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THE BLACK SEA PROPERTY FUND LIMITED Annual Report and Financial Statements For the year ended 31 December 2008

THE BLACK SEA PROPERTY FUND LIMITED

Annual report and financial statements for the year ended 31 December 2008

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Contents

Page

Chairman’s statement 2 Directors’ report 5 Statement of Directors’ responsibilities 8 Independent Auditors’ report to the members of The Black Sea Property Fund Limited 9 Consolidated Income Statement 11 Consolidated Balance Sheet 12 Consolidated Statement of Changes in Equity 13 Consolidated Statement of Cash Flows 14 Notes to the financial statements 15 Corporate information 32



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Chairman’s statement Dear Shareholders: When I wrote to you last in September 2008, the global downturn in the property sector had not yet reached Bulgaria. Since then development activity in Bulgaria has largely ground to a halt. Distressed sellers are appearing though still not at prices we find attractive. Consequently, our focus has been on reducing costs and preserving capital. We continue to have no gearing and are net cash by a substantial margin. We have completed the internalization process by terminating the previous manager and setting up a new wholly-owned advisory subsidiary, BSPF Bulgaria EAD. We have also hired a new chief executive officer to manage that entity. We have substantially reduced operating costs. Our office space costs about 75 percent less than what had been paid previously. Staffing has been reduced by about half. By implementing these changes our annual running costs should be reduced by about 75 percent. Our portfolio primarily comprises six assets plus cash. We have made no new investments over the last year and have sold none of our existing investments. Changes in value year on year are mainly a function of positive foreign exchange gains, primarily the strengthening of the Euro as against Sterling (Black Sea’s functional currency) offset by a diminution in the carrying value of Black Sea’s assets. Because of legal uncertainties we have also written off two assets to nil. Changes in cash position year on year primarily result from share repurchases and contractually required additional lending to existing borrowers. We carry our assets as follows:

Asset

2008 2007 Change Borovets Lakes £8,631,604 £7,632,046 13% Byala £8,624,943 £7,156,160 21% Evergreen £3,426,858 £2,801,562 22% Magnolia - £4,640,795 (100%) Nikea Park - £3,262,856 (100%) Obzor £4,911,033 £2,822,768 74% Cash, including money market investments £12,950,116 £15,077,647 (14%) Total £38,544,554 £43,393,834 Although we were not involved in the purchase of any of these assets, we are ultimately responsible for their valuation. Our objective is an accurate valuation. No one at Black Sea is compensated based on the “net asset value” of Black Sea’s assets. So there is no incentive to maintain unrealistically high valuations. Colliers International appraises our assets semi-annually. The Colliers valuation aims to fix the value of each asset in accordance with the standards of the Royal Institute of Chartered Surveyors. The Board then reviews these valuations in accordance with International Accounting Standards. The valuations are then reviewed by our auditors both locally in Bulgaria and in Jersey, where Black Sea is domiciled. The most robust valuation methodology is one based on comparable sales prices. But this methodology has been impracticable in Bulgaria. There is no public registry in Bulgaria recording transaction prices. The market is shallow. There is low transparency. Given this reality the appraisers focus on asking prices rather than sale prices. They then make adjustments based on their experience and expertise. It is difficult to test objectively the adjustments and the relationship between asking price and value. Another factor especially relevant to Black Sea is that the valuations are of the underlying property rather than the legal structures in which Black Sea is invested. This fact is especially important in connection with the valuations of Magnolia and Nikea Park, which have both been written down to nil notwithstanding that the underlying assets clearly have substantial value. Consequently shareholders should be cautious in trying to extrapolate likely realization amounts from these valuations. Black Sea’s Assets Black Sea’s assets are of two types – interests in financing arrangements and direct interests in land. Borovets Lakes, Byala and Evergreen are direct interests in land (held through Bulgarian holding companies) while Magnolia, Nikea Park and Obzor are interests in financing arrangements. The financing arrangements were mezzanine financing arrangements. Black Sea is only entitled to repayment after the primary lender is repaid in full. Black Sea’s upside is contingent on the sale price of those units sold following repayment of the primary lender. Save for Evergreen, all of the assets are interests in holiday developments originally intended to appeal to westerners. Borovets Lakes is a large land plot in the Borovets ski area outside of Sofia. Borovets is the oldest ski area in Bulgaria and is about 45 minutes from downtown Sofia. The apparent idea behind this investment was to ride on the coattails of the “Super Borovets” project, a large infrastructure project intended to modernize and expand the Borovets ski area. Black Sea’s planned development was to include a hotel and individual units across the road from a planned ski lift. Many expected a boom in the area, which has yet to materialize.



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Chairman’s statement (continued) The group behind “Super Borovets” has been reshuffled and is lacking visibility. Basic infrastructure is missing and the ski lift remains undeveloped. As compared to last year, our carrying value is about £1 million higher, which is a function of a currency gain of about £3 million and a write down of about £2 million. We are working on completing the permitting process, though without Super Borovets it would likely be impracticable for Black Sea to develop this land plot. Byala is a large tract of undeveloped land on the Black Sea coast. Black Sea lent a developer £7,131,253 interest free with repayment and an upside contingent on the sale of completed units. The developer had until March 2008 to commence construction. The developer’s failure to meet this condition required him to transfer the Byala land to Black Sea as full satisfaction for the loan. We are still in the process of trying to complete the transfer. It has been delayed because of bureaucratic issues along with problems with the original contracts. We believe that the transfer should be completed presently. Our carrying value for Byala is Black Sea’s original cost as adjusted by a foreign exchange gain of £2,255,512 and a write down of £786,730. Magnolia in the Pamporovo Mountains in south western Bulgaria has been a problematic investment for some time. The idea behind this development was that Black Sea would finance the construction of a ski resort intended to comprise 420 luxury apartments, commercial shops and so on. Black Sea was a mezzanine lender with a Greek bank as the primary lender. The structure of the deal was that Black Sea agreed to lend a local developer €13.7 million (equivalent to €577 per square metre) to finance 348 units and advanced €5.5 million or €230.8 per square metre. Repayment was contingent upon sale of units. Construction was never completed and part of Black Sea’s investment appears to have been diverted. We commenced litigation against the developer in December 2008. At present, six cases have been filed in connection with this project. We have also notified the criminal prosecutor of certain irregularities related to the developer’s activities in the Bulgarian courts. Because of the uncertainly of the situation we have written this asset down to nil. Evergreen is a zoned plot of land comprising 2.46 hectares of land on the outskirts of Sofia. We carry the asset at about £3.4 million. The change in value year over year is primarily the result of a foreign exchange gain of £1.1 million and a downward revaluation of about £550,000. In October, we decided to halt the Evergreen project prior to commencing construction. As I have mentioned previously, there are a number of reasons why Evergreen is attractive. It is situated in the Malinova Dolina region on a ring road outside of Sofia’s congested downtown. It is close to a nearby modern business park that houses a number of large international companies. Sofia’s underground rail system is projected to extend to this area by 2011. The planned community with well-spaced residences should appeal to a modern lifestyle. While there had been a fair number of pre-construction “reservations,” those reservations were more characteristic of low cost options rather than real financial commitments – a very small deposit gave the buyer the right to purchase a home or flat at a fixed price. In a rising market these reservations had value. In a falling market we believed that holders of reservations would likely default. We gave due consideration to all of these facts but in October decided that at least for now proceeding with the project would be excessively risky. Our plan is either to develop the land or sell it on to a third party. Nikea Park is a completed development located in the Golden Sands resort area 18 km from Varna. Black Sea backed a local Bulgarian developer by financing 119 of the 154 apartment units in a nine story apartment building about 500 metres off the beach. Besides studio, one and two bedroom apartments, Nikea Park comprises a swimming pool, bar, restaurant, kiosk, and spa. Black Sea’s investment was €4 million. The original idea was to market those units “off plan” and to appeal to the buy-to-let market in the UK. That market for all practical purposes, no longer exists. As I have mentioned previously there are several problematic issues with this development including construction quality, relations with the developer and apparent defects in the underlying contractual documents. We have been in litigation with the developer since February 2008. An early victory, mentioned in the mid-year report, was reversed on appeal. Because of legal uncertainty we have written this asset down to nil. Obzor was a loan to a developer in the principal amount of £ 4,060,041 for a planned beachfront development on the Black Sea. We now carry it at £4,911,032. The difference is a foreign exchange gain of £850,991. The Obzor development is completed, and 169 of the 255 units have been sold. Eighty-six units remain unsold. The structure of this transaction was a mezzanine financing with Black Sea behind the primary lender. Buyers “reserved” units by making a downpayment of a portion of the purchase price with the remainder due on completion. The idea was that once the bank was repaid principal and interest Black Sea would be “repaid” essentially as a function of the sale price of the remaining units. The sale of those units would be undertaken either by the developer or under certain circumstances the developer had the right to put the unsold units to Black Sea. While this deal may have been attractive in a rising market, it has proved a lot less attractive in a declining market. Buyers have defaulted on their obligations leaving a larger than expected number of unsold units. We consequently entered into negotiations with the developer to restructure the transaction. Under the new structure Black Sea would receive a lump sum of €2 million and will enter into a profit sharing arrangement with the developer to encourage him to sell the remaining units at an appropriate price. As of this date, the agreement has not yet been completed.



