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In Europe, the EU Commissioner in charge of Internal Markets and Services is pressing ahead with proceedings against several Member States that he believes may be in breach of European Community law, specifically Article 49 of the Treaty of Rome: the freedom to provide and receive services within the EU without discrimination on grounds of nationality - a fundamental principle upon which the European single market is founded. These infringement proceedings have been issued against Member States that seek to prohibit international operators that are licensed and regulated within the EU from offering gambling services within their Member State.

While a process to decide the matter is underway, it is unlikely that the position will be resolved in the short-term. In the meantime, a number of Member States are seeking to enforce laws that will effectively prohibit residents from accessing and enjoying games provided by online gaming operators, despite the view taken by the EU that such action may be in contravention of Article 49. In other jurisdictions such as parts of Asia, while certain online games are permitted using subscription-based gaming models, in many markets gambling online is currently prohibited under local law.

The Board continues to believe that the development of a modern regulatory framework, like those in Gibraltar, the UK, Alderney and Antigua is the most sensible way forward. Online gaming is already enjoyed by millions of adults around the world and the market is expected to grow substantially. PartyGaming believes regulation can strike the right balance between providing adults with a safe and secure gaming environment online whilst ensuring that appropriate protections are put in place to protect children and the vulnerable. What is also clear from the recent experience in the US is that prohibition only drives customers to seek alternative, less transparent sources of online games from businesses that are less likely to provide the protections afforded by publicly-listed and regulated companies.

The Government of the United Kingdom is currently updating gambling legislation in the UK and introduced the Gambling Act 2005 which received Royal Assent in 2005 and is due to be fully implemented by September 2007. A Gibraltar-based operator has been expressly included as having the same rights to advertise in the UK as any EEA state-based operator and so PartyGaming will be able to enjoy equal marketing rights to the UK as a UK-based operator. There can be no assurance, however, that the Gambling Act will not be amended or that secondary legislation or guidance or further legislation will not be introduced and implemented that, in any case, may have an adverse effect on the Group’s operations in the UK.

The Company has taken legal advice concerning the regulatory position in certain other countries where the Group has less significant customer numbers. Subject to the courts in the relevant countries being able to establish jurisdiction, the Group’s activities may constitute criminal or other offences in such jurisdictions exposing the Company, other Group companies and/or their directors to the possibility of sanctions which could have an adverse effect on the Group’s operations and financial position.

Furthermore, the Directors cannot predict when or if the regulatory regime in any jurisdiction will change, what changes, if any, will be made and what effect, if any, such changes will have on the Group’s activities. Any such changes could have an adverse effect on the Group’s operations and financial position.