.144 1.849.830 - 3.710.974

At December 31, 2007 7.098.486 988.123 - 8.086.609

At December 31, 2006 7.426.402 1.407.080 - 8.833.482

Construction

Licenses Software in Progress Total

Cost

Balance at January 1, 2008 8.959.630 2.837.953 - 11.797.583

Additions 195.767 13.871 163.662 373.299

Transfers 479.295 - (50.959) 428.336

Balance at December 31, 2008 9.634.692 2.851.824 112.703 12.599.218

Accumulated Depreciation

Balance at January 1, 2008 1.861.164 1.849.830 - 3.710.974

Charge for the year 469.104 528.984 - 998.088

Balance at December 31, 2008 2.330.249 2.378.814 - 4.709.062

At December 31, 2008 7.304.444 473.011 112.703 7.890.156

At December 31, 2007 7.098.486 988.123 - 8.086.609

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INTANGIBLE ASSETS (continued) 4.

Included in the Company’s license balance is Fixed-Line license with net book value as of December 31, 2008 of EUR 4,483,620 (December 31, 2007: EUR 4,719,600). The Agency for Telecommunications of the Republic of Montenegro issued to Telekom, a Fixed-Line License that is valid as of January 1, 2002 for a period of twenty-five years.

In accordance with the Guidelines on the Changes and Amendments to the Rules on the Determination of Registration and Licensing Fees for Telecommunication Operators and Service Providers dated November 5, 2004, the Government of Montenegro, Ministry of Economy prescribed a special one-time fee for the provision of international traffic services, to be assessed for each year comprising the entire validity period of the telecommunications license in the amount of EUR 120.000. This fee was to be paid in one installment in the amount determined by the Agency for Telecommunications of the Republic of Montenegro. Pursuant to the afore-described, the value of the Company’s telecommunication license is increased by EUR 2.760.000, commencing as of January 1, 2004 until the expiration of the license. License is granted for a period of twenty-three years. Net book value of International traffic service license included in the Company’s license balance amounts to EUR 2.160.000 at December 31, 2008 (December 31, 2007: EUR 2.280.000).

The Company has an existing obligation to pay annual fees, to the Agency for Telecommunications of the Republic of Montenegro (the “Agency”), which are calculated based on the amount of one percent of the Company’s total income in the previous reporting year. The expenses with respect to this obligation to the Agency are stated in the income statement under “Other operating expenses” (Note 26).

In October 2007, the Broadcasting agency of the Republic of Montenegro issued to Telekom a license for building and usage of distribution radio and TV program up to customer for a period of ten years. According to Rules about issuing and condition for usage license for distribution radio and TV programs the Company is obliged to pay one-time fee for registration in amount of EUR 75.000.

The Company has an existing obligation to pay annual fees, to the Broadcasting Agency of the Republic of Montenegro, which are calculated based on the amount of 5 percent of the Company’s income arisen from that service, in the previous reporting year, starting from the year 2008.

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PROPERTY, PLANT AND EQUIPMENT 5.

Land BuildingsEquipment and Other

AssetsConstruction

in ProgressTotal

Cost

Balance at January 1, 2007 2.939.018 73.249.582 38.523.614 2.277.094 116.989.308

Additions - 16.931 367.141 8.802.848 9.186.920

Transfers - 1.213.967 2.889.672 (4.166.717) (63.080)

Disposals - (1.463) (847.920) - (849.383)

Balance at December 31, 2007 2.939.018 74.479.015 40.932.507 6.913.225 125.263.764

Accumulated Depreciation

Balance at January 1, 2007 - 12.367.521 14.492.107 246.173 27.105.801

Charge for the year - 3.147.060 5.801.109 - 8.948.169

Impairment (Note 26) - - - (246.173) ( 246.173)

Disposals - ( 458) ( 658.411) - ( 658.869)

Balance at December 31, 2007 - 15.514.123 19.634.806 - 35.148.929

Net Book Value

At December 31, 2007 2.939.018 58.964.892 21.297.701 6.913.225 90.114.835

At December 31, 2006 2.939.018 60.882.061 24.031.507 2.030.921 89.883.507

Cost

Balance at January 1, 2008 2.939.018 74.479.015 40.932.507 6.913.225 125.263.764

Additions - 29.398 3.906.420 5.128.903 9.064.721

Transfers - 62.017 6.704.014 (7.194.367) (428.336)

Disposals /write –off - - (454.864) - (454.864)

Balance at December 31, 2008 2.939.018 74.570.430 51.088.077 4.847.760 133.445.285

Accumulated Depreciation

Balance at January 1, 2008 - 15.514.123 19.634.806 - 35.148.929

Charge for the year - 3.167.866 7.042.904 - 10.210.771

Disposals /write –off - - (399.503) - (399.503)

Balance at December 31, 2008 - 18.681.989 26.278.207 - 44.960.196

Net Book Value

At Decembar,31 2008 2.939.018 55.888.440 24.809.871 4.847.760 88.485.089

At December 31, 2007 2.939.018 58.964.892 21.297.701 6.913.225 90.114.835

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PROPERTY AND EQUIPMENT (continued)5.

The Company does not possess complete documentation in connection with the titles of the land in the amount of EUR 150.200 and building in the amount of EUR 185.708. Telekom is in the process of obtaining titles for the land and building, but effectively has control over these items.

6. INVESTMENTS IN SUBSIDIAIRES AND ASSOCIATES

(In EUR)

In % December 31, 2007 December 31, 2008

Investments in Subsidiaries

- T Mobile d.o.o., Podgorica 100 19.246.491 19.246.491

- Internet Crne Gore d.o.o., Podgorica 100 2.383.491 2.383.491

21.629.982 21.629.982

Investments in Associates

- PTT Standard d.o.o., Podgorica 20 345.924 345.924

- Service center for electronic operations

E-Mon d.o.o., Podgorica 35 225.388 225.388

571.312 571.312

Less: Allowance (345.924) (345.924)

21.855.370 21.855.370

Telekom is the founder of the entity, T Mobile Crna Gora d.o.o., Podgorica which is its wholly-owned subsidiary. T Mobile’s primary business activities involve the following: public mobile telecommunications, including the cable-based transmission of speech, data, photos and other data, broadcasting, relay and satellite communications, telephone, telegraph and telefax connections, as well as network maintenance services. T Mobile was set up in July 2000 subsequent to which date, Crnogorski Telekom transferred to it the rights to its GSM network.

