2. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 page Corporate officers page The Group page 21

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2 CONTENTS ANNUAL REPORT 2006 page 1 1. DIRECTORS REPORT ON GROUP OPERATIONS page Main factors that have influenced the results for the financial year page Results of operations page Financial position and cash flow page Reconciliation with the Parent Company s financial statements page Sources of funds page Research and innovation page Financial risk management page Strengths and resources not reflected in the financial statements page Shareholdings of management and supervisory bodies, general managers and key managers page Continuity with data published in the fourth quarter of 2006 page Subsequent events page Outlook page CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 page Corporate officers page The Group page CONSOLIDATED FINANCIAL STATEMENTS page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS page Principal activities page Accounting standards used in preparation of the financial statements page Basis of presentation page Consolidation policies page Critical accounting estimates and judgements page Segment information page Notes to the income statement page Notes to the balance sheet page Assets page Liabilities and shareholders equity page Net funds page Contingencies page Commitments page Third-party assets held by the group page Related party transactions page Compliance with Legislative Decree no. 196/2003 page Other information page 64 ANNEXES TO THE CONSOLIDATED FINANCIAL STATEMENTS page 65 PARENT COMPANY S REPORT page DIRECTORS REPORT ON THE PARENT COMPANY S OPERATIONS page Financial review page Sources of funds page Research and innovation page Financial risk management page 74 i

3 5.5 Strengths and resources not reflected in the financial statements page Shareholdings of management and supervisory bodies, general managers and key managers page Other information page Subsequent events page Outlook page Proposed appropriation of net profit for the year page Shareholder resolutions page PARENT COMPANY S BALANCE SHEET AND INCOME STATEMENT page NOTES TO THE PARENT COMPANY S FINANCIAL STATEMENTS page Corporate information page Accounting standards used in preparation of the financial statements page Basis of presentation page Accounting policies page Critical accounting estimates and judgements page Notes to the income statement page Notes to the balance sheet page Assets page Liabilities and shareholders equity page Net funds page Contingencies page Commitments page Shareholder pacts page Compliance with Legislative Decree no. 196/2003 page Related party transactions page Other information page 111 Annex - Transition to International Financial Reporting Standards (IFRS) by the Parent Company page 112 ANNEXES TO THE PARENT COMPANY S FINANCIAL STATEMENTS page 121 REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE GENERAL MEETING OF SHAREHOLDERS page 123 REPORT OF THE INDEPENDENT AUDITORS page 127 ESSENTIAL INFORMATION ON SUBSIDIARIES page 130 ii

4 ANNUAL REPORT

5 DIRECTORS REPORT ON GROUP OPERATIONS 2

6 1.1 MAIN FACTORS THAT HAVE INFLUENCED THE RESULTS FOR THE FINANCIAL YEAR The main results achieved by the Acotel Group in 2006 consist of: 1. strong revenue growth, up 126% on the previous year, rising from 27.9 million euros in 2005 to 63.2 million euros in 2006; 2. an even more substantial improvement in all profit margins, as shown in the reclassified income statement below. Geographically speaking, 54.7% of turnover was generated in the United States which has thus become the Group s main market. Whilst substantially in line with the previous year in terms of absolute value, revenues from the Group s three traditional markets Italy, the Middle East and South America decreased as a percentage of total turnover, and now account for 21.9%, 9.4% and 8.2%, respectively. The remaining portion of 5.8% derives from Africa, other European countries and Asia. In terms of business segment, value added services (VAS) for mobile operators continue to represent the Group s main source of revenue, representing 87.5% of the total. The business segments regarding the design of ICT equipment and security systems design account for 9.8% and 2.7% of total revenues, respectively. The main events that took place in 2006 in the three business segments in which the Group operates are described below. SERVICES This business segment, with revenues amounting to 55.3 million euros in 2006, represents 87.5% of total Group turnover, and is now even more important than in previous years. The Group, which operates in Italy, Brazil, the Middle East and Turkey, adopts different operating strategies for each target segment of the market: B2C in this segment Acotel sells its services primarily content, ringtones, images, games and information - directly to the final customer, carrying out all the related activities from communications to customer care; Network Operators in this segment Acotel provides services on behalf of telephone companies (mainly mobile) in accordance with the Application Service Provisioning model; Media in this segment Acotel manages value added services on behalf of TV, radio or other media, offering, for example, viewers or listeners the chance to vote or buy content relating to a certain television or radio programme; Corporate in this segment Acotel supplies interactive mobile services to companies that, for example, intend to carry out mobile marketing campaigns or, as in the case of banks, that want to offer mobile information and services to their customers. The US subsidiary, Flycell Inc., which produced the highest turnover in this business segment, has been operating in the consumer segment (B2C) since February 2006, after an initial phase of finalising its technical and organisational structures that was completed at the end of Flycell Inc. generated turnover of 33.7 million euros during the year, entirely in North America, compared with almost zero turnover in Such revenues were achieved by incurring substantial 3