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Chairman’s statement (continued)

* * * * The last year has seen a deterioration in Bulgarian property values. Whether that deterioration is a permanent destruction of value or a short tem correction remains unclear. The primary drivers of the holiday market, UK individuals, are no longer buying holiday homes in Bulgaria. The “off-plan” and “buy-to-let” models no longer seem viable. We have faced a number of disappointments including the unresolved litigation regarding Nikea Park and Magnolia, the failure of the remaining units at Obzor to sell as expected, and the decision to halt the Evergreen project. In the face of these structural changes and disappointments, shareholders should keep in mind that we have no leverage and our current share price is about supported by our net cash position alone. Our assets do have value, though how and when this value will be realized is unclear. I look forward to writing next when we release our semi-annual report in the autumn. Respectfully yours, John D. Chapman Chairman Black Sea Property Fund Limited 29 June 2009



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Directors’ Report For the year ended 31 December 2008 The Directors submit their Report and Financial Statements for the year ended 31 December 2008. The Company was incorporated on 27 January 2005, in Jersey and was launched as an unclassified Fund on 14th March 2005 within the provisions of the Collective Investment Funds (Jersey) Law 1988, raising net proceeds of £50 million. On 4 March 2009, the shareholders resolved to apply for listed fund status under Article 3 of the Collective Investment Funds (Jersey) Law, 1988. On 5 March 2009, listed fund status was granted to the Company. The Company is now self-managed and its wholly-owned subsidiary, BSPF Bulgaria EAD provides advisory services to the Company's board of directors in relation to its property portfolio. Listing The Company is quoted on AIM. Investment objective The Black Sea Property Fund seeks to generate capital gains through investment in, or acquisition or development of residential and commercial property in Bulgaria, including, but not limited to, real estate located along Bulgaria's Black Sea coast and in existing or proposed ski resorts. The Company may also seek to generate capital gains through investment in collective investment funds whose primary investment objective is in property investment in the Balkan region. Investment policy

Following the introduction of the revised AIM Rules for Companies on 1 July 2009 (the "AIM Rules"), the Directors have reviewed the Company's investment policy as initially stated in its Admission Document dated 21 February 2005 and as amended by ordinary resolution on 22 June 2007 and further amended on 4 March 2009. In accordance with Article 8.01 of the Company's Articles of Association, the Directors have made minor amendments to the previous policy to ensure it is sufficiently precise and detailed so that it is clear, specific and definitive (as required by the AIM Rules). The Company may invest in, acquire or develop residential or commercial real estate located in any part of Bulgaria including, but not limited to, real estate located along the Black Sea coastline. In addition, the Company may also invest in collective investment funds whose primary investment objective is property investment in the Balkan region. The Company may also invest up to 75% of its assets (at the time of investment) in land, and in property-backed and joint venture projects (which could include ski resort and golf course projects) with local and other partners (including banks). The Company's investment policy does not prohibit it from taking management control of any underlying investments held by the Group. Any cash held by the Group may only be held on deposit or invested in money-market funds or other near-cash investments. The investment policy of the Company as stated in this document may only be varied in whole or in part by way of ordinary resolution of the holders of Shares but such sanction shall not be required if such variation is to correct a manifest error or is necessary to comply with fiscal or other statutory or official requirements, actual or proposed, or if the Directors shall certify that such variation does not materially prejudice the interests of the holders of ordinary shares and does not operate to a material extent to release the Directors from any responsibility to any such holders.

Distributions may be made by way of dividend or a redemption or repurchase of ordinary shares, at the Directors' discretion.



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Directors’ report (continued) Results and Dividends It is not intended in normal circumstances that the Company will pay income dividends on the shares.

If the ordinary shares are trading at a discount to net asset value, the Company may purchase ordinary shares for cancellation.

Proceeds realised from the Company's investment are available for reinvestment by the Company. The Board will, however, consider the distribution of capital profits on investments. After 27 January 2010, any proceeds of sale from investments will be returned to Shareholders in the manner determined by the Board.

If the Company completes the purchase of investment properties and thereafter generates rental yield though letting, such rental income (net of expenses) may be distributed by way of an annual dividend (or more frequently at the Directors' discretion if the amount available is significant). The income statement is set out on page 11 of this Annual Report and Financial Statements. The Directors do not recommend the payment of a dividend for this financial year. Life of the Company On incorporation in 2005, the Company planned to have a life of 5 years plus up to 2 further years for the planned realisation of its property portfolio. On or before 30 June 2012, the Directors will convene an extraordinary general meeting of the Company to consider a special resolution to wind-up the Company. Under Jersey law a special resolution requires the approval of a majority of two-thirds of the votes cast to be passed. The Company's life may also be extended by special resolution of Shareholders. Board of Directors The Directors of the Company, all of whom (other than John Chapman) are non-executive, are : John Chapman (Executive Chairman) Antony Gardner-Hillman Irena Komitova Andrey Kruglykhin Angelo Moskov Bogdan Stanchev Andrew Wignall Changes in Directors On 10 March 2008, Mr W. Roger King resigned as a director of the Company and Mr Andrew Wignall was appointed in his place. On 19 May 2009 Mr Andrey Kruglykhin resigned as a director of the Company. Custodian – money market portfolio

BNP Paribas (Jersey branch) provides custody services in relation to cash, money-market funds and other near-cash investments held by the Company. Shareholders' interests The following table shows the spread of the Company's shareholder base as at 19 June 2009, the latest date practicable prior to publication of this report.

Extent of holdings No. of shareholders

1-9,999 65 10,000-99,999 62 100,000 -,499,999 23 500,000+ 27

___ 177



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Directors’ report (continued) At 19 June 2009 the Company was aware of the following interests of 3% or more in the ordinary share capital of the Company:

Number Percentage interest Vidacos Nominees Limited 94,836,700 44.50% Securities Services Nominees Limited 22,036,000 10.34% BNY (OCS) Nominees Limited 21,628,705 10.15% Euroclear Nominees Limited 20,590,000 9.66% Lynchwood Nominees Limited 7,535,100 3.54% Nortrust Nominees Limited 7,135,400 3.35%

The Company has been informed of the following interests of 3% or more in the ordinary share capital of the Company from beneficial owners:

Beneficial shareholder Number Percentage interest QVT Financial LP 63,912,558 29.99% Weiss Capital LLC 34,489,181 16.20% BNP Paribas Securities Services Nominees Limited 22,036,000 10.34% SVM Asset Management Limited 21,871,825 10.26% GLG Partners 20,550,000 9.64% Baille Gifford 10,000,000 4.69%

The Directors are not otherwise aware of interests of 3% or more in the Company's issued share capital. Directors’ interests The Directors have no interests in the Company's share capital. Mr Kruglykhin is a consultant to, and Mr. Moskov is a partner with, QVT Financial LLP, which is a substantial shareholder of the Company. Directors’ remuneration The maximum amount of directors' ordinary remuneration permitted under Article 30.03 of the Company’s Articles of Association is £100,000 per annum, plus expenses. The directors received in aggregate £96,242 for the year ended 31 December 2008. In addition, John Chapman received special remuneration under Article 30.04 of £47,675 by way of fees pursuant to his Contract for Services with the Company. By Order Of The Board BNP Paribas Securities Services Fund Administration Limited Secretary

29 June 2009



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Statement of directors’ responsibilities The Directors are responsible for preparing the financial statements in accordance with applicable law and International Financial Reporting Standards. Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that year. In preparing those financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the

Company will continue in business; and • state whether applicable accounting standards have been followed, subject to any material departures

disclosed and explained in the financial statements. The Directors are responsible for keeping accounting records that disclose with reasonable accuracy, at any time, the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991, as amended. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud, and other irregularities.



