NET ENTERTAINMENT ANNUAL REPORT 2011

NET ENTERTAINMENTANNUAL REPORT 2011

Net Entertainment in briefNet Entertainment in briefA world-class game portfoliowith leading technologySuccess factorsInnovation and qualityGraphics, animation, sound and mathematics contribute to the entertainment and excitement, whichincreases the loyalty of existing players. It also increase gaming activity and attracts new players. Maximizingplayer experience is always the starting point when Net Entertainment develops a new game.Net Entertainmentalways strivesto deliver thebest games withmaximum gamingentertainment.Net Entertainment is a supplier of gaming systemsto several of the world 's largest gaming operators. Intotal, the Company has approximately 60 customers.The brand is characterized by quality, innovation andtechnology leadership. The gaming system consistsof high quality casino games and an advanced administrationtool. The key to success is a combination ofthe Company's portfolio excellence, which createsprerequisites to maximize the experience for players,and proactive account management which supportsthe operators by optimizing their casino business.Net Entertainment and the Company's customers,the operators, work from a partnership model wherethe player is the main focus. The business is based onthe player finding both entertainment and excitementwhen they play casino, something that Net Entertainmentcreates by maximizing the gaming experienceby offering some of the world's most appreciatedcasino games. The operator can use Net Entertainment'smanagement tool to optimize their casinobusiness by offering bonuses and other incentives toplayers.When a customer agreement is signed with anoperator, a set-up fee is generally paid and then a continuouspercentage of the operator's casino revenue ispaid to Net Entertainment. If the operator is successful,Net Entertainment is successful, and vice versa.Net Entertainment always strives to deliver thebest games with maximum gaming entertainment.This is achieved by developing innovative games thatmatch the player's profile and preferences.Optimizing the businessThrough Net Entertainment's administration tool, the operator can offer bonuses, tournaments and otherpromotions to further enhance the entertainment value and increase player activity. The administration toolallows operators to optimize their casino operations and profits.A powerful platformNet Entertainment managed 8.6 billion transactions in 2011. As the industry matures, players' demandsalso increase and downtime is unacceptable. Net Entertainment therefore places great importance andfocus on stability, availability and capacity in order to make operations even more reliable.SlotsSlot games are Net Entertainment'smost popular games. Game titles suchas Jack and the Beanstalk, Jack Hammer,Robin Hood and Frankensteinare currently some of the world’s bestknown online casino games, created byNet Entertainment.Table gamesTable games are also very popularamong players, especially Blackjackand Roulette, which have existed forseveral hundred years.Video pokerVideo Poker is similar to a slot gamewhich is often appreciated amongpoker players. A classic five card pokergame that is often played in Italy andScandinavia.Mini-gamesNet Entertainment's mini-games aresmaller versions of slot games andtable games. These games are oftenplaced on other parts of the customer'swebsite such as in the sports section oramong the poker games. This allowsNet Entertainment to reach moreplayers.Lottery gamesNet Entertainment has several varietiesof scratch cards that have been wellreceived by players. Scratch cards havegrown substantially offline and haverecently become popular online.Other gamesIn addition to the classic casino games,Net Entertainment also offers gamessuch as horse racing and Keno. Thesegames are based on the same underlyingrandom number generators and mathematicalalgorithms and are suitable forplayers who wishes for something otherthan the classic casino games.Mobile gamesMobile games are the latest additionto Net Entertainment's portfolio.Now players can play casino gameswherever they are; on the subway,on the bus or at home on the couch.The experience is comparable with astandard computer.HistoryNet Entertainment originally came from theland-based casino world. When the Internetwas introduced and online gaming began totake off in the mid 1990s there was no commercialcasino solution on the market and NetEntertainment was founded for this purpose.The Company became a pioneer within onlinecasino and is today among the world's largestsuppliers of online casino games and systems.2011 Mobile games were launched and Net Entertainment entered Italy as a regulated market2010 First platinum game, Gonzo’s Quest was launched2009 Listing on the Nasdaq OMX Stockholm2008 Four new Tier 1 operators were signed2007 Spin-off from Cherry Företagen to NGM Equity2005 Net Entertainment obtained a class 4 license on Malta2002 Net Entertainment Casino TM was launched2000 The first casino was launched1996 Net Entertainment was foundedSlots Table games Video poker Mini games Lottery games Other games Mobile games2Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 3

MESSAGE FROM THE CEOSuccessful initiativesto secure continuedsustainable growthProduct and operationalleadership will ensurean exciting futureYear 2011 was a year of new markets andproduct initiatives to secure continued sustainablegrowth for Net Entertainment. The marketshare increased to 22.4 percent during the yearcompared to 19.3 percent during 2010. In euros,revenues increased 22.2 percent which shouldbe compared with approximately 9 percent forthe global online casino market. Our firm focuson customer closeness, product and technologyleadership has supported us in providing a greatbusiness value for our partners which has alsostrengthened our position as one of the industry’smost prominent suppliers within online casino.Initiatives on new marketsWe have seen a rapid maturity of our industryduring the past years which has led to anincrease in countries wanting to regulate theirlocal online casino market, especially in Europe.We follow the regulatory developments closelyand will continue to evaluate each market froma strategic and financial perspective. In July, wewere among the first to establish operationson the newly regulated Italian market which,according to external evaluators, is expected tobecome one of the largest markets for onlinegaming in Europe. Denmark regulated their localmarket during January 2012, and we were againone of the first to bring our portfolio of onlinecasino games to the Danish players together withour partners.New productsNet Entertainment launched a number of successfulgames during 2011 which has been wellreceived by the players. The number of gamestransactions increased by 42 percent during 2011to 8.6 billion, which is a result of our firm focusto provide our partners and their players withthe ultimate gaming experience in combinationwith having a diversified product portfolio.The total amount of gaming transactionsachieved for 2011 corresponds to 146 times moretransactions than the number of share tradeson Nasdaq OMX Stockholm during 2011 whichfurther proves the high capacity our system andplatform offer.As a commitment to further strengthening theportfolio offering to our partners we developedand launched the first mobile games according toplan by the end of 2011. Net Entertainment haveput significant development focus in meetingplayer demands for availability, quality and usabilityand we are very proud of the positive feedbackreceived from our partners and their players. During2011 we also decided to launch our own LiveCasino product which is a natural complement toour existing product portfolio, which we plan torelease to the market around year-end 2012.CustomersNet Entertainment’s growth in 2011 was generatedfrom organic growth and in total we signedseven customer agreements during 2011, includingTier 1 operators G.Matica focusing on theItalian market and Sky Betting and Gaming focusingon the UK market. Agreements were alsosigned with Unibet, Betsson, Bet24 and Sportingbet(including Scandicbookmaker and Danbook)for delivery of Net Entertainment’s casino on theDanish market. In total, eleven new customerswere launched with Net Entertainment’s casinoduring the year.All in all, 2011 was a fantastic year for NetEntertainment with continued strong organicgrowth in combination with strategic initiatives,and I am very excited about the future whichholds great opportunities for the Company.Björn KrantzActing President and CEO during the periodAugust 2011 to February 2012.Opportunities, growth, creativity and innovationare truly words that imbue Net Entertainment’sbusiness. The Company has experienced a fantasticjourney and it is going to be a pleasure totake Net Entertainment into the future and takeadvantage of the opportunities. Net Entertainmentwill continue to set the standard on themarket and drive it forward through a continuedclose relationship with customers combined withproduct and technology leadership.OrganizationThe employees at Net Entertainment havemade an enormous effort in recent years. NetEntertainment is a Company with strong growth,and in total the number of employees was 231 atthe end of 2011 compared to 182 in 2010 whichhas been necessary in order to take advantageof, and realize the Company’s strategic initiativesand objectives. During 2011 an extensive cultureand value program was initiated which nowbecomes a very important base for our continuedwork to sustain strong growth for the future. Tobuild a strong culture is a very important taskand I look forward to engaging in the continuedimplementation. The gaming industry is dynamicwhich places further requirements to investin the organization with an objective to securecontinued profitable growth.RegulationThe ongoing regulation of online gaming inEurope increases the demands on operators aswell as suppliers which have a natural impact onhow we do business. Regulation is considered tobe positive for Net Entertainment and the gamingindustry as a whole, and we must continue to beswift despite that so far, no common standardexists for adaption and certification of systemsand games on each market. At the same time wesee cost synergies between regulated marketsthat vary depending on the extent of the requirementsmade by the authorities. Net Entertainmenthas the prerequisites, both organizationallyand financially, to take advantage of theseopportunities which will ultimately be necessaryfor continued success. We also follow thedevelopment of markets outside Europe, such asin North America and Asia which are consideredinteresting for the Company.Future outlookNet Entertainment is well positioned forcontinued positive development. The strongdevelopment of smart phones and tablets, combinedwith consumers’ increasing demands foraccess and mobility makes the timing right fora launch of Net Entertainment’s mobile games.Focus on quality and innovation also enablesprerequisites for a positive launch of Live Casinowhich is expected to be released to the marketaround year-end 2012. Live Casino is today thefastest growing games segment within casinoand is expected to contribute positively to NetEntertainment’s development in the future. TheCompany’s strategy to strengthen its position inthe UK which today is Europe’s largest market foronline gaming stays firm and positive discussionsare ongoing with leading operators on thismarket. To be able to deliver a broader productportfolio creates strong customer value which Iam convinced will have a positive impact on bothours and our partners’ future growth.With Net Entertainment’s focus on customercloseness, product and technology leadershipthe Company is well positioned for the future andit will be very exciting to take the Company to newground together with our skilled and motivatedemployees.Per ErikssonPresident and CEO, from March 2012.4Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 5

Net Entertainment's businessNet Entertainment's businessBetter games6Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 7

Net Entertainment's businessNet Entertainment's businessDriving the online casino marketthrough better gamesNet Entertainment was founded in 1996in response to rapidly growing internetconsumption and is today one of the worldleaders within games and system developmentfor online casino. Several of theworld's largest gaming operators currentlyuse Net Entertainment's casino solution.Entertainment and innovation in gamesdevelopment, combined with security andreliability in the Company’s platform and IToperations is at the heart of the business.Net Entertainment's ambition is to be theleader in the casino industry. The Companyaims to create a world class gaming portfoliocombined with technology leadershipwhich has been the key to the Company'ssuccess. Net Entertainment's offering isdesigned to meet the players' and operators'needs and preferences. The Companytoday offers more than 100 games throughthe Company's powerful platform, whichcan manage millions of transactions everyday. The administration tool is designedto optimize the operator's business andmanage the daily operation of the casino.Net Entertainment is constantly developingnew games and features to ensure that theplayers stay with the operator, while newplayers are added to the player base.Net Entertainment's casinoCasino games are all about entertainmentand excitement, some play for fun andrelaxation while others play for the chanceto win money. The game portfolio can bedivided into seven categories: Slots, TableGames, Video Poker, Mini Games, LotteryGames, Mobile Games and Other Games.Initially, the distribution channel has beenthrough a standard computer, but the worldhas recently become increasingly mobile,and today several of Net Entertainment'sgames are available via mobile phonesand tablets. The games are designed tomaximize the total experience for players,which has a positive effect on the operators'performance. Factors that determinethe success of a game are graphics andmathematics. The graphics, animations andsound in the games contribute to the overallentertainment, and mathematics adjust theexcitement in the form of how often a playerwins and the size of their winnings. Findingan equilibrium in the mathematics, combinedwith high-quality entertainment, is thesecret behind the perfect casino game.Continuous analysisThe games are becoming ever morecomplex and require advanced technologyand expertise . It is our ambition to leadgames development and to better understandwhat drives players. Net Entertainmentcontinuously analyses players via theCompany's system. By understanding theplayers' behaviour and preferences, gamescan be developed that provide the optimalexperience for each player segment. Whenthe players' demands are being met, conditionsare created for sustainable growth andprofitability for the operator, and thus for NetEntertainment.By recruiting the best talent withingraphics and design, combined with highlyeducated mathematicians, Net Entertainmenthas created a foundation for continuedsuccess.Net Entertainment also offers a jackpotnetwork where the Company pools theliquidity of several operators in order to createlarge jackpots. Over the years, hundredsof million SEK have been paid out. In 2011,the world's single largest online jackpot everwas paid out by Net Entertainment's slotgame, Mega Fortune. The jackpot amountedto approximately SEK 107 million. The eventis now recorded in the Guinness Book ofRecords.The platform and management toolNet Entertainment's platform is the foundationof the Company's system, the brain andengine, which managed 8.6 billion gamingtransactions in 2011. This corresponds to146 times the number of share trades on theNasdaq OMX Stockholm during 2011. Theplatform allows for IT operations, security,games, the operators and players to interact,which is crucial for a functioning and successfulcasino system.The administration tool enables theoperator to optimize casino operations.Each game session must be an experiencefor the player. Among other things, the toolallows the operator to monitor its casino inreal time and analyse the players' behaviourand preferences. With this information, thecasino can then target special offers andbonuses towards players to further enhancethe entertainment value and player activity.8Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 9

Net Entertainment's businessBusiness concept, business model and strategyServiceInnovation and quality characterize all partsof the business. The Company has severalaccount managers, whose job it is to ensurethat the operator's casino is optimized. NetEntertainment's priority is the highest possibleservice and support for the operators. Thedelivery of the casino means the beginning ofa long-term partnership in which the accountmanagers help create and maintain a successfulcasino business. The Company makes useof a broad approach and works on all levels toassist the operators.With extensive experience, Net Entertainmentprovides the operator with invaluable tips,recommendations and training to contributeto more effective marketing, evaluation of theplayers' behaviour, and regular monitoring.The goal is to help the operator take maximumadvantage of the casino's full potential.Mobile gamesIn recent years, the development of mobilephones has exploded as so-called smartphones have been introduced to the market.Over time, a shift in gaming is expected fromtraditional desktop and laptop computers tomore gaming on tablets and mobile phones.Net Entertainment's brand is associatedwith quality. The strategy is to meet the highdemands of the players and offer casino gamesvia mobile phones and tablets with the sameexperience as on a computer. In this, Net Entertainmenthas been successful.Total bets 2011SEK 134,000,000,000The world's largest online jackpot everSEK 107,000,000Number of game transactions 20118,600,000,00020082009201020112,000 Million3,900 MillionNumber of gaming transactions in Net Entertainment's casino6,100 Million8,600 MillionSuccess breeds success – if the operator is successfulNet Entertainment is successful; and vice versa –a constant incentive to develop the world's best products.A commoninterest: The playerBusiness conceptNet Entertainment's business concept is toprovide gaming operators with leading edgesolutions, enabling them to offer the ultimateentertainment experience. This will enablethe operators to profitably grow their businessfaster than the competition. By doing so, NetEntertainment will generate sustainable profitand growth for its shareholders.Financial objectiveNet Entertainment's objective is to grow fasterthan the market.● Estimated global online casino market: 9%growth in 2011 1● Net Entertainment’s growth 2011: 16%, correspondingto 22% in local currency (Euro)StrategyIn order to maintain strong growth and sustainableprofitability, Net Entertainment will:● Maintain and strengthen its position as aleading casino supplier● Continue to focus on innovation, productquality and technology leadership● Add mobile games in order to increaseplayer availability● Add Live Casino to compliment the existingproduct portfolio● Expand into regulated markets● Preserve and develop core expertise● Invest in order to create organizationalreadiness for new business opportunities● Maintain a strong customer closeness, witha commercial focusBusiness modelNet Entertainment always strives to deliver the bestgames with maximum gaming entertainment. Bycontinuously analyzing players and their behaviourgames can be developed that meet players' profilesand preferences. To understand the player andcustomize the products based on players' wishesand needs.To successfully achieve this objective, NetEntertainment enters into partnerships with theoperators, in which the revenue model is basedon the operator paying a percentage of its casinorevenues to Net Entertainment; a royalty chargebased on how much revenues the gaming systemgenerates for the operator.The delivery of high quality games that are appreciatedby the player, creates value for both the operatorand Net Entertainment. Net Entertainment'sadministration tool allows the operator to developand maintain a successful casino operation.Growth factorsNew games and featuresNet Entertainment continuously releases newhigh-quality games that attract new playersand create incentives for existing players to staywith the operator and continue playing.RegulationDeregulation and re-regulation of nationalgaming legislation is taking place in a largenumber of European countries. This meansthat new markets are opening up for onlinegaming, which contributes both to existingcustomers growth and new agreements beingsigned. Net Entertainment is involved in theongoing deregulation of the European onlinemarket, and markets outside Europe are alsomonitored; such as North America and Asia.Migration from land-based casinosOnline gaming currently represents only 8percent of the total gaming market 1 . Thisproportion is constantly growing and more andmore players choose to play online.New customersNet Entertainment is currently one of theworld's largest suppliers of online casino.Several major operators want Net Entertainment’scasino and discussions on potential collaborationsare ongoing. Also, re-regulation invarious countries is increasing interest amongnew major operators, since there are goodopportunities to take part in the high growthand profitability.Product developmentNet Entertainment closely follows developmentsin the gaming market and what playerswant. The development of new products, suchas mobile games and Live Casino, is part of ourdaily activities.1)H2 Gambling Capital, December 201110Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 11

RESPONSIBLE GAMINGResponsible gaming is important for the gaming industry. Puttingthe player in the centre of all areas of the business also involvespreventing gambling-related problems. Online gaming is aboutentertainment and excitement and can also be profitable, butgambling also carries the risk that the player loses control, whichcan have unfortunate consequences.Net Entertainment and the gamingindustry take responsibilityNet Entertainment has no direct contact with playersbut takes gambling related problems very seriously. TheCompany has a class 4 license in Malta and thus meets allrequirements of the gaming authority, the Lotteries andGaming Authority (LGA). The Company also has a licenseissued by the Alderney Gambling Control Commission.All new games are approved by the LGA and the Alderneyauthorities before they are released. Credibility and trustare important and in the long run benefit Net Entertainmentand its customers. These accreditations createconditions for this. Net Entertainment is also connectedto the organization G4 (Global Gambling Guidance Group).By developing responsible gaming software and trainingprogrammes for employees of gaming companies, and byoffering help lines and personal counselling, G4 endeavoursto minimize the damage and problems that mayarise as a result of gambling addiction. Net Entertainment'scasino has the full support of the organization'sguidelines.Regulatory consumer protection● Protect minors and vulnerable people● Protect players' rights● Promote responsible gaming in a safe environment● Ensure the reliability of games and gaming devices● Keeping online games free of criminal activitiesThe game system is, among other things, developed withfeatures that give the gaming operator the option of allowingend users to restrict their play to certain maximumamounts or block certain features; e.g. autoplay. Thesystem can also be configured to require a certain periodof time between two gaming sessions. All NetEntertainment's games display a clock thatmakes it easier for the player to maintain theirsense of time.The player must be assured that theirmoney is in good hands, and that there istotal randomness in games on an operator'swebsite, and that it is possible towin. Net Entertainment's games andplatform are tested for randomnessby an accredited independenttesting institute. This is arequirement from the gamingauthorities in the marketswhere Net Entertainmentworks. eCOGRA is anotherprofessional organizationthat every year examines NetEntertainment's developmentenvironment, checks andensures that the software ismaintained and operated in asafe and reliable manner, andthat the Company continuallyimplements randomnesstesting by independent testinginstitutes.12Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 13

the MARKETthe MARKETNew regulated markets and new distribution channels,such as mobile games and Live Casino in combination withan increasing player base enable growth in the future.Net Entertainment's marketThe total gross gaming yield, which representsoperators' revenues net of player winnings, for allforms of gaming is expected to reach approximatelyEUR 280 billion for 2011 where online gaming onlycurrently accounts for 8 percent of this market. 1This portion is constantly increasing as broadbandpenetration increases, but also because anincreasing number of people are realising the benefitsof playing online instead of playing in physicalcasinos. Although the market has matured, onlinegaming is still a relatively new phenomenon andnew opportunities are always around the corner.The online gaming market is composed of threegroups of stakeholders - suppliers (game andsystem developers such as Net Entertainment),gaming operators (the supplier's customers) andend-users/players. The online market covers awide range of game types, of which betting, casinoand poker constitute the largest game segments.Net Entertainment's market strategy is to focus ononline casino games, a segment that has demonstratedsolid growth and profitability. Net Entertainmentis one of the world's largest and most successfulsuppliers within this segment, and has many ofthe world's largest gaming operators as customers.In 2011, estimated gross gaming yield for onlinegaming amounted to EUR 22.5 billion, an increase of 5percent compared to 2010. Casino represents approximately24 percent of the total online gaming market. 1Driving forces for continued growthThe market for online gaming is constantly changingwith new opportunities. Historically, growth hasprimarily been affected by increased broadband penetrationand players moving from land-based casinosto play online instead. These factors remain, butnew growth factors continue to emerge, such as there-regulation of markets and new products, such asmobile games. In addition, new technology, combinedwith experience, allows Net Entertainment to developmore complex and more entertaining games. It is notonly graphics that are becoming more advanced, butalso the underlying mathematics.The requirements for both operators and suppliersare steadily increasing in terms of system stabilityand availability. The expectations from the end usersof online games are currently comparable to therequirements placed on TV and telephony. With thelatest generation of mobile games, users can nowplay online games wherever they are, whenever theywant. This not only contributes to greater market potential,it also leads to different consumer behaviour.Increase in gross gamingyield for global onlinecasino 2010-2011 19%3530252015105041% Betting8% Lotteries6% Skill Games7% Bingo14% Poker24% Casino200620072008200920102011 E2012 E2013 E2014 E2015 EThe online gaming market 1Global gross gaming yield online 2006 - 2015BEURGame segments 1The gaming segment's estimated share of the online gaming market in 20111Source: H2 GamblingCapital, December 201114Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 15