7 marketing costs, totaling 15.6 million euros, aimed at acquiring customers and promoting the Flycell brand. The business model used is based on the sale of monthly subscription services and therefore, unless sharp increases in service cancellations occur, customers continue to be remunerative for several months after the month in which the cost of their acquisition was incurred. Flycell Inc. has almost exclusively used the web as a promotional channel, which has proved to be far more effective in terms of customer acquisition costs than other media such as TV and radio. Advertising is conducted in collaboration with third-party affiliates who promote the website within their portals and are paid on the basis of the subscription contracts entered into by customers via their portal. The second contribution to the Services business segment was made by Acotel S.p.A., with turnover amounting to 11.9 million euros, up 6% on The Company generated most of its revenues via services provided to Telecom Italia within the scope of relations established over 10 years ago. Specifically, in addition to continuous upgrading of the services activated over the years, such as the Script TIM services for SMS and MMS, new WAP portals for 2.5G (GPRS) and 3G (UMTS) were developed and put into service during Undoubtedly the most important of these is the one for downloading games, called i-games Store, which is integrated within TIM s official portal. It was entirely developed by Acotel and its operation is outsourced by TIM to the company. These activities are fully in line with current market developments, with the increasing spread of GPRS and UMTS networks and mobile phones having revitalised WAP portals. These have turned out to be one of end users favourite channels for choosing, accessing and downloading content, especially ringtones and games. Other sources of Acotel S.p.A. s revenue derive from activities carried out on behalf of media companies, primarily connected to programmes broadcast by the television companies, RAI, Mediaset, MTV and La7, and on behalf of the corporate customers, especially Unicredit Banca. A substantial contribution to Service revenues was also made by the subsidiaries, Acotel do Brasil and Info2cell, which generated 4.7 and 4.4 million euros during the year, up 46% and 19%, respectively, compared with Both companies mainly carry out activities on behalf of mobile telephone operators and media companies, the former in Brazil and the latter in the Middle East. The substantial growth in Acotel do Brasil was largely due to the well established activities carried out on behalf of certain companies belonging to the TIM Brasil Group. As well as operating as the Centro Stella, functioning as a gateway between TIM and other service providers, the Brazilian subsidiary has continued to produce infotainment services and has started to manage the entire platform for downloading games. An important component of the growth in turnover in 2006 derived from the services provided as part of the World Cup project, which began in April and ended in July, and was designed to coincide with the world soccer championship. During these months the Brazilian subsidiary s turnover rose sharply, reaching a peak in June of more than double the average for the other months of the year. Acotel do Brasil s media-related activities also increased due to the commercial activities carried out in collaboration with the radio and television broadcaster, Globo. In 2006 Info2cell was interconnected with 28 mobile operators, thus consolidating its undisputed leadership amongst Middle East service providers. Indeed, based on a One Stop Shop system (publishing, delivery, accounting, billing, CRM), Info2cell s technological and commercial 4

8 organisation is perhaps unique in enabling content providers, media or consumer brands to provide value added mobile telephony services in an entire geographical region. Being able to operate over such a wide catchment area including almost all mobile phone owners in the Middle East also enables the Company to acquire distribution rights for highly prized content and to sign contracts with major customers. Such contracts entered into in 2006 include agreements with Associated Press, CNN, Cartoon Network, Al Arabiya, Glu and Mubasher, regarding distribution of their content via SMS/MMS/WAP, and with Pepsi in relation to the Pepsi World Cup Mobile Promotion. The latter initiative, which was obtained thanks to the success of a previous promotional campaign conducted in 2005, generated over 8 million SMS messages in only 3 months, involving the customers of 10 mobile operators in the GCC (Gulf Cooperation Council) area. Regarding services provided by Info2cell on behalf of mobile telephony operators, the Ring Back Tone service was a great success. The Jordanian operator, Fastlink, registered over 100,000 users for the service and it was also launched by Etisalat in the United Arab Emirates. An agreement was also signed for this service with the company, Rotana, regarding the distribution of content (ringtones) in Oman, Bahrain, Qatar and the United Arab Emirates. Services provided on behalf of operators also include Alert, which was launched to coincide with the Word Cup, attracting around 50,000 subscribers who received match results in real time via SMS during the championship. Info2cell has also been awarded Nokia certification for the launch of an application to be installed on mobile phones, which enables enjoyment of musical content owned by Rotana. Finally, the subsidiary, Flycell Telekomunikasion Hizmetleri A.S., which was incorporated in the second half of 2005 and is based in Istanbul, reported revenues of 164 thousand euros. The Company started operating by providing services to the customers of the operator, AVEA, and then extended its trading relations to include the operator, Telsim (now Vodafone), and certain media companies, such as the broadcaster, Kanalturk, for voting services, and Estetika, for the distribution of information regarding betting on horse races. DESIGN OF ICT EQUIPMENT The Acotel group of companies operates as a provider of technology platforms for mobile messaging via the subsidiary, Jinny Software Ltd, which reports revenues of 6.2 million euros for 2006, up by around 9.5% on the previous year. The company also grew in size during the year, by increasing staff in its existing offices, and by opening commercial offices in Kuala Lumpur and Rio de Janeiro, from where it has begun to penetrate the Far Eastern and South American markets. Its presence in these two new regions in 2006 also enabled establishment of trading relations with 12 new customers, and the company ended the year with a full order book, including customers from five continents. The high percentage of staff engaged in Research & Development around 30% confirms the company s deep commitment to technological innovation. This commitment enabled creation of a new range of products, developed in full compliance with the IMS (Internet Multimedia Subsystem) architectural framework, towards which all telecommunications operators are gearing their network investment. The new range of products breaks down into four categories Next Generation Messaging, Media, Routing and Filtering, and Rating and Charging leading to a change in the company s tag line, 5

