Annual report 2 OO5 2OO6

Annual report 2 OO5 2OO6

CTT in brief CTT Systems AB is a Swedish technology company operating in the aviation industry. The company develops and markets humidity control systems for commercial aircraft. Customers include both aircraft manufacturers and airlines. The company has its headquarters in Nyköping, Sweden, and has been listed on the O-list of the Stockholm Stock Exchange since 1999. BUSINESS CONCEPT The company s business concept is to solve the two moisture problems currently encountered in commercial aircraft, i.e. preventing condensation between the cabin and the outer skin, and raising the cabin humidity level to enhance comfort and well-being for both crew and passengers. STRATEGY CTT s strategy is to consolidate its position as the leading player on the market through on-going development of products in the Dehumidification and Humidification product sector. Marketing communications will aim to emphasize the humidity-related problems that currently prevail in aircraft. CTT will take an active part in discussions surrounding health and comfort in the cabin. By entering into alliances with other subcontractors in the aviation industry, interesting and competitive system solutions shall be created for both manufacturers and airlines. The long-term goals in volume will be achieved by supplying aircraft manufacturers directly. VISION CTT s vision is that all airlines shall be able to offer the same level of comfort in the cabin as in a normal indoor climate, in terms of air humidity. FINANCIAL CALENDAR The printed annual report for 2005/2006 is distributed to all registered shareholders. Information is published regularly on www.ctt.se. Annual General Meeting: November 16, 2006 Interim report, July Sept: November 16, 2006 Interim report, July Dec: February 2007 Interim report, July March: May 2007 ANNUAL GENERAL MEETING The Annual General Meeting will be held at 5 pm on Thursday, November 16, 2006 at the company s premises, Brukslagarevägen 5, Nyköping, Sweden. Shareholders wishing to attend the Annual General Meeting must be registered in the VPC share register no later than November 3, 2006, and notify the company of their intended participation no later than Monday, November 13, 2006. In order to vote, shareholders whose shares are administered through a bank s trustee department or private fund administrator must temporarily re-register their shares in their own name. Registration must be completed no later than November 6, 2006. 2

The year in brief Table of Contents Boeing appoints CTT as a supplier for the Boeing 787 Dreamliner that will have the Zonal Drying System installed as standard equipment and offer humidifiers as an option for flight deck and crew rest compartments. Monarch orders the Zonal Drying System for its whole fleet of 27 aircraft. Jet Aviation orders the Cair system for an A320 VIP aircraft. First Cair installed for Air Mauritius. Net sales totalled SEK 23.7 million (SEK 12.8 million). Operating loss SEK -13.4 million (SEK -13.3 million) and cash flow SEK -5.9 million (SEK -18.1 million). Order intake rose to SEK 51 million (SEK 22 million). 60 50 40 30 20 10 MSEK 10 20 30 01 02 02 03 03 04 04 05 05-06 CTT in brief..............................2 The year in brief..........................3 Review by the President.....................4 OEM Market.............................7 The need for CTT s products..................8 Scientific study Now it s proven!.............12 Humidity control.........................14 Moisture management......................15 Market overview.........................16 Sales and marketing strategy................18 Customer and product overview...............19 Competition.............................20 Background, organisation, environment and quality.21 Risk and exposure analysis..................23 The CTT share...........................24 Administrative report......................26 Five-year summary........................31 Income statement.........................32 Balance sheet...........................33 Shareholders equity......................34 Cash flow statement.......................34 Accounting principles and notes...............35 Auditors report..........................44 Board of directors and auditors...............45 Senior executives.........................46 Order intake Net sales Loss Production: Byrån i Tranås Photo: Erik Hellquist, Bildmakarna and SAS Group Printing: NRS Tryckeri 2006 3