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KPMG Channel Islands Limited P.O. Box 453 St Helier Jersey JE4 8WQ Channel Islands

5 St Andrew’s Place Charing Cross, St Helier Jersey JE4 8WQ Channel Islands

Independent auditors’ report to the members of The Black Sea Property Fund Limited

We have audited the group and company financial statements (“the financial statements”) of The Black Sea Property Fund Limited for the year ended 31 December 2008 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated Statement of Changes in Equity, the Consolidated and Company Statement of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the company’s members, as a body, in accordance with Article 110 of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As described in the Statement of Directors’ Responsibilities on page 8, the company’s directors are responsible for preparation of the financial statements in accordance with applicable law and International Financial Reporting Standards.

Our responsibility is to audit the financial statements in accordance with the relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies (Jersey) Law 1991. We also report to you if, in our opinion, the company has not kept proper accounting records or if we have not received all the information and explanations we require for our audit.

We read the Chairman’s Statement and the Directors’ Report accompanying the financial statements and consider the implications for our report if we become aware of any apparent misstatements within them.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error.



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Independent auditors’ report to the members of The Black Sea Property Fund Limited (continued)

The Group has made loans to a third party developer, Magnolia Holidays EAD, as described in note 7 to the financial statements. Legal action to recover amounts due to the Black Sea Property Fund Limited or to exercise the company’s charge over the loan collateral, being the share capital of Magnolia Holidays EAD, is ongoing. Whilst various court rulings have been made in support of the company’s position, the ultimate outcome of the legal action is not certain and accordingly the directors of the company have not been able to assess the recoverability of this loan. As a result, the loan receivable balance and accrued interest due from Magnolia Holidays EAD at 31 December 2008 have been written off in full. No satisfactory audit procedures could be performed to obtain reasonable assurance regarding the recoverability, and hence value, of this loan balance.

The Group has also made loans to a further third party developer, Bulmix 97 Group OOD, as described in note 7 of the financial statements. Legal action to recover amounts due to the Black Sea Property Fund Limited or to exercise the company’s charge over the loan collateral, being the Nikea Park Riviera Resort property near Varna, is ongoing. Whilst various court rulings have been made in support of the company’s position, the ultimate outcome of the legal action is not certain and accordingly the directors of the company have not been able to assess the recoverability of this loan. As a result, the loan receivable balance and accrued interest due from Bulmix 97 Group OOD at 31 December 2008 have been written off in full. No satisfactory audit procedures could be performed to obtain reasonable assurance regarding the recoverability, and hence value, of this loan balance. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Qualified opinion arising from limitations in audit scope

Except for the financial effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the carrying value of the loan receivable balances described above, in our opinion the financial statements:

• give a true and fair view, in accordance with International Financial Reporting Standards, of the state of the group’s and of the company’s affairs as at 31 December 2008 and of its loss for the year then ended; and

• have been properly prepared in accordance with the Companies (Jersey) Law 1991. KPMG Channel Islands Limited Chartered Accountants

29 June 2009



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Consolidated income statement

Group Group

Year ended

31 Dec 2008 Year ended

31 Dec 2007 Notes £ £ Revenue 14,858 20,276

Gross profit 14,858 20276 Bank interest 23,739 65,156 Loan interest 871,552 1,170,938

Total revenue 910,149 1,256,370 Gain on investments 9 6,865,192 4,220,954 Gain on investment property 10 4,085,223 - Revaluation of investment property 7 (2,475,346) - Currency (losses) / gains (15,102) 67,413

9,370,116 5,544,737

Operating expenses Management fees 2 (555,000) (1,000,000) Other operating expenses 3 (935,158) (1,658,254)

Total operating expenses (1,490,158) (2,658,254)

Profit before impairment 7,879,958 2,886,483 Impairment 4 (9,901,454) -

(Loss)/profit before tax (2,021,496) 2,886,483 Tax 6 (252,617) (118,547)

(Loss)/profit for the year (2,274,113) 2,767,936

Basic earnings per share (pence) 5 (0.95) 1.1 Diluted earnings per share (pence) 5 (0.95) 1.1 All income is attributable to the holders of the Company’s ordinary shares. There are no minority interests.

The notes on pages 15 to 31 are an integral part of these financial statements. There is no difference between the loss for the year stated above and its historical cost equivalent. All items dealt with in arriving at the loss for the year stated above relate to continuing operations.



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Consolidated and Company balance sheet

As at 31 December 2008 Group Company Group Company

As at 31 Dec

2008 As at 31 Dec

2008 As at 31 Dec

2007 As at 31 Dec

2007 Notes £ £ £ £ Non-current assets Investments in subsidiaries 11 - 52,004 - 56,406 Plant and equipment 7 117,182 - 123,165 - Investment property 7 12,058,462 - 10,680,846 - Capitalised development expenses 7 150,799 150,799 150,799 150,799 Interest in property 7 - - 96,941 - Loans and receivables 7 13,535,976 32,211,122 17,785,638 32,000,569

25,862,419 32,413,925 28,837,389 32,207,774 Current assets Other receivables 12 944,544 29,523 376,870 8,354 Investments at fair value through profit or loss 8 11,754,071 11,754,071 13,200,466 13,200,466 Cash and cash equivalents 1,196,045 121,425 1,877,181 262,395

13,894,660 11,905,019 15,454,517 13,471,215

Total assets 39,757,079 44,318,944 44,291,906 45,678,989 Current liabilities Other payables 13 (528,323) (157,844) (283,145) (174,846)

Net assets 39,228,756 44,161,100 44,008,761 45,504,143

Equity Stated capital 14 46,478,064 46,478,064 50,138,313 50,138,313 Retained (deficit)/earnings (7,249,308) (2,316,964) (6,129,552) (4,634,170)

Total equity 39,228,756 44,161,100 44,008,761 45,504,143

Net asset value per ordinary share (pence) 15 18.4 20.7 17.6 18.2

These financial statements were approved and authorised for issue by the Board of Directors on 29 June 2009, and signed on its behalf by: Andrew Wignall Antony Gardner-Hillman Director Director The notes on pages 15 to 31 are an integral part of these financial statements.



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Consolidated statement of changes in equity

Group

For the year ended 31 December 2007

Stated Retained

capital earnings Total

£ £ £

As at 1 January 2007 50,138,313 (8,343,085) 41,795,228

Net operating profit for the year - 2,767,936 2,767,936

Foreign exchange on subsidiary translation - (554,403) (554,403)

As at 31 December 2007 50,138,313 (6,129,552) 44,008,761

Group

For the year ended 31 December 2008

Stated Retained capital earnings Total

£ £ £ As at 1 January 2008 50,138,313 (6,129,552) 44,008,761 Share repurchase (3,660,249) - (3,660,249) Net operating loss for the year - (2,274,113) (2,274,113) Foreign exchange on subsidiary translation - 1,154,357 1,154,357

As at 31 December 2008 46,478,064 (7,249,308) 39,228,756

The notes on pages 15 to 31 are an integral part of these financial statements.