9 which has become More than Messaging to emphasise the fact that thanks to Jinny products operators can offer highly personalised services to their end customers. The most important sales, which put Jinny among the major market players, include a number of platforms in the Caribbean and South America, rating and charging systems in the Middle East and a Video Ringback Tone in Asia. SECURITY SYSTEMS DESIGN The Italian subsidiary, AEM S.p.A., which operates in this business segment, generated revenues of 1.7 million euros in 2006, up 28.2% on the previous year. Noteworthy in terms of economic importance and image are the activities carried out for the Bank of Italy. In addition to conducting security systems maintenance, AEM has been involved in extension projects entailing structural modifications to equipment. Under the terms of a contract that has been in force for several years, maintenance of Telecom Italia s Teleallarme systems also continued during the period. In September, under the terms of a pre-existing contract, activities were launched on behalf of the customer, ACEA, aimed at constructing a new security room for monitoring access to a water supply remote control room. An order was also obtained from ACEA to build a system for controlling vehicle access based on RFID (radio frequency identification) technologies. This system is due to be installed in the first quarter of

10 1.1.1 RESULTS OF OPERATIONS RECLASSIFIED CONSOLIDATED INCOME STATEMENT Increase/Decrease % inc./(dec.) Revenues 63,223 27,926 35, % Other income (19) (20%) Total revenue 63,298 28,020 35, % Gross operating profit 4, , % 7.51% 2.37% Operating profit/(loss) 3,902 (258) 4, % 6.16% -0.92% Net finance income/(costs) (359) 1,136 (1,495) (132%) PROFIT/(LOSS) BEFORE TAX 3, , % 5.60% 3.13% NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS 1,231 (561) 1, % 1.94% -2.00% NET PROFIT/(LOSS) ATTRIBUTABLE TO PARENT COMPANY 1,231 (561) 1, % 1.94% -2.00% Earnings per share 0.31 (0.14) Diluted earnings per share 0.31 (0.14) Compared with the previous year, the Acotel Group reported a sharp upturn in revenues (up 126%) and robust improvement across all profit margins in the year ended 31 December The increase in turnover, totalling 63,223 thousand euros in 2006, primarily derives from the commercial activity carried out by Flycell Inc., which is now the main source of revenue for the whole Group. Moreover, improvements in turnover registered by the subsidiaries, Acotel do Brasil, Acotel S.p.A., Info2cell, AEM S.p.A. and Jinny Software compared with the previous year, should also be noted. Gross operating profit amounts to 4,752 thousand euros, representing a margin of 7.5%, while the Group reports operating profit, after amortisation and depreciation and impairments of non-current assets, of 3,902 thousand euros (a margin of 6.2%). After net finance income, pre-tax profit is 3,543 thousand euros (a margin of 5.6%). Net profit is thus 1,231 thousand euros. 7

11 Revenue A breakdown of revenue by business segment shows that, compared with the previous year, growth occurred in all the sectors in which the Group operates, although Service revenues accounted for an increasingly larger share of total turnover: Turnover by business segment ( 000) 2006 % 2005 % Services 55, % 20, % Design of ICT equipment 6, % 5, % Security systems design 1, % 1, % Total 63, % 27, % Revenues from Services rose by 164%, whilst those from the design of ICT equipment and security systems design increased by 10% and 28%, respectively. A breakdown of the Group s revenue by geographical segment is as follows: Turnover by geographical segment ( 000) 2006 % 2005 % North America 34, % % Italy 13, % 13, % Middle East 5, % 6, % Latin America 5, % 3, % Africa 1, % 1, % Other European countries % 1, % Asia % % 63, % 27, % The above table shows how important the US market has become for the Acotel Group in a short space of time. Primarily due to the revenues earned from services rendered during the period by the subsidiary, Flycell Inc., the proportion of the Group s total revenue generated in North America has risen from 2.6% in 2005 to 54.7% in As a result of this growth, revenues earned in Italy, whilst up in absolute terms, decreased from 48% in 2005 to 21.9% in 2006, thereby confirming the Group s previous commitment to the process of internationalising revenue sources. 8

12 Gross operating profit Gross operating profit of 4,752 thousand euros for the year ended 31 December 2006 rose sharply (up 615%) compared with the previous year, mainly due to: - the better earnings performances reported by certain Acotel Group companies, especially those achieved by Flycell Inc., Acotel do Brasil, Info2cell and AEM, primarily as a result of increases in their respective turnovers; - the rationalisation process underway within the Group, which has involved a halt to certain overseas activities whose ability to generate earnings is viewed as too remote. Profit before tax Profit before tax of 3,543 thousand euros rose sharply (up 304%) compared with the previous year, despite net finance costs of 359 thousand euros, as opposed to net finance income of 1,136 thousand euros in the previous year. The Group reports after-tax income of 1,231 thousand euros compared with an after-tax loss of 561 thousand euros in

