Highlights of the Consolidated Financial Statements of Flaga Group hf Annual Results 2006 " Revenue was $9.7m in Q4, an increase of 8% compared to same period last year. " Revenue was $32.5m for the year, a decrease of 7% compared to same period last year. " EBITDA was $827k in Q4. " EBITDA was $1m for the year. This includes $376k of restructuring costs that have been classified as operating expenses in accordance with accounting standards. " Net income was $661k in Q4. " Net income was negative of $690k for the year. Key figures from the consolidated accounts: STATEMENT OF OPERATIONS Jan 1,- Jan 1,- USD '000 Q4 Q4 Dec. 31, Dec. 31, 2006 2005 2006 2005 Sales 9.659 8.961 32.474 34.747 Cost of goods sold 4.149 3.425 13.168 13.536 Gross profit 5.509 5.536 19.307 21.212 Operating expenses Sales, general and admin expenses 4.467 4.381 17.062 16.675 Research and development 564 567 2.363 3.718 Restructuring cost 0 2.059 267 2.059 Total operating expenses 5.031 7.007 19.692 22.453 Operating profit (loss) 478 -1.471 -386 -1.241 Net financial expenses -158 -261 -1.071 -1.152 Operating profit (loss) before taxes 320 -1.732 -1.456 -2.393 Taxes 341 566 766 948 Profit (loss) 661 -1.166 -690 -1.445 EBITDA before restructuring cost 1.073 1.268 2.727 EBITDA after restructuring costs 827 -986 1.001 668 BALANCE SHEET USD '000 Dec. 31, Dec 31, % 2006 2005 Change Fixed assets 44.975 45.495 -1,1% Current assets 17.149 16.259 5,5% Total assets 62.124 61.754 0,6% Equity 40.213 40.953 -1,8% Long-term debt 7.597 7.044 7,8% Current liabilities 14.314 13.757 4,0% Equity and total liabilities 62.124 61.754 0,6% KEY RATIOS 2006 2005 2004 2003 2002 Current ratio 1,20 1,18 1,59 2,75 0,65 Equity ratio 65% 66% 66% 68% 7% QUARTERLY STATEMENTS USD '000 Q4 Q3 Q2 Q1 Q4 2006 2006 2006 2006 2005 Sales 9.659 7.498 7.934 7.383 8.961 Cost of goods sold 4.149 3.066 3.222 2.731 3.425 Gross profit 5.509 4.432 4.713 4.652 5.536 Operating expenses Sales, general and admin exp. 4.467 3.968 4.361 4.266 4.381 Research and development 564 458 506 835 567 Restructuring cost 0 0 0 267 2.059 Total operating expenses 5.031 4.426 4.868 5.368 7.007 Operating profit (loss) 478 6 -155 -715 -1.471 Net financial income (expenses) -158 -109 -377 -427 -261 Operating profit (loss) bef. taxes 320 -103 -532 -1.142 -1.732 Taxes 341 -5 164 266 566 Profit (loss) 661 -107 -368 -877 -1.166 EBITDA before restructuring cost 827 316 0 -71 1.073 EBITDA after restructuring costs 827 316 196 -338 -986 Operations in Q4 2006 Revenue for the Flaga Group in Q4 2006 aggregated $9.7m, an increase of 8% compared to a strong Q4 2005. This represented a solid Q4 for the Embla Systems group that has just completed significant organizational changes. The Company continues to work on realignment of the Embla Systems distribution network with new distributors in India and Europe and ongoing discussions with other partners throughout the world. As discussed in prior earnings releases the Company believes that sales in this area have been down because it has taken longer than expected to realign the distributors with new training and support that is essential for long term success. The company has been focusing on correcting this and is beginning to see the results in stronger sales in these markets. The sleep services group continued to see growth in revenue in Q4 over prior years. The sleep services group continued to show solid profitability in Q4. EBITDA for Q4 2006 was positive $827k or 9% compared to EBITDA before restructuring cost $1.1m or 12% for Q4 2005. Operations in 2006 Embla went through a major restructuring in 2006. This was completed on time, within budget, and with the focus of moving the company "Closer to our Customers". The restructuring, which has touched every part of the organization, was initiated in 2005, substantially completed by the third quarter of 2006 and has positioned the organization to take full advantage of the growth in the sleep diagnostic business. The most visible change for the company in 2006 was the successful completion of our name change from Medcare to Embla. The company also opened two new offices in 2006, a new US Corporate head office in Denver, CO, and a new Tech Support/Software Development office in Ottawa, ON, Canada. In fact the company restructured and strengthened its sales and distribution organization worldwide. This has included increasing our direct sales team in Germany and enlarging the global technical service team. A key part of the sales outside the US market is done through relationship with distributors. The company has continued to build on these relationships throughout the world and initiated a far reaching training and educational program to support our distribution partners. 