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Consolidated and Company statement of cash flows

For the Year Ended 31 December 2008 Group Company Group Company

Year ended 31

Dec 2008 Year ended 31

Dec 2008 Year ended

31 Dec 2007 Year ended

31 Dec 2007 £ £ £ £ Operating activities (Loss)/gain before tax for the period (2,021,496) 2,317,204 2,886,483 3,789,848 Gains on investments held at fair value through profit or loss (6,865,192) (11,132,842) (4,220,954) (4,220,954) Gains on investment property (4,085,223) - - - Revaluation of investment property 2,475,346 - - - Currency losses/(gains) 15,102 15,102 (67,413) (67,413) Impairment 9,901,454 9,817,491 - - Increase in loan interest receivable (774,611) (2,183,892) (550,339) (1,550,717) (Increase)/decrease in other receivables (533,607) (21,169) (366,851) 1,466 Increase/(decrease) in other payables 117,128 (17,002) 66,642 (1,194)

Net cash outflow from operating activities after interest and before taxation (1,771,099) (1,205,108) (2,252,432) (2,048,964)

Tax paid (43,797) -

(64,329) -

Net cash outflow from operating activities (1,814,896) (1,205,108) (2,316,761) (2,048,964) Investing activities Loans to developers (982,693) - (1,723,684) - Loans repaid - - 751,031 751,031 Loans to subsidiaries - (450,410) - (13,478,113) Purchase of land and property (14,977) - (10,558,526) - Repaid deposit on land and property 247,238 - - - Purchase of property subsidiary - - - (34,805) Increase in investment in subsidiary - (19,022) - - Purchase of accumulation money market funds - - (9,561,721) (9,561,721)

Sales of accumulation money market funds 5,205,080 5,205,080 21,557,924

21,557,924

Net cash inflow / (outflow) from investing activities 4,454,648 4,735,648 465,024 (765,684) Financing activities Share repurchases (3,660,249) (3,660,249) - -

Net cash outflow from financing activities (3,660,249) (3,660,249) - -

Net decrease in cash and cash equivalents (1,020,497) (129,709) (1,851,737) (2,814,648) Cash and cash equivalents at previous year end 1,877,181 262,395 3,213,477 3,009,810 Effect of foreign exchange rates 339,361 (11,261) 515,441 67,233

Cash and cash equivalents at year end 1,196,045 121,425 1,877,181 262,395

The notes on pages 15 to 31 are an integral part of these financial statements.



15

Notes to the financial statements 1 Accounting policies The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the financial statements of the Company and its subsidiaries (together, the 'Group') and have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Committee of the IASB (IFRIC). (a) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: · financial instruments at fair value through profit and loss are measured at fair value; and · investment property is measured at fair value. (b) Use of estimates and judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting polices and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected (c) Revenue recognition Interest receivable on fixed interest securities is recognised in ‘Interest income’ using the effective interest method. The effective interest method is a way of calculating the amortised cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation includes all amounts paid or received by a member of the Group that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. Interest on impaired financial assets is calculated by applying the original effective interest rate of the financial asset to the carrying amount as reduced by any allowance for impairment. (d) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences up to the date that control ceases. (e) Expenses Expenses are charged through the income statement, except for expenses which are attributable to the disposal of an investment, which are deducted from the disposal proceeds of the investment. In addition, certain expenses associated with the acquisition of an investment have been capitalised. (f) Investments General Assets are recognised at the trade date of acquisition, and are recognised initially at fair value plus any directly attributable transaction costs.



16

Notes to the financial statements (continued) Plant and equipment is stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost of assets, other than land or properties under construction, over their estimated useful lives, using the straight line method, on the following bases: Equipment - 25 years The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Investments at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the relevant member of the Group manages such investments and makes purchase and sale decisions based on their fair value. Fair value is the amount at which an investment could be exchanged between knowledgeable willing parties in an arms length transaction. Purchases of investments are recognised on the trade date, being the date that amounts are due for payment. Investments are derecognised when the rights to receive cash flows from the investments have expired or the relevant member of the Group has transferred substantially all risks and rewards of ownership. Investments are initially recognised at fair value being the transaction price. Transaction costs for all financial assets carried at fair value through profit and loss are expensed as incurred Subsequent to initial recognition, all financial assets at fair value through the profit and loss are measured at fair value. Gains and losses arising from changes in fair value are presented in the income statement in the year in which they arise. On disposal, realised gains and losses are also recognised in the income statement. Fair values of financial instruments traded in active markets are based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. Loans and receivables Loans and receivables include loans and advances originated by a member of the Group which are not intended to be sold in the short term and are recognised on an amortised cost basis. Loans and receivables are recognised when cash is advanced to borrowers and are derecognised when the borrowers repay their obligations, the loans are sold or written off or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less impairment losses. A provision for impairment is established when there is objective evidence that the relevant member of the Group will not be able to collect all amounts due from the relevant borrower. Where they are denominated in a foreign currency they are translated at the prevailing balance sheet exchange rate. Where the interest rate associated with such loans and receivables is below market, an adjustment is made to reflect the fair value accordingly. Investment property Property that is held for capital appreciation, and that is not occupied by the companies in the Group, is classified as investment property. Investment property comprises freehold land and freehold buildings. Land held for capital appreciation or for development as an investment property is immediately classified as investment property. Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at fair value, although the property may not be revalued in the year of acquisition. Changes in fair value are recorded in the consolidated income statement. Fair value is based on active market prices, adjusted if necessary for any difference in the nature, location or condition of the specific asset. If this information is not available, the Group uses alternative valuation methods. The property valuations upon which the directors base their valuation of investments are prepared annually by Colliers International.



17

Notes to the financial statements (continued) Interest in property Interest in property represents amounts capitalised in relation to non-derivative options to acquire property at future dates. Amounts capitalised are amortised over the period of the corresponding options. (g) Movements in fair value Changes in the fair value of all held-at-fair-value assets are taken to the income statement. On disposal, realised gains and losses are also recognised in the income statement. (h) Cash and cash equivalents Cash and cash equivalents comprise current deposits with banks. (i) Taxation The Company is an exempt company for Jersey taxation purposes. The Company paid an exempt company fee of £600 for each Jersey registered company within the Group during 2008. With effect from the 2009 year of assessment Jersey abolished the exempt company regime for existing companies. Profits arising in the Company for the 2009 year of assessment and future periods will be subject to tax at the rate of 0%. In the prior year the Company was exempt from taxation under the provisions of Article 123A of the Income Tax (Jersey) Law 1961 as amended. The Company’s subsidiary companies, BSPF Magnolia AD, BSPF Project 1 EAD, BSPF Project 4 EAD, BSPF Super Borovetz EAD and BSPF Tcherno More EAD will be liable for Bulgarian corporation tax at a rate of 10%. The subsidiary companies are not liable for any further local taxes, however withholding tax may be payable on repatriation of assets and income to the Company, as currently there is no double taxation treaty between Jersey and Bulgaria. Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the balance sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. (j) Foreign currency The results and financial position of the Company are expressed in pounds sterling, which is the Company's functional currency. Transactions in currencies other than Sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items and non-monetary assets and liabilities that are fair valued and that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Gains and losses arising on retranslation are included in net profit or loss for the period where investments are classified as fair value through profit or loss. Exchange differences on translation of the Company's net investment in foreign operations are recognised directly in equity. (k) Share capital Ordinary share Capital Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares are shown as a deduction to reserves. Founder shares Founder shares are classified as equity. (l) Segmental analysis A business segment is a group of assets and operations engaged in providing products or 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 or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.



18

Notes to the financial statements (continued) Other than the investment in money market funds in the UK, the Group is organised into one main geographical and business segment focusing on the Bulgarian property market. No additional disclosure is included in relation to segmental reporting as the Group's activities are limited to one business segment and one main geographical segment. (m) New standards and interpretations not applied At the date of authorisation of these financial statements, the following standards and interpretations were in issue but not yet effective, all of which will be effective for annual periods beginning on or after 1 January 2009: - Amendments to IAS 1-Presentation of Financial Statements: A Revised Presentation - Amendments to IAS 16- Property, Plant and Equipment - Amendments to IAS 19- Employee Benefits - Amendments to IAS 23 - Borrowing Costs - Amendments to IAS 27 - Consolidated and Separate Financial Statements - Amendments to IAS 28 - Investments in Associates - Amendments to IAS 29 - Financial Reporting in Hyperinflationary Economies - Amendments to IAS 31 - Interests in Joint Ventures - Amendments to IAS 36 - Impairment of Assets - Amendments to IAS 38 - Intangible Assets - Amendments to IAS 39 - Financial Instruments: Recognition and Measurement - Amendments to IAS 40 - Investment Property - Revised IFRS 1 - First-time Adoption of International Financial Reporting Standards - Revised IFRS 2 - Share-based Payment - Revised IFRS 3- Business Combinations - Revised IFRS 5- Non-current Assets Held for Sale and Discontinued Operations - IFRS 8-Operating Segments The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements for the Company. 2 Management fees

Group Group year ended 31

Dec 2008 year ended 31

Dec 2007 £ £

Management fees 555,000 1,000,000

The contracted management fee to Development Capital Management (Jersey) Limited during the period of these financial statements was 2% per annum of the amount subscribed plus any gains retained by the Company for reinvestment. The management agreement between the Company and the Manager was terminable by either party on twelve month's notice. The management agreement was terminated on 5th September 2008. The Manager was entitled to receive a performance fee of 20% of any cash returns from the sale of a property investment above a hurdle rate of 10% compound per annum up to 100% and 30% of any returns in excess of this. As at 31 December 2008 there is no contingent performance fee. 20% of any performance fee is subject to a claw back retention against the future performance of the Company.