Internet Crna Gora d.o.o., Podgorica, is a limited- liability company and was founded on August 26, 1997. Principal business activities of this company include provision of the web services and line leases. Since 2004, Crnogorski Telekom is sole owner of the entity „Internet Crna Gora“.

In accordance with its Board of Directors’ Resolution with respect to the Establishment of a Service Center for Electronic Banking dated October 14, 2004, Telekom, in partnership with the entity, Pexim d.o.o, Belgrade, has founded a Service Center for Electronic Banking, E-Mon d.o.o., Podgorica. Crnogorski Telekom’s participation has been contributed in the form of infrastructure and telecommunication capacities, as stated at December 31, 2004, in the present value of expected future cash flows that the Company would realize primarily on the lease of internet capacities and premises, ISDN access and VPN networks to banks. As per the Decision of the Company management, the base for computing the current value of expected future cash flows equals the application of an annual interest rate of 5%.

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6. INVESTMENTS IN SUBSIDIAIRES AND ASSOCIATES (continued)Summarised financial information about associates are given bellow:

Assets Liabilities Revenues Expenses Profit / Loss

Balance ,December 31, 2007

PTT Standard d.o.o. - - - - -

Service center for electronic operations E - Mon d.o.o. 1.044.548 1.044.548 502.563 425.494 77.069

Balance, December 31, 2008

PTT Standard d.o.o. - - - - -

Service centre for electronic operations E - Mon d.o.o. 1.115.307 1.115.307 468.967 346.323 122.644

7. AVAILABLE FOR SALE FINANCIAL ASSETS

(In EUR)

In % December 31, 2007 December 31, 2008

Investments Available for Sale

Investments in Foreign Satellite Associations

- Intelsat, Ltd. 0.0061 23.795 24.799

- New Skies Satellites N.V. 0.0061 575 575

24.370 25.374

Long term investments are denominated in the following currencies:

(In EUR)

December 31, 2007 December 31, 2008

USD 23.795 24.799

EUR 575 575

24.370 25.374

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8. LONG TERM LOANS AND OTHER RECEIVABLES

(In EUR)

December 31, 2007 December 31, 2008

Employee loans 1.951.396 1.895.630

Long term receivables 3.285.625 2.882.115

Prepaid employee benefits 857.913 822.392

Other long term receivables 35.665 3.290

6.130.599 5.603.427

The fair values of employee loans and long term receivables are equal to their carrying amounts.

Employee loans

The maturities of undiscounted employee loans are presented below:

(In EUR)

December 31, 2007 December 31, 2008

From 2 to 5 years 703.418 710.414

Over 5 years 2.161.358 2.109.508

Total undiscounted employee loans 2.864.776 2.819.922

Employee loans in the amount of EUR 1.895.630 (December 31, 2007: EUR 1.951.396) relate to loans granted to the Company’s employees. Such loans were approved for repayment periods of 5, 7 and 20 years, and were issued at an annual interest rate of 2% which is calculated and to be paid on a monthly basis. The total amount of the approved loans per employee ranges from EUR 5,000 to EUR 48,500. For certain employees, the loan liability has been reduced by 0.5 % for each year of employment service up to December 31, 1993. The percentage of this reduction ranges from 3.5 to 14.5 percent of the total amount of the loan. These employees obtained such liability reduction rights based on allocations of their contributions towards residential housing construction up to FY 1993. The effective interest rate on these employee loans was 7.5 % in 2008 and 2007 and corresponding to the rate used by the independent valuation expert.

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8. LONG TERM LOANS AND OTHER RECEIVABLES (Continued)The Company obtained mortgages on the residential housing units occupied by the loan beneficiaries, in order to secure timely loan repayments. In accordance with the terms of the relevant residential loan agreements, upon the completion of the purchase and/or construction of the housing unit, the employee is obligated to register ownership rights in the Company’s name, and to establish a pledging right, namely a mortgage naming the Company the first to collect on the real estate that has been purchased and/or constructed in the amount of the loan liability. The employee is obligated to deliver within the first five-month period from the date of the first loan payment, the documentation detailing the registration of pledging rights. Total exposure to credit risk arisen from loan not covered by pledge amounted to EUR 181.734 (2007: EUR 468.970). However, the market in Montenegro for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment.

Prepaid employee benefits of EUR 822.392 (2007: EUR 857.913) relate to discount on employees loans calculated using the effective interest rate method and are treated as employee remuneration recognized in the Income Statement over the shorter of the term of the loan and the expected service life of the employee (Note 3.10).

During the year 2007, in accordance with the Company’s Statutes and the Rules on the Fulfillment of Employee Residential Housing Requirements, the Company’s Operating committee decided to grant housing loans to employees in total amount of EUR 593.000 free of interest. These loans were issued for a period of 20 years in order to keep key employees of the Company. The total amount of the loan extended per employee ranges from EUR 28.000 up to EUR 42.000. Condition for realization of these loans is that employees have to stay employed in the Company for a loyalty period of minimum three years. If employee left the Company before mentioned term, it is obliged to repay one-time total outstanding amount. If employee would not repay his liability, the Company has the right to activate the pledge and collect its receivables.

Long –term receivables

The maturities of long-term receivables are presented below:

(In EUR)

December 31, 2007 December 31, 2008

From 2 to 5 years 2.962.625 2.962.625

Over 5 years 1.481.312 740.656

Total undiscounted long-term receivables 4.443.937 3.703.281

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8. LONG TERM LOANS AND OTHER RECEIVABLES (Continued)

Receivables from the Government of the Republic of Montenegro in the amount of EUR 3.594.472 (December 31, 2007: EUR 3,920,770) as of December 31, 2008, represent the current value of expected future cash flows which the Company would realize in accordance with the Share Transfer Agreement delineating the transfer of foundation rights in the Radio difuzni centar d.o.o., Podgorica (RDC) entered into on December 10, 2004 between Telekom Crne Gore and the Government of the Republic of Montenegro. According to the aforecited agreement, the RDC become the property of the state.