Message from the President The upturn in the aviation industry is having an effect on CTT. Order intake has soared and we have further consolidated our positions.thus can the financial year 2005-2006 be summarized.the most important success factor is the Zonal Drying System that is now establishing itself as a standard amongst an ever-increasing number of aircraft manufacturers. At the same time, humidification has been taken up on the agenda for real. Air Mauritius showed the way with the first installed Cair. For CTT s part, this means that an intensive development phase, in which personnel with great enthusiasm have borne a heavy burden, is now nearing its fulfilment. The aviation industry continues to develop positively. Growth measured in terms of RPK (Revenue Passenger Kilometres) witnessed strong growth during 2005 with an increase of 7.1%. 2006 has also begun well. Both Boeing and Airbus have received many orders for aircraft; 493 and 117 aircraft respectively during the first six months. Particularly encouraging for CTT is the fact that Boeing has been very successful in selling the new B787 Dreamliner. By the end of September, 2006, Boeing had recorded 420 orders from 32 different airlines. RISE IN ORDERS FOR THE ZONAL DRYING SYSTEM A substantial rise in orders for the Zonal Drying System has also had a positive effect for CTT. A strong demand from the retrofit market during the 2005-2006 fiscal year was particularly encouraging, and in total we received orders for 42 aircraft from six different airlines with a total value of SEK 20 million.the corresponding order intake figure for the current financial period to date is SEK 17 million.whilst the rising order level can be explained in part by the continued high fuel prices, the other major contributory factor is the market recognition of CTT that prompted Boeing to introduce the Zonal Drying System as a standard in the new B787. A very interesting success was the order received from the British airline, Monarch.This is the first time an airline has decided to install the Zonal Drying System in all of its aircraft regardless of type and manufacturer. In October, after the financial period had ended, the next large deal arrived when Continental ordered the Zonal Drying System for 41 of its B757 aircraft.with this contract we have recorded a breakthrough in the North American market. Continental is the fourth largest airline in the USA with a fleet totalling some 360 aircraft.we now have the opportunity to show the American airlines the advantages of our Zonal Drying System. I believe that we have excellent opportunities to further increase sales of the Zonal Drying System on the retrofit market now we, together with the Danish enterprise Satair, can strengthen our sales resources globally. Now is the ideal time for a global sales initiative. Not only do we have high fuel costs as a driving force, but also the B787 agreement serves as a stamp of approval and many airline operators are witnessing a positive economic development that provides them with an opportunity to invest in new technology. CAIR IS ALSO ON COURSE FOR A BREAKTHROUGH AMONGST PASSENGER AIRLINE OPERATORS In June, 2006, the first Cair system was installed in an Air Mauritius A340. The system was certified by the aviation authority late in August, 2006. A second A340 will be equipped with a Cair system in October, 2006. Air Mauritius and CTT have agreed to evaluate the system in this aircraft for a six-month period before any further systems are installed. Airbus are also participating in the evaluation process and are installing equipment in the second aircraft to measure humidity in the cabin both before and after Cair has been put into operation. The order of Cair for the firstclass cabin of one of the world s leading airlines that CTT won after the financial period closed in August can prove itself to be the system s breakthrough into the passenger aircraft market. Our Cair system enjoys a very good reputation on large VIP aircraft where it has won considerable attention and approval amongst the passengers. It is therefore natural that airlines become more interested in introducing humidifiers in the passenger cabins of long-range aircraft. We are very pleased that one of the aircraft manufacturers has endeavoured to meet the airline s wishes and together with CTT and our partner develop Cair for this specific aircraft type. A successful launch of the system with the airline will pave the way for further sales to other operators of this aircraft type. In the longerterm it is likely that aircraft manufacturers will be compelled, as a result of competition, to offer humidification 4

Cair is on course for a breakthrough amongst aircraft manufacturers of first and business-class in all longrange aircraft types.the long-range aircraft that are of most interest are B747-400, B777, A330/340 (there are around 2,000 of these aircraft currently in service) and the new aircraft types A380, B787 and A350. CTT is in an excellent position to win a very large share of this market. CTT IS EVOLVING TO BECOME A RELIABLE OEM SUPPLIER During the financial year 2005-2006, CTT made its definitive breakthrough as an OEM supplier. Series production deliveries of humidifiers for the Airbus A380 began and CTT signed an agreement with Boeing relating to development of both the Zonal Drying System and humidifier for the new B787 aircraft.we are also negotiating with both Airbus and Boeing to implement our systems in a couple of other future aircraft projects. For CTT s long-term development it is of great importance that we succeed as an OEM supplier because the share of the company s total revenues generated by this market will successively increase. For the time being, however, it would require a great deal of capital to build an organisation that could satisfy Airbus and Boeing s demands and expectations of us as a supplier. CTT s workforce has grown from 21 to 34 people since the signing of the agreement with Boeing in August. Most of the new employees were recruited to strengthen the company s Development Department. During the coming twelve months, we will be primarily recruiting for manufacturing activities.we have also made large investments in our business premises, increased the number of office places and, above all, expanded our production facilities.we expect the new extensions we have made will be sufficient to meet our needs during expansion over the next five years. WHAT CAN WE EXPECT OF THE NEAR FUTURE? Turnover will continue to grow during the financial year 2006-2007, primarily as a result of increased sales of the Zonal Drying System on the retrofit market. CTT s costs will also continue to rise as more personnel are recruited and development projects entered by CTT get underway. In summary, although the result will improve it will remain negative. At the beginning of 2007, we will deliver the first Zonal Drying System for Boeing s B787 prototype. Deliveries of the first humidifiers for the B787 will commence early summer, 2007, and deliveries of series production systems in the autumn of the same year.we are a little unsure how the deliveries of humidifiers for the A380 will develop in the near future. Airbus has given notice of lower delivery output during 2007 and 2008 than initially advised.this will also have an effect for CTT. It is our hope that order intake for the Zonal Drying System will continue to increase. On the one hand we expect to see further orders from airlines with existing aircraft and, on the other, expect orders for the Zonal Drying System for the B787 to start arriving in the spring, 2007. Order prospects for Cair are more difficult to forecast.we will undoubtedly receive orders for one or more VIP aircraft but it is less certain when sales to airlines will gather pace. It would be rather optimistic to believe that we will receive any substantial Cair orders from airlines next year. 5