19

Notes to the financial statements (continued) With effect from 1 January 2008, the management fee was changed to £75,000 per annum plus the direct operating costs of Development Capital Management Bulgaria AD. During the twelve months ended 31 December 2008 the total of both the management fee and direct operating costs amounted to £555,000.

3 Other operating expenses 2008 2007



Dec 2007 £ £

Advisory and consultancy fees 282,324 177,850 Legal and professional fees 221,919 279,967 Directors’ remuneration 143,917 101,525 Amortisation charge 102,924 423,257 Administration fees 62,692 58,193 Auditors’ remuneration for: Audit services 26,536 46,484 Non-audit services - - Custodian fees and bank charges 25,066 34,379 Travel and subsistence 20,664 51,414 Marketing and public relations 1,267 426,399 Other 47,849 58,786 935,158 1,658,254

As at 31 December 2009, the Group had no employees other than John Chapman, the Executive Chairman. On 10 December 2008, the Company's wholly-owned property adviser entered into an executive service contract with Mihail Polendakov. 4 Impairment of financial instruments



Dec 2007 £ £ Loans to third parties (9,901,454) - (9,901,454) -

The loan to the Bulgarian Property Investment Trust in the sum of £9,411,673 (EUR9,709,200) has been written down to its estimated recoverable amount of £8,624,943 (EUR8,921,210) being the market value of the land upon which it is secured at 31 December 2008. The loan to Magnolia Holidays EAD in the sum of £5,456,740 (EUR6,963,096) including accrued interest has been written down to nil as in the opinion of the directors there are significant doubts concerning the recoverability of the loan. The loan to Bulmix 97 Group OOD in the sum of £3,534,533 (EUR4,489,607) including accrued interest has been written down to nil as in the opinion of the directors there are significant doubts concerning the recoverability of the loan. The interest previously accrued on the loan to Black Sea Investment Trust is not deemed recoverable and accordingly the amount outstanding relating to prior periods has been written off in the sum of £123,451. 5 Earnings per share The earnings per ordinary share is based on the net loss for the year of (£2,274,113) (2007: profit of £2,767,936) divided by 239,568,022 (2007:250,691,563) ordinary shares. The diluted return per ordinary share is based on the net loss for the year divided by 240,605,366 (2007:251,728,907) ordinary shares, which reflects the potential dilution as discussed in note 14.



20

Notes to the financial statements (continued) 6 Tax

Group Group

year ended 31


Dec 2007 £ £

Irrecoverable overseas tax 217,325 118,547 Property tax 35,292 - 252,617 118,547

This tax represents irrecoverable withholding tax on the interest on loans to subsidiaries. 7 Investing activities (a) Investment property and plant and equipment

Investment Property

Plant and Equipment Total

£ £ £ At 1 January 2008 Cost brought forward 10,680,846 124,918 10,805,764 Accumulated depreciation brought forward - (1,753) (1,753) Net book amount brought forward 10,680,846 123,165 10,804,011 Additions 14,977 - 14,977 Return of deposit (247,238) - (247,238) Depreciation charge - (5,983) (5,983) 10,448,585 117,182 10,565,767 At 31 December 2008 Cost 10,448,585 124,918 10,573,503 Fair value adjustment (2,475,346) - (2,475,346) Foreign exchange gain 4,085,223 - 4,085,223 Accumulated depreciation - (7,736) (7,736) Net book amount 12,058,462 117,182 12,175,644

£ £ £

At 1 January 2007 Cost brought forward 247,238 - 247,238 Accumulated depreciation brought forward - - - Net book amount brought forward 247,238 - 247,238 Additions 10,433,608 124,918 10,558,526 Depreciation charge - (1,753) (1,753) 10,680,846 123,165 10,804,011 At 31 December 2007 Cost 10,680,846 124,918 10,805,764 Accumulated depreciation carried forward - (1,753) (1,753) Net book amount 10,680,846 123,165 10,804,011



21

Notes to the financial statements (continued) (b) Capitalised development expenses Group & Company Group & Company

Group and Company

Group and Company

year ended 31


Dec 2007 £ £

Cost (at opening and closing balance sheet dates) 150,799 150,799 (c) Interest in property

Group Company Group Company

year ended 31 Dec 2008




£ £ £ £

Interest in property - - 96,941 - - - 96,941 -

An interest free loan was made to a third party by the Company’s wholly owned subsidiary, BSPF (Property) Limited in order to secure an option to acquire land at Byala at a future date under certain conditions. This interest free loan is accounted for at amortised cost using the effective interest rate method. As the loan bore interest at a rate below a market rate, a discount had been separately capitalised as "interest in property" in recognition of the asset that the option represented, and has been amortised over its useful economic life. This option has now been exercised and BSPF (Property) Limited, has demanded that this third party transfer the land at Byala in settlement of the outstanding borrowing. As of 19 June 2009, the latest practicable date prior to the publication of this report this transfer had not yet been completed. (d) Loans and receivables

Group Company Group Company





£ £ £ £ Loans and interest 13,535,976 32,211,122 17,553,875 31,768,806 Expenses capitalised - 231,763 231,763

13,535,976 32,211,122 17,785,638 32,000,569 Details of loans and the corresponding developments in existence at the year end are given below: Magnolia, Pamporovo The Company has made loans totalling EUR5,596,096 to its subsidiary BSPF Magnolia EAD on 14 November 2005, 23 May 2006, 18 November 2006 and 2 April 2007. The interest rate is a multiple of 1.25 times the aggregate of 5% and the six month EURIBOR rate. The loan and interest are payable on demand. BSPF Magnolia EAD has subsequently made loans totalling EUR5,488,938 to a developer, Magnolia Holidays EAD with the same interest rate. Interest from Magnolia Holidays EAD is payable on demand. The repayment date of the loan is the earlier of when all units have been sold or 9 January 2009. The loan to Magnolia Holidays EAD has been secured by a share pledge over that company’s entire share capital of 50,000 registered shares as well as security interests in other assets. Following the receipt of legal advice on the recoverability of the loan and the accrued interest thereon, or the possibility of transferring title to the land by way of transfer to the Group of the entire issued share capital of Magnolia Holidays EAD, the loan has been written down to nil as in the opinion of the Directors there are significant doubts concerning the recoverability of the loan.



