Message from the President

In 2007, the Kudelski Group achieved total revenues, including the gain on the sale of a subsidiary and other operating income, of CHF 942.5 million, an operating income (EBIT) of CHF 87.7 million and a net income of CHF 67.4 million. The annual revenue growth reached 33.3%, or 15% excluding OpenTV, a record for the Group. EBIT, even though down, is nevertheless among the four best performances in the history of the company.

The year 2007 marks an important milestone in the evolution of the Group. Several major strategic objectives have been successfully reached, durably modifying the Group's positioning and therefore the balance of forces in the digital television ecosystem. However, some initiatives taken in order to reach these goals as part of the Group's medium and long-term development strategy, had an impact on short-term profitability.

Strategy for sustainable value creation

In the past, the Kudelski Group provided access control solutions by collaborating with partners to offer turnkey solutions. Today, following a profound change in the digital television industry, operators require increasingly complex integrated solutions, enabling them to maintain a competitive advantage against the new rivalry of the telcos. For this reason, the Kudelski Group has invested substantially in new technologies ranging from IPTV to video on demand and from conditional access to content management.

Along with organic growth through acquiring new customers and expanding services into new areas of activity, the Kudelski Group made a decisive step in the area of middleware and interactivity by acquiring control in early 2007 of OpenTV, a San Francisco-based company.

Collaboration with partners in the area of middleware and interactivity has long proved to be the best solution both to preserve the Group's independence and from a strictly economic point of view. The Group awaited the strategically opportune moment to make this acquisition when, following a consolidation, the market evolved towards a situation of duopoly. By taking control of one of the two major players, we became the world leader in this sector.

However, being number one in the conditional access, middleware and interactivity markets is not the ultimate objective. A major effort must be made to ensure that the solutions are fully integrated with each other, so as to provide a comprehensive solution meeting the expectations of operators, and to reduce time-to-market and deployment costs.

The increasing number of contracts won simultaneously by Nagravision and OpenTV confirm what appears to be a fundamental market trend, namely the fact that operators want to reduce the number of suppliers in order to improve their ability to meet the challenges of the future.

Innovation - key to the Group's longevity

The ability of the Group to perpetually reinvent itself has enabled it to successfully accompany the technological revolutions and changing consumer habits. From a manufacturer of professional portable tape recorders, it has become a provider of integrated digital TV solutions, with revenues multiplied by 50. Although investments in developing new technologies are costly, they are also the key to over 56 years of longevity.

The digital TV's new business areas reflect the importance of innovation to the Kudelski Group. In 2007, the new solutions achieved sales of CHF 118.4 million, an increase of almost 120% compared to the previous year. The new product lines, although still not profitable, offer excellent prospects for profitability which should materialize when the market has reached critical mass and adequate volumes. The very positive response of consumers to the initial commercial launch of some of these solutions further confirms this perspective.

Among the new solutions should be especially noted Nagra Mobile which, in no more than two years, set the standard for television on mobile devices. The Kudelski Group is a pioneer and market leader in the mobile pay television DVB-H world with deployments approaching 1.2 million units. Additionally, it has strongly invested in the development of solutions based on the US MediaFLO and Chinese STiMi standards.

In terms of fundamental security technology, the year 2007 was marked by the roll-out of two new families of security solutions for digital television. These are very important steps for the long-term protection of content distributed by our operator customers and for the development of the Group's product portfolio. These new technologies offer optimum security levels to considerably reduce the risk of simultaneous security attacks over geographically distant networks. Their development required a major investment due to the large number and the diversity of Nagravision customers.

Public Access - second major pillar of the Group

The other pillar of the Group, Public Access, achieved a record year in 2007, reaping the harvest of several years of investment in R&D and in the prospection of new markets. The Nagra Public Access entity not only published excellent figures both in terms of growth and profitability, but continued to consolidate its position in numerous new markets.

Outlook and targets

The major efforts made during 2007 will continue in 2008. To achieve the objective that the Group has set, namely to become a provider of turnkey solutions, substantial investments must be made upstream in order to build pre-integrated systems that are easy and cost-effective to install, particularly for emerging markets and medium-size operators.

In addition, the Group aims at becoming the reference in the fields of intuitive user interfaces and advanced advertising, in symbiosis with conditional access. The combination of these three areas into a single solution will enable the Kudelski Group to offer an added value unique in this industry.

The consumer will benefit from a simple and intuitive access to various programming content, whether live, recorded or on demand. It is a disruptive approach to space-time which, with Nagra Mobile technology, sketches the outline of the television of the future: the program you want, whenever and wherever you want it.

In parallel with these changes, the Kudelski Group has the opportunity of converting about 30 million active cards from sales mode to service mode in 2008. This objective, which has been announced for several years, will become reality in 2008. Even if it leads to a significant shortfall in the immediate future due to revenues being carried forward, this migration is a real opportunity to add value to the new conditional access technologies in the coming years.

Maintaining confidence

Despite these developments and future objectives, taking care of our shareholders is important to us. We are fully aware that the past year has been a difficult one for our share price and that our financial outlook for 2008 is not very promising. However, we count on our shareholders to support the strategy chosen by the Group to focus on the mid and the long term, and to continue placing their trust in the company. We are convinced that the investments we make today will be key to positioning the Group very strongly in its sector and ensuring its future prosperity. We expect to improve our external communication in order to better explain the fundamentals of our strategy.

For the fiscal year 2007, the Board of Directors proposes to the General Meeting of Kudelski SA the payment of an unchanged ordinary dividend of CHF 30 cents per bearer share, in continuity with previous years.

We wish to thank warmly our shareholders, customers, partners and employees for having enabled the Kudelski Group to grow in recent years, and for the trust that they have placed in us.

André Kudelski