Pursuant to a relevant decision of the Company’s management, the bases for computing the current value of expected future cash flows equals the application of an annual interest rate of 7.5%, corresponding to the rate used by the independent valuation expert. The effect of income recognized using the effective interest method for 2008 amounted to EUR 273.702 at December31, 2008 (2007: EUR 433.458).

In accordance with the terms of the aforecited agreement, the Government of the Republic of Montenegro is obligated to pay the Company a selling price as defined under the Share Transfer Agreement, in the amount of EUR 5.943.937 within a period of ten years from the date of execution of the Agreement, setting forth a grace period of 18 months during which interest is not to be calculated.

As further defined in this Agreement, at the expiration of the grace period, by the termination of the second year from the execution date of the Agreement, the Government of the Republic of Montenegro is obligated to pay the Company the amount of EUR 300.000 in equal monthly installments on the first day of the month for the coming month. During the third and the fourth year of the payment schedule, the Government of the Republic of Montenegro is obligated to remit to the Company a total annual amount of EUR 600.000 in equal monthly installments on the first day of the month for the coming month. The remaining portion of the selling price, the Government of the Republic of Montenegro shall pay to the Company in the ensuing six years in 72, equal monthly installments to be paid on the first day of the month for the coming month.

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9. INVENTORIES

(In EUR)

December 31, 2007 December 31, 2008

Cables, wires and other materials 1.807.961 1.428.336

Inventory for resale 1.135.788 535.667

2.943.749 1.964.004

Less: provision to net realizable value (886.019) (366.904)

2.057.730 1.597.100

Movements in provisions during the period from January 1, through December 31, 2008 are summarized in the table below:

(In EUR)

2007 2008

Balance, January 1 1.009.698 886.020

Reversal for the year (Note 26) (123.679) (519.115)

Balance, December 31 886.019 336.905

Inventory of EUR 336.905 (2007: EUR 886.020) was written-down to net realizable value as they became wholly or partially obsolete or their selling prices have declined. Allowance has been reduced by EUR 519.115 in 2008 (ffUR 123.679 in 2007). Previous write-downs have been reversed mainly as a result of completion of certain construction in progress for which purpose inventories had been acquired in previous years.

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10. TRADE AND OTHER RECEIVABLES

(In EUR)

December 31, 2007 December 31, 2008

Domestic trade receivables 17.540.417 19.453.188

Foreign trade receivables 2.828.982 4.503.910

Receivables from Telekom Montenegro Group 99.185 941.640

Receivables from Magyar Telekom Group 220.336 18.416

Receivables from Deutsche Telekom Group companies 231.396 489.403

Other taxes receivable 329.265 80.718

Current portion of long term receivables 796.741 882.922

Other receivables 431.952 513.116

22.478.274 26.883.313

Provision for impairment (11.288.496) (11.484.576)

11.189.778 15.398.737

Movements in provisions during the period from January 1, through December 31, 2008 are summarized in the table below:

(In EUR)

2007 2008

Balance, January 1 11.837.553 11.288.496

Charged for the year (Note 26) - 651.086

Write –off - (461.363)

Released during the year (527.112) -

Effects of changes in exchange rates (21.945) 6.358

Balance, December 31 11.288.496 11.484.576

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10. TRADE AND OTHER RECEIVABLES (Continued)Movements in provisions of domestic and foreign receivables during the period from January 1, through December 31, 2008 are summarized in the table below:

Domestic Foreign

2007 2008 2007 2008

Balance, January 1 11.379.121 10.769.611 458.432 518.885

Charged during the year - 675.872 - (24.786)

Write off - (461.363) - -

Released during the year (609.510) - 82.398 -

Effects of exchange rate movements - - (21.945) 6.357

Balance, December 31, 10.769.611 10.984.120 518.885 500.456

Provision for domestic receivables is based on the aging structure of the receivables as at the due date. Provisions for domestic receivables are made on the basis of collectability, according to the previous history of the collection of receivables updated yearly.

Provisions for foreign receivables are made individually on the basis of the management’s estimate of collectability, according to the previous history of the collection from foreign partners. The most significant part of provision relates to Community of Yugoslav PTT of EUR 188.660 (2007: 196.327), Ellite 214.076 (2007: 214.076), and Abissnet only in 2008 EUR 144.250.

Fair values of trade and other receivables are as follows:

(In EUR)

December 31, 2007 December 31, 2008

Domestic and foreign trade receivables 9.080.903 12.472.522

Receivables from Telekom Montenegro Group 99.185 941.640

Receivables from Magyar Telekom Group 220.336 18.416

Receivables from Deutsche Telekom Group companies 231.396 489.403

Other taxes receivable 329.265 80.718

Current portion of long term receivables 796.741 882.922

Other receivables 431.952 513.116

Total 11.189.778 15.398.737

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TRADE AND OTHER RECEIVABLES ( Continued )10.

Trade and other receivables are denominated in the following currencies:

(In EUR)

December 31, 2007 December 31, 2008

EUR 10.968.503 15.395.144

SDR 221.275 3.593

11.189.778 15.398.737

Ageing analysis of receivables that are past due but not impaired as at the reporting date is presented below:

December 31, 2007 December 31, 2008

1-30 days 849.658 1.439.100

31-90 days 576.453 725.103

over 90 days 288.340 419.211

1.714.452 2.583.415

Domestic Foreign

December 31, 2007 December 31, 2008 December 31, 2007 December 31, 2008

1-30 days 829.049 1.160.898 20.610 278.202

31-90 days 542.446 609.310 34.007 115.793

over 90 days 201.978 329.419 86.363 89.792

1.573.472 2.099.628 140.980 483.787

11. SHORT TERM FINANCIAL INVESTMENTSShort-term financial placements relate to the short-term deposits placed for periods up to 365 days at an average annual interest rate of 7.4 % (2007: 7.5%). These placements are denominated in EUR.