22

Notes to the financial statements (continued) Byala The Company has made two loans totalling EUR9,709,200 to its subsidiary BSPF (Property) Limited (BSPF), which has then lent these funds to the Bulgarian Property Investment Trust AD. No interest is accruing on the loans between the parent and the subsidiary BSPF. The loan to the Bulgarian Property Investment Trust (BPIT) is secured by a first ranking mortgage over 161,820 square metres of land in Byala. In accordance with the terms of the loan agreement between BSPF and BPIT, interest is chargeable on the borrowing from the due date of repayment being the 16 March 2008 to the date of actual repayment calculated at 3% per annum above the Royal Bank of Scotland plc base rate. As an alternative to repayment, the loan agreement entitles BSPF to acquire the underlying property for the value of the loan outstanding. As at 19 June 2009, the property had not been transferred to BSPF. The value of interest that would have been charged to BPIT had BSPF not requested the transfer of the underlying property is £549,962 (EUR568,853). The terms of the loan are being renegotiated such that interest will not become due in respect of outstanding borrowings on the basis that the land will be transferred to BSPF. The loan to BPIT has been written down to its estimated recoverable amount of £8,624,943 (EUR8,921,210) being the market value of the underlying land at 31 December 2008. Evergreen The Company has made a loan of EUR4,890,296 to its subsidiary BSPF (Property) Limited, which has then lent these funds to its subsidiary , BSPF Tcherno More EAD. The interest rate is a multiple of 1.25 times the aggregate of 5% and the six month EURIBOR rate. The loans and interest are payable on demand and are unsecured. These funds have been utilised by BSPF Tcherno More EAD to acquire 24,600 square metres of development land in the Malinova Dolina district of Sofia and for the design and development process. Borovets The Company has made loans totalling EUR453,744 to its subsidiary BSPF (Property 2) Limited, which has then lent these funds to its subsidiary BSPF Super Borovetz EAD. The first tranche of EUR360,720 was lent on 26 January 2006 at 5% per annum. The second tranche of EUR 93,024 was lent on 4 May 2007. The interest per annum is a multiple of 1.25 times the aggregate of 5% and the six month EURIBOR rate. The loans and interest are payable on demand. This loan is unsecured. These funds were utilised to pay a deposit for the acquisition of up to 40,000 square metres of development land in the Borovets ski resort. Following re-negotiation of the contract in respect of the land during 2008, a portion of the amounts lent were returned to BSPF Super Borovetz EAD. The Company is endeavouring to recover the remainder. Nikea Park The Company has made loans totalling EUR4,006,605 to its subsidiary BSPF (Property 4) Limited, which has then lent on EUR3,844,425 of the funds to Bulmix 97 Group OOD. Interest is accruing at 7% per annum on these loans and they are repayable on the sale of the individual units at Nikea Park. The loan to Bulmix 97 Group OOD is secured by a second ranking mortgage over the land and a first ranking mortgage over the units as well as the construction rights for these units. The loan has been written down to nil as in the opinion of the Directors there are significant doubts concerning the recoverability of the loan. Obzor The Company has made loans totalling EUR5,274,750 to its subsidiary BSPF (Property 5) Limited (BSPF 5), which has then lent on EUR5,079,726 of the funds to Black Sea Investment Trust AD (BSIT). The loan to BSIT has been secured by a third ranking mortgage (after two mortgages in favour of the financing bank). The loan is repayable upon completion of the property for all sold units. BSPF 5 will acquire ownership of the unsold units at a cost of EUR 650 per square metre less the disbursed amount of EUR 195 per square metre. The loan agreement between BSPF 5 and BSIT requires the payment of interest at a rate of 7% per annum on the balance of the loan outstanding from the date of drawdown to the date of repayment, payable from the sale price of units. The loan agreement is being renegotiated such that interest will not become due in respect of outstanding borrowings. The value of interest that would have been charged to BPIT had BSPF not requested the transfer of the underlying property is £370,809 (EUR 489,371). See Note 17. Borovets Lakes The Company has made loans totalling EUR11,538,177 to BSPF Project 4 EAD. The interest rate is a multiple of 1.25 times the aggregate of 5% and the six month EURIBOR rate. This loan is repayable on demand and unsecured.These funds have been utilised by BSPF Project 4 EAD to acquire 123,961 square metres of development land in the Borovets ski resort.



23

Notes to the financial statements (continued) 8 Investments held at fair value through profit or loss

Group and Company Group and Company



£ £ Accumulation money market funds Unlisted Unlisted Opening book cost 11,822,918 23,045,435 Movements in year: Purchases at cost - 9,561,721 Sales - proceeds (5,205,080) (21,557,924) - realised gain on sales 268,781 1,117,155 - realised exchange gain / (loss) on sales 654,122 (343,469) Closing book cost 7,540,741 11,822,918 Closing fair value adjustment on money market funds 1,169,861 596,939 Closing unrealised exchange gain 3,043,469 780,609 Closing fair value 11,754,071 13,200,466 9 Gains on investments



£ £ Foreign exchange gain on loans 3,106,507 2,449,065 Movement in fair value adjustment on money market funds 2,835,782 998,203 Gain on disposal of money market fund 922,903 773,686 Net gain on investments 6,865,192 4,220,954 10 Gains on investment property



£ £ Foreign exchange gain on investment property 4,085,223 - Net gain on investment property 4,085,223 -

11 Investment in subsidiaries

Company Company 31 Dec 2008 31 Dec 2007

Direct Subsidiaries € £ € £ BSPF (Property) Limited 1 1 1 1 BSPF (Property 2) Limited 1 1 1 1 BSPF (Property 3) Limited 1 1 1 1 BSPF (Property 4) Limited 1 1 1 1 BSPF (Property 5) Limited 1 1 1 1 BSPF (Property 6) Limited 1 1 1 1

BSPF Project 1 EAD 25,565

17,252 25,565 17,252

BSPF Project 4 EAD 25,565

17,552 25,565 17,552

BSPF Magnolia AD 25,562

17,194 25,562 17,194

76,698 52,004 76,698 52,004



24



25

Notes to the financial statements (continued) 11 Investment in subsidiaries (continued)

Indirect Subsidiaries € £ € £ BSPF Tcherno More AD 25,591 19,585 6,391 4,402 BSPF Super Borovetz EAD 25,565 17,522 - -

127,854 89,111 83,089 56,406 The Euro amounts have been translated at the respective rate prevailing at the date of acquisition. The Company holds 50,000 ordinary shares of Bulgarian Lev 1 in BSPF Magnolia AD, and BSPF Project 1 EAD and BSPF Project 4 EAD which are incorporated in Bulgaria. These shares are fully paid and represent the entire issued share capital of each entity. The Company also holds 1 ordinary share of EUR1 in each of the remaining subsidiaries which are incorporated in Jersey. This represents the entire issued share capital of these companies. The authorised share capital of each is EUR 10,000. 12 Other receivables

Group Company Group Company 31 Dec 2008 31 Dec 2008 31 Dec 2007 31 Dec 2007 £ £ £ £

Bank and deposit interest receivable 2,459 2,459 4,117 4,117 Inventories 646,461 - 79,705 - Prepayments and accrued income 78,566 3,113 103,021 4,237 Other debtors 217,058 23,951 190,027 -

944,544 29,523 376,870 8,354 13 Other payables

Group Company Group Company 31 Dec 2008 31 Dec 2008 31 Dec 2007 31 Dec 2007 £ £ £ £ Amounts due to subsidiaries - (3) - (3) Tax liability (237,392) - (89,275) - Trade creditors (92,424) - (844) - Accruals (157,843) (157,841) (174,867) (174,843) Advances from customers (34,524) - (16,438) - Other creditors (6,140) - (1,721) -

(528,323) (157,844) (283,145) (174,846) None of the amounts are past due or impaired 14 Stated capital

Company Company Authorised: 31 Dec 2008 31 Dec 2007 Founder shares of no par value 10 10 Ordinary shares of no par value Unlimited Unlimited

Issued and fully paid: £ £ 2 founder shares of no par value - - 213,112,898 (2007: 250,691,563) ordinary shares no par value 46,478,064 50,138,313



26

Notes to the financial statements (continued) 14 Stated capital (continued)

Movements in stated capital during the year Number of shares £

Shares in issue on 1 January 2008 250,691,563

50,138,313

Shares repurchased for cancellation 25 July 2008 (1,298,922)

(120,512)

Shares repurchased for cancellation 8 September 2008 (714,184)

(71,634)


(42,981)


(57,307)


(51,741)

Shares repurchased for cancellation 19 September 2008 (14,283,674)

(1,432,653)

Shares repurchased for cancellation 26 September 2008 (19,766,171)

(1,883,421)