13 1.1.2 FINANCIAL POSITION AND CASH FLOW RECLASSIFIED CONSOLIDATED BALANCE SHEET ( 000) 31 Dec Dec 2005 Increase/(Decrease) % change Non-current assets: Property, plant and equipment 1,579 1, % Intangible assets 13,623 12,584 1,039 8% Financial assets Other assets % TOTAL NON-CURRENT ASSETS 15,734 14,127 1,607 11% Net current assets: Inventories % Trade receivables 18,301 12,352 5,949 48% Other current assets 2,963 1,759 1,204 68% Trade payables (7,660) (6,237) (1,423) (23%) Other current liabilities (4,334) (3,382) (952) (28%) TOTAL NON-CURRENT ASSETS 9,748 4,791 4, % STAFF TERMINATION BENEFITS AND OTHER EMPLOYEE BENEFITS (1,031) (948) (83) (9%) NON-CURRENT PROVISIONS (27) (70) 43 61% NET INVESTED CAPITAL 24,424 17,900 6,524 36% Shareholders' equity: Share capital 1,084 1, Retained profit/(accumulated losses) 47,526 48,277 (751) (2%) Net profit/(loss) for the year 1,231 (561) 1, % Minority interests TOTAL SHAREHOLDERS' EQUITY 49,871 48,830 1,041 2% MEDIUM/LONG-TERM DEBT (30) (16%) Net cash and cash equivalents: Current financial assets (15,050) (19,761) 4,711 24% Cash and cash equivalents (10,620) (11,395) 775 7% Current financial liabilities % (25,610) (31,123) 5,513 18% NET FUNDS (25,447) (30,930) 5,483 18% TOTAL SHAREHOLDERS' EQUITY AND NET FUNDS 24,424 17,900 6,524 36% The Acotel Group s net invested capital at 31 December 2006 is 24,424 thousand euros, made up of non-current assets of 15,734 thousand euros, net current assets of 9,748 thousand euros, staff termination benefits of 1,031 thousand euros and other non-current provisions of 27 thousand euros. Net invested capital is financed by shareholders equity of 49,871 thousand euros and net funds of 25,447 thousand euros. 10

14 A detailed analysis of changes in the principal balance sheet items shows that: non-current assets are 15,734 thousand euros, marking a net increase of 1,607 thousand euros compared to the previous year. The most significant change regards the increase in tangible and intangible assets primarily as a result of investments carried out to develop the Noverca platform, which is explained in detail in other sections of this report; the changes to net current assets derive from growth in turnover, which generated a higher rate of increase in trade receivables than in trade payables; net funds at 31 December 2006 amount to 25,447 thousand euros, a decrease of 5,483 thousand euros compared to 31 December 2005, due primarily to the support given by the Group to the subsidiary, Flycell Inc., for development of the US market RECONCILIATION WITH THE PARENT COMPANY S FINANCIAL STATEMENTS Pursuant to Consob Resolution no. DEM/ of 28 July 2006, the reconciliation between the net result and shareholders equity of Acotel Group S.p.A., and the corresponding consolidated items is as follows: Net result 2006 profit / (loss) Shareholders' equity at 31 Dec 2006 positive/(negative) Shareholders' equity and net result reported in the Parent Company's financial statements ,228 Effect of consolidation of Group companies Consolidation reserve Currency translation reserve - (283) Amortisation and impairment of goodwill arising from consolidation - (5,872) Group interest in shareholders' equity and net result for the year 1,231 49,841 Minority interest in shareholders' equity and net result for the year - 30 Shareholders' equity and net result reported in the consolidated financial statements 1,231 49, SOURCES OF FUNDS The Group s financial strength was confirmed in 2006, with net cash and cash equivalents of 25,610 thousand euros and net funds of 25,447 thousand euros. As in the past, the Group did not resort to external sources of funding in 2006, being able to finance investment, above all in its foreign subsidiaries during the start-up of their respective businesses, from operating cash flow and its own funds. 11

15 Current financial assets not used to finance operations are invested in low-risk financial instruments. 1.3 RESEARCH AND INNOVATION SERVICES During 2006 the Group also concentrated its research and development activities on improving the performance and operations of the platforms that individual companies use in their respective markets to provide value added services. The development and management of platforms continued to be entirely conducted using internal Group resources, in order to guarantee technological independence and the development of know-how. In addition, a new platform was developed in Italy which, as of 2007, will allow the Group to offer communication services using VoIP (Voice over Internet Protocol) technology, to be marketed under the Noverca brand. This complex system offers users services such as phone calls, video communication and instant messaging via the internet. The system is based on cooperation between a series of central software applications, called AS Application Servers, operating on hardware that is mainly installed at the Data Center in Rome, and software applications, called Softclient, operating on end-user devices (e.g. personal computers and smart phones). A website, has also been built, via which users can register, download the Softclient software and access the services. PRODUCTS The Irish subsidiary, Jinny Software Ltd., which designs, produces and develops ICT equipment, continued its strong commitment to research and development in As previously mentioned, around one third of Jinny s employees are involved in research and development. Activities during the year focused on the development of equipment for next generation networks (NGN) based on internet multimedia subsystem (IMS) architecture, leading to the completion and presentation on the market of a new product range, which breaks down into four categories: Next Generation Messaging, Media, Routing and Filtering, and Rating and Charging. SECURITY SYSTEMS The Group s commitment to developing new products and systems for the security market continued during the period via the subsidiary, AEM. In particular, technological activities aimed at developing current systems included continuation of a project to adopt the IP protocol for remote alarm platforms. This technology will enable elimination of the use of dedicated physical telephone lines, resulting in significant cuts in infrastructure and operating costs. The new products have been developed with the aid of market surveys, which forecast a turnaround for the sector, especially for remote video surveillance systems. The new products will be aimed at 12