It will be interesting to see how forthcoming aircraft projects from Airbus and Boeing develop in the near future. In the autumn, Airbus officially launched development of the long-range A350 aircraft that should be ready for delivery to customers in 2012. According to Airbus advertising, the aircraft will have a humidified passenger cabin. At the same time, Boeing is working with a successor to the B737 that, according to many analysts, will be built with the same technology as the B787. CTT has great prospects of being able to deliver systems for both of these aircraft types. Finally, I would like to thank CTT s personnel for working so well over the past year. During this demanding expansion and development phase many employees have made great efforts under pressing conditions. I am however convinced that these sacrifices will be rewarded and that we at CTT, together with our loyal shareholders, have many interesting and profitable years ahead of us. Nyköping September 2006 Torbjörn Johansson President 6

The OEM market With forecasts predicting annual growth rates averaging 5% for passenger traffic and 6% for freight traffic, the aircraft industry s long-term potential significance is vindicated by an expected requirement for 27,000 new aircraft (for 50 or more passengers) over the next twenty years! Because an aircraft type s lifetime is typically long, it isn t every year that the development of a completely new aircraft model is planned or set in motion. However, the coming years look set to be particularly eventful with the introduction of many new types in prospect.this creates opportunities for CTT, as it has long been our stated ambition that aircraft manufacturers should install systems already at their production facilities, either as a standard or option for the customer. At present, the company maintains the following OEM relations: - Boeing, that has decided to have the Zonal Drying System as a standard installation on all B787s and humidification as an option for flight deck and crew rest compartments and, for a number of years already, has offered the Zonal Drying System as an option for new production B737NGs. - Airbus, that has selected CTT s humidification technology for the A380 as an option for crew rest compartments. Boeing B787 - Dreamliner. The launch of the B787 has been the most successful in Boeing s history with firm orders for 360 aircraft.the first 50 aircraft for commercial service are expected to come off the production line in 2008.Thereafter, production output will increase successively to reach approximately ten aircraft per month by around 2011. A customer ordering a B787 today will, at the current rate of production, have to wait until 2013 before Boeing can deliver.the successful launch has however resulted in the company considering an earlier acceleration of production output than originally planned. In which case, output would rise to fourteen aircraft per month from 2014. In total, Boeing hopes to build around 3,000 aircraft over a 20-year period.the B787 is based upon ground breaking technologies whereby the fuselage, to a large extent, is made of composite materials that result in lower maintenance costs and lower weight (reducing fuel consumption by 20%). Airbus A380 - Superjumbo. The world s largest ever passenger aircraft, Airbus new aircraft type A380 carried out its maiden flight last year with deliveries to the first customer, Singapore Airlines, planned to commence at the end of next year.with the possibility of carrying up to 555 passengers and with a longer range than that of other large aircraft, the A380 creates new conditions for both airlines and passengers, alike.the lower operating costs per passenger mile will change areas of the aviation market. Another noteworthy feature is the exceptionally quiet operational noise levels of the aircraft. Airbus has 159 aircraft in an order book dominated by Asian carriers (Qantas, Singapore, Malaysian, Korean, and Thai) and airlines from the Middle East (Emirates and Qatar). In Europe, Lufthansa, Air France and Virgin have ordered the aircraft type.the A380 project is however delayed. Airbus has advised a number of airlines that the first deliveries will be delayed by 12-18 months. B737NG The market for short-haul aircraft (for 100 or more passengers) is dominated by two players: Airbus with its A320 family and Boeing with the B737NG. Both aircraft types are delivered at a rate of 300-350 units annually.the Zonal Drying System has been available as an option for the B737NG for a number of years. FUTURE AIRCRAFT TYPES A350 Airbus has launched the A350XWB, with the first deliveries of aircraft to customers expected to commence 2012. Despite the redesign of the aircraft during the year, orders for 100 aircraft (Qatar accounting for no less than sixty thereof) have been received. It has always been our declared ambition that Airbus should select our technology by virtue of our leading position in the humidification market.the A350WXB will be an important indicator as to whether Airbus, like Boeing, has decided to solve the condensation problem once and for all by selecting the Zonal Drying System or resolve it with another solution. New B737 With the Zonal Drying System as base equipment on the B787, the likelihood of Boeing selecting the system for future aircraft models has increased. A great deal speaks in favour of the company starting a project the aim of which would be to find a replacement for the company s faithful servant, the B737NG. Forecasts suggest the new aircraft could enter commercial service around 2015. Aircraft type 2005 2006P 2007P 2008P 2009P 2010P B737NG 194 285-300 325-350 325-350 350-385 385-400 B787 - - - 45-50 70-75 80-85 A380 - - 1 13 25 45 7