the MARKETthe MARKETOnline casino is growing, but Net Entertainment is growing faster!Geographical distribution 2011 and the expected average annual growth 2011-2015Net Entertainment's home market is by far the largest, with good expected growth. 1The drivers ofonline gamesIncreased broadbandpenetrationNew technology forgames and systemdevelopmentNew distributionchannels, such assmart phonesand tabletsMigration fromland-based casinosto online casinosNew player groupsRegulation ofonline gamingThe global market growth for online casino was 9 percentyear 2011 compared to the previous year. The correspondinggrowth of Net Entertainment in the sameperiod is 16 percent or 22 percent in local currency(Euro). Net Entertainment's main market, online casino,has shown strong growth, which is expected to continue.Today, the casino constitutes about 24 percent of theonline market 1 . In 2011, the online casino market isestimated to have generated a gross gaming yield of EUR5.5 billion. 1Net Entertainment's objective is to grow faster thanthe market. With the quality Net Entertainment's gamingsystem provides, the Company is well positioned in themarket to continue growing with sustainable profitability.Mobile gamesThe mobile market for online games is gaining in popularity.The overall growth for sports betting, casino, bingo,poker and lottery games via mobile phones is expectedto grow by an average of 21 percent per year from 2011to 2015 1 . Net Entertainment launched their first mobilegame to the market in the fourth quarter of 2011.1 Source: H2 Gambling Capital, December 2011876543210The global online casino market 1Gross gaming yield of global online casino 2006 – 20155432106543220062006200720072008200820092009201020102011 E2011 E2012 E2012 E2013 E2013 EThe European online casino market 1Gross gaming yield online casino in Europe 2006 – 20152014 E2014 E2015 EBEUR2015 EBEURNorth AmericaGrowth: 2,3 %Share:16,8%Latin America andthe CaribbeanGrowth: 11,6 %Share:2,5%EuropeGrowth: 7,7 %Share:45,3%AFRICAGrowth: 10,8 %Share:0,9%OCEANIAGrowth: 9,0 %Share:5,7%Asia andthe Middle EastGrowth: 6,3 %Share:28,8%10200620072008200920102011 E2012 E2013 E2014 E2015 EIn partnership withUniversal Studios,Net Entertainmentis developing the slotgame Scarface, oneof history 's mostfamous movie titles.Scarface Universal Studios®Scarface Universal Studios®Mobile gaming 1Global gross gaming yield online 2006 - 2015BEURExpected average annualgrowth in gross gaming yieldfor mobile games 2011-2015 121%Since North America banned online gambling in 2006,Europe has been by far the largest market with over45 percent share of total gross gaming yield for onlinegaming1. Online gaming is a global phenomenon andgrowth is expected to be good in most regions. Africa,Latin America and the Caribbean are expected to be thefastest growth markets by 2015, albeit from historicallylow levels. In North America, discussions are in progresson re-regulating online gaming, which would provideinteresting opportunities for the Company. Discussionsare still at an early stage and it is difficult to predictthe outcome. Discussions are also ongoing in severalEuropean countries on a possible re-regulation. NetEntertainment is monitoring these discussions closely.Asia and the Middle East are less developed in terms ofonline gaming; partly due to cultural differences comparedto the western world. Meanwhile, online gaming isbecoming more common in these regions, which is whypositive growth is predicted in the coming years.Expanding into new markets has changed and hasbecome more complicated with the current regulation inEurope. Net Entertainment has the prerequisites neededfor establishment in regulated markets, both financiallyand organizationally. Expansion into new marketsalso places high demands on both game developersand game operators to develop new interesting games,adapted to local conditions.1Source: H2 Gambling Capital, December 2011In North America,discussionsare in progresson re-regulatingonline gambling,which wouldprovide interestingopportunitiesfor the Company.16Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 17

the MARKETthe MARKETRegulation of the online gaming market in EuropeItaly was first, followed by Denmark - more countries will followThe online gaming market is being regulated in severalcountries, within and outside Europe. The regulatorychanges provide greater opportunities for the gamingindustry and Net Entertainment. Accessibility to newplayers, combined with broader marketing channelsmakes for greater potential and revenue streams.Net Entertainment is at the forefront of establishmentin regulated markets. Before establishing in a newlyregulated market, the Company's products and servicesundergo a full review by the gaming authority in theregion. The games are certified by independent testingcompanies in order to be compatible with the requirementsfor technical standards and random numbergeneration in the games Net Entertainment offers.Net Entertainment was one of the first casino suppliersto penetrate the Italian market, which was regulated in2011 and also Denmark in early 2012.CompetitionNet Entertainment is among the largest suppliers inthe world. Growth and profitability are hallmarks of thecasino market, which is dominated by a few players. NetEntertainment is a pure B2B Company and focuses solelyon casinos, which has also become a success factor forthe Company. Most competitors offer a broad productportfolio that includes poker, betting and bingo.Net Entertainment's share ofthe online casino market inEurope 2011Net Entertainment's share ofthe online casino market inEurope 201022% 19%The global online market 2011 1Growth on the global online market amounted to 5 percent in 2011.22.5 BEURGlobal online casino 1The casino market represents about 24 percent of the global onlinemarket.5.5 BEURRegulationNational gaming legislationis being deregulatedand re-regulated in alarge number of Europeancountries. In particular,the developmentof a national licensingsystem was prompted bythe European Court'srecent case, which givesmember states greaterfreedom to introducelimitations on offers ofinternational gamingservices. The EU'smember states haveincreased opportunitiesto secure tax revenue,provided that the licensingsystem creates goodconditions for competition,and is formally opento all operators whomeet certain basic conditions.Net Entertainmentalso assesses the pros-Net Entertainment's share of global online casinoThis market share is based on the gross gaming yield of Net Entertainment'scustomers in relation to the global casino market onlinepects for further expansion.The main reasonis that the Company cancontinue to win new marketshare by delivering asuperior product. Goodproducts and effectiveproduct developmentensures the conditions8.8%for being able to win newbusiness. By broadeningthe product range,Net Entertainment canreach new markets andbroaden its customerbase.ItalyIn July 2011, theItalian gamblingmarket online wasregulated. Legislationrelating to onlinecasino games for endcustomers is initiallylimited to tablegames. Net Entertainment'sambitionis to launch slotmachines as soon asthe Italian gamingauthority allows it.SWEDENIn Sweden, discussionsof a potentialchange in regulationregarding onlinegaming have been initiatedas the SwedishSocial DemocraticParty presented anew political positionfor online gaming. Anew legal frameworkhas not beenpresented howeverand it is uncertain ifa new proposal forre-regulation will bepresented before theelection in 2014.GermanyIn Germany, the sixteenstates are preparinga federal legalframework with theaim that it will takeeffect during spring2012. Simultaneouslythe state Schleswig-Holstein has adoptednew legislation whichhas been approved bythe EU commissionfor betting and onlinecasino.DenmarkIn January 2012 theDanish market foronline games wasregulated. The legalframework includessports and horsebetting, online casinoand poker. The casinogames includeblackjack, roulette,slots, baccarat andpunto banco. NetEntertainmentlaunched a numberof customers on thelocal market in January2012.SpainSpain has introduceda federal gaminglegislation whichis expected to takeeffect during thethird quarter 2012.At the same time theautonomous regionscan admit their ownlegal framework.Madrid has utilizedthis right and hasgranted licensesto two land-basedoperatorsFRANCEFrance adopted a legalframework in June2010 where they grantlicenses to onlinegaming operatorswho fulfill the localrequirements. Thisallows private operatorsto offer betting onsporting events, horseracing, and poker onthe Internet. The legalframework, which atthe moment does notinclude casino, involveshigh taxation whichmakes it less attractiveto private operators.18Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 19

EMPLOYEESEMPLOYEESThe atmosphere in Net Entertainment is characterised by creativity and apassion for entertainment and gaming. The Company is constantly changing;new markets, new customers and new products require the best skills.Great employees– Great successAt Net Entertainment it is not a cliché that the employeesare the most important resource. Our employees are takingNet Entertainment into the future and are the reason whythe Company has become one of the most reputable casinoproviders in the world. Performance, development, responsibilityand team spirit are Net Entertainment's focus areas.Having the right employees is what matters. In orderto keep the customers happy, a value is created - a valuethat beats our competitors. Value is created by personnelwho, with their expertise, experience and individualitywill generate a powerful momentum in operational activities.Expertise is important. Net Entertainment's successlargely depends on how well we attract, utilise and developexpertise. Employees are an essential component of NetEntertainment's delivery of value. They also represent NetEntertainment and are therefore part of the brand.Constant change and developmentThe gaming industry is constantly changing, new marketsare regulated and opened to online gaming. New technologymeans that new products can be developed and theplayers have ever-higher demands for entertainment,Net Entertainment's valuesThink ahead,Be aheadPassionfor gamingwhich increases the complexity of the games developed.Net Entertainment is a dynamic organization and a creativeworkplace where innovation, new ideas and initiativesare crucial to the Company's future. It is important thatemployees develop in their profession, while still retaininga wholistic sense of the Company. With the rightcombination of skill and strong team spirit, the Companycan continue to be a leader in both technology and gamingentertainment.The corporate cultureNet Entertainment's culture is imbued with creativityand passion for gaming. Creating entertainment requiresacceptance and openness to innovation and playfulness.With the rapid growth the Company is undergoing, thesize of our office space almost doubled in 2011, whichnow contains several so-called creative rooms. These aredecorated in the style of the games' appearance in orderto promote innovation and fresh ideas.Regardless of whether an employee works as a graphicartist, salesperson, tester or within IT operations,community is vital to the Company's development. OurWe actspeedsmartSimplicityin all we doThe average age ofNet Entertainment35years of ageAbsence in NetEntertainment2%Togetherwe winstrength is based on the collective expertise and experienceof the Company's employees. For us, it is importantthat employees are happy in their role, feel committedto the Company and community, and contribute to NetEntertainment's success.LeadershipFor Net Entertainment, leadership means that managers,along with other employees, drive the Company forwardand simultaneously understand and convey Net Entertainment'svision, objectives, and strategy, both externallyand internally. As Net Entertainment grows, theresponsibility of the managers and their roles becomesever more important. Net Entertainment holds a leadershipforum every month in order to establish a commonAn attractive workplace = a key success factorTo ensure future success, NetEntertainment needs to be ableto attract dedicated, highly skilledemployees who enjoy workingin a in a high pace internationalenvironment.The fact that the employeeswill be part of one of the largestand most successful providersof online casino games is agreat opportunity for personaldevelopment. Net Entertainmentencourages initiative and thedesire to develop your ideas. Thereis access to the latest technologyand tools needed to develop strongideas all the way to commercialsuccess.management culture based on the Company's core values.We invest in our managers and many developmentactivities have been implemented during the year.A broad range of skillsIn order to offer successful casino games and a solidtechnological platform with high capacity and being theworld's most successful casino supplier, a broad rangeof skills are required. Employees from 18 nationalitieswork at Net Entertainment and they have backgroundsranging from computer games and the IT industry to thetelecom and finance sectors. The innovation and experiencefrom different organizations and working styles thatnew employees bring with them contribute positively tothe Company's development in a variety of ways.Net Entertainment's corporateculture is characterised by ahigh degree of professionalismand team spirit. It is a naturalresult of the specialist skills andhigh degree of creativity that theCompany’s employees possess.With a defined approach, basedon collaboration, a team spirit andengagement is created that benefitsboth the individual employeesas well as Net Entertainment.Employees of18 nationalitiesIndiaChinaEnglandIrelandItalyGreeceHollandMaltaFinlandAge distributionof employeesGender breakdownin Net EntertainmentPakistanCanadaSwedenAustraliaUSASpainGermanyIraqFrance-2526-3031-3536-4041-4546-5051-5575% Men25% Women20Net EntertainmentAnnual Report 2011Net EntertainmentAnnual Report 2011 21

Board of Directors & auditorssenior executivesPontus LindwallBoard memberBorn in 1965Elected in 2011Independent in relationto senior executives andmajor owners. Pontusis the Chairman of theBoard of Directors inBetsson AB, a customerand former ParentCompany of Net Entertainment.Pontus Lindwall is theChairman of the Boardof Betsson AB (publ) anda Board Member of SolportenFastighets ABand Mostphotos AB.Pontus holds a Masterof Engineering from theRoyal Institute of Technologyin Stockholm.Shareholding* ) :841,000 B shares.Shareholding in endowmentinsurance* ) :339,500 A shares and120,070 B shares.22Net EntertainmentAnnual Report 2011Peter HambergBoard memberBorn in 1973Elected in 2009Independent in relationto the Company andsenior executives. PeterHamberg is closelyrelated to one of theCompany’s majorshareholders.Peter Hamberg isthe CEO and a BoardMember of HambergFörvaltnings AB and aBoard Member of SolportenFastighets AB.Peter has a Bachelor'sdegree in internationalbusiness administrationfrom San FranciscoState University, USA.Share holding* ) :121,000 B shares.Shareholding in endowmentinsurance* ) :24,000 B shares.Mikael GottschlichBoard memberBorn in 1961Elected in 2008Independent in relationto the Company, seniorexecutives and majorownersMikael Gottschlich is theChairman of the Boardof Sentat Asset ManagementAB and a BoardMember of CKT Capital,including subsidiariesand PROACT AB (publ).Michael has also beenCEO of MG InstrumentAB, Arkivator AB andLGP Telecom.Shareholding* ) :300,000 B shares.Shareholding in endowmentinsurance* ) : -Fredrik ErbingBoard memberBorn in 1967Elected in 2008Independent in relationto the Company, seniorexecutives and majorownersFredrik Erbing worksas Vice President andBusiness Unit Managerat Acando AB. Fredrikholds Master of Engineeringfrom the RoyalInstitute of Technologyin Stockholm.Shareholding* ) :20,000 B shares.Shareholding in endowmentinsurance* ) :20,000 B shares..Vigo CarlundChairman of the BoardBorn in 1946Elected in 2008Independent in relationto the Company, seniorexecutives and majorownersVigo Carlund is theChairman of the Boardof Korsnäs AB, LosNaranjos SL and aBoard Member ofInvestment AB Kinnevik,Academic Work SolutionsAB and iZettle AB.Shareholding* ) : -Shareholding in endowmentinsurance* ) :450,000 B shares.Niclas ErikssonBoard memberBorn in 1964Elected in 2008Independent in relationto the Company, seniorexecutives and majorownersNiclas Eriksson isChairman of the Boardin Kungstadens FastighetsAB and a BoardMember of VasastadenHolding AB, VassholmenAB, Isogenica Ltdand Central Asia Gold.Niclas holds a Master ofFinancial Economics.Shareholding* ) :25,000 B shares.Shareholding in endowmentinsurance* ) : -auditorsAt the annual generalmeeting held on April10 2008, Deloitte ABwas elected as theCompany’s auditorsfor the period until the2012 Annual GeneralMeeting, with TheréseKjellberg (authorisedpublic accountant andmember of FAR SRS) asthe chief auditor.* ) The specified shareholdings of board members and senior executivesinclude holdings through families and companies as of March 2012.Claes TellmanCommunicationsDirectorBorn in 1956Employed since 2011Claes Tellman hasmore than 20 years’experience withincommunication andmarketing. Claes haspreviously worked ascommunications directorat Svenska Spel andCoca-Cola and as CEOof Casino Cosmopol.Claes has an MBA fromStockholm School ofEconomics.Shareholding* ) : -Shareholding in endowmentinsurance* ) : -Share option rights:50 000.Maria Z FurenmoHR DirectorBorn in 1964Employed since 2011Maria has extensiveexperience from HRrelated work withingrowth companies andchange managementwithin largercompanies. Maria haspreviously worked asHR director at Nordnet,PostNet, Torget.se,Cell Network and mostrecently at Outokompu.Maria holds a B.Sc. inBusiness Administrationand a degree inHuman Resourcesfrom the University ofStockholm.Shareholding* ) :500 B shares.Shareholding in endowmentinsurance* ) : -Share option rights:50 000.Björn KrantzManaging Director andChief of GMONet EntertainmentMalta LtdBorn in 1970Employed since 2009Björn Krantz hasmore than 15 years ofinternational experiencein the fields of sales andmarketing management.Björn has several years’experience from thetelecom industry, includingSwedia Networksin London and Ericssonin Sweden, London,USA and Austria, mostrecently as head of salesand business developmentfor Ericsson,Central Europe. Björnhas a degree in Mechanics& Electronics and hasalso studied at the IHMBusiness School.Shareholding* ) : -Shareholding in endowmentinsurance* ) : -Share option rights:100 000.Simon HammonChief Product OfficerBorn in 1983Employed since 2011Simon has detailedknowledge of the gamingcycle from being theOperations and ProductDevelopment Director inhis own online business.Experience includesplatform, gamedevelopment, networkoperations and affiliatemanagement withinthe bingo and casinosphere. Simon holdsa LLB in Law from theUniversity of Durham.Shareholding* ) : -Shareholding in endowmentinsurance* ) : -Share option rights:-Per ErikssonPresident and CEOBorn in 1961Employed since 2012Per Eriksson hasworked within the ITindustry for over 26years and most recentlyworked as the Presidentand CEO at DustinGroup. Prior to this,Per was Head of DellEMC for Europe, MiddleEast and Africa and theCEO of Dell Nordic. Perhas a B.Sc. in BusinessAdministration from theUniversity of Stockholm.Shareholding* ) : -4 000 B-shares.Shareholding in endowmentinsurance* ) : -Share option rights: -Maria HedengrenChief Financial OfficerBorn in 1970Employed since 2011Maria has a wide rangeof experience from variousfinance positions,mainly within the ITindustry. Maria workedas an auditor at ArthurAndersen in Swedenand in the United Statesbefore joining RescoAB (publ) as CFO. Mariaalso held several seniorfinance positions atLawson Software andmost recently as Headof Group Control atIBS before joining NetEntertainment. Mariais educated at the Universityof Gothenburg,School of Business,Economics and Law.Shareholding* ) :560 B shares.Shareholding in endowmentinsurance* ) : -Share option rights:-Bertil LundellChief Technology OfficerBorn in 1965Employed since 2011Bertil has a long experiencefrom working atvarious managementpositions in internationalproduct orientedsoftware companies,including as manager atSungard Front ARENA,Global Research andDevelopment Directorfor Pointsec MobileTechnologies AB(former Protect DataAB) and manager forCheck Point SoftwareTechnologies, Sweden.Bertil holds a Masters inComputer Science andTechnology from theRoyal Institute of Technologyin Stockholm.Shareholding* ) : -Shareholding in endowmentinsurance* ) : -Share option rights:80 000.Net EntertainmentAnnual Report 2011 23

the sharethe SHAREIn 2011, the world's stock markets were affected by theeconomic turmoil both within and outside Europe, and the OMXStockholm Mid Cap PI Index fell by 24.9 percent.Net Entertainment's shareresisted the general stockmarket decline in 2011AnalystsABG Sundal Collier,StockholmMartin ArnellCarnegie Investment Bank,StockholmChristian HellmanDanske Bank,StockholmBile DaarErik Penser,StockholmMikael HolmHandelsbankenCapital Markets,StockholmRasmus EngbergSEB Enskilda,StockholmChristopher Lyrhem24Net EntertainmentAnnual Report 2011The gaming industry is generally more resistant togeneral economic downturns in terms of financialdevelopment, but was impacted negatively from a shareperspective during the year. Net Entertainment's shareprice has resisted the general stock market downturnrelatively well, but declined by 8.6 percent in 2011. Investorrelations activities have continued during the year andthe Company met the majority of investors in Sweden andin Europe.Share price performance and turnoverIn 2011, the share price fell from SEK 70.00 to SEK 64.00, adecrease of 8.6 percent. The Nasdaq OMX Stockholm MidCap_PI index fell by 24.9. The OMX Stockholm ConsumerServices_PI index fell by 7.5 percent. Net Entertainment'smarket value, i.e. the value of all outstanding shares,amounted to SEK 2,531 (2,769) million as of December 319075604530150Jan Feb Mar Apr May June July Aug Sep Oct Nov DecShare development and share turnover2011Net Entertainment BOMX Stockholm Mid Cap Index2 5002 0001 5001 000500SX500 OMX Stockholm Consumer Services PINumber of shares traded per month, 000s0© SIX2011. In 2011, 13.9 million shares were traded, which resultedin an average daily turnover of about 55,000 shares.Investor relationsNet Entertainment views communication and transparencyas very important in order to be able to maintaingood relations with shareholders, potential investors,and analysts. The Company places great emphasis oninvestor relations with the purpose of informing the capitalmarket of Net Entertainment's activities, developmentand financial position in order to increase knowledge andinterest in the Company, but also to obtain a fair valuation.Net Entertainment takes part in the many investor relationsactivities such as seminars and investor presentationsin Europe. In addition to this, Net Entertainmentparticipates in all major gaming trade shows such as EIG,which is held in Milan, and ICE in London.100806040200FebAprJunAugOctDecFebNet Entertainment BOMX Stockholm Mid Cap IndexAprJunAugShare development and share turnover2009 - 2011OctDecFebAprJunAugOctDec3 5003 0002 5002 0001 5001 000500SX500 OMX Stockholm Consumer Services PINumber of shares traded per month, 000s0© SIXShare option rights program 2011-2014At the end of 2011, the total outstanding share optionrights amounted to 353,100 corresponding to the samenumber of shares. In the case of full subscription of theseshare option rights the Parent Company’s equity willincrease by SEK 24.8 million.The share option rights were issued at market valuedetermined at SEK 7.20 which generated SEK 2.5 millionto equity for the Group. The strike price for the shares isdetermined at SEK 70.20 which represents 130 percent ofthe average share price during the measurement periodin May 2011. Subscription of shares can be made duringthe period August 1 to October 1, 2014. An additional160,000 share option rights were held by the wholly ownedsubsidiary Mobile Entertainment ME AB. These werecancelled during 2011.Share option rights program 2009-2012At the end of 2010, the total outstanding share optionrights amounted to 586,225 corresponding to the samenumber of shares. In the case of full subscription ofthese share option rights the Parent Company’s equitywill increase by SEK 42.0 million.The share option rights were issued at market valuedetermined at SEK 7.10 which generated SEK 4.2 millionto equity for the Group. The strike price for the sharesamounts at SEK 71.70 which represents 130 percent ofthe average share price during the measurement periodin May 2009. Subscription of shares can be made duringthe period May 15 to July 15, 2012. 43,000 share optionrights have been cancelled in 2010.Dividend policy and proposed dividends 2011It is the ambition of Net Entertainment’s Board of Directorsthat the Company’s ordinary dividend shall grow inline with the Company’s earnings per share, with due considerationfor the Company’s long-term capital requirements.However, the ambition is that the dividend shall beat least 50 percent of net profit after tax, after taking theCompany’s long-term capital requirements into account.The Board of Directors proposes that no dividend is tobe paid for the fiscal year 2011. The Board proposes to theAnnual General Meeting to allocate SEK 79.1 (79.1) millionto shareholders, which corresponds to SEK 2.00 (2.00) pershare through a share redemption program. The recorddate for the share redemption program is scheduled to26 April 2012. The complete proposal and an informationfolder will be available three weeks prior to the annualgeneral meetingThe information will be available for shareholders at theCompany and on the website www.netent.com as from28 March 2012. The information will also be sent free ofcharge to those shareholders who so request and providetheir postal address.Distribution of shareholders,share of capitalLegal entities 17%Banks, insurance companies 9%Mutual funds 17%Other 3%Private investors 24%Foreign shareholders 30%Distribution of shareholders,share of votesLegal entities21%Banks, insurance companies 4%Mutual funds 8%Other 8%Private investors31%Foreign shareholders 28%Shareholders A-shares B-shares Holdings Holdings VotesPer Hamberg 1 700 000 1 823 478 3 523 478 8.9% 20.9%Rolf Lundström 1 152 500 1 432 191 2 584 691 6.5% 14.4%Lars Kling 797 000 501 810 1 298 810 3.3% 9.4%Svenska Handelsbanken SA 700 000 30 700 030 1.8% 7.8%Berit Anita Lindwall 561 000 122 595 683 595 1.7% 6.4%EFG Bank 360 000 1 986 966 2 346 966 5.9% 6.2%Banque Carnegie Luxembourg 339 500 49 000 388 500 1.0% 3.8%Knutsson Holdings AB 0 2 600 000 2 600 000 6.6% 2.9%SIX SIS AG, W8IMY 0 1 820 289 1 820 289 4.6% 2.0%Swiss Life 0 1 775 000 1 775 000 4.5% 2.0%Total, ten largest shareholders 5 610 000 12 111 359 17 721 359 44.8% 75.8%Other shareholders 0 21 832 357 21 832 357 55.2% 24.2%Total 5 610 000 33 943 716 39 553 716 100.0% 100.0%Share holdings indicated include holdings by family and companiesTen largest shareholders according to Euroclear Sweden AB as or December 31 20112011 2010 2009Earnings per share 2.92 3.05 2.72Transfer to shareholders 1 2.00 2.00 2.00Transfer to shareholders as % of after tax profits 68 66 74Outstanding shares at year-end, millions 39.6 39.6 39.6Average number of outstanding shares, millions 39.6 39.6 39.6Closing share price, SEK 64.00 70.00 60.75Direct return 2 3.1 2.9 3.3Total return, Net Entertainment shares in % 3 -5.7% 18.5 156.2P/E ratio 21.9 23.1 22.3Number of shares traded per year, millions 13.9 10.8 19.3Turnover rate in % 35.0 27.4 48.8Market value at year-end, SEK millions 2 531.4 2 768.8 2 402.9Number of shareholders 3 131 3 408 3 7451The Board's proposal for 20112Transfer to shareholders divided by share price at year-end3Percentage change in closing price 2011 plus transfer to shareholders in 2011 compared to the final day oftrading in 2010Key data for Net Entertainment's shareNet EntertainmentAnnual Report 2011 25