2006 represented another record year financially for SleepTech. The company received accreditation from the AASM for their clinical training and education programs making SleepTech one of only seventeen such programs in the United States. The company continues to invest in clinical education and training programs, technological enhancements and marketing resources towards creating a more flexible and cost efficient environment. Revenue for the year 2006 was $32.5m, compared to $34.7m over the same period in 2005, a decrease of $2.2m or 7%. The gross profit margin was 59% compared to 61% in the previous year, which is due to one-time write offs of inventory and parts as the product line was rationalized. EBITDA for the year 2006 was positive $1m after restructuring costs. EBITDA before restructuring cost and the cost related to staff overlap ($267 and $376k respectively) was a positive $1.6m in the year or 5%. In comparison EBITDA before restructuring cost was $2.7m or 8% for the same period previous year. The reduction is fully explained by the revenue shortfall, as expenses have been in line with budget and previous statements. Net loss after taxes was $690k for the year 2006 in comparison to a net loss after taxes of $1.4m for 2005. Balance Sheet Total assets at the end of 2006 were $62.1m, an increase of 369k from the beginning of the year. Deferred tax assets are capitalized and amounted to $4.2m at the end of 2006. Shareholders' equity was $39.8m at December 31, in comparison to $41m at the beginning of the year. Equity ratio was 64% in comparison to 66% at year-end 2005. Cash Flow Working capital provided by operating activities in the year was $1.4m compared to working capital of $545k the previous year. Future Prospects The business of sleep medicine continues to grow everywhere in the world, which is largely being driven by the reimbursement of the therapy equipment necessary to treat the disorders. The therapy business for sleep apnea alone is a multi billion dollar global business. As a result the Company is working with a number of potential partners to leverage the benefit of providing a joint diagnostic and therapy offering that will allow the Company to grow faster. The North American market continues to be the biggest single market and there the Company is focusing to take advantage of relationships with therapy companies and others who can expand the Company's business. European countries like Germany are growing quickly and, collectively, compare to the US in size and growth. Beyond Europe, the Company continues to expand relationships with distributors to take advantage of a growing sleep market in other parts of the world, especially Asia. In the US, SleepTech continues to have a solid contractual service platform with leading hospitals and sleep professionals. Globally, Embla has a strong market presence with distribution and direct sales networks in every significant sleep market. The sleep profession is still young and fragmented, but the Company recognizes the dynamic nature of the market and is making a collective effort to better utilize the potential for future global growth. The transition of the Company from the previous business model to the current global business model has better positioned the Company to exploit opportunities in the fast growing and profitable sleep market in the years to come. Despite the revenue shortfall, the Executive Management team of Flaga Group remains confident that the objectives of higher efficiency and sustainable market growth that drove the transition remain achievable and that the Company is on track to achieve long term prosperity. For further information, please contact: David Baker, CEO, tel: +1 480 236 4705 Rósa Steingrímsdóttir, CFO, tel: + 354 840 9040