The need for CTT s products HISTORY OF AVIATION The aviation industry, which recently celebrated the 100 year anniversary of the Wright brothers first flight, has undergone extremely expansive development. In the early days, aviators flew in open, singleseat, propeller-driven aircraft used primarily for postal and military purposes. Once it became possible to construct larger aircraft, passenger-carrying, open, propellerdriven aircraft entered the scene. The introduction of pressurized cabins represented a leap in development, enabling flights at higher altitudes where weather conditions are more favourable.this placed greater demands on the reliability of the systems in the aircraft as conditions are different at higher altitudes. For instance, the surrounding temperature is lower causing new phenomena. During the 1930s, the need for our dehumidification system first became apparent.with a warm cabin and very cold exterior, condensation began to form on the inside of the aircraft fuselage. At that time, aircraft were equipped with few electronic systems and the structure was significantly oversized which meant the negative effects of condensation were surmountable.with the introduction of the jet engine into passenger service in the 1950s, capacity could be increased and aircraft could thus fly further, and carry more passengers.this created a need for our other product, Cair which humidifies the cabin, counteracting the arid cabin environment of long-distance flights. In recent years, progress has mainly been made in the field of computers, communications, engines, and design optimization to maximize efficiency of the aircraft. This has resulted in an increasing number of computer-controlled systems in aircraft, which are more sensitive to condensation, as is all electronic equipment. Today s passengers have a greater awareness of health issues and are beginning to demand greater comfort during flights. If aircraft have been optimized to attain technical perfection over the last 100 years, the future will, in all probability, focus on people. Air travel will be developed into a method of travel that combines maximum comfort with extremely high safety standards. On this basis, we envisage a continuing future need for our products. CONDENSATION IN AIRCRAFT Moisture enters the fuselage of an aircraft during ground stops. It is also emitted by every person on board. In flight, the aircraft is exposed to extremely low temperatures. Modern jet aircraft have a cruising altitude of over 10,000 metres where temperatures lie between -50 and -60 C.This cools the fuselage to between -30 and -40 C, resulting in large amounts of water condensing on the inner skin of the fuselage. Water collects in the insulation and runs down into the belly of the aircraft. 8

OPERATIONAL EFFECTS OF CONDENSATION Increased aircraft weight. Depending on the number of passengers, flight distance, aircraft type and climate zone, larger or smaller amounts of condensation are created. Condensation can increase the weight of the aircraft by over half a ton. This unwanted increase means higher fuel consumption with negative effects for both transport economy and the environment. Disturbances in electrical systems. Many of the electrical cables in an aircraft are located in the space between the inner and outer skins, where condensation accumulates. This can trigger warning signals and short circuits in sensitive equipment, resulting in delays and component replacement. Inspections and repairs are expensive and time-consuming.this type of problem has come to the fore following a number of incidents during recent years. MAINTENANCE RELATED EFFECTS OF CONDENSATION Corrosion mainly affects the areas around aircraft windows and doors, antenna or wing mountings, and belly structures. Floor beams and electrical contacts are also exposed areas. Corrosion entails extra expense for the airlines who often have to replace structural parts at D-checks. Older aircraft in particular are affected by increased maintenance costs due to corrosion. Damaged insulation. Water gets trapped in the insulation, making the material heavier in addition to reducing its functional capacity. During maintenance, parts of the insulation may have to be dried or replaced.this entails extra costs for the airlines, yet only provides a temporary solution to the problem once the aircraft re-enters service the insulation will get wet again. Mould flourishes in wet insulation which can be a problem for passengers and maintenance staff. EFFECTS OF CONDENSATION ON COMFORT Rain in the plane. Air passengers are exposed to dripping water during take-off and landing.this is caused by condensation gathering on ceiling panels. Most noticeably during take-off, water runs along fissures in ceiling panels and drips on passengers: Rain in the plane. Reduced insulation effect. Water trapped in the insulation reduces its insulation effect. Passengers feel cold draughts at windows and doors. Acoustic insulation is also adversely affected, resulting in higher noise levels in the cabin from engines and wind against the aircraft. Wet insulation Mould.The one thing that benefits from wet isolation Zonal Drying System Provided by F E - Increased weight / fuel consumption Water and ice in insulation - Malfunction in electrical systems - Rain in the plane - Corrosion / contamination - Ruined insulation blankets - Fungus and bacteria - Deteriorated insulation effect - Aircraft cabin low humidity / dry air - Increased maintenance costs 9

ZONAL DRYING AND ITS BENEFITS The areas listed are those most open to improvement with our Zonal Drying System. Our calculations, based on experience from actual installations and reports from operators of our systems, indicate that the payback period for a Zonal Drying System in an aircraft is two to four years, depending on the type of air travel.the payback period is shortest for operators with a high degree of use and high passenger figures.this should be compared to an aircraft s economic and technical lifetime of 20 to 25 years. It is also important to note that some of the benefits of the Zonal Drying System cannot be calculated in monetary terms, but are linked to passenger comfort and operational reliability.these advantages include increased operational reliability, no damp seats or carpets, no brown windows with condensation, no cold draughts due to retained insulation effect, etc. However, we believe that the most important advantage is the fact that it is simply not consistent with today s flight safety requirements to have several hundred kilos of uncontrolled water flowing around in a plane, close to electrical cables, components and computers. WHY IS AIR SO DRY IN THE CABIN? Air conditioning systems in modern aircraft are designed to take in approximately 50 percent of their air quota via the engines in other words, atmospheric air from around 10,000 metres altitude.the remaining 50 percent consists of recirculated cabin air. Atmospheric air is extremely dry which means cabin air is also dry. Normally, the relative humidity (RH) in homes and offices is between 50 and 60 percent. In an aircraft, the level lies between 5 and 15 percent. In extreme cases, humidity levels as low as two percent have been recorded. HOW DOES DRY AIR EFFECT PEOPLE? Passenger comfort is mainly affected on long-haul flights of 5 to 18 hours. The human body is not designed to function in a dry environment (lower than 20% RH) and is adversely affected when subjected to it. In the dry conditions on board, many passengers experience irritated mucous membranes in the nose and throat, contact lenses have to be removed, there is an increased likelihood of colds, and a greater risk of bacteria spreading. Problems also occur with dry skin, allergies, etc.this especially applies to cabin crews, who are continuously exposed to low humidity levels.the problem is most apparent in business class and first class where there are fewer passengers and less moisture is generated. Conditions in tourist class are somewhat better as passenger density is higher and more moisture is generated. However, even in tourist class, moisture needs to be added to attain an acceptable humidity level. WHY INCREASED CABIN HUMIDITY? Average Cabin Humidity without CAIR Relative Humidity % 30,0 25,0 20,0 15,0 10,0 5,0 0,0 First / Business Economy Without CAIR - Condensation in Crown Area Crown Area Low humidity in business area ~5% Crown Area Low humidity in economy area ~10% 10 THE DRY FACTS Most passengers on long-haul flights experience Cold symptoms Soar throat, dry skin Dryness in mouth, nose and eyes Jet-lag / Increased fatigue General uncomfortable feeling Medical experts and specifications for in-house air quality (ASHRAE), recommends 20% relative humidity as the lowest acceptable level.