Five-year summaryFive-year summaryFive-year summaryCONDENSED CONSOLIDATED INCOME STATEMENTSSEK thousands 2011 2010 2009 2008 2007Operating revenues 427,618 368,280 300,050 205,573 132,020Operating profit before depreciation/amortization 175,536 167,370 142,480 103,316 58,419Depreciation/amortisation -45,823 -30,959 -22,298 -15,513 -7,839Profit after depreciation/amortization 129,713 136,411 120,182 87,803 50,580Net financial income/expense -719 -4,972 -2,966 -1,850 224Profit after financial income/expense 128,994 131,439 117,216 85,953 50,804Profit after tax 115,614 120,467 107,677 79,967 45,911CONDENSED CONSOLIDATED BALANCE SHEETSSEK thousands 2011 2010 2009 2008 2007ASSETSNon-current assets 183,554 131,492 79,674 42,202 30,124Current receivables 184,630 128,343 63,999 54,679 42,055Cash and cash equivalents 74,234 47,034 105,009 65,132 25,915Total current assets 258,864 175,377 169,008 119,811 67,970TOTAL ASSETS 442,418 306,869 248,682 162,013 98,094EQUITY AND LIABILITIESShareholders' equity 237,983 199,845 174,018 116,493 53,145Long-term liabilities - - - 1,676 2,195Current liabilities 204,435 107,024 74,664 43,844 42,754Total liabilities 204,435 107,024 74,664 45,520 44,949TOTAL EQUITY AND LIABILITIES 442,418 306,869 248,682 162,013 98,094CONDENSED CONSOLIDATED CASH FLOW STATEMENTSEK thousands 2011 2010 2009 2008 2007Cash flows from operating activities 203,251 119,629 150,042 89,073 35,879Cash flows from investing activities -99,044 -93,822 -62,136 -23,414 -13,439Cash flows from financial activities -76,565 -79,107 -45,280 -29,665 -9,889Cash flow for the year 27,642 -53,300 42,626 35,994 12,551Liquid assets at the beginning of the year 47,034 105,009 65,132 25,915 13,053Exchange rate differences in cash and cash equivalents -442 -4,675 -2,749 3,223 311Liquid assets at the end of the year 74,234 47,034 105,009 65,132 25,915Key figuresGroup 2011 2010 2009 2008 2007Operating margin (percent) 30.3 37.0 40.1 42.7 38.3Profit margin (percent) 30.2 35.7 39.1 41.8 38.5Interest coverage ratio (multiple) 778 4,533 2,494 297 273Equity/assets ratio (percent) 53.8 65.1 70.0 71.9 62.4Quick ratio (percent) 126.6 163.9 226.4 273.3 184.0Net interest-bearing liabilities (SEK thousands) -74,234 -47,034 -105,009 -65,132 -25,915Net Debt/equity ratio (multiple) -0.3 -0.2 -0.6 -0.6 -0.5Average number of employees 220 152 110 70 60Employees at year-end 231 182 133 85 67Employees and consultants at year-end 324 284 187 132 77Earnings per share 2.92 3.05 2.72 2.02 1.16Shareholders’ equity per share 6.02 5.05 4.40 2.95 1.34Dividends per share (proposed för 2011) 2.00 2.00 2.00 1.25 0.75Average number of outstanding shares 39,553,716 39,553,716 39,553,716 39,553,716 39,553,716Number of shares at year-end 39,553,716 39,553,716 39,553,716 39,553,716 39,553,716DefinitionsOPERATING MARGINOperating profit in relation to revenues.PROFIT MARGINProfit after financial items divided by revenues.INTEREST COVERAGE RATIO (MULTIPLE)Profit after financial items, plus interest expense, dividedby interest expense.EQUITY/ASSETS RATIOEquity at the end of year as a percentage of total assets atthe end of year.QUICK RATIOCurrent assets divided by current liabilities.NET INTEREST-BEARING LIABILITIESNet of interest-bearing provisions and liabilities lessfinancial assets including cash and cash equivalents.NET DEBT/EQUITY RATIO (MULTIPLE)Net of interest-bearing earnings and liabilities minusfinancial assets including cash and cash equivalentsdivided by shareholders’ equity.AVERAGE NUMBER OF EMPLOYEESAverage number of employees converted into full-timeequivalents.NUMBER OF EMPLOYEES AT YEAR-ENDNumber of employees during the year.NUMBER OF EMPLOYEES AND CONSULTANTSAT YEAR-ENDNumber of employees and subcontractors at year-end.EARNINGS PER SHAREProfit pro the year divided by the average number ofshares outstanding during the year.SHAREHOLDERS’ EQUITY PER SHAREShareholders’ equity divided by the number of sharesoutstanding at the end of the year.DIVIDEND PER SHAREImplemented/proposed dividend divided by the numberof shares outstanding during the year.AVERAGE NUMBER OF OUTSTANDING SHARESWeighted average number of shares outstanding duringthe period, adjusted for bonus issue and share split.NUMBER OF SHARES OUTSTANDINGThe number of shares outstanding at year-end, adjustedfor bonus issue and share split.Net EntertainmentNet Entertainment26 Annual Report 2011Annual Report 2011 27

Management reportmanagement reportManagement ReportABOUT NET ENTERTAINMENTNet Entertainment is a world leading supplier of digitallydistributed gaming systems used by some of the world’smost successful online gaming operators. The Net EntertainmentCasino is a complete gaming system comprisinga full suite of high quality games and a powerfulmanagement platform. The games create the ultimategaming experience for the player while the administrationtool enables Net Entertainment’s customers, the operators,to optimize their business and profitability. Operatorsare provided a customized system solution that is easilyintegrated ensuring short time to market and a cost efficientoperation. Revenues consist of royalties based on therevenues generated for the operators by the Company’sproducts and setup fees when new agreements are signed.Net Entertainment is a pure development Companyand thus does not conduct any gaming operations of itsown. The Company’s brand is internationally recognizedand associated with innovation, service, and quality.The majority of technical development and operationsare managed at the Group’s Parent Company in Stockholm,Sweden. Product management, sales, customersupport and marketing are managed from the Malta office.The Company also has an office in Gibraltar. Developmentis also carried out in Gothenburg in Sweden and inIndia and the Ukraine. Net Entertainment also manage IToperations on Alderney.The Parent Company is listed on NASDAQ OMX Stockholm(NET-B.ST)BUSINESS MODEL AND OBJECTIVESNet Entertainment’s business model is to provide gamingoperators with leading edge solutions, enabling them tooffer the ultimate entertainment experience. This willenable them to profitably grow their business faster thanthe competition. By doing so, Net Entertainment shall generatesustainable profit and growth for its shareholders.The gaming operators pay a monthly license fee calculatedas a percentage of the gross gaming yield generatedby the casino. It is therefore in the interest ofboth the operator and Net Entertainment to increase theoperator’s gaming revenues. Through the launch of newand unique games with high entertainment value and differentkinds of bonus and loyalty schemas, players areencouraged to stay on the operator’s site.The market for online gaming is expected to maintaingood growth and Net Entertainment’s objective is to growfaster than the market.Important events during the year●●Seven new license agreements were signed, includingG.Matica and Sky Betting & Gaming. Eleven newcustomers casinos’ were launched●●The number of game transactions amounted to 8.6billion, an increase of 41.7 percent compared to 2010●●●●●●●●●●Net Entertainment launched Frankenstein, the firstgame in collaboration with Universal Studios and initiateddevelopment of ScarfaceThe Italian market for online gaming was regulatedand Net Entertainment was among the first suppliersto enter the local marketNet Entertainment adjusted the system and the gamesto meet the requirements on the Danish market whichregulated online gaming in January 2012A decision was made to launch an in-house developedLive Casino product with a planned launch around theend of 2012Net Entertainment completed the development ofmobile games which were launched during the endof 2011MARKETThe online gaming market has shown positive growth inrecent years. Growth continued during 2011 albeit at asomewhat lower pace. The global gross gaming yield foronline gaming, including all game segments, is estimatedto amount to EUR 22.5 billion in 2011. In coming years,Europe is expected to represent close to half of the globalgross gaming yield, making it the single largest gamingmarket 1 .Deregulation and reregulation of national gaming lawsis taking place in many European countries. The developmentof national licensing systems is partly drivenby rulings in the European Court of Justice which havegiven the member states a somewhat larger freedom toimplement limitations regarding the offering of remotegaming cross borders. EU member states are now givenincreased opportunities to secure tax revenues providedthe licensing systems create good competitive conditionsthat are formally open for all operators who meet certainrequirements.However, it is important to highlight that the EuropeanCourt of Justice has through a number of rulings inSeptember 2010 confirmed the principle that companieslegally established within EU also have the right to offerand provide online gaming. Any restrictions imposed by amember state shall be continuous, systematic and coherent.National restrictions must always be proportionateto the purpose that justifies the restriction.Net Entertainment closely monitors the developmenton all markets that are undergoing regulation. A selectionof markets is stated below.Italy was previously a regulated market, limited tosports and horse betting, tournament poker, skill games,and scratch tickets available online via licensed operators.In July a new legal framework took effect which also includescash game poker, bingo and online casino games.The legislation for online casino games to end users is initiallylimited to table games. Net Entertainments ambitionis to launch slots as soon as the Italian gaming authorityallows it.France adopted a legal framework in June 2010 wherethey grant licenses to online gaming operators who fulfillthe local requirements. This allows private operators tooffer betting on sporting events, horse racing, and pokeron the Internet. The legal framework, that at the momentdoes not include casino, involves high taxation which makesit less attractive to private operators.In January 2012 a new legislation took effect in Denmarkwhere operators can now offer online games tothe local market via a license. Companies who intend tooperate on the local market must fulfill the gaming authoritiesrequirements during the fourth quarter 2012. Thelegal framework includes sports and horse betting, onlinecasino and poker. The casino games include blackjack,roulette, slots, baccarat and punto banco.Spain has introduced a federal gaming legislationwhich is expected to take effect during the third quarter2012. At the same time the autonomous regions can admittheir own legal framework. Madrid has utilized thisright and has granted licenses to two land based operators.In Germany, the 16 states are preparing a federal legalframework with the ambition that it will take effect duringspring 2012. Simultaneously the state Schleswig-Holsteinhas adopted a new legislation which has been approvedby the EU-commission under which private operators areawarded licenses for betting and online casino.In Sweden, discussions of a potential change in regulationregarding online gaming have been initiated as theSwedish Social Democratic Party presented a new politicalposition for online gaming. A new legal frameworkhas not been presented however and it is uncertain if anew proposal for re-regulation will be presented beforethe election in 2014.Net Entertainment believes that the conditions forcontinued expansion are good. The key reason for this isthat the Company can continue to gain market share bydelivering first-class products in combination with continuedstrong customer closeness. Good products and aneffective product development secure the conditions fornew deals. By extending the product portfolio, Net Entertainmentcan target a wider market and broaden itscustomer base.Net Entertainment’s customers are located in Europe,which is the largest geographical market for online gaming.The Company will continue to focus on the Europeanmarket, but at the same time monitor new potentialmarkets such as North America and Asia.NEW AGREEMENTS AND CUSTOMERSDuring 2011 a total of seven new customer agreementswere signed, including Sky Betting & Gaming andG.Matica.Sky Betting & Gaming is focused on the UK market andhas a broad offering of services within betting and gamesvia SkyBet, SkyPoker, SkyVegas and SkyBingo. The Companyis licensed in Alderney and is owned by BskyB GroupPLC.G.Matica is an Italian based operator founded in 2004already holding a license from the Italian gaming authorityAAMS to offer online sports betting, poker and casino inItaly. G.Matica is a land based operator with an existingonline presence.A number of agreements were terminated with smallercustomers that did not generate the minimum turnoverwhich the Company requires.CUSTOMERS TO BE LAUNCHEDAt the end of 2011, the Company held agreements with anumber of operators that have not yet launched, includingbwin.it, G.Matica and Sky Betting & Gaming.bwin.it is part of the bwin.party Group which is theworld’s largest listed online gaming operator. On the Italianmarket bwin.party is a leading operator, offering onlinepoker, sports betting and lotteries with a significantmarket share.REVENUES AND PROFITABILITYRevenues for 2011 increased by 16.1 percent to SEK 427.6million from SEK 368.3 million. Operating profit decreasedto SEK 129.7 million from SEK 136 million and the operatingmargin was 30.3 percent compared to 37.0 percentthe previous year.1H2 Gaming Capital, December 2011Net EntertainmentNet Entertainment28 Annual Report 2011Annual Report 2011 29

Management reportmanagement reportRevenues and operating profit for the most recent sixyears are presented in the diagram below.450400350300250200150100500RevenuesOperating profit2006 2007 2008 2009 2010 2011Revenues and operating profit2006–2011 SEK millionRevenues - Volume, Price and currency developmentNet Entertainment’s revenues are affected by changes involume, price (royalty levels and mix), and currency. Thevolume is affected by both existing customers’ growth aswell as the launch of new customers. The largest part ofrevenues is derived from royalty revenues and a smallerpart from setup-fees as new customer agreements aresigned as well as revenues for managing pooled jackpots.Revenues increased by 16.1 percent for the full year2011. Net Entertainment’s revenue increase comparedwith the corresponding period last year is a combinationof existing customers’ growth and revenues from thelaunch of new customers. During 2011, eleven new customershave been launched.Royalty revenues were positively affected by significantlyhigher volumes during the entire twelve month periodcompared to the corresponding period a year earlier. Theaverage royalty level has been stable during 2011 comparedto previous year.Revenues are affected by the development of the Swedishcurrency in relation to other currencies. The majorityof revenues are invoiced in Euros, but also in Britishpounds and US dollars. Revenues are reported in Eurosand then translated into the Swedish Krona for theGroup’s reporting. During 2011 the Swedish Krona was5.3 percent stronger than in 2010. In Euros, total revenuesincreased by 22.2 percent for the full year 2011 comparedto 16.1 percent in SEK. The revenue increase comparedto the corresponding period the previous year is thus attributableto increased volumes from existing customersand the launch of new customers.The number of game transactions continues to growand amounted to 8.6 billion transactions, an increase of41.7 percent compared to 2010. This corresponds to 146times more than the number of share trades on NasdaqOMX Stockholm in 2011. The increase of the number ofgame transactions has primarily been within the slotgames. Since the bet per transaction is lower for slotscompared to other casino games the revenues do not followa corresponding development as the number of gametransactions.PROFITABILITYOperating profit for 2011decreased by 4.9 percent to SEK129.7 (136.4) million. Operating expenses during 2011have increased compared to previous year due to theCompany’s expansion and strengthening of the organizationwithin areas such as sales, product management, development,and IT operations to meet increased demandsfrom the market and authorities. The strengthening of theorganization is enabled mostly through own personnel butalso through external recourses in the form of outsourcingboth within and outside Europe and subcontractors.In addition, the regulation of the online market createsnew requirements which affect costs, as do new productareas such as mobile games, Live Casino and platformdevelopment.The operating margin amounted to 30.3 percent during2011 compared to 37.0 percent the previous year. Themargin is affected by the currency development as wellas the effect on operating expenses from the strengthenedorganization and to what extent development costsare capitalized.During the third quarter 2011, costs amounting to SEK6.7 million affected operating profit due to the departureof senior executives. Excluding this cost the Company’soperating margin was 31.9 percent for the full year 2011.The financial net amounted to SEK -0.7 (-5.0) millionand consists of exchange rate effects on cash and cashequivalents, financial receivables and financial liabilitiesas well as the return on cash and cash equivalents. Thevolatility in the Swedish Krona has periodically led to effectson inter-company balances which are items includedin the financial net.The Group had an effective tax rate of 10.4 (8.3) percentfor 2011. The effective tax rate is affected by in whichcountry where the Group conducts operations where theprofit is generated and can vary from one reporting periodto the next.CAPITAL INVESTMENTSThe Group’s expenditure for capitalized development projectsas intangible assets amounted to SEK 77.5 (67.6)million. Investments in property, plant, and equipmentamounted to SEK 21.5 (26.2) million.Investments in intangible assets consist of developmentof new games, technical adjustments in the platform suchas new functionality, increased capacity and adjustmentsfor requirements on regulated markets. Among largerdevelopment projects, the projects mobile adjustment,regulation of the Danish and Italian market, Live Casino,platinum games and so called branded games.Investments in property, plant, and equipment are primarilyservers and other computer equipment. The investmentpace is driven by both the increased transactionvolume and the increased requirements for system availability.During 2011 the Company has opened a new officein Gothenburg and expanded the office area in Stockholmwhich has led to investments in furniture, fixtures andequipment. During 2011investments has also been madein building a test studio for Live Casino.CASH AND CASH EQUIVALENTS,FINANCING AND FINANCIAL POSITIONThe Group’s cash flow from operating activities amountedto SEK 203.3 (119.6) million. The improvement of SEK 83.6million is mainly due to changes in managing Funds heldon behalf of licensees during 2010 and 2011. The changeduring the fiscal year 2010 affected cash flow negativelyfor the comparative year by SEK -46.4 million as Fundsheld on behalf of licensees on the client account can nolonger be considered as cash and cash equivalents andthe change during 2011 regarding postponed transfer tothe client account which affected cash flow positively bySEK 30 million during 2011. The remaining increase ismainly derived from improved cash flow from operatingactivities.Cash flow from investing activities amounted SEK -99.0(-93.8) million. Cash flow from financing activities was SEK-76.6 (-79.1) and manly consisted of transfer to shareholdersamounting to SEK 79.1 million according to decisionmade on the Annual General Meeting on April 13, 2011.The Group’s cash and cash equivalents amounted toSEK 74.2 (47.0) million on December 31 2011. In addition,there are available credit lines of SEK 40 million that havenot been used.PERSONNEL AND ORGANIZATIONAt the end of the period, the number of employeesamounted to 231 versus 182 people one year ago. Includingexternal recourses such as dedicated persons withcontract suppliers and subcontractors, Net Entertainmentemployed 324 (284) persons.During 2011 the Company’s new CFO, Maria Hedengren,has commenced her position. Maria has an extensiveexperience from IT related businesses, most recentlyworking at IBS, an international supplier of ERP systems.During the year Per Eriksson was appointed Presidentand CEO of Net Entertainment with a start date on March1, 2012. Per previously served as CEO and President ofDustin Group AB. Prior to that, Per has had a long careerwithin Dell, where he left as Head of Dell EMC, (Europe,Middle East and Africa).PARENT COMPANYThe Parent Company’s revenues amounted to SEK 308.1(248.9) million. Operating profit amounted SEK 22.6 (22.4)million. The operating margin was 7.3 (9.0) percent. Currencyeffects on inter-company transactions are includedin financial items and for the fourth quarter anticipateddividend from subsidiaries. Profit after tax was SEK 84.8(81.9) million in 2011.Revenues in the Parent Company come from servicesprovided to subsidiaries. No development costs are capitalizedin the Parent Company as projects are orderedand owned by subsidiaries in Malta. Some parts of thetechnologies are still owned by the Parent Company andgenerate inter-company royalty revenues. The operatingmargin during 2011 has been affected negatively due toan increasing cost base as the business grows while theParent Company’s revenues have not increased to thesame extent, as parts of the expansion of the organizationhas not been directly related to the services provided tosubsidiaries.Cash and cash equivalents in the Parent Company atthe end of the period amounted to SEK 25.1 (33.8) million.Investments in property, plant and equipment amountedto SEK 13.8 (9.7) million for the period January-December2011.RISK FACTORSSpecified below are some of the business and industryrelated risk factors that could have consequences for NetEntertainment’s future development. The risk factors arenot arranged in order of importance or potential economicimpact on the Company’s income, profit, or financialposition. Neither should these be seen as exhaustive, butmerely as constituting illustrative starting points. For financialrisk factors that affect the Company’s business,see note 25.Political decisionsNet Entertainment is a supplier of digitally distributed gamingsystems, which means that the business is stronglydependent on the legal situation regarding these types ofgames. Since most of the Company’s customers are activein Europe, the legal situation in the EU is of particularinterest.Net Entertainment is legally established in the EU. Thisprovides the Company with constitutional protection forbusiness activities that observe national rights, EU rights,and the overarching WTO system. Despite this, business isdependent on the legal and political conditions that applyto customers, i.e. purchasers of digitally distributed gamingsystems. The development of the EU legal protectionthat customers have against protectionist national monopolysystems is of particular importance.In principle, the market for all types of gaming servicesis regulated by national legislation that determineshow gaming activities may be conducted. Since Net Entertainmentis a subcontractor without its own operatorbusiness, the Company is only affected indirectly by theregulations that apply to the gaming market. Changesin the customers’ circumstances can also change NetEntertainment’s conditions for growth, profitability, andhow products are designed.Net EntertainmentNet Entertainment30 Annual Report 2011Annual Report 2011 31