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12. ADVANCES, PREPAYMENTS AND OTHER ASSETS

(In EUR)

December 31, 2007 December 31, 2008

Estimated receivables for direct international traffic 1.163.076 953.212

Prepaid expenses to Magyar Telekom Group 221.512 25.055

Prepaid expenses to Deutsche Telekom Group 239.845 525.008

Advances paid for current assets 61.206 56.591

Advances paid for fixed assets 4.000 4.000

Other prepaid expenses 3.230.369 3.123.495

4.920.008 4.687.361

The structure of other accrued expenses is given below:

(In EUR)

December 31, 2007 December 31, 2008

Non due value added tax 27.994 26.581

Prepaid marketing expenses 40.455 40.192

Prepaid rental expenses 78.839 11.977

Prepaid sponsorship expenses 118.182 37.393

Estimated receivables for interconnection 928.399 2.621.637

Accrued receivables for sold investment in Crnogorska komercijalna banka 1.860.635 -

Accrued revenues - 70.857

Other prepaid expenses 175.867 314.857

3.230.369 3.123.495

Fair value of prepayments and accrued expenses are as follows:

(In EUR)

December 31, 2007 December 31, 2008

Estimated receivables based on international incoming calls - direct traffic 1.163.076 953.212

Prepaid expenses to Magyar Telekom Group 221.512 25,055

Prepaid expenses to Deutsche Telekom Group 239.845 525.008

Advances paid for current assets 61.206 56.591

Advances paid for fixed assets 4.000 4.000

Other prepaid expenses 3.230.369 3.123.495

4.920.008 4.687.361

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12. ADVANCES, PREPAYMENTS AND OTHER ASSETS (continued)Advance payments and prepaid expenses are denominated in the following currencies:

December 31, 2007 December 31, 2008

EUR 4.917.847 4.686.062

SDR 2.160 -

GBP - 1.299

4.920.008 4.687.361

13. CASH AND CASH EQUIVALENTS

(In EUR)

December 31, 2007 December 31, 2008

Cash on hand 2.630 2.267

Cash in banks 2.311.377 2.128.152

Financial assets maturities of less than 3 months 23.700.000 3.500.000

Total 26.014.007 5.630.418

At December 31, 2008 time deposits represent deposits placed with domestic banks, for a period up to three months and at an average annual interest rate of 7.27 % percent (2007: 6,62 %).

All cash and cash equivalents are denominated in EUR.

14. RESTRICTED CASH

Restricted cash deposited with the Community of the JPTT (comprised of entities that provide telecommunication services from the republics of the former Yugoslavia) in amount of EUR 312.265 (440.244 USD) for 2008 and EUR 299.630 (440.244 USD) for 2007, are provided and kept for special purposes and are used for the settlement of liabilities for international telecommunication traffic realized prior to July 1, 2002 via the Community of the JPTT.

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15. FINANCIAL INSTRUMENTS

a) Financial instruments by categories

The accounting policies for financial instruments have been applied to the line items below:

Assets as per balance sheet December 31, 2007 Loans and receivables

Long term loans and receivables 5.237.021

Short term financial investments 20.500.000

Trade and other receivables 11.189.778

Restricted cash 299.630

Cash and cash equivalents 26.014.007

Total 63.240.436

Liabilities as per balance sheetDecember 31, 2007

Financial liabilities measured at amortized costs

Trade and other payables 8.046.271

Total 8.046.271

Assets as per balance sheet December 31, 2008 Loans and receivables

Long term loans and receivables 4.777.745

Short term financial investments 30.000.000

Trade and other receivables 15.398.737

Restricted cash 312.265

Cash and cash equivalents 5.630.418

Total 56.119.165

Liabilities as per balance sheet December 31, 2008

Financial liabilities measured at amortized costs

Trade and other payables 9.256.800

Total 9.256.800

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15. FINANCIAL INSTRUMENTS ( continued )

b) Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired is presented below:

Long term loans and receivables(In EUR)

December 31, 2007 December 31, 2008

Counterparties with external credit raiding B + 3.285.625 2.882.115

Counterparties without credit rating 1.951.396 1.895.630

5.237.021 4.777.745

Cash at bank and short term cash depositsDecember 31, 2007 December 31, 2008

Banks without credit rating 46.514.007 30.312.265

46.514.007 30.312.265

Trade receivables December 31, 2007 December 31, 2008

Counterparty without external credit rating:

Domestic 8.360.796 10.894.827

Foreign 2.828.982 4.503.910

11.189.778 15.398.737

Restricted cashDecember 31, 2007 December 31, 2008

Counterparty without credit rating 299.630 312.265

299.630 312.265

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16. SHARE CAPITAL

At December 31, 2007 At December 31, 2008

Number of Shares % Value Number of Shares % Value

Subscribed and paid in capital

- Magyar Telekom 36.177.950 76,53 107.902.165 36.177.950 76,53 107.902.165

Privatization Funds 268.317 0,51 710.791 248.921 0,53 742.417

Other companies 5.228.931 11,12 15.684.969 6.878.023 14,55 20.513.975

Retail (citizens) 5.598.742 11,84 16.698.469 3.969.046 8,40 11.837.837

47.273.940 100.00 140.996.394 47.273.940 100 140.996.394

At December 31, 2008 and December 31, 2007 the par value of an individual share equals EUR 2.98254. Telekom’s shares are publicly listed on the NEX Montenegro Stock Exchange. The market price of an individual share as at December 31, 2008 equals EUR 2,4727 (December 31, 2007: EUR 6.3500).

17. STATUTORY RESERVES

Under local statutory legislation, the Company is required to set aside 5 percent of its gross statutory profit for the year in a statutory reserve until the level of the reserve reaches 1/10 of the share capital. These reserves are used to cover losses and are not distributable to share holders except in the case of bankruptcy of the Company.

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18. PROVISIONS

(In EUR)

2007 2008

Balance, January 1 14.376.051 5.175.445

Additions 1.289.292 4.775.183

Amounts utilized / retired (9.959.968) (3.967.907)

5.705.375 5.982.721

Less: non current portion (529.930) (801.550)

Balance, December 31 5.175.445 5.181.171

Severance payments Legal cases Employee benefits MTIP Total

January 1, 2007 9.704.078 4.671.973 732.799 - 15.108.850

Charged during the year 183.838 372.655 - - 556.493

Used during the year (9.704.078) (53.021) (202.869) - (9.959.968)

January 1, 2008 183.837 4.991.607 529.930 - 5.705.375

Charged during the year 3.611.638 267.475 377.036 40.870 4.297.019

Used during the year (3.611.638) (356.268) (51.766) - (4.019.673)

December 31, 2008 183.837 4.902.814 855.200 40.870 5.982.721

Less: non current portion - - (801.550) - (801.550)

Current provision 183.837 4.902.814 53.650 40.870 5.181.171

Amount of EUR 3.611.638 at December 31, 2008 (EUR 9.704.078 at December 31, 2007) is related to disbursed severance payments to employees who applied on “Employment and social program” and left the Company during the year 2007.