DEMANDS ON ENHANCED COMFORT Passengers today are more knowledgeable and aware of their health, and the effects of flying.what s more, people are much more conscious of how they spend their work and leisure time, making demands on the possibilities to work and rest during flights.the airlines response is demonstrated in the fact that a majority of airlines have redesigned, or are in the proceeds of redesigning, their cabins for improved comfort. Airlines spend millions of dollars installing better seating, video on demand, live TV, internet connections, etc, to meet passenger demands. Some airlines have even installed fake starry skies to simulate night skies and thus promote sleep. Air quality onboard is a matter of much discussion; many passengers consider it to be poor, with fatigue, faintness, etc, as the result.the fact that people today fly longer, up to 18 hours, means that the effects of poor air quality are more pronounced. In all likelihood, we will see requirements for improved air quality onboard, with the emphasis on the level of humidity. CAIR AND ITS BENEFITS Cair is developed to meet passenger requirements on health and increased well-being during flights. In-flight studies have shown that humidifying the cabin reduces tiredness and alleviates dehydration of the eyes, skin and mucous membranes. As the condition of the mucous membranes is essential for the body s immune system, there is thus a reduced risk of viral infection during flights. Our goal with Cair is to improve the passenger s sense of well-being during flights. Cair raises the humidity level in the cabin, which has a positive effect on all the passenger s senses. Passengers will feel better, sleep better, food and drink will taste better. Cair means airlines around the world get a unique opportunity to gain competitive advantages through improved comfort on long-haul flights a strategic marketing tool in parity with in-flight entertainment. OUR MISSION To enhance passengers total inflight experience by contributing to their health and well-being. Our objective is to have passengers arrive feeling better than when they departed. OUR PRODUCT Cair will provide humidified fresh air in the aircraft cabin. This will improve the passengers all sensory experiences.you will feel better.you will sleep better. Your food will taste better. After a long-haul flight you will land in better shape. Average Cabin Humidity without CAIR Average Cabin Humidity with CAIR Relative Humidity % 30,0 25,0 20,0 15,0 10,0 5,0 0,0 First / Business Economy With CAIR - Dry Crown Area Crown Area Increased humidity in business area ~25% Crown Area Increased humidity in economy area ~15% FIVE GOOD REASONS Increased cabin humidity will reduce many of the discomforts and lower the risk of getting airborne infections Passengers and crew will feel better Passengers will experience a more relaxed and comfortable flight The sleep will be better The food and wine will taste better The risk for airborne infections are lowered A very important factor for well-being and comfort. Limited modification work necessary. Cost comparable to 1-2 business class seats. 11