management reportmanagement reportThe European Court has dealt with national gaming regulationsin a variety of rulings. Currently, EU law allowsits member countries relatively free choice in regulatinggaming. However, the regulations must meet EU law’srequirements for proportionality and non-discrimination.They must meet the basic requirements of consistencyand structure. For example, national regulation must notexclude private foreign agents on public health grounds ifthe state allows comprehensive promotion of public gamingcompanies with the purpose of strengthening thePublic Treasury. Those who argue against gaming monopoliesargue that gaming monopolies cannot be justifiedfor health or safety reasons when they are operated forprofit.In recent years, the European Court and national courtshave made important rulings that affect the market forentertainment gaming. Some rulings have contributed toopening up markets for private operators, while other decisionshave been more protectionist oriented. In 2009, theEuropean Court gave member states increased flexibilityto maintain protectionist monopoly systems. Through aseries of rulings in September 2010, the European Courthas confirmed the principle that in EU law, establishedcompanies also have the right to offer and provide onlinegaming. Any limitations imposed by a member state mustbe cohesive, systematic, and consistent. National restrictionsmust always be proportional in relation to the purposethat motivates the restriction.It may be noted that the gaming market has not beenthe subject of specific harmonization measures within theEU. Some legal documents in the form of directives, regulations,or decisions have not been adopted by EU politicalinstitutions.Deregulation and reregulation of national gaming lawsis taking place in many European countries where Italy,France and Denmark has recently regulated online gaming.The development of national licensing systems ispartly driven by rulings in the European Court of Justicewhich have given the member states a somewhat largerfreedom to implement limitations regarding the offeringof remote gaming across borders. EU member states arenow given increased opportunities to secure tax revenuesprovided the licensing systems create good competitiveconditions that are formally open for all operators whomeet certain requirements.Net Entertainment has a ”class 4 license” in Malta thatcovers delivery and technical operation of casino gamesfor gaming operators licensed in Malta. Malta is a memberof the EU, and thus governed by European law. Maltais one of the few countries in the EU that chose to allowthe gaming sector to be exposed to competition througha national licensing system. Net Entertainment also hasa category 2 license on Alderney.Political decisions and court rulings in the EU areawith the purpose of making it difficult for private gamingoperators on the national market, primarily in Sweden,Malta, and the UK, as well as Norway outside the EU, candramatically affect Net Entertainment’s customers’ business,and thus the Company’s business, in a negative way.A liberalisation of the gaming market in these marketsmight also have a positive impact on Net Entertainment’scustomers, and thus for Net Entertainment.In the current situation, it is difficult to predict how thelegal situation in the EU will develop, and thus impactthe commercial conditions for gaming operators, andultimately game developers such as Net Entertainment.Therefore, it must be particularly noted that the currentlegal developments in the various member states, in combinationwith an emerging practice in EU law, means thatNet Entertainment seems, at least in the case of the EUmarket, in a relatively unpredictable legal environment,meaning that there is a difficult to quantify risk that NetEntertainment’s business may be negatively affected bylegal developments in the future.In October 2006, a law came into effect in the USA thatforbids enabling gaming for people in the USA. The lawhas had a big impact on the ability of operators to conductgaming business in the USA, and has also been abarrier to banks and other financial institutions to providepayment transactions for Internet-based gaming. In connectionwith the law coming into effect, Net Entertainmentceased cooperation with operators targeting players onthe American market, in order to avoid legal risks associatedwith this market. At the moment, Net Entertainmentdoes not offer its products or services to gaming operatorswho in turn offer games to players in the USA.Operations subject to official approvaland other legal aspectsBy order of the Maltese lottery inspection (Lotteries andGaming Authority, LGA), Net Entertainment’s subsidiaryNet Entertainment Malta Ltd holds a ”class 4 license”,which means that the Company can offer gaming systemsunder the license, and that Net Entertainment and its productsare approved by LGA. It is of very great importancefor Net Entertainment’s business that the permit is maintainedand extended. Extension for another five years wasobtained in November 2010.Net Entertainment also has a category 2 license onAlderney which enables the Company to offer its casinosolution to gaming operators that are licensed by the gamingauthority on Alderney. This license is also of greatimportance to maintain for the Company. The Alderneylicense is valid until further notice.Certain member states in the EU, including Sweden,have bans against promoting lottery that is organised froma foreign country. ”Promotion” is considered a broad concept,and thus can include a wide variety of activities. ThatNet Entertainment’s activities, namely delivering softwareand providing hosting for gaming operators, should beable to be considered ”promotion” seems far-fetched, buthow far this ”promotion” extends is unclear. This constitutesan example of how Net Entertainment operates inan unpredictable legal environment, as mentioned above.Service disruptionsNet Entertainment is responsible for the operation of thelicensed customer system through the Company’s variousoperation centres in different places in the world. Like allInternet-based services, the system can sometimes sufferfrom operational interruptions. These can be causedfor many different reasons, and may be either within oroutside of Net Entertainment’s control. In case of operationalinterruptions, the Company’s product is entirely orpartially unavailable for the end user, which affects thegaming operator’s income and thus the license incomefor Net Entertainment. Any operational interruption ortechnical problem with the Company’s servers could thereforeresult in lost income, loss of confidence in the Company,and possible claims for damages. The Company isconstantly working to minimize the risk of operationalinterruptions by ensuring high technical security in thesystem, among other things. Net Entertainment providesno product guarantee in the customer contract, whichalso contains clauses that limit the Company’s liability fordamages in case of an operational interruption.Gambling addictionDespite the fact that Net Entertainment does not conductany gaming operator activities, people who are sufferingfrom gambling addictions could sue companies within theNet Entertainment corporation in their capacity as a supplierof the underlying software and enabler of gaming.Even if such claims appear to be unfounded, and wouldlikely be refused by a court, they can result in substantialexpenses and loss of confidence in Net Entertainment,which could ultimately lead to reduced income.Dependence on key personneland skilled employeesNet Entertainment’s success is dependent on the abilityto maintain a high level of technical skills with staff, andto be able to retain and recruit staff with extensive knowledgein game development and technology in the communitieswhere Net Entertainment conducts business. Inaddition, the business is dependent on certain key peopleat the management level. Because of the high rate of development,the loss of certain key people or staff withingame development and technology may temporarily havea negative impact on the Company’s profit and financialdevelopment. Net Entertainment actively works to acquirean engaged and loyal staff through continuing educationand opportunities for advancement within the organization,among other things.Dependence on large customersThe loss of some of the Company’s customers may havea negative impact on Net Entertainment’s income andprofit. As the number of large customers increases, thedependence on individual large customers gradually decreases.CompetitionThe Company competes with a number of agents withmuch greater financial and operational resources thanNet Entertainment. The market is very attractive, andnew agents may come to establish themselves. However,the threshold for becoming established on the market forgame development is high. If Net Entertainment cannotsuccessfully respond to such competition, this may negativelyimpact the Company’s profit and financial position.The Company’s goal is to maintain and develop its positionin the market as a world-leading supplier of digitallydistributed gaming systems, and as a respected agent onthe market. By continuing to focus on the development ofgames with high entertainment value, in combination witha powerful administrative tool and related services, NetEntertainment hopes to be able to retain existing customersand attract new ones.Intellectual property rightsNet Entertainment’s most important intellectual propertyrights mainly consist of the copyrights for the software, inparticular Net Entertainment Casino, and related materialsthat are developed and continue to be developedwithin the corporation. Therefore, it is very important thatanything developed within the corporation remains NetEntertainment’s property. Through contracts with employeesand consultants, it is ensured that the copyright fordeveloped products falls to Net Entertainment. Along withNet Entertainment’s success, the Company has at varioustimes been sued for allegedly infringing on intellectualproperty rights. Although the Company has not lost in anysuch claim, there is a risk of negative impact in the futureif a court rules against the Company. Each case involvesvarying degrees of expenses for legal advisors.Exchange rate fluctuationsThe corporation’s profit and financial position are exposedto exchange rate fluctuations, since most of the incomeis in Euros (EUR) and the majority of the expenses are inSwedish kronor (SEK). Net Entertainment’s current policyis not to hedge changes in value in exchange rates. Astrengthening in the value of SEK in relation to EUR negativelyimpacts the Company’s profit. The fulfilment of NetEntertainment’s financial goals may be affected by futurechanges in exchange rates.Profit is also affected by changes in exchange ratewhen profit from foreign subsidiaries is converted toSwedish kronor. Furthermore, the corporation’s equity isaffected by changes in exchange rates when assets andliabilities of foreign subsidiaries are converted to Swedishkronor.Net EntertainmentNet Entertainment32 Annual Report 2011Annual Report 2011 33

MANAGEMENT REPORTmanagement reportCorporate Governance ReportTax situationThe Group’s tax expense is affected by in which countrywhere the Group conducts operations where the profitis generated and tax laws in each respective country.Comprehensive assessments are required to be ableto establish the appropriation for income tax. There aremany transactions and calculations where the final tax isuncertain at the time when the transactions and calculationsare implemented. With the help of legal experts, theCompany has assessed how tax regulations affect the businessin order to ensure a correct tax situation. This alsoapplies to indirect taxes. The Company reports and paysto the tax authorities the amount of tax that the Companyconsiders correct. However, these figures may prove to beinadequate in the event that the tax authorities interpretthe tax rules more restrictively than the assessment theCompany has made and believes is correct.Corporate Governance ReportNet Entertainment NE AB is a Swedish public limitedliability Company listed on Nasdaq OMX Stockholm. Thebasis for the Company’s management, leadership, andcontrol by shareholders, the Board of Directors, and theCEO are applicable external laws and rules, as well asinternal regulations such as policies and instructions.The most prominent laws and regulations are the SwedishCompanies Act, the Swedish Code of CorporateGovernance (”the Code”), Nasdaq OMX Stockholm’slisting requirements as specified in ”Rules for issuers”.The Company has not committed any violations of therules on the exchange where the Company’s shares areadmitted to trade or of generally accepted principles inthe market.Also, the Articles of Association have a central rolein the corporate governance by defining the Company’sname, the domicile of the Board of Directors, businessdirection, information concerning share capital and votingrights for shares, as well as how conversion of A-shares toB-shares may occur. The Company’s Articles of Associationdo not contain any specific rules regarding amendmentsto the Articles of Association.Due to legislative amendments, a corporate governancereport is a legal requirement for all Swedish companieswhose shares are traded on the Swedish regulatedmarket and whose fiscal years begin after 28 February2009, i.e. Net Entertainment from the fiscal year 2010. TheCompany’s auditor shall review the corporate governancereport. An additional legal requirement is that the AuditCommittee shall have an independent member who alsohas accounting or auditing skills.The Swedish Companies Act contains basic rulesabout a limited liability Company’s organization. Thepurpose of the Code is to provide guiding rules for goodcorporate governance and to supplement the legislationin a number of areas. The Annual Accounts Actplaces requirements on how corporate governance reportsshall be created. The Code allows for companiesto deviate from these rules if, in individual cases, it canbe considered to result in better corporate governancefor the Company (according to the principle ”comply orexplain”). If a Company finds that a certain rule or recommendationin the Code is not appropriate to complywith due to the Company’s special circumstances, theCompany may deviate from this rule, provided that thedeviation is disclosed and justified, and that the chosenalternative solution is specified. The Company follows theCode without deviations.ANNUAL GENERAL MEETINGThe Annual General Meeting (AGM) is Net Entertainment’shighest governing body, in which shareholders exercisetheir influence in the Company. The AGM has a senior positionin relation to the Board of Directors and the ChiefExecutive Officer. To be entitled to vote for their sharesat the AGM, shareholders must be recorded in the shareregister five work days before the meeting, including Saturdays,and announce their participation to the Companyno later than the day which is stated in the summons.Shareholders who cannot attend personally can participatethrough a representative. Decisions at the meetingare normally made by a simple majority of votes. However,certain types of resolutions require sanction by a higherproportion of the votes and shares represented at the AGMas dictated by the Swedish Companies Act.The AGM shall be held within six months from the end ofthe fiscal year. The time and place is announced in connectionwith the third quarter earnings report at the latest. Informationon how a shareholder can have a matter raised atthe meeting, and by when such a request must be receivedby the Company in order to make sure it is brought up in theAGM, is announced on the Company’s website at the latestby the third quarter earnings report. The summons to theAGM is announced at least four weeks prior to the meeting,and will then be available on the website.At the AGM, a presentation of the Company’s develop-% of capital % of votes Attendance100908070605040302010050454035302520151050% 2009 2010 2011 AttendanceAttendance at the Annual General MeetingNet EntertainmentNet Entertainment34 Annual Report 2011Annual Report 2011 35

management reportCorporate Governance Reportmanagement reportCorporate Governance Reportment over the past year is given, and resolutions will bemade on a number of central matters. The AGM approvesthe annual accounts for the previous fiscal year, decideson discharge from liability for the Board of Directors andCEO, elects the Board of Directors and auditors, decideson compensation for the Board of Directors and auditor,decides how the Nominating Committee shall be appointed,and handles other formal matters such as any changesin the articles of association. Extraordinary GeneralMeetings may be held when warranted.Each A share carries ten votes and each B share carriesone vote. Each voting shareholder in Net Entertainmentmay vote for the full number of owned and representedshares without limitations in voting rights.Annual General Meeting 2011The AGM 2011 was held on April 13 at Stockholm Konserthus.At the meeting, 34.3 percent of all votes and 34.6percent of all shares were represented. The AGM wasattended by all members of the Board of Directors, theCompany’s auditor, the CEO, and all other senior executives.Of the four members of the Nominating Committee,three were present.At the AGM, resolutions were made on ordinary matters,and also on a share split and automatic redemptionprocedure concerning a transfer to the shareholders ofSEK 2.00 per share, and authorization for the Board ofDirectors to decide on a new issue of at most 4,300,000shares of series A and/or series B, with the purpose ofincreasing the Company’s financial flexibility, as well asthe ability to make payments with its own financial instrumentsin connection with any Company acquisitions andacquisitions of businesses that the Company may transact.For more information, view the website.The website contains all required documents for themeeting, as well as the minutes of the meeting and theArticles of Association.AGM 2012The AGM 2012 will take place on 18 April at Spårvagnshallarnain Stockholm at 15.00. The summons to the AGMis shown on the Company’s website at www.netent.com/agm, where the required documents are also availablebefore the meeting.Net Entertainments ten largest shareholdersaccording to Euroclear Sweden ABat December 31 2011Percent ofcapitalPercent ofvotesPer Hamberg 8.9 20.9Rolf Lundström 6.5 14.4Lars Kling 3.3 9.4Svenska Handelsbanken SA 1.8 7.8Berit Anita Lindwall 1.7 6.4EFG Bank 5.9 6.2Banque Carnegie Luxembourg 1.0 3.8Knutsson Holdings AB 6.6 2.9SIX SIS AG, W8IMY 4.6 2.0Swiss Life 4.5 2.0Shareholdings include holdings through families and companies.NOMINATING COMMITTEEThe AGM decides on how the Nominating Committee shallbe appointed.At the AGM in April 2011, it was decided that the Chairmanof the Board of Directors, Vigo Carlund, shall convenea Nominating Committee consisting of a representativefrom each of the three largest shareholders as of 31 August2011 who, together with the Chairman of the Board ofDirectors, shall be members of the Nominating Committeefor the AGM 2012. In September 2011, Per Hamberg(appointed by the Hamberg family), Christoffer Lundström(Provobis Invest AB) and Eugen Steiner (the Kling family)were appointed as members of the Nominating Committee.Per Hamberg was appointed Chairman of the NominatingCommittee. The composition of the NominatingCommittee is based on the list of registered shareholdersprovided by Euroclear Sweden and other reliable ownershipinformation as of the last business day in August.The Nominating Committee has prepared a proposalto be submitted to the AGM 2012 for resolutions regardingthe Chairman of the Meeting, the Chairman of the Boardof Directors and other members of the Board of Directors,auditors in appropriate cases, remuneration to the Boardof Directors and the auditors, as well as principles for appointmentof the Nominating Committee. The NominatingCommittee’s mandate period runs until the new NominatingCommittee is appointed in accordance with the resolution onselection of the Nominating Committee for the AGM 2012.The composition of the Nominating Committee meetsthe Code’s requirements for independent members.In its work, the Nominating Committee has participatedin the assessment of the Board of Directors and itswork as well as the Chairman of the Board report on theCompany’s activities, goals, and strategies, in order tomake correct assessments concerning the compositionof the Board of Directors. In addition, the NominatingCommittee has analyzed the skills and experience of themembers of the Board of Directors, and compared themwith the needs that have been identified. The NominatingCommittee has noted that the members of the Board ofDirectors hold a wide range of extensive experience inbusiness activities, technology, the gaming industry andfinancial markets, etc. Since the Annual General Meeting2011 the Nominating Committee has met on five occasions.The Nominating Committee’s proposal, its justifiedopinion on the proposed Board of Directors and supplementaryinformation regarding the nominated membersof the Board of Directors are announced in connectionwith the summons to the AGM and will be presented atthe AGM 2012 together with a report of the NominatingCommittee’s work.Members of the Nominating committeePer Hamberg (Appointed by the Hamberg family)Christoffer Lundström (Provobis Invest AB)Eugen Steiner (Kling family)Vigo Carlund, Chairman of the Board of Directorsthe board of directorsThe Board of Directors is elected by the shareholders atthe AGM with a mandate period from the AGM until theend of the next AGM. The Company’s Articles of Associationdo not contain specific provisions on the appointmentand dismissal of board members. The Board of Directorsmanages the shareholders’ interests by establishing goalsand strategies for the business, evaluating the executivemanagement and securing systems for monitoringand control of established goals. It is also the task of theBoard of Directors to ensure that there is sufficient controlover the Company’s compliance with laws and otherregulations that apply to the Company’s business, thatthe necessary ethical guidelines are established for theCompany’s conduct and to ensure that the Company’scommunications are open, as well as accurate, relevantand reliable.Between AGMs, the Board of Directors is the Company’shighest governing body.According to the articles of association, Net Entertainment’sBoard of Directors shall consist of three to ninemembers and no deputies. The AGM decides the exactnumber of members.The members of the Board of Directors shall devotetheir time and attention to Net Entertainment and acquirethe necessary knowledge to defend the Company and itsshareholders.At the AGM in April 2011, six members were elected:Vigo Carlund, Fredrik Erbing, Niclas Eriksson, MikaelGottschlich, Peter Hamberg and Pontus Lindwall. For afurther description of the members, refer to page 22.All but one member are independent in relation to theCompany and its management, and five members to largershareholders. Pontus Lindwall was not independentin relation to the Company during the period April-October2011 as he was the CEO at the Company until October2006. The evaluation of the members of the Board of Directors’independence is based on the Code’s rules, whichapply from 1 February 2010.At the Board meetings, Vigo Carlund and Peter Hamberghave been present at all meetings, Fredrik Erbingand Pontus Lindwall were absent from one meeting, NiclasEriksson was absent from three meetings and MichaelGottschlich was absent from four meetings.The Chairman of the Board of directorsThe Chairman of the Board of directors is appointed bythe AGM. Vigo Carlund was appointed Chairman of theBoard of directors by the AGM 2011.The Chairman organizes the work of the Board of Directorsso that it is conducted efficiently and is such thatthe Board of Directors fulfils its commitments. This alsoincludes organizing and leading the work of the Board ofDirectors in order to create the best possible conditionsfor the work, ensuring that new members of the Board ofDirectors go through the necessary introductory training,that the Board of Directors regularly updates and deepensits knowledge of the Company, the industry, and its development,is responsible for contacts with the owners,and communicates its opinions to the Board of Directors.The Chairman also ensures that the Board of Directorsreceives sufficient information and support for decisionsin its work and, in consultation with the CEO, establishesproposals for the agendas of Board meetings. The Chairmanof the Board of Directors verifies that the Board ofDirectors decisions are implemented and is responsiblefor ensuring that the Board of Directors’ work is evaluatedannually and that the Nominating Committee is informedof the evaluation. The Chairman is also a support for theCEO.The work of the Board of DirectorsThe Board of Directors is regulated by the rules of procedure,in addition to laws and recommendations. The rulesof procedure are established by the Board of Directors andreviewed annually through Board decisions.The rules of procedure are divided into different sectionsin order to clarify and regulate the Board of Directors’work and tasks. The parts consist of the Board ofDirectors’ rules of procedure and instructions to the CEOand Audit Committee. The Remuneration Committee iscomposed of the entire Board of Directors.The rules of procedure describe which items shall befound on the agenda at each Board meeting, the annualcycle of items over the business year and the agenda forstatutory Board meetings. The rules of procedure includethe Board of Directors´ general duties, distribution ofwork within the Board of Directors, how Board meetingsshall be recorded and provision of information to theBoard of Directors before the Board meeting and betweenBoard meetings.Before each Board meeting, the members receivewritten material about the matters to be discussed atthe Board meeting. Also, each month, a monthly reportis distributed containing operational and financial developments.In 2011, the Board of Directors held 22 meetings, includingthe constituting meeting, four for the approval ofinterim reports, and ten extra Board meetings. In connectionwith the Board meeting in June, a strategy meetingwas held,in which the executive management presentedan in-depth analysis of the industry development and theproposed strategic direction for continued growth and development.This meeting was held in Sweden.The key points at the Board meeting in 2011 werematters concerning strategy, taxes, approval of businessplans and budgets, forecasts, key policies, annual report,earnings report and interim reports, recruitment of CEOand investments. Among investment matters, most notablewere adaptations to various geographic markets andthe investment in a Live Casino product. Other mattersaddressed by the Board of Directors were financial goals,Net EntertainmentNet Entertainment36 Annual Report 2011Annual Report 2011 37