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18. PROVISIONS (continued)

a) Employee Benefits (continued)

Jubilee award obligations Retirement obligations Total

January 1, 2007 491.141 241.658 732.799

Amounts utilized / retired (202.869) - (202.869)

December 31, 2007 288.272 241.658 529.930

January 1, 2008 288.272 241.658 529.930

Additions 244.664 132.372 377.036

Amounts utilized / retired (51.766) - (51.766)

December 31, 2008 481.170 374.030 855.200

Less: non current portion (427.520) (374.030) (801.550)

Current portion 53.650 - 53.650

Provisions for employee benefits are stated at the present value of expected future payments to employees with respect to employment anniversary awards and retirement benefits which are described in the Collective Bargaining Agreement of the Company.

According to the Collective Bargaining Agreement of Crnogorski Telekom:The employer is obliged to pay the equivalent of ten times the minimum base salary established at the Company upon the retirement to pension •of the employee. The payment is due on the day of the retirement, but not later than 30 days after the last working day of the employee.The employer shall pay an employment anniversary (jubilee) award to employees according to the following:•

For 10 years of service life with the Company the amount equivalent to 3 times the minimum base salary established at the Company;o For 20 years of service life with the Company the amount equivalent to 5 times the minimum base salary established at the Company;o For 30 years of service life with the Company the amount equivalent to 7 times the minimum base salary established at the Company;o For 39 years of service life for men and 34 for women with the Company the amount equivalent to 9 times the minimum base salary o established at the Company.

Payments to defined contribution pension and other welfare plans of the State of Montenegro are recognized as an expense in the period in which they are earned by the employees.

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18. PROVISIONS (continued)b) Provision for legal cases

Provision for legal cases in the total amount of EUR 4.902.814 mostly relates to provision provided for legal proceeding filed by the Company’s former employees in February 2007 in amount of 3,500,000 . The amount also includes a provision relating to compensation for damage on breaking of telephone cables and phone box and law suit by employees of the Radio broadcasting center for not paid overtime and holiday during the period from 1997 to 2005.

19. DEFERRED INCOME TAX LIABILITY

a) Net deferred Tax Liabilities

(In EUR)

December 31, 2007 December 31, 2008

Balance, beginning of the year 2.206.800 2.297.979

Calculated deferred taxes for the year 91.179 95.530

Balance, end of the year 2.297.979 2.393.509

Balance at December 31, 2006

Income statement effect

Balance at December 31, 2007

Income statement effect

Balance at December 31, 2008

Intangible assets 126.592 (178.450) (51.858) (11.856) (63.714)

Property, plant and equipment 2.080.208 269.629 2.349.837 107.386 2.457.223

Total 2.206.800 91.179 2.297.979 95.530 2.393.509

Deferred tax liabilities relate to temporary differences between the property and equipment and intangible assets base recognized in the tax statement, and the carrying amount of property and equipment and intangible assets as recorded in the Company’s financial statements. All temporary differences relate to accelerated tax depreciation.

b) Income Taxes

(In EUR)

December 31, December 31,

2007 2008

Current income taxes 2.265.569 1.148.189

Deferred income taxes 91.179 95.530

Charge for the year 2.356.748 1.243.719

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19. DEFERRED INCOME TAX LIABILITY (continued)

Deferred income tax liabilities have not been recognized as at 31 December 2007 and 31 December 2008, for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries. Unremitted earning totaled EUR 8.518.195 as at 31 December 2008 (December 31, 2007: EUR 25,994,934).

c) Reconciliation of the Theoretical Income Taxes and Actual Income Taxes

The reconciliation of the Company’s theoretical income tax and actual income tax for December 31, 2008 and December 31, 2007 is provided in the table below:

(In EUR)

December 31, 2007 December 31, 2008

Profit before taxes 25.994.934 11.709.278

Income tax at a rate of 9% 2.339.544 1.053.835

Other adjustments 17.204 189.884

2.356.748 1.243.719

Dividend income is not taxed as it is paid from after-tax profits of subsidiaries.

20. TRADE AND OTHER PAYABLES

(In EUR)

December 31, 2007 December 31, 2008

Domestic trade payables 4.180.747 3.398.372

Foreign trade payables 3.428.750 4.931.554

Other taxes and social security 202.243 1.029.070

Payables to subsidiaries 293.745 249.070

Payables to Magyar Telekom Group 38.189 100.773

Payables to Deutsche Telekom Group 88.356 477.111

Other payables 16.485 99.920

8.248.514 10.285.870

Fair values of trade and other payables are equals their carrying amounts. Contracted maturity of trade and other payables is up to 30 days.

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20. TRADE AND OTHER PAYABLES (continued)

Trade payables are denominated in the following currencies:

(In EUR)

December 31, 2007 December 31, 2008

EUR 7.692.908 9.548.580

SDR 555.607 461.367

USD - 275.923

8.248.514 10.285.870

21. ACCRUED LIABILITIES AND ADVANCES

(In EUR)

December 31, 2007 December 31, 2008

Estimate of liabilities based on international outgoing calls and direct traffic 736.256 412.394

Accrued expenses to Magyar Telekom Group 75.700 17.001

Accrued expenses to Deutsche Telekom Group 62.342 64.423

Liabilities for dividends 233.684 559.585

Amounts received in advance 173.752 220.504

Other accrued liabilities and revenues 6.613.051 8.598.577

7.894.785 9.872.484

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21. ACCRUED LIABILITIES AND ADVANCES (continued)

Structure of other accrued liabilities and revenues is given bellow:

(In EUR)

December 31, 2007 December 31, 2008

Accrued liabilities for local municipality fees 1.945.072 1.266.540

Accrued liabilities for consultant services 1.339.483 1.918.423

Accrued liabilities for marketing 304.233 446.879

Accrued liabilities for interconnection 863.906 754.719

Accrued liabilities for post services 257.513 156.997

Accrued liabilities for electricity 203.143 190.310

Accrued liabilities for bonuses 292.053 903.494

Accrued liabilities for non geographical codes 203.405 405.923

Accrued liabilities for IPTV services - 230.166

Accrued revenues 645.913 618.093

Accrued liabilities for maintenance 114.779 263.545

Accrued liabilities for IPTV platform implementation - 262.135

Accrued liabilities for Data Warehouse Project - 233.360

Accrued liabilities for usage of mobile telephony infrastructure for fixed telephony needs

- 412.896

Other accrued liabilities 443.551 535.097

6.613.051 8.598.577

Accrued liabilities and advances are denominated in the following currencies:

(In EUR)

December 31, 2007 December 31, 2008

EUR 7.887.366 9.821.037

SDR 7.419 -

USD - 51.447

7.894.785 9.872.484

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FIXED LINE SERVICES AND OTHER REVENUES22.