Now it s proven! Scientific study confirms that the human condition benefits from the effects of an on board humidifier system. 12 Increased cabin humidity on board results in fewer discomforts with respiratory tracts, dry eyes, and dry skin whilst at the same time, alleviating headaches and general fatigue. This has now been confirmed by an independent scientific study, published in the Scandinavian Journal of Work Environmental Health and Indoor Air 2006. The difference is significant. Air as dry as that which can be found in cabins on intercontinental flights, can otherwise only be found in the Polar regions.the human body isn t designed to live let alone work under such conditions.this is the opinion of senior lecturer Dan Norbäck, who leads the work at the Institute for Work Environment at the Uppsala University Hospital, Sweden, with whom we had a chat. Who are those, who have undertaken the study? A short account, please? My name is Dan Norbäck, I headed the investigation and I am a lecturer at the Institute for Work Environment at the Uppsala University Hospital. Gunnilla Wieslander is a head doctor here specialising in aviation medicine. Torsten Lindgren is a researcher and work hygienist with a background in safety engineering at SAS, who held a disputation on a thesis about interior environments in aircraft. You and your team are working here at the Academic Hospital in Uppsala. Why you? We are researching indoor environments and one of our lines of research relates to cabin environments. That we have a candidate for the doctorate who works at SAS simplifies matters, since it isn t usually easy to gain access to the airline fraternity. We conducted a similar study on passive smoking a few years ago, so the methodology was already in place. Can you briefly explain what the aim of the study is? We studied what takes place when one humidifies on board an aircraft. Besides air humidity, we looked at factors such as temperatures, bacteria, carbon dioxide levels, mould and other chemical substances. On the one hand, we wanted to see how dry air is experienced and, on the other, how it objectively affects the human being. What was so unique about this study? An intervention study is an experiment in reality. Usually one puts subjects in a test chamber and simulates the changes. By contrast, we change the conditions in the cabin and examine what effect they have. What was your course of action? We flew eight return trips from Stockholm-Arlanda to Chicago with intercontinental direct flights in a Boeing 767. Each flight took eight-nine hours.the cabin crew stayed in Chicago one night and flew back again.the humidifier was turned on for one leg of the trip, and off for the other.we randomly changed the order so that neither we who were conducting the study or the crew knew if it was on or off. During the flights we interviewed the cabin personnel and conducted clinical examinations. Amongst other tests, we measured tear film stability, i.e. we looked at how long one can keep the eye open without discomfort. Short intervals between blinking indicate that the eye is irritated; long intervals mean good tear film.we also carried out ultrasound in the nose with an acoustic rhinometer, which functions in a similar way to an echosounder.with a lung function meter we could also see the effects on the lower respiratory tracts. We are talking about a blind study. Neither the team of doctors that conducted the test or the crew knew when the humidifier was activated. What is the significance of this? A random selection and blind study ensured that we could eliminate the risk that people feel under scrutiny or that they let themselves be influenced by certain perceived unusual circumstances.this gives the result greater credibility. The hypothesis was that increased cabin humidity on board would result in fewer discomforts with respiratory tracts, dry eyes, and dry skin, and also alleviate headaches and general fatigue. Was this the case? Yes. On a six-grade scale, discomforts drop on average 1-1.5 points. That is a significant change.the greatest effect was observed, as expected, on the eyes, upper respiratory tracts (i.e. nose) and skin. In other words, dry air affected those parts of the human body it came into contact with. Is there any risk that other factors, for example jet lag or the crew s general state of health, influenced the result? No, very small as we used a random and blind method.what we don t yet really know is how cabin humidity

Installation of humidifiers results in increased comfort in terms of weight affects people; that is something we will look at more closely.this can be done in one of two ways, partly by an increase in cabin humidity and partly by the air becoming cleaner.the air humidifier that is installed in the aircraft also cleanses the air of bacteria and particles. Who will benefit from this study? Passengers, cabin personnel and pilots. In the broader context, it will also affect the airlines because their success is dependent on satisfied personnel and satisfied passengers. What conclusion should the aviation industry draw from this? Increased cabin humidity means that crew experience improved air conditions and they feel better, and what is good for the personnel is also good for the passengers. An interesting factor in this context is that it wasn t the company health welfare section at SAS who initiated the study, but a suggestion from the people who take care of the passengers. Installation of humidifiers results in increased comfort related to system weight. That s how the airlines calculate. How long do you think it will take before air humidifiers become standard equipment on intercontinental flights? Difficult to say. It could be within five years that manufacturers offer air humidification as an option. As far as I know, both airlines and aircraft manufacturers are aware of the study. The name of the study: Changes in ocular and nasal signs and symptoms among air crew in relation to air humidification on intercontinental flights. 13

Humidity control the technology ZONAL DRYING SYSTEM The outer skin of the aircraft is extremely cold and when the cabin air meets this surface, condensation occurs in the form of frost that turns to ice.when the outer skin heats up during landing, the ice melts. Most of the water runs out through drainage vents when the aircraft is on the ground, but some accumulates in the insulation blankets and as pools in the fuselage. The Zonal Drying System takes air from the cabin, removes the moisture, and blows the air between the cabin and the aircraft s outer skin.there, a weak over-pressure is created by a barrier of dry air, which dries the insulation blankets. At the same time, the relative humidity of the air coming into contact with cold surfaces is reduced, eliminating condensation. The technology is based on Munters well-known moisture removal technology, which is already used in the military aviation industry with land-based equipment. CTT has refined this technology by building small, lightweight drying units, which can be installed for permanent operation in an aircraft. A Zonal Dryer consists of a fan, a heater and a rotor.the rotor is made from glass fibre and is impregnated with silica gel, a substance with excellent properties for absorbing and dissipating moisture. Two separate airstreams are led through the slowly moving rotor. One, comprising about 80 percent of the air, passes through the rotor for drying.the dry air is then led to the area to be dried. The other 20 percent of the airstream is warmed before passing through and drying the rotor.this moist air is re-circulated in the cabin, either directly or via the aircraft s air conditioning system. Rain in the plane Inside an aircraft, rain should be the last thing to worry about. Zonal Drying System Provided by Depending on the aircraft type, the Zonal Drying System is either fitted in the crown area or beneath the cabin floor.the system remains in operation as long as the aircraft has electric power, in other words during flight and most of the time on the ground.the Zonal Drying System has been adapted and installed in various aircraft types. ZONAL DRYING SYSTEM PRINCIPAL OF THE ZONAL DRYER REDUCED CONDENSATION Using the Zonal Drying System Air intake The aircraft s electrical interface Rotor absorbs moisture Dry air (80%) Moist air (20%) Thermal fuse CTT s Zonal Drying System reduces the build-up of frost and dries damp insulation in the aircraft. This is achieved by distributing an even flow of dry air in the area between the cabin and the plane s outer skin, the crown area. Heater Thermostat Thermistor Rotor motor 14