management reportCorporate Governance Reportmanagement reportCorporate Governance Reporttvision, and mission, as well as financial policy.Also present at the Board meetings were the CEO andthe CFO who also took the minutes for the meetings. TheCEO reports on operational developments at each ordinaryBoard meeting and the CFO reports on financialdevelopments. In addition, various senior executives participatedin presentations on different agenda items.At the Board meeting in February 2012, the head auditor,Therese Kjellberg, Deloitte, reported her conclusionsfrom the audit for 2011. During the meeting, the membersof the Board of Directors had the opportunity to ask theauditor questions without Company management beingpresent.The Chairman of the Board of Directors annuallyevaluates the work of the Board of Directors through asystematic and structured process with the purpose ofdeveloping the Board of Directors’ work and efficiency.The Board of Directors continually evaluates the CEO’swork and the Board of Directors addresses this evaluationwithout anyone from the Company management beingpresent.Attendance, meetings2011Board ofDirectorsAudit Remunerationcommittee committeeVigo Carlund 22 of 22 - 1 of 1Pontus Lindwall 16 of 17 - - of 1Fredrik Erbing 21 of 22 5 of 5 1 of 1Niclas Eriksson 19 of 22 - 1 of 1Mikael Gottschlich 18 of 22 5 of 5 - of 1Peter Hamberg 22 of 22 5 of 5 1 of 1Audit CommitteeThe Board of Directors has established an Audit Committeewhich, since April 2011, has consisted of Fredrik Erbing(Chairman), Peter Hamberg and Mikael Gottschlich.CFO Maria Hedengren is an adjunct to the Committee,and functions as its secretary. The Company’s auditorsattend the Committee’s meetings for presentations anddebriefing.The Audit Committee is responsible for monitoring andquality assurance of the Company’s financial reporting. Interms of financial reporting, the Audit Committee monitorsthe efficiency of the Company’s internal controls andrisk management. The Committee keeps itself informedof the audit of the annual accounts and the consolidatedfinancial statements and reviews and monitors theauditor’s impartiality and independence and pays specialattention if the auditor provides the Company with servicesother than auditing services. The Committee is alsoresponsible for the Board of Directors’ ongoing communicationwith the Company’s auditors, establishing guidelinesfor what services may be procured by the auditors inaddition to regular audits, evaluation of the audit process,counseling the Nominating Committee when preparingproposals to the auditors and audit fees. In addition, theCommittee has established an annual plan for its work,an updated risk analysis for the business with special focuson financial reporting, approved the auditor’s auditplan, read and evaluated the auditor’s review, evaluatedthe internal controls and the process improvement workperformed by the Company in that regard, considered theFinance policy and discussed the risks and their connectionto internal control and accounting issues. During theyear, special attention has been devoted to further developmentof the Finance department and controller function.The Audit Committee met five times in 2011. The auditorattended all meetings.Remuneration CommitteeThe Remuneration Committee consists of all six membersof the Board of Directors. The Chairman of the Board ofDirectors is the Chairman of the Committee. All memberswere independent in relation to the Company except forPontus Lindwall during the period April-October 2011 ashe was the CEO of the Company up until October 2006.During the period April-October 2011 no meetings wereheld in the Remuneration Committee and Pontus Lindwalldid therefore not participate in any decisions wherehe could be considered biased.The Remuneration Committee deals with matters concerningremuneration and benefits for senior executives,including the CEO. The Remuneration Committee preparesmatters for decision by the Board of Directors concerningthe CEO’s remuneration and benefits, as well as mattersof principle for all senior executives. The Committeemakes decisions on matters of remuneration concerningother senior executives, and other matters of lesser importance.The Board of Directors also decides on mattersof principle concerning remuneration to senior executivesand salary for the CEO. The Board of Directors has establishedguidelines for remuneration to senior executivesthat are presented to and approved by the AGM. Theguidelines for remuneration to senior executives are monitoredand evaluated annually, including programs thatare ongoing, and that ended during the year, for variableremuneration for the Company management. The currentremuneration policy is attached to the minutes from theAGM, which is available on the website.The Remuneration Committee met once in 2011 whereall members of the Board of Directors were present exceptfor Michael Gottschlich and once in the beginning of2012 where all members participated.Instructions for the CEOThe Board of Directors has prepared and establishedinstructions regarding the CEO’s tasks and responsibilities,as well as obligations to the Board of Directors.The CEO is responsible for managing and developing theCompany and dealing with the ongoing management ofthe Company’s business affairs within the framework ofthe Swedish Companies Act, the Company’s businessplan, instructions for the CEO and guidelines and instructionsannounced by the Board of Directors. In theinternal work, the CEO shall monitor that the Company’sorganization is businesslike and efficient, ensure that theinternal controls are effective and efficient, implementthe Company’s strategy and goals and process and suggestqualitative and quantitative goals for the Company’svarious business units. For the Board of Directors, theCEO shall continuously and before each ordinary Boardmeeting create, compile, and present data that the Boardof Directors requests for assessment of the Company’seconomic situation, such as reports, key figures and comments,proposals for a business plan, a marketing plan,budgets, forecasts, financial statements, interim reportsand annual reports.REMUNERATION TO THE BOARD OF DIRECTORSAND SENIOR EXECUTIVESRemuneration to the Board of DirectorsRemuneration to the Board of Directors is proposed bythe Nominating Committee and decided by the AGM,andis paid to members of the Board of Directors who are notemployed by the Company.Monetary data regarding remuneration distributed tothe Board of Directors per fiscal year is shown in note 6on page 59.REMUNERATION TO THE BOARD OF DIRECTORS 2009-2011, kSEKDecided at the AGM 2011 2010 2009Chairman of theBoard of Directors 550 650 500(including fees for assignmentsin foreign subsidiaries) (-) (100) -Members of theBoard of Directors 220 220 200Chairman of theAudit Committee 270 50 -Remuneration to senior executivesIn order to achieve good long-term value growth for shareholders,Net Entertainment seeks to offer its employeescompetitive remuneration and an attractive workplacethat makes it possible to recruit and retain the right employees.For senior executives, the Board of Directors hasprepared guidelines for remuneration as outlined below.The Board of Directors has, with support from the thirdsentence in the introduction to the guidelines, deviatedfrom the guidelines to senior management for variablecompensation of the Acting CEO for 2011. There are specificreasons for this that are related to the extended responsibilitiesof the role as CEO brought in, as comparedto the former position.Monetary data regarding remuneration distributed toemployees and senior executives is shown in note 6 onpage 59.Guidelines adopted by the AGM 2011These guidelines shall be applied for the CEO of Net EntertainmentNE AB and other senior executives of the Company.The principles in these guidelines are relevant to employmentcontracts entered into after the Annual GeneralMeeting and in such cases amendments are made in existingcontracts after the Annual General Meeting. The Boardof Directors shall be able to deviate from the guidelinesprovided that there are special grounds in a specific case.It is of fundamental importance for the Company andits shareholders that the principles for remuneration andother conditions of employment of senior executives fromboth a short-term and long-term perspective are competitiveand create good conditions for retaining and motivatingskilled employees and attracting new employeeswhen needed. In order to achieve this, it is important thatthe Company has fair and internally balanced conditions,while maintaining market competitiveness. The employmentconditions for senior executives should contain awell-balanced combination of fixed and variable salary,share-based incentive programs, retirement benefits andconditions for termination of employment.Remuneration should be based on performance andshould therefore contain a combination of fixed and variablesalary such that variable remuneration constitutes anappropriately large part of the total remuneration.The fixed salary shall be competitive, individual andshall be based on the individual’s responsibility, role,skills, and experience in relevant positions.An annual variable salary shall be measured and paidon an annual basis. The annual variable salary shall becapped at 100 percent of the fixed salary and shall be basedon actual achievements in relation to the establishedfinancial and operational goals. Goals for variable salaryare determined annually by the Board of Directors withregard to variable salary for the CEO and by the CEO withregard to variable salary for other people in senior management,in order to ensure that they are in line with theCompany’s business strategy and objectives. The conditionsfor variable salary shall include the minimum levelof performance in relation to goals for which no variablesalary is received.In order to ensure long-term commitment, continuedemployment, and competitive remuneration from an internationalperspective, annual variable salary may besupplemented with long-term cash incentive programswith deferred payment between 12 and 24 months. Suchincentive programs are used selectively and are based onobjectives related to the current fiscal year. Long-termcash incentive programs require continued employmentuntil a pre-agreed date in order for payment to be made.Long-term cash incentive programs shall be capped at 50percent of the annual fixed salary and shall otherwise followthe same principles that apply to the Company’s annualvariable salary as above.Persons within the sales organization may have vari-Net EntertainmentNet Entertainment38 Annual Report 2011Annual Report 2011 39

management reportCorporate Governance Reportmanagement reportCorporate Governance Reportable remuneration in the form of commissions based onsuccessful sales. In certain situations, when a particularlygood sales result has been achieved, the commission mayadd up to an amount that exceeds 100 percent of the fixedsalary. For persons with commission remuneration, thevariable salary according to the two preceding paragraphsis limited to 50 and 25 percent of the fixed salary.The Board of Directors has the right to reclaim variablepay paid on the basis of information that later proved to beevidently erroneous.Leading employees are invited to participate in an ongoingshare-based program to motivate long-term work. Inorder to strengthen loyalty to the Company, a share-basedincentive program in the form of share option rights maybe issued under competitive conditions combined withcash remuneration, which is payable in connection withthe use of share option rights to employees who are stillemployed at the time of redemption. Such remunerationmay not exceed 50 percent, net after tax, of the premiumpaid for the share option rights.Retirement benefits for the CEO and other persons inthe Company’s management shall be competitive andshall be based on defined benefit pension plans, wherethe premium shall be capped at 33 percent of the pensionablesalary. Other benefits, such as Company car, remunerationfor health insurance, etc. shall constitute a minorpart of the total remuneration and shall be consistent withwhat is competitive.The CEO and other individuals in the Company’s managementteam have a notice period of six months. Otherindividuals in the Company’s management team shallhave notice periods of between three and six months. Severancepay, including dismissal pay, shall not exceed 18months’ salary.Guidelines determined by the Board ofDirectors and proposed to the AGM 2012For the AGM 2012 the Board of Directors has proposed thefollowing changes and clarifications to the guidelines forremuneration to senior executives;The annual variable salary shall be maximized to 50percent of the fixed salary. Previous guidelines were maximizedto 100 percent.Persons within the sales organization may have variablecompensation in the form of commission-basedcompleted sales. Provision for sales persons can amountto a maximum of 100 percent of the fixed salary, whichcan be obtained through particularly good sales performance.This is not a change from previous guidelines buta clarification.Leading employees are offered to participate in theongoing share based incentive program in the form of ashare option rights or share purchase plan issued undermarket conditions to motivate long term employmentand promote increased community of interest with theCompany’s shareholders. Previous guidelines only coveredshare option rights in the category of share-based incentiveprograms. The CEO may have a notice period of no morethan twelve months. Other members of the Company’ managementmay have a notice period of no more than sixmonths. In addition to the notice period there may be severancepay. Notice period and severance pay shall not togetherexceed the equivalent of a total of 18 months’ salary.AUDITAuditors are elected by the AGM, and review theCompany’s accounts and management on behalf of theAGM. According to the articles of association, Net Entertainmentshall have one or two auditors. Deloitte AB wereelected as auditors at the AGM in April 2008 for the perioduntil the AGM 2012. Therese Kjellberg was appointed chiefauditor. At the AGM 2012 an auditor for the period up untilthe AGM 2013 will be appointed.The auditor has presented her conclusions of the synopticreview of the interim report for January - September2011, the audit for the entire year 2011, and internalcontrol for the audit committee and the Board of Directors.The auditor also met with the Board of Directors andthe audit committee without anyone from the Companymanagement present.In addition to the audit, the auditor has had a limitednumber of other tasks for Net Entertainment. Thesehave been audit-related services concerning accountingand reporting, and well as assisting with establishing theCompany’s tax returns. In the previous year, assignmentrelating to the initial public offering in 2009 has takenplace. Remuneration to the auditor is stated in note 23 onpage 63.INTERNAL CONTROL: The Board of Directors’DESCRIPTION OF THE MOST IMPORTANTELEMENTS IN THE COMPANY’S SYSTEM FORINTERNAL CONTROL AND RISK MANAGEMENTREGARDING FINANCIAL REPORTINGThe Board of Directors’ responsibility for internal governanceand control is regulated in the Swedish CompaniesAct the Annual Accounts Act, and the Code. In the AnnualAccounts Act, it is required that the Company annually describethe Company’s system for internal control and riskmanagement regarding financial reporting. The Board ofDirectors has overall responsibility for financial reporting.The Board of Directors’ and the committees’ division oflabor is regulated in the Board of Directors’ rules of procedure.The Audit Committee has an important role in preparingthe Board of Directors’ work to ensure the qualityof financial reporting. The preparation involves matterson internal control and compliance, control of reportedvalues, estimates, assessments and other matters thatcould affect the quality of the financial reports. The Committeealso has continuous contact with the auditor.Net Entertainment applies the established frameworkfor internal control COSO (Committee of Sponsoring Organizationsof the Treadway Commission). The principlesof COSO consist of five interrelated components: controlenvironment, risk assessment, control activities, informationand communication and review process.The Board of Directors’ rules of procedure specifywhich reports and what information of a financial natureshall be distributed to the Board of Directors at each ordinaryBoard meeting and in between. The CEO ensuresthat the Board of Directors receives the reports requiredin order for the Board of Directors to be able to continuouslyassess Net Entertainment’s economic position.The quality of the external financial reporting is ensuredthrough a number of measures and procedures. Allinterim reports are subject to processing by the Board ofDirectors before being released, along with the earningsreport and annual report. The CEO is responsible for allinformation provided, such as press releases, presentationsfor meetings with analysts, media, and owners andinvestors. In addition to the annual report, the auditor alsoreviews interim earnings report for the third quarter.Internal control refers to the process that is influencedby the Board of Directors, the Company managements,and other staff, and is designed to provide a reasonableassurance that the goals of the Company are achievedwith regard to●●●●●●efficient and effective operations,reliable financial reporting, andcompliance with applicable laws and regulations.The basis of the internal controls related to the financialreporting consists of the overall control environment thatthe Board of Directors and the management have establishedand communicated. The Board of Directors andthe management operate based on this, which createsdiscipline and structure for other parts of the process.These parts include risk assessment, control activities,including both general and more specific controls withthe purpose of preventing, detecting, and correcting errorsand discrepancies, systems for internal and externalinformation and communication, and monitoring fromthe Board of Directors and the Company managementand further down the organization in order to ensure thequality of the process. An important part of the controlenvironment is that the organizational structure, decisionmaking, and authority are clearly defined and communicatedin the form of regulatory documents and internalpolicies, guidelines, manuals and valuations.Control environmentIn the development of processes, Net Entertainment hasconsidered the control environment and the risk assessmentperformed. A well-designed internal control not onlycreates conditions for reliable financial reporting, but probablycontributes to a healthy and sustainable businesswith greater profitability as a result. Work on the design ofinternal processes and monitoring of these is continuouslyongoing within Net Entertainment and is becoming increasinglyimportant as the Company grows. This is especiallyimportant regarding the systems Net Entertainment developsand operates on behalf of licensees.The Board of Directors has prepared and establishedinstructions for the CEO and instructions for financialreporting to the Board of Directors at Net Entertainmentregarding the ongoing work with internal control that isdelegated to the CEO. In turn, the CEO delegates authorityto the people that report to him, both directly and throughestablished guidelines and manuals within the Company.The Company’s corporate values are an important elementhere, which provides guidance for daily operations.The Company’s finance function reports to the auditcommittee and to the Company’s Chief Financial Officerand works to develop and improve the internal controlregarding financial reporting in the Company, both proactivelywith a focus on the internal controls environment,and by reviewing how the internal controls work. Constantdevelopment of internal controls is important for arapidly growing Company like Net Entertainment. During2011 the work to further develop the internal control hascontinued. To increase clarity and to implement additionalinternal control activities as a natural part of the continuouswork on financial reporting, a re-organization was carriedout so that the areas of responsibilities between thecontrolling function and the accounting department werechanged. The usage of the new system for time and projectfollow-up has also been further developed. The Grouphas a department with special responsibility for regulatorycompliance, as well as quality and processes. Regulatorycompliance in this respect also refers to industry specificregulation from gaming authorities in different countries.In 2011 a new role for security control has been recruitedin this department.Internal governance instruments for financial reportingprimarily consist of the Company’s Finance Policy, InformationPolicy, Economic Handbook, and authorizationinstructions that define accounting and reporting rules,as well as the Company’s definition of processes and minimumrequirements for good internal control regardingfinancial reporting. Guidelines for financial reporting areupdated when there are changes in the legal requirements,listing requirements and / or accounting standardsthat are relevant to the Company. In addition, the Companyhas prepared policies regarding trading of Companyshares, IT and information security, dividend, drugs andgambling, and more.Risk assessmentRisks regarding financial reporting are evaluated and monitoredby the Board of Directors through the Audit Committee.Net Entertainment has implemented a structuredrisk assessment process in order to enable identificationNet EntertainmentNet Entertainment40 Annual Report 2011Annual Report 2011 41

management reportCorporate Governance Reportmanagement reportCorporate Governance Reportof the significant risks that affect the internal controls regardingfinancial reporting, as well as identification of therisks that exist. These risks are mainly attributed to the areassuch as regulated activity, the billing process, developmentexpenditure and taxes and the Company’s significantliquid funds. During the risk assessment, particular attentionhas been paid to the risk of irregularities and favoritismby other parties at the Company’s expense and risk of lossor misappropriation of assets. At the same time, the risk assessmenthas a greater focus on key processes and items.Matters are prepared by the Audit Committee beforeconsideration by the Board of Directors. The risk assessmentresults in control goals that support the basic requirementsof financial reporting being fulfilled. The riskassessment is updated annually by the Company, andthe results are reported to the Audit Committee and theBoard of Directors.Control activitiesThe most significant risks identified regarding financialreporting are managed through the control structuresof processes. Control activities are designed and documentedat the process level and include both generaland more specific controls with the purpose of preventing,detecting, and correcting errors and discrepancies.When designing control activities, it is ensured that theyare performed correctly and on time. So-called generalIT controls are designed for the system that support theprocesses that affect internal control regarding financialreporting. The design of processes and control activitieswithin IT is also affected by regulations specified by thegaming authorities, such as the Lotteries and GamingAuthority of Malta (LGA), and external reviews in connectionwith control of such regulatory compliance. Suchreviews are implemented both by certified auditing agenciesfor certification in relation to requirements from authoritiesand by the Company’s external auditors. Controlactivities include from the review and monitoring of performanceoutcomes to specific account reconciliations.Areas that are covered by control activities are, for example:●●proper authorization of business transactions●●business systems that affect financial reporting, includingverification management●●the accounting process, including year-end reportsand consolidated annual accounts and their compliancewith applicable regulations in the form of generallyaccepted accounting principles, applicable laws andregulations and requirements for listed companies,but also in order to ensure proper decision making forthe Board of Directors and management●●significant and unusual or complicated businesstransactions, as well as business transactions or valuationsof assets or liabilities that contain significantelements of judgement.Information and communicationInformation and communication concerning internal governanceinstruments for financial reporting are availablefor all affected employees on the Company’s internal network.Net Entertainment has information and communicationchannels with the purpose of promoting completenessand accuracy of financial reporting. Only a limitednumber of persons within the functions Finance, IR andCEO staff have access to information that is consideredconfidential, such as budgets, forecasts, economic outcomereporting, Board material and compensation. Accessto such confidential information is in accordance with thepowers which the Company’s personnel have been awardedin the organization. Important guidelines and manualsof importance for financial reporting are updated andcommunicated to affected employees in connection withthe introduction of new employees and possible changesto all affected personnel. There are both formal and informalcommunication channels to senior executives andthe Board of Directors for information from employees.The employees can also contact the Board of Directorsvia e-mail and be anonymous to senior executives if theyso wish, a so-called whistle blower policy. For externalcommunication there are guidelines for the Companywith high standards for accurate and relevant informationto the market. The Board of Directors annually establishesan information policy for the Company whichamong other things provides guidelines for contacts withanalysts and media. In connection with the introduction ofnew employees, the employees are informed of the guidelinesand laws that apply to the Company regarding forexample managing insider information and trading withthe Company’s shares. Prior to each quarterly earningsreport a reminder is sent about the share trading rules.Review processThe Board of Directors continuously evaluates the informationthat the Company management provides. The reviewprocess includes both monitoring of monthly financialreports for budget and goals and reporting at Boardmeetings. Through the Audit Committee, the Board of Directorsreviews and assesses the internal control’s organizationand function. The Audit Committee’s work includes,among other things, ensuring that measures are takenregarding deficiencies and proposals for measures thatare identified through internal control activities and theexternal audit. The Company’s policies and instructionsare evaluated and updated at least annually with regardsto effectiveness and functionality or more often if needed.The Company’s CFO presents the results of the workon internal controls as a recurring point on the agenda forthe Audit Committee’s meetings. The results of the AuditCommittee’s work in the form of observations, recommendations,and proposals for decisions and measuresare continuously reported to the Board of Directors.Internal auditAccording to the Code, in companies that do not have a separatereview function (internal audit), the Board of Directorsshall annually evaluate the need for such a functionand justify the conclusion in the description of the internalcontrol. There is no such separate review function in NetEntertainment. The responsibility for further developmentand management of the system for internal control occursin the organization together with existing functionsfor quality, processes and regulatory compliance. It is theBoard of Directors’ assessment that there is no need tocreate a separate review function due to the limited scopeand complexity of the business. The extent is limited to324 persons employed at the end of 2011 and operationsmainly located in Malta and Stockholm and IT operationsorganizational structurenominatingcommitteeremunerationcommitteeGlobal Market OperationsHRProcess andQualityshareholdersAnnual Generalmeetingboard of directorsCEOProduct Managementand development units in an additional two countries. Toensure adequate risk management, governance, ethics,quality, compliance and efficiency the finance function isused with the support from external specialists in specificmatters. The Audit Committee has a recurring point onthe agenda for its meetings to get statements from theCFO on how work is progressing regarding improvementof internal controls on financial reporting and places requirementson improvements based on for example therisk analysis and dialog with the Company’s auditors. Separatefrom the economy function a quality function existsthat reports directly to the CEO and whose purpose is toensure further development of the Company’s processesregarding quality assurance, regulatory compliance anddisaster management.FinanceCommunicationauditoraudit committeeDevelopment andIT-OperationsNet EntertainmentNet Entertainment42 Annual Report 2011Annual Report 2011 43