16 a market that goes beyond the large organisations with whom AEM has previously operated. They will be based on more recent signal detection and transmission technologies and will be able to meet the most complex security requirements. 1.4 FINANCIAL RISK MANAGEMENT Credit risk 47.6% of total trade receivables relate to amounts due from the mobile transaction network provider, mblox (25.7%), which provides Flycell Inc. the necessary connectivity with US telephone operators, and Telecom Italia (21.9%). At the date of publication of this report, around 20% of these receivables, amounting to approximately 1.8 million euros, have yet to be collected. There are no significant disputes with customers. Liquidity risk The Group does not resort to external sources of funding and is able to meet its cash requirements from operating cash flow. The cash flows, borrowing requirements and liquidity of Group companies are monitored and managed centrally under the Parent Company s control, with the aim of ensuring effective and efficient management of the Group s financial resources. Foreign exchange risk The Group is not exposed to any significant extent to foreign exchange risk, which is, however, limited to the conversion of the financial statements of certain foreign subsidiaries, as, with the exception of Jinny Software Ltd., foreign operating companies report substantial convergence between the currencies used for receivables and payables. Interest rate risk As the Group does not rely on external sources of funding it is not exposed to interest rate risk. 1.5 STRENGTHS AND RESOURCES NOT REFLECTED IN THE FINANCIAL STATEMENTS This paragraph provides a brief summary of the strengths that the Acotel Group considers it has and that are not sufficiently evident from the data in the financial statements. Technological independence: The Group develops all the technology platforms that it utilises internally. This long-standing approach allows the Group, particularly in the Services segment, to replicate its commercial strategy and enter new countries at extremely low costs. 13

17 Medium/long-term contracts: the greater part of the commercial B2B (Business to Business) relationships between Acotel Group companies and their customers are based on long-term partnerships, which help to increase the Group s economic stability. Stable shareholder structure: 57.4% of the share capital of Acotel Group S.p.A. is held by members of the founder s family. This concentration of ownership ensures continuity in the management of the Group, which aims to create value over the medium/long-term. Financial independence: as previously indicated, the Acotel Group, both through its operating activities and shrewd management of its financial resources acquired as a result of the flotation, has the necessary financial resources to finance its development without having to resort to bank borrowings. Geographical diversification: during 2006, 54.7% the Acotel Group s consolidated turnover was generated in North America, 21.9% in Italy, 9.4% in the Middle East, 8.2% in Latin America, and the remaining portion in Africa, other European countries and Asia. This distribution supports the strategy of diversification into various geographical areas pursued by the Group with a view to minimising the impact of any local problems. 1.6 SHAREHOLDINGS OF MANAGEMENT AND SUPERVISORY BODIES, GENERAL MANAGERS AND KEY MANAGERS (art. 79, CONSOB Regulation no /99) NAME GROUP COMPANY NO. OF SHARES HELD AT 1 JAN 2006 NO. OF SHARES PURCHASED NO. OF SHARES SOLD NO. OF SHARES HELD AT 31 DEC 2006 PERCENTAGE INTEREST AT 31 DEC 2006 Claudio Carnevale (a) Acotel Group S.p.A. 664, , % Andrea Morante Acotel Group S.p.A. 99, , % Claudio Carnevale Acotel S.p.A. 20, , % Claudio Carnevale AEM S.p.A. 2, , % (a) Ownership is exercised via Clama S.A. of which Claudio Carnevale owns 99.9% of the share capital. Claudio Carnevale and Margherita Argenziano each hold 25% of the share capital of Clama S.r.l., which in turn holds 1,727,915 shares of Acotel Group S.p.A. at 31 December No transactions took place between Clama S.r.l. and Acotel Group S.p.A. and other Group companies during the period. At 31 December 2006 Acotel Group S.p.A. does not possess shares or units of holding companies, either directly or through fiduciary companies or proxies, nor has it acquired or sold shares during the financial year. Other Group companies do not possess Acotel Group S.p.A. shares, either directly or through fiduciary companies or proxies, nor have they acquired or sold shares during the financial year. 14

18 1.7 CONTINUITY WITH DATA PUBLISHED IN THE FOURTH QUARTER OF 2006 In order to guarantee the continuity of published accounting data, in compliance with the provisions of Annex 3D to the Regulations for Issuers introduced by CONSOB Resolution no of 14 May 1999, the differences reported with respect to fourth-quarter data are shown in the table below. Such differences are not significant. ( 000) 2006 results Q4 FY Difference Revenues 63,216 63,223 7 Gross operating profit 4,703 4, Operating profit 3,852 3, Net profit attributable to the Parent Company 1,256 1,231 (25) 1.8 SUBSEQUENT EVENTS In February the subsidiary, Info2cell (I2C), obtained authorisation from the Saudi Investment Authority to set up a joint venture with a local partner. This joint venture, which is expected to start up very shortly, will provide services to the Saudi Arabian market, one of the most important in the Middle East region. At the outset it will use the I2C technology platform in Dubai and then later set up its own infrastructure. In Brazil the subsidiary, Acotel do Brasil, has launched a service for downloading personalised wallpapers. This service enables individual customers to create unique graphic objects, which are therefore clearly different from other customers wallpapers. In March Jinny Software signed a letter of intent, regarding an order of great strategic and economic value, with a customer in Africa. 1.9 OUTLOOK The Group will aim to achieve growth targets and improve profit margins in the three business segments in which it operates, in accordance with the following guidelines. In the Services segment, based on the results achieved in 2006, with particular reference to the strong growth in the consumer segment in the USA and the overall strengthening of the B2B segment in other markets, operations will continue in accordance with well established business models, taking action where possible to improve them. To this end, initiatives are underway on both the technological and content fronts aimed at improving user experiences, in order to increase customers satisfaction with the services and thereby boost usage and achieve greater long-term loyalty. An example is the launch of a new version of the portal, which incorporates tools for creating communities and video and chat services (the latter via WAP portals) in Brazil. In terms of geographical expansion, it is planned to strengthen the Group s competitive 15