Shares in issue at 31 December 2008 213,112,898

46,478,064 Founder shares are not eligible for participation in Company investments and carry no voting rights at general meetings of the Company. A further 1,037,344 shares will be issued contingent upon final construction permits being granted for the options over the sites at Shabla and Kavarna. 15 Net asset value per share The net asset value per ordinary share is based on the net assets attributable to ordinary shareholders of £39,228,756 (2007:£44,008,761,) divided by 213,112,898 (2007: 250,691,563) ordinary shares, being the number of outstanding ordinary shares in issue at the year end. 16 Financial instruments The Group's financial instruments comprise money market funds, cash balances and debtors and creditors that arise directly from its operations, for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The main risks the Group faces from its financial instruments are (i) market price risk (comprising currency risk, interest rate risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Board regularly reviews and agrees on policies for managing each of these risks. The policies for managing these risks are summarised below and have been applied throughout the period. The numerical disclosures exclude short-term debtors and creditors. (i) Market price risk Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Group's operations. It represents the potential loss the Group might suffer through holding market positions as a consequence of price movements and movements in exchange rates. It is the Board's policy to hold a broad spread of fixed interest investments using collective schemes in order to reduce risk arising from factors specific to a particular country or sector. The Custodian monitors the prices of the money market funds throughout the year which are reported to the Board. The Board meets regularly in order to review investment strategy. (ii) Currency risk The functional and presentational currency of the Group is Sterling. Options over property, loans and other investments are denominated in Euros and the Group is therefore exposed to movements in the exchange rate between the Euro and Sterling. The Group does not hedge this risk.



27

Notes to the financial statements (continued) 16 Financial instruments (continued) Currency rate exposure An analysis of the Group's currency exposure is detailed below:

31 Dec 2008 31 Dec 2007 Financial Net monetary Financial Net monetary investments assets investments assets £ £ £ £

Sterling - 704,876

- 11,198,245

Euro 25,290,047 12,678,584

30,986,104 1,752,046 Bulgarian LEV - 555,249 - 72,366

25,290,047 13,938,709

30,986,104 13,022,657

Foreign currency sensitivity

The table below details the Group's sensitivity to a 5% increase in the value of sterling against the relevant currency. With all other variables held constant, net assets attributable to shareholders and the change in net assets attributable to shareholders per the consolidated income statement would have decreased by the amounts shown below. The analysis is performed on the same basis for 2007.

31 Dec 2008 31 Dec 2007 Profit & loss Equity Profit & loss Equity £ £ £ £

Euro (573,102) (1,104,663) 1,554,152 87,602

Bulgarian LEV - 199,927 - 3,618

(573,102) (904,736)

1,554,152 91,220 A 5% weakening of sterling against the relevant currency would have resulted in an equal and opposite effect on the above financial statement amounts to the amounts shown above, on the basis that all other variables remain constant.



28

Notes to the financial statements (continued) (iii) Interest rate risk Interest rate movements may affect: (i) the fair value of the investments in fixed interest rate securities, (ii) the level of income receivable on cash deposits, and (iii) interest payable on the company's variable rate borrowings.

The interest rate profile of the Group excluding short term debtors and creditors as at 31 December 2008 was as follows:

Weighted

average Weighted 31 Dec 2008 31 Dec 2008 31 Dec 2008

period for which average Fixed Floating Non-interest

rate is fixed interest rate rate rate bearing

Years % £ £ £

Assets

Euro loans to third parties - - - - 13,535,976

Equities - - - - 11,754,071

Euro cash deposit - - - 620,122 - Bulgarian LEV cash deposit - - - 555,249 -

Sterling cash deposit - - - 20,674 -

Total assets - 1,196,045 25,290,047

Weighted average Weighted 31 Dec 2007 31 Dec 2007 31 Dec 2007

period for which average Fixed Floating Non-interest rate is fixed interest rate interest rate bearing Years % £ £ £

Assets

Euro loans to third parties 2.00 7.00

6,085,624 4,640,795 7,156,160

Equities - - - - 13,200,466

Euro cash deposit - - - 1,752,046 -

Bulgarian LEV cash deposit - - - 72,367 -

Sterling cash deposit - - - 52,769 -

Total assets 6,085,624 6,517,977 20,356,626 * The weighted average interest rate is based on the current yield of each asset, weighted by its market value. This excludes the loan to third parties for the Nikea Park development as the loan is repayable depending on sales and development. The floating rate assets consist of cash deposits on call earning interest at prevailing market rates. The non-interest bearing assets represent the equity element of the portfolio.



29

Notes to the financial statements (continued) Maturity profile The following table sets out the carrying amount, by maturity, of the Group’s financial instruments that are exposed to interest rate risk:

31 Dec 2008

Within Within Within More than

Past due 1 year 2-3 years 4-5 years 5 years Total

£ £ £ £ £ £

Fixed rate Loans to third Parties - -

-

- - -

- - - - - -

Floating rate Loans to third parties - -

-

- - -

Cash - 1,196,045

-

- - 1,196,045

-

1,196,045

-

- - 1,196,045

Non-interest bearing Loans to third parties 13,535,976 -

-

- - 13,535,976

Other payables -

(528,323)

-

- - (528,323)

13,535,976

(528,323) - - - 13,007,653

31 Dec 2007 Past due Within Within Within More than 1 year 2-3 years 4-5 years 5 years Total £ £ £ £ £ £

Fixed rate

Loans to third parties

-

- 2,822,768

- - 2,822,768

- - 2,822,768 - - 2,822,768

Floating rate


-

4,640,795 -

- -

4,640,795

Cash

- 1,877,182 -

- -

1,877,182

-

6,517,977 -

- -

6,517,977

Non-interest bearing


-

7,156,160 -

- -

7,156,160

Other payables

-

(283,145) -

- -

(283,145)

-

6,873,015 -

- -

6,873,015



30

Notes to the financial statements (continued) The loan of EUR4,006,605 to third parties for the Nikea Park development has been excluded from the maturity profile as the loan has been written down to nil. Interest rate sensitivity An increase of 100 basis points in interest rates during the period would have increased the net assets attributable to shareholders and changes in net assets attributable to shareholders by £43,582 (2007 £37,667). A decrease of 100 basis points would have had an equal but opposite effect. (iv) Liquidity risk A significant portion of the Group's assets comprise cash balances and readily realisable securities, which can be sold to meet funding commitments if necessary. As at 31 December 2008, the Group does not have any significant liabilities due. (v) Credit risk The Group places funds with third parties and is therefore potentially at risk from the failure of any such third party of which it is a creditor. The Group expects to place any such funds on a short-term basis only and spread these over several investments. The Group's principal financial assets are loans and receivables, other receivables, investments and cash and cash equivalents. The maximum exposure of the Group to the credit risk is the carrying amount of each class of financial assets. Loans and receivables are represented by loans to and receivables from third parties. No significant credit risk is recognised in respect of other receivables represented mainly by prepayments and other debtors, and cash and cash equivalents. Investments are represented by holdings in money market funds which are rated AAA and use risk spreading to minimise exposure to any one counterparty. The Group's credit risk is primarily attributable to loans to and receivables from third parties. The Board monitors each loan according to the individual characteristics of each project, including regular contact with developers, site visits and if necessary reporting by an outsourced real estate consultant to evaluate whether there is any impairment. With the exception of the loans to Magnolia Holidays EAD, Bulmix-97 OOD and the Bulgarian Property Investment Trust A.D., all financial assets of the Company are neither past due nor impaired. The loans to Magnolia Holidays EAD and Bulmix-97 OOD have been written down to nil as in the opinion of the directors there are significant doubts concerning the recoverability of the loans. In respect of the loan to the Bulgarian Property Investment Trust A.D., the Company is seeking the transfer of the underlying land to its wholly owned subsidiary, BSPF Property Limited. Further details on the loans to Magnolia Holidays EAD and Bulmix-97 OOD can be found in note 16 (vi) below. (vi) Credit risk exposure

In summary, compared to the amounts in the Consolidated Balance Sheet, the maximum exposure to credit risk at 31 December 2008 was as follows:

31 Dec 2008 31 Dec 2007

Balance sheet Maximum exposure Balance sheet Maximum exposure

£ £ £ £

Non-current assets Loans and Receivables 13,535,976 13,535,976 17,688,697 17,688,697