Moisture management the technology CAIR Cair consists of the CTT Zonal Drying System, and a system for humidifying sections of the aircraft s passenger and crew areas.the humidifying part of Cair consists of one or more humidifiers with water supply systems. The humidifier uses the technique of evaporative humidification and has been developed in cooperation with Munters.The main component in the humidifier is a pad of glass fibre with specially designed air channels moistened via a spreader system.when dry air passes the moist surface of the pad, the water evaporates and the air is humidified while it is cooled. By dimensioning the pad according to the airflow to be humidified, as well as controlling the supply of water and air temperature before the pad, the humidifier can operate without further regulation. Minerals and other contamination in the water are precipitated in the pad.the pad is replaced at regular intervals depending on the mineral content of the water.the risk of bacteria spreading via the humidifier is minimal since the water evaporates during transfer to the air and thus cannot carry any bacteria. The humidifier is installed in supply ducts to the zones to be humidified.water is taken from the aircraft s regular water system. In addition to the actual humidifier, the CAIR systems for the new Airbus and Boeing aircraft, A380 and B787, incorporate a software-based control unit, moisture sensors and advanced water valves. Zest! Food and drink tastes better. Cair Provided by The air passes through the integrated humidifiers and is being led out in the cabin via the existing ECS air system The dried air is distributed evenly in the cabin Crown Area via light weight Piccolo Ducting Systems Forward Zonal Dryer and Inlet Air Filter Piccolo Ducting System (distribution of dry air) Piccolo DuctingSystem (distribution of dry air) Aft Zonal Dryer and Inlet Air Filter, Crown Area The regenerated (moist) air is disposed of via the right hand triangle area beneath the floor The regenerated (moist) air is disposed of via the aircraft s triangle area beneath the floor ECS Cabin Riser Ducts Cabin Humidifier Zone 2 right hand triangle area beneath the floor Cabin Humidifier Zone 1, left hand triangle area beneath the floor ECS air Mixing Chamber Current humidification system average water consumtion for Zone 1 & 2 (typical first/business class areas) is 14 l/h 15

Market overview TURBULENCE EXPECTED FOR SOME The past few years have witnessed some major changes in the aviation industry. A number of airline business concepts have been tested and evaluated during this period. Certain airlines, especially the low-cost carriers and regional airlines are healthy and growing, whereas others have been forced to reposition themselves and adapt to the changed market climate. In the process of drawing up new business plans for these airlines, it has not only been necessary to increase revenues and reduce costs, but also improve productivity levels. A typical example of an airline that has succeeded is Aer Lingus and, to a degree, also SAS, whereas others such as Varig of Brazil have gone into bankruptcy. This process of change combined with on-going high oil prices has resulted in problems for many, whilst at the same time the industry has benefited from a vibrant economy with good load factors and increased earnings per passenger. According to the ICAO, the industry lost around USD 3,300 million during 2005 (USD 5,700 million) with European and Asian carriers earning money whilst their American counterparts lost almost USD 10,000 million. 2005 but IATA still expects the companies will record a loss of USD 4,200 million in 2006 before they recover and show a total profit of USD 6,000 million in 2007. However, the price of oil will continue to rise and this, combined with the war in the Middle East and prevailing terrorist threat makes the future very difficult to predict. The aircraft manufacturers witnessed a sales boom in 2005 with Boeing and Airbus recording a total of 2,140 orders, thereby breaking the previous record of 1,631 orders back in 1989. 2006 also began well with 200 orders for Airbus and 531 orders for Boeing during the first seven months. Boeing had a good start with its B787 and now has booked 360 orders, while Airbus has delivery problems with its A380 and went back to the drawing board with the planned A350 that has been redesigned as the A350XWB (XtraWide- Body), featuring a larger cabin and B787 design. Regional Jet manufacturers, Bombardier and Embraer, are those that have felt the impact of the oil price affects most. Orders during 2005 of their regional aircraft have dropped 33% compared with 2004. By contrast, Bombardier has seen an upturn in orders for its fuel-efficient propjet aircraft. Both Boeing s and Airbus order books grew by almost 50% during 2005 to 3,990 aircraft and, combined with the announced increases in production, will mean that the companies will deliver around 800 aircraft annually during the coming years. Now the airlines must consolidate themselves and save the capital necessary to be able to finance all these aircraft.this fact and worries about the price of oil, that some analysts believe could rise to a price of USD 100 per barrel - representing a 50% increase from the current level means that airlines must continue to work at cost savings, revenue increasing measures, as well as improved productivity. The status of the different aircraft types according to Flight International (June 30 2006) can be seen in the table below. FUTURE PROSPECTS Boeing, Airbus and IATA estimate a traffic increase in the region of approximately 5% annually during the period 2006-2026. Converted into numbers, there will be a need for some 25,000-27,000 aircraft, with narrow/bodies accounting for around 16 MARKET STABILITY OR THE CALM BEFORE THE STORM Measured in RPK (Revenue Passenger Kilometres), market growth continued to develop strongly during 2005 with a passenger increase of 7.1%. Airbus and Boeing foresee continued market growth averaging 5% annually in the coming years whereas the ICAO predicts an increase of 6.5% for 2006. Once again, it is in Europe and Asia where growth will be strongest. Passenger revenues rose by almost 10% during Aircraft type Delivered* On order** Orders 2005 Orders H1, 2006 A32x 2 609 1 560 912 78 A330/A340 728 223 66 6 A380 0 159 20 0 A350XWB 0 100 87 13 B737NG 1 753 1 365 569 374 B757 913 0 0 0 B767 703 28 15 4 B777 539 276 154 22 B747-400 556 46 25 10 B787 0 360 235 69 B747-8 0 19 18 1 CRJ 1 345 77 98 8 EMBRAER 967 318 63 17 *) December 31, 2005 **) June 30, 2006