19 position in the Middle East with the setting up of a joint venture in Saudi Arabia (51% owned via the subsidiary, Info2cell). Also in the Services segment, the Group s investments in IP (Internet Protocol) technologies will begin to bear fruit during This category of service can be used via a personal computer or high-tech mobile device (e.g. smart phones and palmtops) and will initially include communications services such as telephony, video calls, instant messaging and presence services. This range will later be extended to include the latest services such as multimedia content distribution and remote home monitoring. In the Products segment the above-mentioned growth targets will be pursued by leveraging investments carried out in 2006 by the subsidiary, Jinny Software. This will entail developing new equipment that perfectly meets the requirements of the Group s customers (mobile operators), and also building a new direct and indirect marketing structure capable of operating worldwide. The positive growth projections are backed up, at least as far as the first half of the year is concerned, by the healthy state of the company s order book at the end of Finally, in the Security Systems segment the Group intends to exploit its prestigious customer portfolio and technological developments in video surveillance (with solutions based on IP technologies and networks) and access control (using RFID technology), in order to boost turnover from both new and existing customers. To this end, AEM aims to obtain all the certifications necessary to take part in private and public tenders during

20 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER

21 Acotel Group S.p.A. Registered offices at Via della Valle dei Fontanili 29/ Rome, Italy Share capital: 1,084,200.00, fully paid-in Rome Companies Register, Tax and VAT number:

22 2.1 CORPORATE OFFICERS BOARD OF DIRECTORS Claudio Carnevale Chairman and CEO Francesco Ago (1), (2) Director Margherita Argenziano Director Luca De Rita Director Giovanni Galoppi (1), (2) Director Giuseppe Guizzi (1), (2) Director Andrea Morante Director (1) Member of the Remuneration Committee (2) Member of the Internal Audit Committee BOARD OF STATUTORY AUDITORS Antonio Mastrangelo Chairman Maurizio Salimei Auditor Umberto Previti Flesca Auditor INDEPENDENT AUDITORS Deloitte & Touche S.p.A. 19

23 The Board of Directors and the Board of Statutory Auditors of Acotel Group S.p.A. were appointed on 28 April 2006 by the General Meeting of Shareholders, which also appointed Mr Claudio Carnevale as Chairman. The General Meeting of 28 April 2006 also appointed Deloitte & Touche S.p.A. to audit the consolidated and separate financial statements for the financial years from 2006 until With a resolution of 10 May 2006 the Board of Directors appointed Mr Claudio Carnevale as CEO, granting him all the powers of routine and extraordinary administration to be delegated in accordance with the law and the articles of association. At the same board meeting of 10 May 2006 Francesco Ago, Giovanni Galoppi and Professor Giuseppe Guizzi were appointed members of the Remuneration Committee and of the Internal Audit Committee. Francesco Ago was appointed as Chairman of both committees. 20

24 2.2 THE GROUP The parent company of Acotel Group S.p.A. is Clama S.r.l., which at 31 December 2006 holds 1,727,915 ordinary shares, representing 41.4% of the share capital. Clama S.r.l. does not carry out management and coordination activities pursuant to art of the Italian Civil Code. 21

25 CONSOLIDATED FINANCIAL STATEMENTS 22

26 CONSOLIDATED INCOME STATEMENT ( 000) Note Revenues 1 63,223 27,926 Other income Total revenue 63,298 28,020 Movement in work in progress, semi-finished and finished goods (1) (10) Raw materials 2 (1,864) (1,523) External services 3 (42,685) (13,140) Rentals and leases 4 (1,553) (1,422) Staff costs 5 (12,512) (10,271) Amortisation and depreciation 6 (813) (923) Internal capitalised costs 7 1,083 - Impairment charges/reversal of impairment charges on non-current assets (37) - Other costs 8 (1,014) (989) Finance income 9 1,118 1,345 Finance costs 9 (1,477) (209) PROFIT/(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 3, Taxation 10 (2,312) (1,439) NET PROFIT/(LOSS) FROM CONTINUING OPERATIONS 1,231 (561) Net profit/(loss) from discontinued operations - - NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS 1,231 (561) Net profit/(loss) attributable to minority interests - - NET PROFIT/(LOSS) FOR THE YEAR ATTRIBUTABLE TO PARENT COMPANY 1,231 (561) Earnings per share (0.14) Diluted earnings per share (0.14) 23

27 CONSOLIDATED BALANCE SHEET ASSETS ( 000) Note 31 Dec Dec 2005 Non-current assets: Property, plant and equipment 12 1,579 1,175 Goodwill arising from consolidation 13 11,531 11,531 Other intangible assets 14 2,092 1,053 Non-current financial assets 2 2 Other non-current assets Deferred tax assets TOTAL NON-CURRENT ASSETS 15,734 14,127 Current assets: Inventories Trade receivables 18 18,301 12,352 Other current assets 19 2,963 1,759 Current financial assets 20 15,050 19,761 Cash and cash equivalents 21 10,620 11,395 TOTAL CURRENT ASSETS 47,412 45,566 NON-CURRENT ASSETS HELD FOR SALE - - TOTAL ASSETS 63,146 59,693 24

28 CONSOLIDATED BALANCE SHEET LIABIITIES AND SHAREHOLDERS' EQUITY ( 000) Note 31 Dec Dec 2005 Shareholders' equity: Share capital 1,084 1,084 Share premium reserve 55,106 55,106 - Treasury shares (3,873) (3,873) - Cost of capital increase (59) (59) Currency translation reserve (279) (89) Other reserves Retained profit/(accumulated losses) (3,726) (3,143) Net profit/(loss) for the year 1,231 (561) Shareholders' equity attributable to the Parent Company 49,841 48,800 Minority interest TOTAL SHAREHOLDERS' EQUITY 22 49,871 48,830 Non-current liabilities: Non-current financial liabilities Staff termination benefits and other employee benefits 24 1, Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES 1,221 1,211 Current liabilities: Current financial liabilities Trade payables 26 7,660 6,237 Tax liabilities 27 1,570 1,144 Other current liabilities 28 2,764 2,238 TOTAL CURRENT LIABILITIES 12,054 9,652 NON-CURRENT LIABILITIES HELD FOR SALE - - TOTAL LIABILITIES 13,275 10,863 EQUITY 63,146 59,693 25