MANAGEMENT REPORTmanagement reportTHE SHAREThe share capital in Net Entertainment amounts to SEK1,190,566.85 divided into 5,610,000 shares of series A,with ten votes per share, and 33,943,716 shares of seriesB, with one vote per share. Owners of shares of series Ahave the right to convert one or more shares of series A toshares of series B, through written request to the Board ofDirectors, within the framework for the maximum numberof shares of series B that may be issued according to thearticles of association. All classes of shares have equalrights to Net Entertainment’s assets and earnings. In theevent of liquidation, the shareholders have the right to aportion of the surplus in relation to the number of sharesthat the shareholder owns. Shareholders can vote for thefull number of shares represented at the AGM. As far asthe Company knows, there are no limitations that prohibitthe transfer of the Company’s shares, either legal or agreementsbetween shareholders.Net Entertainment has not issued convertible debt instruments.As of 31 December 2011, Per Hamberg owned, directlyor indirectly, 8.9 percent of the shares, and 20.9 percentof the votes, and Rolf Lundström owned 6.5 percent of theshares, and 14.4 percent of the votes.SHARE OPTION RIGHTSPROGRAM 2011-2014The Annual General Meeting on April 13, 2011 resolvedto introduce a long-term incentive program intended forsenior management and key employees within Net Entertainment.The resolution entailed the issue of a maximumof 740,000 share option rights to personnel with permanentemployment within Net Entertainment to subscribefor an equal amount of shares in Net Entertainment NEAB.At the end of the subscription period 353,100 share optionrights had been subscribed to, corresponding to 62.5percent of the offer which amounted to a total of 565,000share option rights, offered to employees. The share optionrights were issued at market value determined toSEK 7.20 which generated SEK 2.5 million to equity forthe Group. The strike price for the shares is determinedto SEK 70.20 which represents 130 percent of the averageshare price during the measurement period in May 2011.Subscription of shares can be made during the period August1 to October 1, 2014. An additional 160,000 share optionrights were held by the wholly owned subsidiary MobileEntertainment ME AB. These were cancelled in 2011.At the end 2011, the total outstanding share optionrights amounted to 353,100 corresponding to the samenumber of shares. In the case of full subscription of theseshare option rights the Parent Company’s equity will increaseby SEK 24.8 million.To stimulate participation in the program the Boardof Directors has decided to offer a loyalty compensationwhich will be paid no later than September 1, 2014 to theparticipants in the program who are still employed at NetEntertainment at the date of payment and have not resignedor been dismissed. The compensation can amount toa maximum of 50 percent of paid premium for the shareoption rights net after tax or a total of SEK 2.4 million includingsocial security costs paid by the Company. Thiscommitment is accrued for in the accounts on an ongoingbasis considering forecasted employee turnover andinterest.PROGRAM 2009-2012At the end of 2011, there were a total of 586,225 shareoption rights outstanding representing the same numberof shares. In the event that full subscription occurs basedon these share option rights, SEK 42.0 million will be contributedto the Parent Company’s equity. The share optionrights were issued within the framework of an incentiveprogram, and were subscribed at a market price establishedat SEK 7.10, of which SEK 4.2 million is contributedto equity for the corporation. The subscription price forshares was established at SEK 71.70, which constitutes130 percent of the average share market price during theperiod of 12–26 May 2009. Subscription of shares may occurduring the period of 15 May–15 July 2012. 43,000 shareoption rights have been cancelled in 2010.With the purpose of stimulating participation in theprogram, the Board of Directors has decided to submita loyalty remuneration to be paid no later than 15 June2012 to the participants in the program who, at the timeof payment, are still employees of Net Entertainment andhave not resigned. The remuneration may add up to anamount that corresponds to a maximum of 50 percent, netafter tax, of the premium paid for the share option rightswhich on the balance day represented a commintment ofno more than SEK 0.8 million including social expenses aspaid by the Company. This commitment is accrued for inthe accounts on an ongoing basis considering forecastedemployee turnover and interest.Mandate for new share issueAt the AGM 2011, the Board of Directors was authorized,on one or more occasions before the next AGM, with orwithout deviation from the shareholders’ preferentialrights, to decide on issuance of new shares, convertiblesand/or share option rights that entail the issuance of,conversion to, or new subscription of a total of at most4, 300, 000 shares of series A and/or series B (correspondingto an increase of about 10 percent of the capital) forcash payment and/or with provision of capital contribution,set-off, or otherwise with conditions. The use of the authorizationmay not lead to the proportion of shares of seriesA exceeding 14.2 percent of the total number of shares.The purpose of the authorization is to increase theCompany’s financial flexibility and to be able to make paymentswith its own financial instruments in connectionwith any acquisitions of companies or businesses that theCompany may come to implement. In the event of issuancewithout preferential rights for the shareholders, thebasis of the established issue price shall be the shares’market value at the time of issue, subject to market-basedissue discount.EVENTS AFTER THE END OF THE PERIODNet Entertainment signed agreements with several customersfor establishment in Denmark which has regulatedonline gaming. On January 1 2012 Net Entertainmentlaunched these customers on the local Danish market.FUTURE OUTLOOKNet Entertainment’s positive growth thus far has primarilybeen generated by increased volumes from theCompany’s existing customer base. Reregulation ofthe market for online gaming is taking place in severalcountries in Europe where Net Entertainment haslaunched several customers in Italy during 2011 and inDenmark during January 2012. In addition, new revenuestreams from product launches such as mobile gamesand later on Live Casino, is expected to contribute positivelyto the Company’s growth going forward. The combinationof the existing customer base, regulation of markets,integration of new customers and new games andproducts create a positive future outlook for the Company.The cost for doing business increases gradually and isdriven by several factors where regulatory adjustments isone of them. The strategic initiatives create opportunitiesand continued competitiveness.PROPOSED DIVIDENDThe Board of Directors proposes that no dividend is paidfor the fiscal year 2011.The Board of Directors proposes to the AGM to allo-cate SEK 79.1 (79.1) million to shareholders, which correspondsto SEK 2.00 (2.00) per share through a shareredemption program. The record date for the shareredemption program is scheduled to 26 April 2012.The complete proposal will be available three weeksprior to the AGM as well as an information folder. Theinformation will be available for shareholders at theCompany and on the website www.netent.com as from28 March 2012. The information will also be sent free ofcharge to those shareholders who so request and providetheir postal address.THE BOARD OF DIRECTOR’S PROPOSEDALLOCATION OF PROFIT IN THE PARENT COMPANYThe following profits are at the disposal of the AGM (SEK)Opening profit brought forward 20,106,729Share premium reserve 6,015,820Profit/loss for the year 84,830,734110,953,283The Board of Directors proposesThat the following amount should be carriedforward 110,953,283Proforma after transfer to the shareholdersOpening profit brought forward incl.profit/loss for the year 110,953,283Transfer to shareholders -79,107,43231,845,851The Group’s and the Company’s result and position areshown in the following income statements and balancesheets, cash flow statements and equity statements andrelated notes and supplementary information which forman integrated part of this annual report.Net EntertainmentNet Entertainment44 Annual Report 2011Annual Report 2011 45

FINANCIAL STATEMENTSFINANCIAL STATEMENTSIncome statements andstatements of total incomeGroupBalance sheetsGroupSEK thousands Note 2011 2010Revenues 3, 4 426,838 368,170Other revenues 5 780 110Total operating revenues 427,618 368,280OPERATING EXPENSESPersonnel expenses 6 -146,547 -98,219Depreciation/amortization 12, 13 -45,823 -30,959Other operating expenses 23 -105,535 -102,691Total operating expenses -297,905 -231,869Operating profit 129,713 136,411FINANCIAL ITEMSFinancial income 8 6,640 1,270Financial expense 9 -7,359 -6,242Total financial items -719 -4,972Profit before tax 128,994 131,439Income tax 10 -13,380 -10,972Profit for the year 115,614 120,467Earnings per share before dilution (SEK) 11 2.92 3.05Earnings per share after dilution (SEK) 11 2.92 3.05SEK thousands Note Dec 31, 2011 Dec 31, 2010ASSETSFIXED ASSETSIntangible fixed assets 12 133,142 87,021Tangible fixed assets 13 50,412 44,471Total fixed assets 183,554 131,492CURRENT ASSETSAccounts receivable 15 3,680 5,473Prepaid expenses and accrued income 16 54,788 47,111Other receivables 17 38,473 29,351Funds held on behalf of licensees 87,689 46,408Cash and cash equivalents 18 74,234 47,034Total current assets 258,864 175,377TOTAL ASSETS 442,418 306,869SEK thousands Note Dec 31, 2011 Dec 31, 2010EQUITY AND LIABILITIESSHAREHOLDERS’ EQUITY 19Share capital 1,191 1,191Other capital contributed 40,904 38,362Reserves -7,469 -6,558Retained earnings incl. profit for the year 203,357 166,850Total equity 237,983 199,845Number of shares at period’s end 39,553,716 39,553,716Average number of shares 39,553,716 39,553,716Effective tax rate 10.4% 8.3%Profit for the period attributable to:Parent Company shareholders 115,614 120,467CURRENT LIABILITIESAccounts payable 33,498 19,458Current tax liabilities 18,512 11,262Other liabilities 20 118,710 49,845Accrued expenses and deferred income 21 33,715 26,459Total current liabilities 204,435 107,024Statement of total income – Group 2011 2010Profit for the period 115,614 120,467Other total incomeExchange differences arising from thetranslation of foreign operations-911 -15,532Sum of other total income for the period, net after tax -911 -15,532Total income for the period 114,703 104,935TOTAL EQUITY AND LIABILITIES 442,418 306,869Pledged assets None NoneContingent liabilities None NoneProposed/implemented transfer to shareholders/dividend per share 2.00 2.00Net EntertainmentNet Entertainment46 Annual Report 2011Annual Report 2011 47

FINANCIAL STATEMENTSFINANCIAL STATEMENTSCash flow statementsGroupChanges in equityGroupSEK thousands Note 2011 2010OPERATING ACTIVITIESOperating profit 129,713 136,411Adjustments for non-cash items– Depreciation/amortization 12, 13 45,823 30,959– Other -430 -4,922Interest received 420 167Interest paid -166 -29Income taxes paid -6,060 -8,538Cash flow from operating activities before changes in working capital 169,300 154,048Increase / decrease in accounts receivable 1,793 -1,631Increase / decrease in other receivables -58,080 -62,713Increase / decrease in trade payables 14,040 7,450Increase / decrease in other current liabilities 76,198 22,475Cash flows from operating activities 203,251 119,629INVESTING ACTIVITIESAcquisition of intangible assets 12 -77,539 -67,645Acquisition of tangible fixed assets 13 -21,505 -26,177Cash flow from investing activities -99,044 -93,822FINANCING ACTIVITIESReceived premium for share option rights 2,542 -Transfer to shareholders -79,107 -79,107Cash flows from financing activities -76,565 -79,107Cash flow for the year 27,642 -53,300SEK thousandsShare capitalOther capitalcontributedReservesRetained earningsincl profitfor the yearTotal equity2010Opening equity Jan 1, 2010 1,191 38,362 8,975 125,490 174,018Profit for the year - - - 120,467 120,467Exchange differences arising from thetranslation of foreign operations - - -15,532 - -15,532Total income for 2010 - - -15,532 120,467 104,935Transfer to shareholders - - - -79,107 -79,107Closing equity Dec 31, 2010 1,191 38,362 -6,558 166,850 199,845SEK thousandsShare capitalOther capitalcontributedReservesRetained earningsincl profitfor the yearTotal equity2011Opening equity Jan 1, 2011 1,191 38,362 -6,558 166,850 199,845Profit for the year - - - 115,614 115,614Exchange differences arising from thetranslation of foreign operations - - -911 - -911Total income for 2011 - - -911 115,614 114,703Premium received for share option rights - 2,542 - - 2,542Transfer to shareholders - - - -79,107 -79,107Closing equity Dec 31, 2011 1,191 40,904 -7,469 203,357 237,983There is no minority interest in the Group. All equity is therefore attributable to Parent Company shareholders.Cash and liquid assets at beginning of period 47,034 105,009Exchange rate differences in cash and cash equivalents -442 -4,675Cash and cash equivalents at year-end 18 74,234 47,034Net EntertainmentNet Entertainment48 Annual Report 2011Annual Report 2011 49

FINANCIAL STATEMENTSFINANCIAL STATEMENTSIncome statements andstatements of total incomeParent CompanySEK thousands Note 2011 2010Revenues 3, 4 307,623 248,754Other revenues 5 506 109Total operating revenues 308,129 248,863OPERATING EXPENSESPersonnel expenses 6 -167,148 -118,521Depreciation/amortization 12, 13 -8,957 -8,094Other operating expenses 23 -109,469 -99,821Total operating expenses -285,574 -226,436Operating profit 22,555 22,427FINANCIAL ITEMSProfit/loss from interests in Group companies 7 68,870 68,506Interest and similar income 8 5,492 518Interest and similar expense 9 -5,861 -4,157Total financial items 68,501 64,867Profit before tax 91,056 87,294Balance sheetsParent CompanySEK thousands Note Dec 31, 2011 Dec 31, 2010ASSETSFIXED ASSETSIntangible fixed assets 12Games and gaming systems - -Total intangible fixed assets - -Tangible fixed assets 13Equipment and fittings 27,983 23,136Total tangible fixed assets 27,983 23,136Financial fixed assetsParticipating interests in Group companies 14 512 512Total financial fixed assets 512 512TOTAL FIXED ASSETS 28,495 23,648CURRENT ASSETSCurrent receivablesAccounts receivable 15 28 2Receivables from Group companies 24 180,224 235,068Other receivables 17 8,476 5,980Prepaid expenses and accrued income 16 6,580 3,762Total current receivables 195,308 244,812Cash and bank balances 18 25,050 33,760TOTAL CURRENT ASSETS 220,358 278,572TOTAL ASSETS 248,853 302,220Tax 10 -6,225 -5,359Profit for the year 84,831 81,935Earnings per share before dilution (SEK) 11 2.14 2.07Earnings per share after dilution (SEK) 11 2.14 2.07Number of shares at period’s end 39,553,716 39,553,716Average number of shares 39,553,716 39,553,716Effective tax rate 6.8% 6.1%Statement of total income –Parent Company 2011 2010Profit for the period 84,831 81,935Other total incomeSum of other total income for the period, net after tax - -Total income for the period 84,831 81,935Proposed/implemented transfer to shareholders/dividend per share 2.00 2.00SEK thousands Note Dec 31, 2011 Dec 31, 2010EQUITY AND LIABILITIESSHAREHOLDERS’ EQUITY 19Restricted equityShare capital 1,191 1,191Statutory reserve 38 38Total restricted equity 1,229 1,229Unrestricted equityShare premium reserve 6,015 3,473Retained earnings 20,107 17,279Profit for the year 84,831 81,935Total unrestricted equity 110,953 102,687TOTAL EQUITY 112,182 103,916CURRENT LIABILITIESAccounts payable 28,773 16,789Liabilities to Group companies 24 69,181 149,417Tax liabilities 6,127 5,928Other liabilities 20 3,177 2,501Accrued expenses and deferred income 21 29,413 23,669TOTAL CURRENT LIABILITIES 136,671 198,304TOTAL EQUITY AND LIABILITIES 248,853 302,220Pledged assets None NoneContingent liabilities None NoneNet EntertainmentNet Entertainment50 Annual Report 2011Annual Report 2011 51

FINANCIAL STATEMENTSFINANCIAL STATEMENTSCash flow statementsParent CompanyChanges in equityParent CompanySEK thousands Note 2011 2010OPERATING ACTIVITIESOperating profit 22,555 22,427Adjustments for non-cash items– Depreciation/amortization 12, 13 8,957 8,094– Other -327 -3,731Interest received 123 116Interest paid -166 -24Income taxes paid -6,026 -1,001Cash flow from operating activities before changes in working capital 25,116 25,881Increase / decrease in accounts receivable -26 1,261Increase / decrease in other receivables 76,735 169,866Increase / decrease in trade payables 11,983 6,477Increase / decrease in other current liabilities -32,149 -135,264Cash flow from operating activities 81,659 68,221SEK thousandsShare capitalOther capitalcontributedSharepremiumreserveReservesRetained earningsincl profitfor the yearTotal equityOpening equity Jan 1, 2010 1,191 38 3,473 15,244 81,143 101,089Profit for the year - - - - 81,935 81,935Total income for 2010 - - - - 81,935 81,935Allocation adopted byAnnual General Meeting - - - 2,036 -81,143 -79,107Closing equity Dec 31, 2010 1,191 38 3,473 17,279 81,935 103,916Opening equity Jan 1, 2011 1,191 38 3,473 17,279 81,935 103,916Profit for the year - - - - 84,831 84,831Total income for 2011 - - - - 84,831 84,831Received premium for share option rights - - 2,542 - - 2,542Allocation adopted byAnnual General Meeting - - - 2,828 -81,935 -79,107Closing equity Dec 31, 2011 1,191 38 6,015 20,107 84,831 112,182INVESTING ACTIVITIESAcquisition of tangible fixed assets 13 -13,804 -9,651Cash flow from investing activities -13,804 -9,651FINANCING ACTIVITIESReceived premium for share option rights 2,542 -Transfer to shareholders/dividend -79,107 -79,107Cash flow from financing activities -76,565 -79,107CASH FLOW FOR THE YEAR -8,710 -20,537Cash and cash equivalents at beginning of year 33,760 54,297Cash and cash equivalents at year-end 18 25,050 33,760Net EntertainmentNet Entertainment52 Annual Report 2011Annual Report 2011 53

NOTEsnotesNotes to financial statementsNote 1general informationNet Entertainment NE AB (Parent Company, corporate registration number556532-6443) and its subsidiaries (together, the Group or the Company)is a world leading supplier of digitally distributed gaming systemsused by some of the world’s most successful online gaming operators.The Net Entertainment Casino is a complete gaming system comprisinga full suite of high quality games and a powerful management platform.The games create the ultimate gaming experience for the playerwhile the management platform enables Net Entertainment’s customers,the operators, to optimize their business and profitability. Operators areprovided a customized system solution, that is easily integrated ensuringshort time to market and a cost efficient operation. Revenues consist ofroyalty, based on the gaming yield generated by the Group’s customersand setup fees when new agreements are signed. Net Entertainment isa pure development Company and thus does not conduct any gamingoperations of its own. The Company’s brand is internationally recognizedand associated with innovation, service, and quality.All technical development is carried out at the Group’s Stockholm officeand all commercial operations: sales, marketing, and product managementare carried out from the Malta office. The Company also hasan office in Gibraltar. Development is also carried out in Gothenburg,Sweden and in India and the Ukraine. Net Entertainment also manageIT operations on Alderney.The Parent Company is listed on NASDAQ OMX Stockholm (NET-B.ST)This annual report was approved for publication by the Board of Directorson March 15, 2012. The Statements of Income and Balance Sheetsshall be adopted at the Annual General Meeting on April 18, 2012.Note 2Accounting and valuation principlesBasis of preparationThe consolidated financial statements have been prepared in accordancewith International Financial Reporting Standards (IFRS), issued by theInternational Accounting Standards Board (IASB) and interpretations issuedby the IFRS Interpretations Committee, as endorsed by the EU. Theconsolidated financial statements are also prepared in accordance withthe Swedish Annual Accounts Act, the Swedish recommendation RFR 1“Supplementary Accounting Rules for Groups” and applicable statementsissued by the Swedish Financial Reporting Board. The accounting policieshave been applied in the reporting for all companies within the Groupand in the consolidation for each time period which is presented in theGroup’s financial statements.Preparation of the Group’s financial reportsThe Parent Company’s functional currency is the Swedish krona, which isalso the reporting currency for the Parent Company and the Group. Thismeans that the financial reports are presented in SEK.All figures are expressed in thousand Swedish kronor unless otherwisestated. SEK million is an abbreviation of million Swedish kronor.Amounts and figures in brackets are comparable figures for the sameperiod in the previous year.Assets and liabilities are reported using the historical cost basis ofaccounting, apart from some financial assets and liabilities which aremeasured at fair value.The most important accounting principles in the preparation of theseconsolidated financial statements are stated below. These principleshave been applied consistently for all the years presented, unless otherwisestated.The Parent Company applies the same principles as the Group, withthe exception that the Parent Company’s report has been prepared in accordancewith RFR 2 Accounting for Legal Entities. This results in certaindifferences caused by the requirements of the Annual Accounts Act orby tax considerations. The accounting principles for the Parent Companyare stated below in the section ’Parent Company Accounting Principles’.Standards, Amendments and Interpretations effective for 2011These new, amended or revised standards have been applied from 2011:Standards• Amendments to IAS 24 Related Party Disclosures (Revised definitionand partial exemption for government-related entities)• Amendments to IAS 32 Financial instruments: Classification (Classificationof Rights Issues)• Improvements to IFRSs issued 2010Interpretations• Amendments to IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset,Minimum Funding Requirements and their Interaction (Prepaymentsof a Minimum Funding Requirement)• IFRIC 19 Extinguishing Financial Liabilities with Equity InstrumentsAll new, amended or revised standards and Interpretations above havebeen adopted but has not had any significant impact on the amountspresented in these financial statements. However they might affect theaccounting for future transactions and eventsStandards, revised Standards and Interpretations in issue not yeteffective that has not been early adopted by the GroupAmendments to IFRS 7 Financial Instruments: Disclosures increase thedisclosure requirements of transfer transactions of Financial Assets.These amendments are designated to give a greater transparency of therisk exposure of a Financial Asset that has been transferred to a thirdparty but where the Company to some extent retains exposure in the asset.The amendments also require additional disclosures if a disproportionateamount of transfer transactions are undertaken around the end ofa reporting period. Other amendments to IFRS 7 increase the disclosurerequirements when offsetting Financial Assets and Financial Liabilities.Management’s assessment is that the amendments to IFRS 7 will nothave any significant impact on the consolidated financial statements.IFRS 9 Financial Instruments issued in November 2009 introduces newrequirements regarding classification and measurement of Financial Assets.In October 2010 IFRS 9 was revised with requirements for the classificationand measurement of financial liabilities and derecognition. Theamendment to IFRS 9 issued in December 2011 implies that IFRS 9 shallbe effective to annual periods beginning on or after 1 January 2015. InDecember 2011 IFRS 7 was amended which implies increased disclosurerequirements in the period when IFRS 9 is applied for the first time. Managementis currently analysing the impact of the application of IFRS 9Financial Instruments.In May 2011 IASB issued a package of five standards on consolidation,joint arrangements, associates and disclosures; three new standards IFRS10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS12 Disclosure of Interests of Other Entities and amendments to two existingstandards, IAS 27 Separate Financial Statements and IAS 28 Investmentsin Associates and Joint Ventures. Amendments have also been made toIAS 1 Presentation of Financial Statements (Presentation of Items of OtherComprehensive Income), IAS 12 Income taxes, IAS 19 Employee benefitsand IAS 32 Financial Instruments: Presentation.According to Management’s assessment, other new and amended standardsand interpretations will not have any significant impact on the consolidatedfinancial statements in the period of initial application.CLASSIFICATIONSAssets are classified as current assets if they are expected to be soldor are intended to be sold or used in the Company’s normal operatingcycle, if they are held primarily for trading purposes, if they are expectedto be sold within twelve months after the balance sheet date or if theyare cash or cash equivalents. All other assets are classified as fixed assets.Liabilities are classified as current liabilities if they are expectedto be settled in the Company’s normal operating cycle, if they are ownedprimarily for trading purposes, if they are expected to be settled withintwelve months after the balance sheet date or if the Company does nothave an unconditional right to defer settlement of the liability for at leasttwelve months after the balance sheet date. All other liabilities are classifiedas long-term liabilities.CONSOLIDATED STATEMENTSThe consolidated financial statements include the Parent Company andcompanies in which the Parent Company directly or indirectly owns morethan half of the voting rights or has control.Principles of consolidationThe consolidated accounts have been prepared in accordance with thepurchase method. Acquisition-related costs are expensed in the periodsin which they occur. The cost of an acquisition is measured as the fairvalue of the assets given, plus costs directly attributable to the acquisition.Identifiable assets acquired and liabilities and contingent liabilitiesassumed in a business combination are measured initially at their fairvalues at the acquisition date, irrespective of the extent of any minorityinterest. The difference between the cost of acquisition of the sharesand the fair value at the time of acquisition of the Group’s share of theidentifiable net assets acquired is recognised as consolidated goodwill.If the difference is negative, the amount is immediately recognised in theincome statement.Subsidiaries’ revenue, expenses, assets and liabilities are included inthe consolidated financial statements from the date on which control arises(acquisition date) until and including the date on which control ceases.Intra-group receivables and liabilities, and transactions among groupcompanies and any associated gains, are eliminated in their entirety.Translation of foreign operationsOperations which do not have the Sweden krona as their functional currencyare translated to SEK using the current method. All assets, provisionsand other liabilities are translated at the closing day rate, andincome statement items are translated at the average rate. Exchangerate differences arising during this conversion, translation differencesare recognized via toal income in equity. Foreign operations are sold attheir accumulated translation differences, less any hedging in the consolidatedfinancial statements.RevenuesNet Entertainment’s revenues are largely dependent on the licensingof online gaming products/services. Revenue consists of the fair valueof what is received or will be received for services sold in the Group’soperating activities. Revenue is recognised excluding VAT and discounts,and after elimination of internal Group sales. All invoicing takes placemonthly in arrears.Net Entertainment Casino generates license revenues according toa royalty model and the amount is determined by the earnings generatedby the product for the customer and is recognised for the period thecustomer uses the product.The Group reports revenue when its amount can be reliably measuredand it is likely that the Company will reap financial benefits in thefuture. The revenue amount cannot be measured in a reliable manneruntil all sales commitments are fulfilled or have lapsed. The Group basesits assessments and estimates on historical outcomes and takes intoaccount the type of customer, type of transaction and special circumstancesin each individual case. If there are any circumstances that mightchange the original assessment of the revenue amount, the estimatesare reviewed. These reviews can result in increases or decreases of theestimated revenue or expenses and affect the revenue during the periodwhen the circumstances that caused the change came to the knowledgeof the Company management.Other revenuesRevenues from activities which do not come under ordinary operations arereported as other income. This item mainly includes recovered amortizedreceivables, exchange gains from operations and profit from the sale offixed assets.Financial income/expensesInterest revenues and expenses are reported in the period they are incurred.Other operating expensesCosts of secondary activities in ordinary operations relating to operatingreceivables and operating liabilities are reported as other operatingexpenses. This item mainly includes exchange losses from operationsand losses on the sale of fixed assets.Segment reportingOperating segments are reported in a manner consistent with the internalreporting provided to the chief operating decision maker. The chiefoperating decision maker is the person or group that allocates resourcesto and assesses the performance of the operating segments of an entity.In the case of the Group, the chief operating decision maker has beenidentified as the Chief Executive Officer who makes strategic decisions.The Company’s only product (segment) is systems for casino gamesPooled JackpotsDuring 2010 the procedure for pooled jackpots changed which affectedthe accounting for these. Previously, the funds were separated to specificbank accounts that have been included in Net Entertainment’s reportedcash and cash equivalents. The new procedure entails a different typeof bank account that is excluded from the Company’s cash and cashequivalents. In the balance sheet the funds are now reported as currentreceivables. As before, a corresponding amount is reported underliabilities in the balance sheet as other current liabilities. In the cashflow statement, jackpot funds and payment of winnings are included inchanges in working capital. As this was not a change in accounting policies,historical comparable figures were not restated.Cash flow statementThe cash flow statement is prepared using the indirect method. The recognisedcash flow only covers transactions that result in incoming orNet EntertainmentNet Entertainment54 Annual Report 2011Annual Report 2011 55