(In EUR)

December 31, 2007 December 31 2008

Subscriptions, connections and other charges 8.770.125 11.405.777

Outgoing domestic traffic revenues 16.553.103 14.933.889

Outgoing international traffic revenues 4.849.896 2.988.798

Total outgoing traffic revenues 21.402.999 17.922.687

Incoming domestic traffic revenues 15.363.174 5.475.647

Incoming international traffic revenues 29.839.823 20.941.320

Total incoming traffic revenues 45.202.997 26.416.967

Leased lines and data transmission 3.700.129 3.763.822

ADSL revenues 3.070.265 5.468.473

MIPNET revenues 1.544.236 1.904.921

EXTRA TV revenues - 2.398.298

Revenues from sold internet access - 641.495

Equipment sales 758.141 945.407

Other consultancy fee - 2.275.004

Other revenue 2.339.665 1.849.609

86.788.557 74.992.460

23. OTHER OPERATING INCOME

(In EUR)

At December 31,

2007 2008

Gains on disposal of investments 1.795.506 -

Rebranding revenue 290.517 -

Dividend income - 26.449

2.086.023 26.449

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24. EMPLOYEE RELATED EXPENSES

(In EUR)

December 31, 2007 December 31, 2008

Net salaries 8.347.885 8.177.215

Taxes and contributions on salaries 4.901.907 4.933.514

State pension contributions 1.047.551 1.006.939

Jubilee awards and planned early retirement (150.889) 377.036

Travelling costs 415.341 371.647

Severance payments 40.578 3.603.533

Benefits 257.635 652.323

14.860.008 19.122.207

Benefits include among others: winter and summer allowance, meal allowance, transport of employees to work etc. Jubilee awards and planned early retirement in amount of EUR 377.036 in 2008 are related to increased long term provision for retirement and jubilee awards, according to actuarial valuation of this provision (Note 18).

25. PAYMENTS TO OTHER NETWORK OPERATORS

(In EUR)

December 31, 2007 December 31, 2008

Payments to domestic fixed and mobile network operators 13.844.854 10.649.121

Payments to foreign fixed and mobile network operators 10.683.083 6.592.798

24.527.937 17.241.919

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26. OTHER OPERATING EXPENSES

(In EUR)

December 31, 2007 December 31, 2008

Materials, maintenance and service fees 5.746.583 6.694.481

Provisions and charges 329.990 (75.034)

Concession fee 857.407 921.920

Sponsorships 580.620 490.803

Municipality fees and charges 2.136.974 1.322.325

Fees and levies 737.633 864.274

Marketing B 1.629.221 1.681.376

Consulting 1.265.065 2.149.972

Rental fees 1.230.037 1.626.001

Increase/decrease of allowances recognize in inventories (Note 9) (123.679) (519.115)

Increase/(decrease) in bad debt allowances recognized in profit or loss (Notes 10) (572.695) 651.086

Impairment of construction in progress (Note 5) (246.173) -

ADSL installation fee and cost of internet traffic via no. 9803 1.007.187 1.708.622

Other expenses 1.585.276 1.332.007

16.163.446 18.848.717

Sponsorship expenses amounted to EUR 245.000 EUR 490.803 as at December 31, 2007, 2008 respectively, are mostly related to sponsoring of the Basketball Club “Budućnost”, EUR 62.000 FSCG, and EUR 25.000 Football Club Budućnost.

The consulting expenses of EUR 2.149.972 (2007: EUR 1,265,065) mostly relate to Magyar Telekom consulting fee which is established in accordance with “Services agreement” between the Company and Magyar Telekom NyRt.. In accordance with the terms of this Agreement Magyar Telekom may provide managerial, personnel, administrative, financial, accounting, purchasing, engineering, marketing and other international telecommunication services to its subsidiaries in Montenegro.

The expenses of local municipalities’ fee and charges refer to fees for buildings, telecommunication networks, pits and poles that are placed on municipalities’ land. During the year 2007 the Government is adopted a “The law of local government finance” which allows every municipality to define these mentioned fees at their own will. This law is in force.

Provision and charges expense in the amount of EUR 75.034 represents reversal on provision for legal cases, which are finished in favour of Crnogorski Telekom.

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27. FINANCIAL INCOME

(In EUR)

December 31, 2007 December 31, 2008

Interest income from

bank deposit 2.674.365 3.141.034

employee loans 50.680 52.881

Interest income from unwinding of discount for long –term receivables 582.646 374.370

Foreign exchange gains 209.319 198.095

3.517.013 3.766.380

28. FINANCIAL COST

(In EUR)

December 31, 2007 December 31, 2008

Interest expense 10.817 1.931

Foreign exchange losses 210.119 195.360

220.936 197.291

29. EARNINGS PER SHARE

(In EUR)

December 31, 2007 December 31, 2008

Profit attributable to equity holders of the Company 23.638.186 10.465.559

Weighted-average number of issued ordinary shares 47.273.940 47.273.940

Number of ordinary shares 47.273.940 47.273.940

Basic earning/(loss) per share

- from ordinary business operations 0,5000 0,2214

Basic earnings per share, net 0,5000 0,2214

The Company does not potentially have any amounts of diluted shares.

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30. DIVIDEND PER SHAREDuring 2008, profit related dividend for 2007, totalling EUR 23.638.186 were declared and in amount of EUR 22.000.000 distributed. The per share dividend totalled EUR 0.4654.