29 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY AT 31 DECEMBER 2006 ( 000) Share capital Share premium reserve - Treasury shares - Cost of capital increases Currency translation reserve Other Retained Net profit for reserves profits the year TOTAL Balances at 1 Jan ,084 55,106 (3,206) (59) (324) 197 (2,326) (765) 49,707 Appropriation of net profit for (817) Purchase of treasury shares (667) (667) Other movements Net result for 2005 (561) (561) Balances at 31 Dec ,084 55,106 (3,873) (59) (89) 335 (3,143) (561) 48,800 Appropriation of net profit for (583) Other movements (190) (190) Net result for ,231 1,231 Balances at 31 Dec ,084 55,106 (3,873) (59) (279) 357 (3,726) 1,231 49,841 The share of shareholders equity attributable to minority interests at 31 December 2006 amounts to 30 thousand euros and has not changed over the last three years. 26

30 CONSOLIDATED CASH FLOW STATEMENT ( 000) A. NET CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,123 31,720 B. CASH FLOWS FROM (FOR) OPERATING ACTIVITIES (2,873) 773 Cash flows from operating activities before changes in working capital 2, Net profit/(loss) for the year 1,231 (561) Amortisation and depreciation Impairment of assets 8 31 Net change in staff termination benefits Net change in deferred tax assets (43) 70 (Increase) / decrease in receivables (7,161) (3,154) (Increase) / decrease in inventories (179) (211) Increase / (decrease) in payables 2,375 3,494 C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES (2,420) (961) (Purchases)/disposals of fixed assets: - Intangible assets (1,309) (448) - Property, plant and equipment (947) (690) - Financial assets (164) 177 D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES (220) (409) Increase / (decrease) in medium/long-term borrowings (30) (63) Changes in treasury shares - (667) Other changes in shareholders' equity (190) 321 E. CASH FLOW FOR THE YEAR (B+C+D) (5,513) (597) F. NET CASH AND CASH EQUIVALENTS AT END OF YEAR (A+E) 25,610 31,123 27

31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28

32 4.1 PRINCIPAL ACTIVITIES Acotel Group S.p.A. is the leader of a Group of companies operating in the ICT sector, based on a single business project. The main companies in The Acotel group of companies of companies, in addition to Acotel Group S.p.A., which basically performs management functions and manages the Acotel Platform, through which it operates directly on the market as an Application Service Provider, are: - Acotel S.p.A., which markets the multimedia services for Italy; - A.E.M. S.p.A., which deals with the design and production of security systems exclusively in Italy; - Acotel Participations S.A. which acts as a sub-holding and controls the majority of the Group s foreign companies responsible for business development in their local markets; - Jinny Software Ltd, deals with the design, production and development of high-tech ICT equipment; - Info2cell.com FZ-LLC, which operates as a Wireless Application Services Provider in partnership with leading Middle-eastern mobile telephone operators; - Acotel do Brasil Ltda, which markets multimedia services to Brazilian operators; - Flycell Inc., which provides consumer services to the US market; - Flycell Telekomunikasyon Hizmetler A.S., which supplies value added services in Turkey; - Flycell Media S.p.A., which, as of 2007, will offer integrated communications services (data, audio, video) based on the IP (Internet Protocol) marketed under the Noverca brand; - Flycell Latin America Conteúdo Para Telefonia Móvel LTDA, which was established in 2006, will supply consumer services to the Brazilian market. These financial statements have been drawn up in thousand of euros, the Parent Company s accounting currency. The foreign companies are included in the consolidated financial statements according to the accounting standards indicated in the following notes. 4.2 ACCOUNTING STANDARDS USED IN PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements for the year ended 31 December 2006 have been prepared in accordance with the international financial reporting standards (IFRS), as issued by the International Accounting Standards Board (IASB) and approved by the European Union. IFRS also includes all the revised International Accounting Standards (IAS) and all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), which was previously called the Standing Interpretations Committee (SIC). The Acotel group of companies adopted IFRS from 1 January 2005, with the transition date as of 1 January The information required by IFRS 1 First adoption of IFRS, is shown in an Annex to the consolidated financial statements for

33 Accounting standards and interpretations applied as of 1 January 2006 The new standards and interpretations regard: Changes to IAS 19 employee benefits; IFRIC 4 determining whether a contractual agreement contains a lease; Changes to IAS 39 fair value measurement options; Changes IAS 39 hedging of intercompany transactions; Changes to IAS 39 and IFRS 4 changes in the accounting treatment of guarantees issued. Application of these standards and interpretations has no significant impact on the consolidated financial statements. New standards and interpretations not yet applied As required by IAS 8 Accounting standards, changes to accounting estimates and errors, the IFRS applied as of or subsequent to 1 January 2007 are indicated below: IFRS 7 Financial instruments: additional disclosures; Changes to IAS 1 Presentation of financial statements - Information regarding share capital; IFRIC 8 Scope of application of IFRS 2; IFRS 8 Operating segments; IFRIC 9 Reassessment of embedded derivatives. The Group is evaluating the eventual impact that these changes may have on the consolidated financial statements. 4.3 BASIS OF PRESENTATION The financial statements were drawn up on the basis of the historical cost principle modified, as required, for the valuation of certain financial instruments. The Acotel group of companies of companies has prepared the income statement on the basis of the nature of expenses format, which is considered more representative of the Group s approach to management of the business and is utilised for internal reporting. The form of presentation used for the balance sheet distinguishes between current and non-current assets and liabilities, as allowed by paragraph 51 et seq of IAS 1. Shareholders equity is presented in columns that reconcile the opening and closing balance of each item that is part of the schedule. Finally, the statement of cash flows was prepared in accordance with the indirect method. 30