NOTESnotesoutgoing payments. This means that discrepancies may occur comparedwith changes in individual items in the balance sheet.Intangible assetsDevelopment expenditure is capitalized to the extent that it is expectedto result in future economic benefits. Only expenditure associated withthe development phase of online gaming products, gaming systems andgaming platforms are capitalized and recognised as an asset from thedate on which the decision is made to complete the project and whenconditions allow this. The carrying amount includes direct expenditurefor salaries, purchased services, materials and indirect expenses thatcan be reasonably and consistently attributed to the asset.Development expenses are recognized in the balance sheet at cost,less deductions for accumulated amortisation and impairment losses.Regular assessments are made of the projects’ income-generatingcapacity in order to identify any impairment requirements. Intangiblefixed assets also include acquired gaming agreements, concessions andtrademarks. These intangible assets are reported in the balance sheet atacquisition value, less accumulated amortization and impairment losses.All of the Company’s intangible assets have a known useful life.Tangible assetsItems of property, plant and equipment are recognised as assets in thebalance sheet when it is probable that future economic benefits associatedwith the asset will flow to the entity and the cost of the asset can bemeasured reliably. Items of property, plant and equipment are recognisedat cost less accumulated depreciation and impairment losses. Repairsand maintenance are recognised as expenses in the period incurred.Depreciation/amortization and impairmentDepreciation/amortization is based on the original acquisition cost lessthe estimated residual value and allowance for impairment. Depreciation/amortizationis applied on a straight-line basis over the asset’s estimateduseful life. The following useful life for assets (years) are used:• Trademarks, domain names, 3-5 years.• Gaming agreements and concessions, 3–5 years.• Capitalized development expenses for games, gaming systems andgaming platforms are based on class of asset and amount to a maximumof 3 years.• Computer and server equipment, 4–5 years.• PCs (work stations for developers etc.) 1–3 years.• Office equipment, 3–7 years.The residual value and useful life of an asset are reviewed annually. Ifthe carrying amount of tangible, intangible or financial fixed assets inthe Group appears excessive, impairment is identified and quantified byreference to the recoverable value of individual or naturally related typesof assets, measured as the higher of net selling price and value in use.The value in use is measured as expected future discounted cash flow.Impairment loss is the difference between the carrying amount and therecoverable value. When a previously recognised impairment loss is nolonger warranted, it is reversed. A reversal may not be higher than avalue that does not exceed the carrying amount that would have beenrecognised (net of amortization or depreciation) had no impairment lossbeen recognised.Financial instrumentsFinancial assets can be classified in the following categories:(a) financial assets measured at fair value in the income statement, (b)loan receivables and accounts receivable and (c) available-for-sale financialassets. The classification is dependent upon the purpose for whichthe financial asset was acquired. The classification of the financial assetsis determined at the time of initial accounting.The Group does not have any assets which fall under the categories (a)or (c).Loan receivables and accounts receivableLoan receivables and accounts receivable are financial assets that are notderivatives with fixed payments or payments that can be defined and arenot listed in an active market. They are included in current assets withthe exception of items with an expiry date of more than 12 months fromthe closing date, which are classified as fixed assets. In this category,Accounts receivable as well as Cash or cash equivalents are recognizedin the balance sheet (see notes 15 and 18).Accounts receivableAccounts receivable are initially measured at fair value and then at accumulatedacquisition value with application of the effective interestmethod, less any provision for impairment. Provision for impairment onaccounts receivable is made when there is direct evidence that the Groupwill not be able to collect all the amounts due under the original termsof the receivable. The amount of a provision is the difference betweenthe asset’s carrying value and the current value of assessed future cashflows, discounted using the original effective interest rate and the adjustmentis recognised in the income statement in sales costs. Whenan accounts receivable cannot be collected, it is completely written offaccounts receivable.Cash and cash equivalentsCash and cash equivalents include cash, bank balances and other shortterminvestments with an expiry date within three months of the acquisitiondate.Shareholders’ equityShareholders’ equity consists of registered share capital, other paid-incapital, hedge reserves, retained earnings and profit for the year. Ordinaryshares are classified as equity. Transaction expenses that can bedirectly attributed to issues of new shares or options are recognised, netafter tax, in equity as a deduction from the issue amount. Other than theshares’ quota value, other capital contributed refers to amounts receivedfrom new share issue, shareholder contribution and group contribution.Translation reserves relate to translation differences attributableto translation of foreign subsidiary operations into Net Entertainment’sreporting currency.Accounts payableAccounts payable are initially recognised at fair value and then at the accumulatedacquisition value using the effective interest method.Other financial liabilitiesFinancial liabilities not held for trading are initially valued at fair valueand then at amortized cost. Accumulated acquisition value is measuredon the basis of the effective interest calculated when the liability wasrecognised. This means that surplus and deficit values and transactioncosts are accrued over the liability’s maturity.Financial investmentsFinancial investments are either financial assets or short-term investments,depending on the purpose of the holding. If their maturity orexpected period of ownership exceeds one year they are financial fixedassets, and if it is less than one year they are short-term investments.Financial investments comprising shares are either financial assetsmeasured at fair value in the income statement or available-for-salefinancial assets.Interest-bearing securities acquired to be held until maturity areclassified as held-to-maturity financial assets and are measured at amortizedcost. Interest-bearing securities, not acquired to be held untilmaturity, are classified as “available-for-sale” financial assets. Whenfinancial assets are measured at fair value in the income statement, anychanges in value are recognized in net finance income/expense.Hedge accountingNet Entertainment does not regularly hedge the risk exposure in termsof exchange rate fluctuations from future cash flows with financial instruments.By way of exception, hedging can occur for identified flows,which was carried out in 2010. No currency forward contracts exist atthe end of each fiscal year.All existing derivatives are recognised at fair value in the balancesheets. For derivative instruments qualifying as cash flow hedge, the effectiveportion of the changes in the fair value is recognised in separateequity categories until such time that the hedged item is recognised inthe income statement. For derivative instruments that do not meet thecriteria for hedge accounting, and for ineffective portions of derivativesqualifying for hedge accounting, changes in fair value are recognised inthe income statement as other interest income/expenses.TaxesTotal tax expense consists of current tax and deferred tax. Current tax istax (paid or received) that relates to the current year. This also includesadjustment of current tax attributable to prior periods.Income tax liabilities and receivables are valued at their nominalamount according to tax regulations and tax rates that have been approvedor announced and which are likely to be adopted. For items reportedin the income statement, related tax effects are also reported inthe income statement.Tax effects of items recognized via total income against equity or directlyagainst equity, are recognized against other total income or against equity.Deferred tax is calculated using the balance sheet method based ontemporary differences arising between the reported value and tax valueof the assets and liabilities, and applying the tax rates and regulationsapproved or announced at the balance sheet date and which are expectedto apply when the deferred tax receivable concerned is realised or thedeferred tax liability is settled. Temporary differences are not consideredfor goodwill related to consolidation or in differences attributable toshares in subsidiaries and associated companies that are not expectedto be taxed within the foreseeable future. Untaxed reserves includingdeferred tax liabilities are reported in legal entities. Deferred tax assetsrelating to deductible temporary differences and loss carryforwards areonly reported to the extent that it will be possible to utilise them in thefuture and that they will result in lower future tax payments.LeasesLeases are classified either as finance or operating leases in the consolidatedincome statement. Leasing of fixed assets where the Group isessentially exposed to the same risks and rewards as in direct ownershipis classified as finance leasing. The leased asset is recognised in fixedassets and the corresponding rental liability falls under interest-bearingliabilities. Leasing of assets where the lessor essentially remains theowner of the asset is classified as operating leasing and the leasingcharges (after deduction of any incentive from the lessor) are expensedon a straight-line basis over the leasing period. Details of operatingleases and rental agreements are shown in note 22.DividendsDividends are recognised as a liability in the period in which they areapproved by the Annual General Meeting.Employee benefitsPension costs and pension commitmentsThe Group has various pension plans in different countries. The pensionplans are normally financed by payments from the relevant Groupcompanies and in some cases from employees. As all pension plans aredefined-contribution the Group has no legal or informal obligations oncethe contributions have been paid. The Group’s outgoing payments fordefined-contribution pension plans are reported as an expense duringthe period in which the employees performed the services to which thecontribution relates.Remuneration after termination of employmentThe Group has no obligations to employees after they have retired orfinished in their posts.Termination benefitsCompensation is paid when an employee’s job is terminated by Net Entertainmentbefore the normal retiring date or when an employee voluntarilyaccepts severance pay. The Group recognises severance pay whenit is demonstrably committed to either terminating the employment ofemployees in accordance with a detailed formal plan without the possibilityof retraction, or providing termination benefits as a result of an offerwhich is made to encourage voluntary departure.Bonus plansThe Group recognises a liability and an expense for bonus based on variousqualitative and quantitative standards. The Group provides a provisionfor bonuses if there is a legal obligation or an informal obligation owingto previous practice.ProvisionsA provision is recognized in the balance sheet when the Group has apresent obligation (legal or informal) as a result of a past event and anoutflow of resources will probably be required to settle the obligationand a reliable estimate of the amount can be made. In a situation wherethe effect of when the payment takes place is important, provisions aremeasured by discounting expected future cash flows at an interest ratebefore tax, so that it reflects the present market value of the expenditurerequired to settle the amount and, if applicable, the risks associated withthe liability. A restructuring provision is recognised when the Group hasdefined a detailed, formal restructuring plan and the restructuring haseither commenced or has been officially approved. No provision is madefor future operating expenses.Contingent liabilitiesA contingent liability is recognised when there is a possible obligationarising from past events and its existence is confirmed only by the occurrenceor non-occurrence of one or more uncertain future events, or whenthere is an obligation which is not reported as a liability or a provisiondue to the fact that it is not probable that an outflow of resources will berequired to settle the obligation.PARENT COMPANY ACCOUNTING PRINCIPLESThe Parent Company complies with the same accounting principles asthe Group with the exception of that which is stated below.Interests in subsidiaries are reported at acquisition value with deductionsfor possible depreciation. Acquisition-related expenses for the subsidiaries,which are expensed in the consolidated financial statements,are included as part of the acquisition value for shares in subsidiaries.Shareholder contributions are recognized directly in the equity of therecipient Company and capitalised in the contributor’s shares and participatinginterests. These assets are subsequently subject to impairmenttesting. Group contributions made or received for the purpose of minimizingthe Group’s total tax are recognised directly as financial incomeafter deduction for their current tax effect.Dividends from subsidiaries are recognised when the right to receivedividends is considered to be reliable.The Parent Company recognises the deferred tax liability on untaxedNet EntertainmentNet Entertainment56 Annual Report 2011Annual Report 2011 57

notesnotesreserves as part of the untaxed reserves because of the connection betweenaccounting and taxation.The amendments in RFR 2 Accounting for legal entities, which hascome into effect and applies to the fiscal year 2011, has meant that groupcontribution is no longer reported against equity. A Group contributionwhich the Parent Company obtains from a subsidiary is reported in accordancewith the same principles as normal dividend from subsidiariesand is reported as financial income. Group contributions from the ParentCompany to subsidiaries is reported in the income statement as afinancial item.The amendments in RFR 2 regarding group contribution and otheramendments in RFR 2 has not had any significant effect on the ParentCompany’s financial reports.KEY ESTIMATES AND ASSUMPTIONSThe Group makes estimates and assumptions about the future. Theseestimates are used when preparing the financial reports. By definition,these predictions rarely match the actual results. They are regularlyevaluated and are based on historical experience and other factors, includingexpectations of future events that are deemed reasonable in thecircumstances.TaxesThe Group’s tax expense is primarily affected by the distribution of profitbetween Sweden and the countries in which the Group conducts operationsand tax laws in each respective country. Extensive assessments arerequired in order to establish the provisions for income tax. There aremany transactions and calculations where the final tax is uncertain at thetime when the transactions and calculations are taking place. The Companyhas with legal experts assessed how tax rules affect the businessto ensure a correct tax situation. This also applies to indirect taxes. TheCompany reports and pays tax authorities the tax amounts the Companydeem to be correct. However, these amounts may be insufficient if taxauthorities make more restrictive interpretations of tax regulations thanthe Company has done and deems as correct.Impairment testsEvery year, the Group’s assets are tested to determine if any impairmenthas occurred in accordance with IAS 36. The Group has investedconsiderable amounts in the development of gaming platforms and theircarrying amounts are compared to the present value estimated fromexpected future discounted cash flows.Development expenses are recognised in the balance sheet at cost,less deductions for accumulated amortisation and impairment losses.Regular assessments are made of the projects’ income-generating capacityin order to identify any impairment requirements.Note 3REVENUESGROUP PARENT COMPANY2011 2010 2011 2010– License revenues,royalties 426,838 368,170 18,697 15,592– Consulting revenues - - 267,992 231,297– Invoiced expenses - - 20,934 1,865Total 426,838 368,170 307,623 248,754Note 4Segment reportingThe corporate management has identified the CEO as the chief operatingdecision maker.Segments are defined as it can generate revenue and incur expenses.Defined segments within the Group are used for follow-up purposes tomake strategic decisions. In its reporting to the chief operating decisionmaker, the Group has identified one reportable segment. The segmentthat has been identified is the system for casino games. The CEO assessesthe business performance based on the operating segment.Geographically, Net Entertainment’s customers (gaming operators, bettingcompanies) offer gaming to their customers (players) in many differentcountries. The domicile of Net Entertainment’s direct customers’(websites) is determined by reasons completely different to proximity tothe local market, for instance appropriate gaming legislation or otherreasons. The advantage of the Internet is that it is a global, cross-borderform of distribution, where gaming site owners can be domiciled anywherein the world and still serve many local markets around the world.Net Entertainment Group operations are spread geographically for legalreasons. The geographical information below regarding revenues andassets have been distributed based on where the Group’s customers havetheir headquarters and where the Group has its assets.GEOGRAPHICAL BREAKDOWN2011 2010RevenueSweden - -Malta 80% 82%Other Countries 20% 18%Fixed AssetsSweden 15% 18%Malta 79% 76%Alderney 6% 6%The distribution per customer is presented to give a picture of the dependencyof specific customers.customers2011 2010Customer I 20% 24%Customer II 13% 15%Customer III 9% 13%Note 5other revenuesGROUP PARENT COMPANY2011 2010 2011 2010– Exchange differences,operations 763 - 489 -– Other 17 110 17 109Total 780 110 506 109NotE 6EMPLOYEE BENEFITSAVERAGE NUMBER OF EMPLOYEESAveragenumber ofemployees2011 2010Of whichmenAveragenumber ofemployeesOf whichmenSweden 198 76% 139 79%Malta 22 83% 13 74%Group total 220 77% 152 78%REMUNERATION TO SENIOR EXECUTIVES2011 2010Members of the Board, currentVigo Carlund, Chairman of the Board 440 220Fredrik Erbing 253 270Niclas Eriksson 220 220Mikael Gottschlich 220 220Peter Hamberg 220 220Pontus Lindwall 147 -Members of the Board, previousRolf Blom, former Chairman of the Board 200 654Summa 1,700 1,804The table shows the remuneration expensed in each fiscal year.SALARIES AND SOCIAL SECURITY EXPENSES2011 2010SalariesSocial securityexpenses(of whichpension costs)SalariesSocial securityexpenses(of whichpension costs)Board of Directorsand the CEO 6,018 3,406 6,437 2,981(1,188) (1,191)Other employees Sweden 101,603 45,036 68,360 29,336(11,458) (8,682)Total Parent Company 107,621 48,442 74,797 32,317(12,646) (9,873)Other employees Malta 11,997 459 8,740 715(83) (242)Total Group 119,618 48,901 83,537 33,032(12,729) (10,115)Presented salaries and social security expenses represents amounts expensedas well as capitalized as development costs.Number and percentage of women in executive positions at year–end2011 2010No. ofmenNo. ofwomen WomenNo. ofmenNo. ofwomen WomenBoard of Directors 6 - 0% 6 - 0%Other senior executives 6 2 33% 5 - 0%Total Group Board of Directorsand senior executives 12 2 17% 11 - 0%REMUNERATION TO THE BOARD OF DIRECTORSRemuneration to the Board of Directors are approved by the Annual GeneralMeeting. At the Annual General Meeting April 13, 2011 it was resolved,for the period up until the end of the next Annual General Meeting2012, that remuneration would be paid of SEK 1,700 thousand of whichSEK 550 thousand to the Chairman of the Board and SEK 220 thousand toeach Board member and an addition of SEK 50 thousand to the Chairmanof the Audit committee.REMUNERATION TO SENIOR EXECUTIVESDuring 2011, the remuneration to the CEO amounted to SEK 4,318 (4,633)thousand, of which SEK 313 (1,570) thousand was variable compensation,and pension costs of SEK 1,188 (1,191) thousand. Other benefits, such ashealth care insurance amounted to SEK 2 (7) thousand. Accrued costsrelating to the departure of the former CEO at the end of 2011, amountedto SEK 3,985 thousand including social security contribution.The notice period for termination of employment is six months if initiatedby the CEO and twelve months if initiated by the Company.Remuneration to other senior executives during 2011 amounted toSEK 7,823 (2,698) thousand, of which SEK 637 (344) thousand was variablecompensation and pension costs of SEK 1,396 (668) thousand. Seniorexecutives consisted of 11 (6) persons during 2011, of which severalonly for a portion of the year.The notice period for other senior executives varies between 3–6months and is mutual. In one case, severance pay corresponding to anadditional two months’ salary is applicable which is deductible againstsalary from new employment. Other benefits, such as health care insurance,amounted to SEK 16 (7) thousand.Note 7EARNINGS FROM SHARES IN SUBSIDIARIESparent company2011 2010Anticipated dividend from subsidiaries 68,870 68,506Total 68,870 68,506Note 8FINANCIAL INCOMEGROUP PARENT COMPANY2011 2010 2011 2010Interest income 422 167 123 116Exchange rate differences 6,218 1,103 5,369 402Total 6,640 1,270 5,492 518Note 9FINANCIAL EXPENSESGROUP PARENT COMPANY2011 2010 2011 2010Interest expense 166 29 166 24Exchange rate differences 7,193 6,213 5,695 4,133Total 7,359 6,242 5,861 4,157Net EntertainmentNet Entertainment58 Annual Report 2011Annual Report 2011 59