31. RELATED PARTY TRANSACTIONSCrnogorski Telekom A.D, Podgorica was acquired by Magyar Telekom NyRt. (MT). MT obtained control of Crnogorski Telekom on March 31, 2005 and by the end of 2007 and 2006 it had 76.53% stake. Deutsche Telekom AG is the ultimate controlling owner of Magyar Telekom holding 59.21% of the issued shares. Deutsche Telekom (DT) Group and Magyar Telekom Group have a number of fixed line and mobile telecom service provider subsidiaries worldwide, with whom the Company has regular transactions.

The ultimate parent of the Company is Deutsche Telekom AG (incorporated in Germany). Internet Crne Gore is an internet provider company fully owned by Crnogorski Telekom A.D., Podgorica. T-Mobile is company fully owned by Crnogorski Telekom and its primary business activity is provision of mobile telephony services on the territory of the Republic of Montenegro.

All transactions with related parties arise in the normal course of business and their value is not materially different from the terms and conditions that would prevail in arms-length transactions.

Transaction with related parties includes provision and supply of telecommunication services and leased lines.

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31. RELATED PARTY TRANSACTIONS (Continued)

I Liabilities (In EUR)

December 31, 2007 December 31, 2008

T-Mobile Crna Gora d.o.o., Podgorica

Interconnections 341.562 -

Mobile telephony services 31.073 5.544

Other services 11.041 24.168

Deferred rental revenues (over one year) 43.474 37.437

Deferred rental revenues (up to one year) 6.037 6.037

Capitalized work - 3.352

Accrued expenses for interconnections - 420.644

Accrued expenses for rural telephones - 412.896

Accrued expenses for consultant fee 816.427

433.187 1.726.505

Internet Crne Gore d.o.o., Podgorica

Commission paid for internet services 36.250 9.029

Commission for ADSL sales 215.380 205.460

Capitalized work - 1.517

Accrued expenses for consultant fee - 222.871

251.630 438.877

Total - Telekom Montenegro Group 684.817 2.165.382

Magyar Telekom

Interconnections 47.210 91.882

Makedonski telekomunikacii

Interconnections 66.679 25.892

Total - Magyar Telekom Group 113.889 117.774

Deutsche Telekom

Interconnections 33.044 365.258

Ote telekom

Interconnections - 75.891

T - Hrvatski telekom

Interconnections 117.655 100.385

Total - Deutsche Telekom Group 150.699 541.534

949.405 2.824.689

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31. RELATED PARTY TRANSACTIONS (Continued)

II Receivables (In EUR)

December 31, 2007 December 31, 2008

T-Mobile Crna Gora d.o.o., Podgorica

Interconnections 428.818 4.127

Leased lines 44.215 863.025

Fixed telephony service 585 5.344

Other services 13.867 56.040

Capitalized work - 466

Accrued revenues for interconnection - 260.552

Accrued revenues for leased lines - 15.920

Accrued revenues for consultant fee - 1.805.666

Accrued revenues for sale equipment - 21.750

487.485 3.032.890

Internet Crne Gore d.o.o., Podgorica

Fixed telephony service 506 382

Leased lines 68.913 -

Other services 1.921 12.255

Accrued revenues for consultant fee - 469.338

71.340 481.975

Total Telekom Montenegro Group 558.825 3.514.865

Makedonski telekomunikacii

Interconnections 41.285 42.102

Magyar Telekom

Interconnections 400.562 -

Other services - 1.370

Total - Magyar Telekom Group 441.847 43.472

Deutsche Telekom

Interconnections 168.428 328.722

Ote telekom

Interconnections - 58.907

T - Hrvatski telekom

Interconnections 302.813 626.782

Total - Deutsche Telekom Group 471.241 1.014.411

1.471.913 4.572.748

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31. RELATED PARTY TRANSACTIONS (Continued)

III Revenues (In EUR)

December 31, 2007 December 31, 2008

T-Mobile Crna Gora d.o.o., Podgorica

- Interconnections 6.914.697 4.476.315

- Income from line leases 820.665 1.840.658

- Income from telephony services 5.578 40.539

-‘ Rent of business premises 425.198 -

- income from capitalized work - 17.868

- Other income 96.182 1.946.076

8.262.320 8.321.455

Internet Crna Gora d.o.o., Podgorica

- Income from telephony services 5.452 4.037

- Income from line leases 286.400 -

- Global internet access 706.800 587.010

- ISDN subscription PRA 52.170 51.509

-‘ Rent business premises 64.925 -

- Other income 2.247 577.327

1.117.995 1.219.883

9.380.315 9.541.338

Magyar Telekom

Interconnections 1.541.809 30.137

Makedonski telekomunikacii

Interconnections 183.748 223.293

Total - Magyar Telekom Group 1.725.557 253.430

Deutsche Telekom

Interconnections 1.351.586 1.893.472

Ote telekom

Interconnections - 594.693

Hrvatski telekom

Leased lines - 8.700

Interconnections 2.233.081 3.710.279

Total - Deutsche Telekom Group 3.584.667 6.207.144

14.690.539 16.001.912

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31. RELATED PARTY TRANSACTIONS (Continued)

IV Expenses (In EUR)

December 31, 2007 December 31, 2008

T-Mobile Crna Gora d.o.o., Podgorica

- Interconnections 5.971.603 5.757.927

- Mobile telephony services 87.123 82.193

- expenses from capitalized work - 32.202

- Other expenses 22.394 1.287.076

Internet Crna Gora d.o.o., Podgorica

- Leases 931.379 1.700.803

- expenses from capitalized work 34.135

- Other 75.810 320.524

1.007.189 2.055.462

Total Telekom Montenegro Group 7.088.309 9.214.861

Magyar Telekom

Interconnections 165.234 3.109

Consultancy services 960.000 750.000

Makedonski telekomunikacii

Interconnections 218.742 156.556

Total - Magyar Telekom Group 1.343.976 909.665

Deutsche Telekom

Interconnections 213.842 142.109

OTE Telekom

Interconnections - 129.223

Leased lines - 13.299

T - Hrvatski telekom

Interconnections 567.078 299.405

Leased lines 138.574 145.041

705.652 444.446

Total - Deutsche Telekom Group 919.494 729.077

9.351.779 10.853.602

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31. RELATED PARTY TRANSACTIONS (Continued)

In 2008 the Company rewarded only short term employee benefits to management, which amounted to EUR 270.633 (December 31, 2007 EUR 496,984) for net salaries and bonuses to key management, who are members or permanent invitees of the Management Committee of Telekom Crna Gora Group, and EUR 97.327 (December 31, 2007 EUR 198,734) for related taxes and contributions. Also, the Company has no rewarded severance payments to management (2007: net amount EUR 19,000 and EUR 17,376 for taxes and contributions). There was no employee loan granted to these employees as at the end of December, 2008.