13,535,976 13,535,976 17,688,697 17,688,697



31

Notes to the financial statements (continued) 16 Financial instruments (continued) (vi) Credit risk exposure (continued) Magnolia, Pamporovo Magnolia Holidays EAD has defaulted on its loan repayment to the wholly owned subsidiary of the Company, BSPF Magnolia EAD in the amount of EUR5,488,938 and the interest thereon of EUR636,050. On 17 January 2008, the lender commenced a court action to force repayment of the defaulted amount in the Plovdiv District Court. That court ruled against the lender, which then appealed to the Plovdiv Regional Court, and the Company currently awaits a decision. A decision has still not been rendered. On 17 January 2008 BSPF Magnolia EAD, a wholly owned subsidiary of the company, declared the loan provided to Magnolia Holidays EAD in the sum of EUR5,488,938 and the interest of EUR636,050 as due and payable. Magnolia Holidays EAD did not pay any of the amounts claimed by BSPF Magnolia EAD. As a result, on 29 January 2008, BSPF Magnolia EAD registered the enforcement of a share pledge, which is security under the Loan and Guarantee Agreement. The pledge is for 50,000 shares, which is the entire registered share capital of Magnolia Holidays EAD. On 6 February 2008, Magnolia Holidays EAD filed an application with the Plovdiv Regional Court to suspend the enforcement of the share pledge on the grounds that the claimed amount had not yet become due and payable. The Court granted the application with a ruling on 11 February 2008. On 20 February 2008 BSPF Magnolia EAD appealed the ruling of the Plovdiv Regional Court. The case has been forwarded to the Plovdiv District Court and awaits decision. At the beginning of July 2008, the Company took control over 100% of the pledged shares of Magnolia Holidays EAD, the entity which owns the real estate at Pamporovo. As a result of the completion of the share pledge enforcement procedure initiated by BSPF Magnolia EAD on 29 January 2008, on 16 July 2008 BSPF (Property 3) Limited acquired all 50 000 shares of Magnolia Holidays EAD. BSPF Magnolia EAD as pledgee then endorsed the shares to BSPF (Property 3) Limited in accordance with the Bulgarian Registered Pledges Act and thus completed the share pledge enforcement procedure. On 12 September 2008, the borrower filed claims with the Plovdiv District Court against BSPF Magnolia and Magnolia Holidays EAD as defendants claiming that the pledge was a nullity and seeking cancellation of the enforcement of the share pledge. On 24 September 2008 the Plovdiv District Court suspended the registration of BSPF (Property 3) Limited as a sole owner of Magnolia Holidays EAD. This has now been separated into two cases, one pending in the Arbitration Court at the Bulgarian Chamber of Commerce and Industry, the other in the Sofia City Court. On 2 February 2009 the Plovdiv District Court issued judgment that effectively rejected the refusal of the Bulgarian Trade Register to register BSPF (Property 3) Limited as the sole owner of the capital of Magnolia Holidays EAD along with the registration of the new management appointed by BSPF (Property 3) Limited. On 28 April 2009 the Plovdiv Court of Appeals refused to hear an appeal of that decision. That decision may be appealed to the Supreme Court of Cassation. On 24 November 2008 its former owner purported to increase the capital of Magnolia Holidays EAD from BGN50,000 to BGN500,000 and registered the capital increase at the Trade Register. On 05 December 2008 BSPF (Property 3) Limited filed a claim against Magnolia Holidays EAD to the effect that the purported capital increase is null and asking BSPF (Property 3) Limited to be confirmed by the court as the only lawful sole owner of the capital of Magnolia Holidays EAD. A decision of the Plovdiv District Court is now pending. The Plovdiv Regional Court is now hearing a third case initiated by the borrower against the distribution of proceeds resulting of the share pledge enforcement. The basis of the claim is the borrower’s allegation that his signature was forged on certain documents. The expert’s report has confirmed that the signatures were genuine. Judgment is expected presently. On 9 December 2008 on behalf of BSPF (Property 3) Limited a complaint was sent to the Plovdiv Regional Prosecution Authority claiming that the actions of the former owner of Magnolia Holidays in connection with the capital increase were illegal and provided sufficient grounds for the State to institute a criminal case against him.



32

Notes to the financial statements (continued) 16 Financial instruments (continued) (vi) Credit risk exposure (continued) Nikea Park On 28 February 2008 the lender BSPF (Property 4) Limited filed an application for issuance of a writ of execution against Bulmix-97-Group Ltd (“the borrower”) with the Sofia Regional Court for breach of its contractual obligations. On 19 May 2008 a writ of execution was issued. On 20 June 2008 the procedure of forced enforcement of the mortgage was initiated through private bailiff in Varna. On 3 July 2008 the borrower filed an application with Varna Regional Court for suspending the enforcement procedures and on 25 July 2008 Varna Regional Court issued a court order court order suspending the enforcement. Due to successful appeal filed on behalf of the creditor BSPF (Property 4) Limited before the Varna District Court, on 17 December 2008 the Varna District Court issued a court order cancelling the suspension of the enforcement procedure. The order of Varna District Court was then appealed to the Supreme Court of Cassation, which returned the case to Varna District Court to issue a new order to confirm the lawfulness of the enforcement procedure. A ruling is expected presently. Fair value of financial assets and liabilities The book value of the cash at bank and loans to third parties included in these financial statements are approximate to their fair value. Investments held for trading are valued at their fair value, which has been determined with reference to quoted market prices. 17 Commitment The Company has an agreement to advance EUR5,274,750 to the developer of the site at Obzor. At the period end EUR5,079,726 of this loan has been advanced. It is anticipated that a further agreement with the developer will be signed shortly (the "Revised Agreement"). Pursuant to the terms of the Revised Agreement, the original agreement will be terminated and the developer will repay EUR2,000,000 upon the Revised Agreement coming into force, and the Company and the developer will split the proceeds of all future unit sales at the Obzor site 70:30 respectively, and 80:20 once an aggregate total of EUR4,000,000 sales have been made. In the previous financial year, the Company signed an agreement to advance up to EUR4,678,500 for the development of the site at Kavarna upon the fulfilment of required contractual conditions (the “Kavarna Agreement”). No advances have yet been made on this loan and pursuant to the terms of the Revised Agreement, upon its coming into effect, the Kavarna Agreement and all obligations thereunder will be terminated. 18 Related party transactions The Company purchased three options at launch from the former Manager of the Company, Development Capital Management (Jersey) Limited. The option over the Obzor development was purchased from the former Manager in exchange for 691,563 ordinary shares in the Company. The two remaining options over the sites at Kavarna and Shabla have been assigned to the Company. Consideration of 1,037,344 shares in the Company will be issued to the former Manager contingent upon final construction permits being granted in respect of the sites at Kavarna and Shabla. At the year end, final construction permits had not been issued on either site and therefore no value has been ascribed to the options. Information regarding subsidiaries and subsidiary loans can be found in notes 6(d) and 11. The management fees incurred for the year are disclosed in note 2. As at 31 December 2008 there were no unpaid amounts. 19 Directors’ interests Total compensation to the Directors over the period was £143,917 Mr Angelo Moskov is a partner of QVT Managed Funds, which control or have a beneficial interest in 75,091,775 ordinary shares in the company. 20 Company domicile The Black Sea Property Fund Limited is a company domiciled in Jersey, Channel Islands.



33

Corporate information

Registered office BNP House Anley Street St Helier Jersey CI JE2 3QE

Registrar Capita IRG (Offshore) Limited 12 Castle Street St Helier Jersey CI JE2 3RT

Strategic Adviser Colliers International Business Park Sofia Mladost 4 Build 13B 1715 Sofia Bulgaria

Legal Adviser (United Kingdom) Travers Smith LLP 10 Snow Hill London EC1A 2AL

Nominated Advisor and Broker Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT

Auditors to the Company KPMG Channel Islands Limited PO Box 453 5 St Andrew’s Place St Helier Jersey CI JE4 8WQ

Custodian BNP Paribas (Jersey Branch) BNP House Anley Street St Helier Jersey CI JE2 3QE

Administrator and Secretary BNP Paribas Securities Services Fund Administration Limited Liberte House 19-23 La Motte Street St Helier Jersey CI JE2 4SY

Legal Adviser (Jersey) Ozannes Advocates PO Box 733 29 Esplanade St Helier Jersey CI JE4 0ZS

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