34 4.4 CONSOLIDATION POLICIES Basis of consolidation At 31 December 2006, in addition to the Parent Company, Acotel Group S.p.A., the following direct or indirect subsidiaries of The Acotel group of companies were consolidated: Company Date of acquisition Group s interest (%) Registered office Share capital Acotel S.p.A. 28 April % (4) Rome EURO 13,000,000 AEM Advanced Electronic Microsystems S.p.A. 28 April % Rome EURO 858,000 Acotel Participations S.A. 28 April % Luxembourg EURO 1,200,000 Acotel Chile S.A. 28 April % (5) Santiago, Chile USD 17,310 Acotel Espana S.L. 28 April % (5) Madrid EURO 3,006 Acotel Do Brasil LTDA 8 August 2000 (1) 100% (5) Rio de Janeiro BRL 1,868,250 Acotel France S.A.S. 22 October 2002 (1) 100% (5) Paris EURO 56,000 Jinny Software Ltd. 9 April % (5) Dublin EURO 2,972 Millennium Software SAL 9 April % (6) Beirut LPD 30,000,000 Info2cell.com FZ-LLC 29 January 2003 (3) 100% (5) Dubai DH 18,350,000 Emirates for Information Technology Co. 29 January % (7) Amman JD 710,000 Flycell Media S.p.A. 10 July 2002 (2) 100% Rome EURO 400,000 Flycell Inc. 28 June 2003 (1) 100% (5) Wilmington USD 10,100,000 Acotel Group (Northern Europe) Ltd 27 May 2004 (1) 100% Dublin EURO 101,000 Flycell Telekomunikasyon Hizmetleri A.S. 2 July 2005 (1) 99.9% Istanbul TRY 50,000 Flycell Latin America Conteúdo Para Telefonia Móvel LTDA 6 June 2006 (1) 100% (8) Rio de Janeiro BRL 250,000 (1) The date of the company s entry into the Group coincides with its incorporation. (2) Prior to such date the Group held 50% of the company s share capital, posted to investments in associates. (3) Prior to such date the Group held 33% of the company s share capital, posted to investments in associates. (4) AEM owns 1.92% of the share capital. (5) Controlled via Acotel Participations S.A. (6) Controlled via Jinny Software Ltd. (7) Controlled via Info2cell.com FZ-LLC. (8) Controlled via Flycell Inc. The basis of consolidation changed during 2006 due to the incorporation by Flycell Inc. of Flycell Latin America Conteúdo Para Telefonia Móvel LTDA. In December 2006 Acotel Participations S.A. sold its interest in Flycell Media S.p.A to Acotel Group S.p.A. In February 2007 Flycell Media S.p.A. changed its name to Noverca S.r.l. Consolidation was based on the financial statements for the year ended 31 December 2006 of the Parent Company and of all its subsidiaries. 31

35 Consolidation principles The consolidated financial statements include the financial statements of Acotel Group S.p.A. and those of its subsidiaries prepared at and for the year ended 31 December Subsidiaries are defined as entities over which the Group has the power to govern the financial and operating policies. The net profit or loss of subsidiaries acquired or sold during the year is included in the consolidated income statement from the effective acquisition date until the effective disposal date. Where necessary, adjustments are made to the financial statements of subsidiaries in order to bring their accounting policies into line with those adopted by the Group. The assets and liabilities and the revenues and expenses of consolidated companies are recorded on a line-by-line basis. The carrying amount of investments is eliminated against the corresponding share of the investee companies shareholders equity and the individual assets and liabilities are recognised at fair value at the date control was obtained. Any positive difference is recognised in non-current assets as Goodwill arising from consolidation, while negative differences are recognised in the income statement. Intercompany receivables and payables, including dividends distributed within the Group, are eliminated. Profits and losses and revenues and expenses arising from intercompany transactions are eliminated. The financial statements of Group companies are prepared in the functional currency of each company. For the purposes of the consolidated financial statements, the financial statements of each company are translated into the Group s functional and presentation currency: the euro. The assets and liabilities of overseas subsidiaries are translated into euros at closing exchange rates. Revenues and costs are translated at average rates for the year. Any translation differences are recognised in shareholders equity in the currency translation reserve. This reserve is recognised in the income statement as a gain or a loss in the period in which the related subsidiary is sold. Minority interests in shareholders equity and in net profit for the period year is shown in the specific items in the consolidated balance sheet and income statement. Accounting policies The following is a summary of significant accounting policies used in the preparation of the consolidated financial statements: Property, plant and equipment Property, plant and equipment used to manufacture or supply goods and services is recognised at historical cost, inclusive of any incidental expenses and the direct costs incurred to make the asset ready for use. Property, plant and equipment is depreciated on a straight-line basis every year, depending on the estimated useful life of the asset, applying the following rates: 32