Agreements with the Company’s Senior Management

In 2008 and 2007, in the case of some key senior executives the Company has set up a loyalty bonus scheme, according to which if key management stays with the Company for two years from the date of signature, the Company will incur approximately EUR 151.255 for the years 2008 and 2007 respectively, costs with regard to this commitment according to the conditions prevailing as at December 31, 2008.

32. CONTINGENT LIABILITIES

Environmental matters

Environmental regulations are developing in the Republic of Montenegro and the Company has not recorded any liability at 31 December 2008 for any anticipated costs, including legal and consulting fees, site studies, the design and implementation of remediation plans, related to environmental matters. Management does not consider the costs associated with environmental issues to be significant.

33. CONTINGENT ASSETS

The total amount of potential damages arising from legal actions filed by the Company equals to EUR 8.218.846 (December 31, 2007 EUR 7,437,320) . Such lawsuits have been filed by the Company against it subscribers, citizens and businesses in attempts to collect past due receivables.

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34. COMMITMENTS

(a) Operating lease commitments – Company as lessee

The Company leases various offices and warehouses, internet access, lines, under operating lease agreements. The lease terms are between one year to unlimited term, and the majority of lease agreements are renewable at the end of the lease period at market rate.

The lease expenditure charged to the income statement during the year is disclosed in note 26.

b) Other commitments

Expenditures committed up to the balance sheet date, which has not been recognized in the financial statements are as follows:

(In EUR)

December 31, 2007 December 31, 2008

Contracted liabilities on:

Property and equipment 2.460.302 1.690.087

Sponsorships 400.000 183.000

Marketing 141.398 31.280

Other operating expenditure commitments - 995.140

Total 3.001.700 2.899.507

Expenditures committed up to December 31, 2007 have maturity period within one year from the balance sheet date.

c) Use permits According to the management information, future expenses will occur in connection to the acquiring of already required permits for use of networks, optics, transmission and other equipment. In addition, based on the Share Sale – Purchase agreement dated 15 March 2005 concluded between the Government of the Republic of Montenegro and the Employment Bureau of Montenegro, as Sellers, and Matav Hungarian Telecommunication Company, as the Purchaser, the Sellers undertake to cause the Company to submit, thorough and complete applications to the relevant Public Authority to obtain all outstanding permits for the continued i) conduct of their respective business and/or ii) ownership and/or operation of their respective assets existing on the date of the signing of this Agreement. It has not been possible to quantify the potential expenditure required in connection with this matter.

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34. COMMITMENTS (continued)

Potential onerous contractd)

In accordance with the Share Sale – Purchase Agreement dated 15 March 2005 concluded between the Government of the Republic of Montenegro and the Employment Bureau of Montenegro, as Sellers, and Magyar Telekom, as the Purchaser, the Purchasers undertake to cause the Company to enter into contracts with the Radio Diffusion Center to lease of optical fiber capacities for transmission of TV and radio signals and the University of Montenegro to provide of connection capacities. In both cases it is envisaged that the counterparties shall not pay any compensation for the use of these capacities. As at December 31, 2008, either no contracts had been signed or it was not possible to determine the value of the proposed services. Based on the information available, the Management was unable to assess the amount and impact of the agreement with the University of Montenegro.

35. EXCHANGE RATESThe official exchange rates for major currencies used in the translation of balance sheet items denominated in foreign currencies, into euros as at December 31, 2007 and December 31, 2008 were as follows:

31 December , 2007 31 December, 2008

SDR 1.0735 1.0887

USD 0.6806 0.6969

36. CASH GENERATED FROM OPERATIONS

31 December, 2007 31 December, 2008

Profit for the year 23.638.186 10.465.559

Adjustments for:

Income tax expense 2.356.748 1.243.719

Net financial income 11.617 (804)

Depreciation and amortization 9.885.383 11.208.859

Interest income (see Note 27) (2.837.670) (3.258.017)

Increase/(decrease) of allowances recognized in inventories (see Note 26) (123.679) (519.115)

Increase/(decrease) in bad debt allowances recognized in profit or loss (see Note 26) (572.695) 651.086

Change in working capital:

Change in payables 482.536 3.455.469

Change in inventory (1.174.716) 979.746

Change in receivables 1.807.818 (5.513.913)

Provision for Severance payments (see Note 18) (9.520.240) -

Provision for Employee benefits (see Note 18) (202.869) 325.270

Other non-cash items (357.318) (500.194)

Total 23.393.101 18.537.665

37. POST BALANCE SHEET EVENTIn February 2009 Crnogorski Telekom has received a resolution from the tax authority that the amount of the social security allowances paid over the maximum limit prescribed for the year 2008 cannot be reclaimed by the Company. According to our information, the return of these amounts was rejected now for all companies in Montenegro. This refusal is not in line with our interpretation of the relevant laws, neither with the practice of the same authorities in the previous years, therefore the Company decided to lodge an appeal against this resolution. The total potential impact of this event on the Company financials is EUR 57.145.

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Further information

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Contacts

Crnogorski Telekom Moskovska 2981000 PodgoricaMontenegroTel: + 382 20 433 433Fax: + 382 20 225 752 e-mail: office@telekom.mewww.telekom.me

Crnogorski Telekom stock symbol:

NEX Montenegro: TECG

Stock trading information:

Nova berza hartija od vrijednosti Crne Gorea.d. - NEX Montenegro

Miljana Vukova bb 81000 Podgorica Montenegro

Tel.: + 382 20 23 06 90 Faks:+ 382 20 23 06 40 E-mail: nex@nexmontenegro.com www.nex.cg.yu

Published by:©Crnogorski Telekom Group, 2009

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