notesnotesNote 10INCOME TAXNotE 12INTANGIBLE ASSETSNotE 13TANGIBLE FIXED ASSETSGROUP PARENT COMPANY2011 2010 2011 2010CURRENT TAXSweden 6,225 5,359 6,225 5,359Outside Sweden 9,431 4,465 - -Total current tax 15,656 9,824 6,225 5,359DEFERRED TAXOutside Sweden -2,276 1,148 - -Total deferred tax -2,276 1,148 - -Total tax expense 13,380 10,972 6,225 5,359GROUP PARENT COMPANY2011 2010 2011 2010Difference between actual tax expense and taxexpense based on present tax rateRecognised profit before tax 128,994 131,439 91,056 87,294Tax according to present tax rate 26.3% 33,925 34,568 23,948 22,958Difference in tax rates in foreign operations-22,592 -23,926 - -Tax effect fromnon-taxable items - - -18,113 -18,017Tax attributable to prior years -6 1 -6 90Tax effect fromnon-deductible items 2,053 328 396 328Recognised tax expense 13,380 10,972 6,225 5,359Specification of deferred tax expenseTax on temporarydifferences -2,276 1,148 - --2,276 1,148 - -Note 11EARNINGS PER SHAREGROUP PARENT COMPANY2011 2010 2011 2010Profit after tax attributable to ParentCompany shareholders (SEKthousand) 115,614 120,467 84,831 81,935No. of shares 39,554 39,554 39,554 39,554Earnings per share (SEK) 2.92 3.05 2.14 2.07Earnings per share is calculated based on the average number of shares.The number of shares have been calculated in accordance with IAS 33Earnings per share.At the end of 2011 the total outstanding share option rights amountedto 939,325 corresponding to the same number of shares. The share optionrights have been issued as part of two long-term incentive programsin accordance with the resolutions on the Annual General Meetings onApril 29, 2009 and April 13, 2011. The potential shares the issue of theshare option rights are considered, when calculating the number of sharesand earnings per share after dilution, to the extent they affect dilutionin accordance with IAS 33 Earnings per share. As the share price on theclosing day is below the strike price of SEK 71.70 and 70.20 the potentialshares have no dilutive effect and are therefore not included in the numberof shares after dilution.GroupGamingproducts,systems andplatformsGamingcontractsandlicensesTotal2010Opening acquisition value 89,878 1,615 147 91,640Capitalized developmentexpenses for the year 67,645 - - 67,645Translation difference –12,364 - - –12,364Closing accumulatedacquisition value 145,159 1,615 147 146,921Opening amortization 42,146 1,615 147 43,908Amortization during the year 19,477 - - 19,477Translation difference –3,485 - - –3,485Closing accumulated amortization 58,138 1,615 147 59,900Closing residual valueaccording to plan Dec 31, 2010 87,021 - - 87,0212011Opening acquisition value 145,159 1,615 147 146,921Capitalized developmentexpenses for the year 77,539 - - 77,539Translation difference -1,531 - - -1,531Closing accumulatedacquisition value 221,167 1,615 147 222,929Opening amortization 58,138 1,615 147 59,900Amortization during the year 30,401 - - 30,401Translation difference -514 - - -514Closing accumulated amortization 88,025 1,615 147 89,787Closing residual valueaccording to plan Dec 31, 2011 133,142 - - 133,142Parent companyGamingproducts,systems andplatformsGamingcontractsandlicensesTrademarksTrademarksTotal2010Opening acquisition value 24,433 1,615 147 26,195Closing accumulated acquisitionvalue 24,433 1,615 147 26,195Opening amortization 23,447 1,615 147 25,209Amortization during the year 986 - - 986Closing accumulated amortization 24,433 1,615 147 26,195Closing residual valueaccording to plan Dec 31, 2010 - - - -2011Opening acquisition value 24,433 1,615 147 26,195Closing accumulatedacquisition value 24,433 1,615 147 26,195Opening amortization 24,433 1,615 147 26,195Amortization during the year - - - -Closing accumulated amortization 24,433 1,615 147 26,195Closing residual valueaccording to plan Dec 31, 2011 - - - -GROUP PARENT COMPANY2011 2010 2011 2010EQUIPMENT AND FITTINGSOpening acquisition value 63,165 42,240 32,311 24,687Acquisitions for the year 13,648 24,149 5,942 7,624Translation differences -272 -3,224 - -Closing accumulatedacquisition value 76,541 63,165 38,253 32,311Opening depreciation 24,549 15,024 15,030 8,820Depreciation during the year 13,908 10,582 7,507 6,210Translation differences -60 -1,057 - -Closing accumulated depreciation 38,397 24,549 22,537 15,030Closing residual valueaccording to plan 38,145 38,616 15,716 17,281NotE 14PARTICIPATING INTERESTS IN GROUP COMPANIESGROUP PARENT COMPANY2011 2010 2011 2010Leasehold improvementsOpening acquisition value 6,884 4,856 6,884 4,856Acquisitions for the year 7,861 2,028 7,861 2,028Closing accumulatedacquisition value 14,745 6,884 14,745 6,884Opening depreciation 1,029 130 1,029 130Depreciation during the year 1,449 899 1,449 899Closing accumulated depreciation 2,478 1,029 2,478 1,029Closing residual valueaccording to plan 12,267 5,855 12,267 5,855Parent Company Corp. Reg. No. Reg. HQ Share % No. of sharesCarryingamount 2011Carryingamount 2010NameMobile Entertainment ME AB 556185-1758 Stockholm 100% 1,000 89 89– Net Entertainment Malta Holding Ltd. Malta 0.01% 1– Net Entertainment Malta Ltd. Malta 0.01% 1– Net Entertainment Malta Services Ltd. Malta 0.03% 1– Net Entertainment International Ltd Malta 0.08% 1– Merit Media Marketing Ltd Malta 0.08% 1Net Entertainment Malta Holding Ltd. C 37769 Malta 99.99% 3,999 423 423– Net Entertainment Malta Ltd. Malta 99.99% 3,999– Net Entertainment Malta Services Ltd. Malta 99.97% 2,999– Merit Media Marketing Ltd Malta 99.92% 1,199– Net Entertainment International Ltd Malta 99.92% 1,199– NE Services Ltd Gibraltar 100% 2,000– Net Entertainment Alderney Ltd Alderney 100% 1,000Summa 512 512parent company2011 2010Changes in participations in Group companiesOpening acquisition value 512 512Closing carrying amount 512 512Net EntertainmentNet Entertainment60 Annual Report 2011Annual Report 2011 61

notesnotesNotE 15ACCOUNTS RECEIVABLENotE 19SHAREHOLDERS’ EQUITYNotE 21ACCRUED EXPENSES AND DEFERRED INCOMENotE 24RELATED PARTY TRANSACTIONSThe carrying amounts for accounts receivable comply with the fair valuesand corresponds to nominal amounts. No receivables have been placedas security for liabilities or contingent liabilities.On December 31, 2011, accounts receivable due totaled SEK 2,991(4,463) thousand with no indication of impairment identified. This appliesto a number of independent customers that have not previously had paymentdifficulties. Acknowledged bad debts during the period and an ageanalysis of consolidated accounts receivable are presented below. Theanalysis of bad debt only contains receivables in which no impairmenthave been identified. Credit risks are detailed in note 26.GROUP PARENT COMPANY2011 2010 2011 2010Per January 1 2,629 - - -Provision for bad debt 401 2,629 - -Customer losses in the incomestatement -2,658 - - -Per December 31 372 2,629 - -Age analysis accounts receivable0–30 days 3,669 3,309 17 230–60 days 3 2,164 3 -Older than 60 days 8 - 8 -Total 3,680 5,473 28 2NotE 16PREPAID EXPENSES AND ACCRUED INCOMEGROUP PARENT COMPANY2011 2010 2011 2010Accrued license/royalty income 41,218 34,928 - -Prepaid IT-services 5,556 5,633 825 -Prepaid rent 3,976 2,234 3,654 1,993Prepaid license fees 1,133 1,126 283 749Other prepaid expenses 2,905 3,190 1,818 1,020Total 54,788 47,111 6,580 3,762NotE 17OTHER RECEIVABLESGROUP PARENT COMPANY2011 2010 2011 2010VAT 7,659 5,266 7,659 5,181Receivables from operators 29,995 23,266 - -Other 819 819 812 799Receivables from Group companies- - 180,224 235,068Total 38,473 29,351 188,695 241,048NotE 18CASH AND CASH EQUIVALENTSGROUP PARENT COMPANY2011 2010 2011 2010Cash and bank balances 74,234 47,034 25,050 33,760Total 74,234 47,034 25,050 33,760Share capital distributionNo. ofshares2011 2010SharecapitalNo. ofsharesSharecapitalShares, series A(10 votes per share) 5,610,000 168 5,610,000 168Shares, series B(1 vote per share) 33,943,716 1,023 33,943,716 1,023Total number of shares 39,553,716 1,191 39,553,716 1,191Quotient value per share SEK 0.0301GROUPOther capital contributedThis pertains to shareholders’ equity contributed by the owners, Groupcontributions and premiums for issued share option rights.RESERVESTranslation reserveThe translation reserve comprises all exchange-rate differences thatarise from the translation of financial statements from foreign operationsthat have prepared their financial statements in a currency otherthan the currency in which the consolidated financial statements arepresented. At year end, the accumulated translation differences wereSEK -7,469 (-6,558) thousand.Specification reservesTranslation differenceOpening balance Jan 1, 2010 8,975Translation differences for the year -15,532Closing balance Dec 31, 2010 -6,558Translation differences for the year -912Closing balance Dec 31, 2011 -7,469RETAINED EARNINGS INCL. PROFIT FOR THE YEARRetained earnings including profit for the year comprise earnings in theParent Company and its subsidiaries, as well as the portion of untaxedreserves attributable to shareholders’ equity.PROPOSED/COMPLETED TRANSFER TO SHAREHOLDERSThe Board of Directors proposes that no dividend is paid for the fiscalyear 2011.The Board of Directors proposes to the Annual General Meeting to allocateSEK 79.1 (79.1) million to shareholders, which corresponds to SEK2.00 (2.00) per share. The Board of Directors intends to propose that thetransfer be handled through a share redemption program.NotE 20OTHER CURRENT LIABILITIESGROUP PARENT COMPANY2011 2010 2011 2010Other current liabilitiesProcessed Jack-Pot 115,399 46,409 - -Employee income tax withheld 3,311 2,886 3,177 2,501Other 0 550 - -Liabilities to Groupcompanies - - 69,181 149,417Total 118,710 49,845 72,358 151,918GROUP PARENT COMPANY2011 2010 2011 2010Accrued wages and salaries 8,153 4,893 7,131 3,732Vacation pay liability 7,555 6,243 7,187 6,054Social security contributions 5,200 4,105 5,200 4,105Payroll tax 2,851 1,826 2,851 1,826Other 9,956 9,392 7,044 7,952Total 33,715 26,459 29,413 23,669NotE 22LEASINGLeasing expenses for vehicles, rent of premises and other rented equipmentas well as those which fall under the heading operational leasingamounted to:GROUP PARENT COMPANY2011 2010 2011 2010Expensed lease payments andrental charges 12,295 8,940 10,444 8,003Total 12,295 8,940 10,444 8,003Future minimum charges for non-cancellable operating leases and rentalagreements:GROUPPARENT COMPANYWithin one year 14,439 13,189Two to five years 52,497 51,683After five years - -Total 66,936 64,872NotE 23AUDITORS’ FEESDeloitte AB were elected auditors by the 2008 Annual General Meeting fora period of four years. Deloitte AB are auditors for Net Entertainment NEAB and the Swedish subsidiary. In addition to the auditing assignment,Net Entertainment has also used Deloitte AB for consultation on taxation,VAT, accounting matters and analyses.GROUP PARENT COMPANY2011 2010 2011 2010DeloitteAuditing assignments 793 909 486 559Other assignments than theauditing assignment 62 83 62 83Tax consultations 219 133 20 20Other service 38 27 38 27Total 1,112 1,152 606 689parent company2011 2010Purchase of services from related partiesPurchase from subsidiaries - -– share of total operating expenses - -Sale of services to related partiesSales to subsidiaries 307,623 248,754– share of total revenue 99.99% 99.96%Liability to related partiesLiability to subsidiaries 69,181 149,417Receivable from related partiesReceivable from subsidiaries 180,224 235,068The Parent Company is related to its subsidiaries. Sold services pertainmainly to consulting services, license fees, hosting and forward invoicedexpenses. Related party transactions are priced on the basis of fair marketconditions.The foreign subsidiaries are related to WH Law, as the Board Memberin these subsidiaries, Dr. Olga Finkel, is also Managing Partner atWH Law. Remuneration to WH Law has amounted to SEK 1,102 (2,040)thousand.NotE 25FINANCIAL RISKSThe Group’s financial activities are pursued on the basis of a low-risk financialpolicy as established by the Board of Directors. Financial activities andthe management of financial risks are coordinated via the Parent CompanyNet Entertainment NE AB, which is also responsible for the investmentof excess liquidity. According to the finance policy placementof cash and cash equivalents may take place with a maturity of up to sixmonths with no more than 25 percent of the excess liquidity bound onlonger terms than three months.The wholly owned operating subsidiaries are themselves responsible formanaging their financial risks within the framework set by the Board ofDirectors and following coordination with the Parent Company.MARKET RISKGroup earnings are exposed to changes in exchange rates since mostsales are in Euros, and expenses are in SEK (transaction exposure). Earningsare also affected by exchange rate fluctuations when foreign subsidiaries’earnings are translated to SEK (translation exposure). Moreover,exchange rate movements affect Group equity when assets and liabilitiesin foreign subsidiaries are translated to SEK (translation exposure). Atthe present time there is no hedging of equity in foreign subsidiaries.If the SEK had weakened/strengthened by 10 percent in relation to theEuro with all other variables constant, earnings for the year as of December31, 2011, would have been SEK 33,3 (29,6) million higher/lower.Of the Group’s total costs 2011, 77 (85) percent is in SEK.Net Entertainment does not regularly hedge the risk exposure in termsof exchange rate fluctuations from future cash flows with financial instruments.By way of exception, hedging can occur for identified flows.INTEREST RATE RISKSNet Entertainment is largely a debt-free Company, which means that theinterest rate risk to which Group revenue and cash flows are exposed,is low. Changes in the interest rate position affect the Group’s return oncash and cash equivalents. The risk in these changes is deemed immaterial.Net EntertainmentNet Entertainment62 Annual Report 2011Annual Report 2011 63

notesCREDIT RISKThe Group does not have any significant concentration of credit risks.The Group has set guidelines for safeguarding the sale of services tocustomers with a suitable credit background. No credit limits were exceededduring the reporting period and management does not expect anymaterial losses resulting from failed payments from these other parties.Through short lead time and credit term, which gives a short customercredit time, the credit risk is further reduced.Maximum credit risk exposure corresponds to the reported value offinancial assets.LIQUIDITY RISKLiquidity risk is managed by means of the Group holding sufficient cashand cash equivalents in order to finance the operation. Managementalso monitors rolling forecasts for the Group’s liquidity reserve, whichconsist of cash and cash equivalents (note 18) on the basis of expectedcash flows.Group financial liabilities essentially consist of accounts payable,where the contractual expiry date falls within 12 months. Accounts payableusually have a credit of 30 daysCAPITAL RISK MANAGEMENTThe aim of Net Entertainment with regard to the capital structure is tosecure the Group’s ability to continue its operations, so that it can continueto generate return for its shareholders and maintain an optimumcapital structure in order to keep the capital costs down.In order to maintain or adjust the capital structure, Net Entertainmentcan change the allocation paid to the shareholders, repay capital to theshareholders, issue new shares or sell assets to reduce liabilities.Net Entertainment assesses the capital on the basis of net debt/equityratio and quick ratio.The net debt/equity ratio (multiple) at the end of the reporting periodamounted to –0.3 (–0.2) whilst the quick ratio amounted to 127 (164)percent.The Board of Directors and the CEO certifies that the consolidated financial statements and annual report have beenprepared in accordance with International Financial Reporting Standards (IFRS), as approved by the European Union, and generallyaccepted accounting principles in Sweden and gives a true and fair view of the Group’s financial position and results of operations andthat the management report for the Company and for the Group gives a fair review of the development and performance of the business,financial position and results of operations and describes the material risks and uncertainties that the companies in the Group face.Vigo CarlundChairman of the Board of DirectorsNiclas ErikssonMember of the Board of DirectorsStockholm March 15, 2012Pontus LindwallMember of the Board of DirectorsMikael GottschlichMember of the Board of DirectorsPer ErikssonPresident and CEOOur audit report was submitted on March 15, 2012Deloitte ABFredrik ErbingMember of the Board of DirectorsPeter HambergMember of the Board of DirectorsNotE 26Events after the end of the fiscal yearNet Entertainment signed agreements with several customers for establishmentin Denmark which has regulated online gaming. On January 12012 Net Entertainment launched these customers on the local Danishmarket.Therése KjellbergAuthorized Public AccountantNet EntertainmentNet Entertainment64 Annual Report 2011Annual Report 2011 65

Audit ReportTo the annual meeting of the shareholders of Net Entertainment NE AB (publ)Corporate identity number 556532-6443Report on the annual accounts and consolidated accountsWe have audited the annual accounts and consolidated accounts of NetEntertainment NE AB (publ) for the financial year 2011-01-01 – 2011-12-31. The annual accounts and consolidated accounts of the Company areincluded in the printed version of this document on pages 26-65.Responsibilities of the Board of Directors and the Managing Directorfor the annual accounts and consolidated accountsThe Board of Directors and the Managing Director are responsible for thepreparation and fair presentation of these annual accounts and consolidatedaccounts in accordance with International Financial Reporting Standards, asadopted by the EU, and the Annual Accounts Act, and for such internal controlas the Board of Directors and the Managing Director determine is necessaryto enable the preparation of annual accounts and consolidated accountsthat are free from material misstatement, whether due to fraud or error.Auditor’s responsibilityOur responsibility is to express an opinion on these annual accountsand consolidated accounts based on our audit. We conducted our auditin accordance with International Standards on Auditing and generallyaccepted auditing standards in Sweden. Those standards require thatwe comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether the annual accounts andconsolidated accounts are free from material misstatement.An audit involves performing procedures to obtain audit evidence aboutthe amounts and disclosures in the annual accounts and consolidatedaccounts. The procedures selected depend on the auditor’s judgement,including the assessment of the risks of material misstatement of theannual accounts and consolidated accounts, whether due to fraud or error.In making those risk assessments, the auditor considers internalcontrol relevant to the Company’s preparation and fair presentation ofthe annual accounts and consolidated accounts in order to design auditprocedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company’sinternal control. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of accounting estimatesmade by the Board of Directors and the Managing Director, aswell as evaluating the overall presentation of the annual accounts andconsolidated accounts.We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our audit opinion.OpinionsIn our opinion, the annual accounts have been prepared in accordancewith the Annual Accounts Act and present fairly, in all material respects,the financial position of the Parent Company as of 31 December 2011 andof its financial performance and its cash flows for the year then ended inaccordance with the Annual Accounts Act, and the consolidated accountshave been prepared in accordance with the Annual Accounts Act andStockholm 15 March 2012present fairly, in all material respects, the financial position of the Groupas of 31 December 2011 and of their financial performance and cashflows in accordance with International Financial Reporting Standards, asadopted by the EU, and the Annual Accounts Act. A corporate governancestatement has been prepared. The statutory administration report andthe corporate governance statement are consistent with the other partsof the annual accounts and consolidated accounts.We therefore recommend that the annual meeting of shareholdersadopt the income statement and balance sheet for the Parent Companyand the Group.Report on other legal and regulatory requirementsIn addition to our audit of the annual accounts and consolidated accounts,we have examined the proposed appropriations of the Company’s profit orloss and the administration of the Board of Directors and the ManagingDirector of Net Entertainment NE AB (publ) for the financial year 2011-01-01 – 2011-12-31.Responsibilities of the Board of Directors and the Managing DirectorThe Board of Directors is responsible for the proposal for appropriationsof the Company’s profit or loss, and the Board of Directors and the ManagingDirector are responsible for administration under the Companies Act.Auditor’s responsibilityOur responsibility is to express an opinion with reasonable assurance onthe proposed appropriations of the Company’s profit or loss and on theadministration based on our audit. We conducted the audit in accordancewith generally accepted auditing standards in Sweden.As a basis for our opinion on the Board of Directors’ proposed appropriationsof the Company’s profit or loss, we examined the Board of Directors’ reasonedstatement and a selection of supporting evidence in order to be ableto assess whether the proposal is in accordance with the Companies Act.As a basis for our opinion concerning discharge from liability, in additionto our audit of the annual accounts and consolidated accounts, weexamined significant decisions, actions taken and circumstances of theCompany in order to determine whether any member of the Board ofDirectors or the Managing Director is liable to the Company. We also examinedwhether any member of the Board of Directors or the ManagingDirector has, in any other way, acted in contravention of the CompaniesAct, the Annual Accounts Act or the Articles of Association.We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.OpinionsWe recommend to the annual meeting of shareholders that the profitbe appropriated in accordance with the proposal in the statutory administrationreport and that the members of the Board of Directors andthe Managing Director be discharged from liability for the financial year.Annual General Meetingand other informationANNUAL GENERAL MEETINGNet Entertainment NE AB will hold its Annual General Meeting onWednesday 18 April 2012 at 15.00 CET at Spårvagnshallarna, Birger Jarlsgatan57A, Stockholm, Sweden. Notification of the Annual General Meetingis published on Net Entertainment’s website www.netent.com/agm.Right of attendance and registrationShareholders wishing to attend the Annual General Meeting must berecorded in the register of shareholders maintained by Euroclear SwedenAB on Thursday April 12, 2012, and also notify Net Entertainment of theirintention to attend no later than Thursday April 12, 2012.Shareholders must send written notice of attendance with their name,personal/corporate identity number, address, email address, telephonenumber and number of shares to Net Entertainment NE AB, Attn:AGM, Luntmakargatan 18, 3tr, SE111 37,Stockholm, Sweden, by fax at+46 8-57 85 45 10, by email to agm@netent.com or on Net Entertainment’swebsite at www.netent.com/agm.Share registrationShareholders whose shares are registered in the name of a nomineemust temporarily register their shares in their own names to be entitledto participate in the Meeting. Such registration must be affected no laterthan 12 April 2012. This means that shareholders must notify their nomineewell in advance of that date.OTHER INFORMATIONNet Entertainment intends to distribute financial reports and statementson the dates below:Annual General Meeting 2012 April 18, 2012Interim report: January–March 2012 April 26, 2012Interim report: April–June 2012 July 13, 2012Interim report: July–September 2012 October 25, 2012Earnings report 2012 and quarterlyreport for the fourth quarterFebruary 7, 2013Financial reports, press releases and other information are available fromthe date of publication on Net Entertainment’s website www.netent.com.Net Entertainment’s principal method of distributing financial reportsis by electronic means. Financial reports, press releases and otherinformation are available for viewing on Net Entertainment’s website(www.netent.com) where it is also possible to subscribe to reports andpress releases via email. Financial reports are available on the websitefrom the date of publication. Printed copies of the Annual Report are sentby regular post upon request. For further information, please contact PerEriksson, CEO, or Maria Hedengren, CFO, on +46 8-57 85 45 00, or emailinvestor@netent.com.Therése KjellbergAuthorized Public AccountantNet EntertainmentNet Entertainment66 Annual Report 2011Annual Report 2011 67

addressesParent Company and DevelopmentNet Entertainment NE ABLuntmakargatan 18SE-111 37 STOCKHOLMSWEDENPhone: +46 8 578 54 500Fax: +46 8 578 54 510E-mail: info@netent.com or ir@netent.comGlobal Market OperationsNet Entertainment Malta Ltd.The Marina Business CentreTa’Xbiex XBX 1120MALTAPhone: +356 21 31 16 21Fax: +356 227 681 00E-mail: sales@netent.com68Net EntertainmentAnnual Report 2011The Annual Report 2011 was produced by Net Entertainment in collaboration with 3BL Stockholm.Printing: Ineko AB, Stockholm.

Net Entertainment NE AB (publ)Corporate Identity Number 556532-6443Luntmakargatan 18SE-111 37 Stockholm, Swedenwww.netent.cominfo@netent.com