Tilgin interim report 1 January - 30 June 2008

Second quarter 2008
“¢ Net sales SEK 41.0 million (55.2), a 31 % increase from previous quarter
“¢ Net result SEK -17.3 million (-42.3), to be compared with SEK -31.4 million in the first quarter

Tilgin AB (Stockholm: TILG) net sales increased by 31 percent from the first quarter, but decreased compared with the corresponding period in 2007. The company has two business segments – IP residential gateway and IPTV – two operations with different competitive premises.

Net sales in IP residential gateway increased by 48 percent to SEK 37.7 million. Major customers include TeliaSonera, Tele2 and DU from Dubai. With over 30 customers in over ten countries, our IP residential gateway business has now established a broad customer base and considerable international range.

In this segment Tilgin is developing and selling software and solutions to telephony and broadband operators wanting to offer the “digitally connected home” by connecting customer services such as Internet connection, IP telephony, local networks etc. We are also marketing software for managing networks.

Of the two business segments, IP residential gateway well meets our expectations on sales volume, margin and a diversified customer base. My assessment is that we, over time, have a stable and very promising business in this segment.

Tilgin’s other business segment, IPTV, showed net sales of SEK 3.3 million in the second quarter, which is less than in the previous quarter, and significantly less than in the corresponding period last year. The decrease from last year is explained by the loss of Belgacom, our largest customer, at the end of 2007. Belgacom made up almost 90 percent of segment net sales. Despite low sales this segment contributed positively to the overall gross margin in the second quarter. After the end of the second quarter we have signed several IPTV orders, for example with an incumbent in Southern Europe, a Danish utility company and an incumbent in the Middle East. Cooperation with system integrators such as Ericsson and Nokia Siemens Networks confirms the technical quality of our products, but the business segment is dependent on a few large customers, and long sales cycles create strongly varying sales levels from quarter to quarter.

IPTV has an attractive strategic position, but despite a number of significant orders it has not attained the critical mass needed to reach a stable level of profitability. Obviously this is not a viable situation in the long run. At the same time, the market for IPTV is characterised by accelerating growth, driven by the fact that operators are on the verge of commercial IPTV volume roll-outs. As a relatively small player in this field it is imperative for Tilgin to take advantage of the current market momentum in order to capitalise on made investments and its attained market position. While working on increasing IPTV sales, we are also actively pursuing opportunities for various forms of cooperations, strategic alliances, part-ownerships etc.

Tilgin had a tough start in 2008, but during the second quarter we have managed to stabilise the development. Sales increased, the gross margin improved and our financial resources were strengthened through the new share issue that brought Tilgin SEK 72 million. Our cost savings in the second quarter reached SEK 8.6 million, to be compared with the planned SEK 7 million. While I view the second half of 2008 in a positive light, I will currently refrain from presenting a forecast for the remainder of the year.

Significant events during the second quarter

• In April Tilgin was chosen to provide a major Southern European incumbent with Tilgin’s Mood 400 HDTV set-top box solution for IPTV.
• In April Tilgin received a new order for IP technology from a leading pan-Nordic operator,
  referring to Tilgin’s Vood 322 IP home gateway, and also the company’s management system VCM.
• In May, Tilgin’s rights issue of shares and warrants was concluded, and the new shares raised some SEK 72 million before issue and guarantee expenses. The number of outstanding shares in the company increased by 22,274,598 to 44,549,198. Further, 14,849,732 warrants in two series (7,424,866 warrants in each series) were issued, with duration until 31 August 2009 and 2010 respectively, and with exercise price SEK 4 and SEK 5 respectively.
• Also in May Peter Galyas, CTO at Tilgin, was appointed to the Board of Directors of the Home Gateway Initiative (HGI). HGI drives the standardisation of home gateways to facilitate the
  growth of next-generation broadband services.
• Existing customers that have generated large orders during the quarter include DU (IP residential gateway, Dubai), Megaphone (IP residential gateway, Sweden) and TeliaSonera (through AxCom, IP residential gateway, Sweden).

Significant events after the reporting period

• Tilgin received new customs duties in July amounting to approximately SEK 6.6 million, referring to import shipments in 2005 and 2006. Tilgin has appealed the duties and has also been granted postponement of execution, pending decision from the court.
• In August Tilgin won a breakthrough order from a Southern Europe incumbent, for delivery of Mood 400 HDTV set-top boxes together with management software. Order value approximately USD 1.7 million.
• Also in August Tilgin received another IPTV order for Mood 400 HDTV and management software, from the broadband subsidiary of a leading Danish utility company.
• In the same month the company received a field test order on HD IPTV technology from a Middle East incumbent, as part of that operator’s initial IPTV rollout and evaluation of IPTV technology, which will take place in the third quarter.

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