75% and wide-bodies for around 25% of this figure.around 13% of the new aircraft will be regional jet aircraft. Geographically, the markets that are predicted to expand fastest are in the Asia-Pacific region, both domestic and international, with an annual growth rate of around 7-8%. In the shorter perspective, both Airbus and Boeing believe some 800 jet aircraft for 50 or more passengers will be delivered during the coming twelve months. The focus on cost savings and high oil prices benefit the revenue cost estimate for our Zonal Drying System for which airlines are showing an ever-growing interest, and this, combined with the increase of deliveries of new aircraft, means that we believe the interest for our system can be really significant in the coming years. The airlines requirement for improved productivity favours our Cair system because as competition becomes greater so too does the need for differentiation and value for money for the passengers. More airlines are competing on the same long-haul routes and they are seeking new ways to attract customers.this is where our Cair system is well positioned warranting a direct effect on the passengers comfort and well-being, thus making it easy to communicate its advantages to the customers.when our launch customer Air Mauritius commences flights with our Cair system, we expect to attract a great deal of interest from manufacturers and other airlines. MARKET POTENTIAL The market for single-aisle aircraft has the greatest potential for our Zonal Drying System and there are currently some 7,500 of these aircraft in service worldwide, primarily B737NG, A32x, and B757. As decisions to invest are difficult for airlines we view the retrofit market as remaining sluggish. However, we ought to be able to sell the Zonal Drying System to a certain sector of the market.we believe the sales potential for new production aircraft to be considerably higher, especially in view of the fact that our system has now been selected as base equipment for the Boeing 787 and is an option for the Boeing 737NG. Boeing is moreover studying a replacement for the B737 known as the B737RS and it is our opinion that we will be well positioned for our system to become a standard. Airbus is studying a replacement for the A320-series and also here, we believe that our Zonal Drying System should be of interest to have as a standard.the redesign made by Airbus for the A350XWB can also open up opportunities for our participation. Wide-bodies are the market that is best suited for Cair.The current number of wide-bodies in operation worldwide is around 2,500 aircraft and includes A330, A340, as well as B777, B767, and B747-400. Due to the fact that a retrofit of the Cair system is more complicated, we only anticipate a small market share. Based on prevailing market trends we believe the future of Cair lies in systems installed in new aircraft at the time of delivery.there are orders for around 1,200-odd aircraft of the current types available, where the A330, A340, A380, B777 and B787 have growing order books whilst the B767 and B747-400 are nearing the end of their life cycle. In addition, Airbus has received orders for 100 of its new A350XWB and Boeing nineteen orders for its B747-8 that is also suited for Cair. Here we believe in a growing market share as Cair establishes itself as a concept on the market. The VIP market is stable and we have installed systems on a number of larger business aircraft. By virtue of the good relations we maintain with the world s largest completion centres (Lufthansa Technik, Jet Aviation, AAC, etc.) we believe that we can sell 1-2 Cair systems annually for widebodies and 2-4 for narrow-bodies. We also believe that there exists a long-term potential for selling Cair system to both the business jet aircraft types Global Express and Gulfstream as well as the possible future VIP versions of the Embraer 170/190. NEW AIRCRAFT TYPES Today, there are three major new aircraft projects in progress: the Airbus A380 (first delivery autumn 2007), Boeing 787 (first estimated delivery 2008) and A350XWB (first delivery 2012). Both manufacturers are discussing humidification as a part of their aircraft equipment. Where the A380 is concerned, CTT in cooperation with AOA Gauting has been appointed as supplier of humidifiers for crew rest compartments. For the B787, our Zonal Drying System has been selected as standard equipment and we have also been appointed as suppliers of humidifiers for the crew rest compartments and flight deck. Boeing has promised an increased cabin humidity level of some 20% for the B787 that, in our opinion, can only be achieved through active humidification. Airbus says that it is developing, and plans to deliver, the A350XWB with increased cabin pressure and an increased cabin humidity level of 20%. Additionally, Airbus is promoting larger windows and increased cabin humidity levels as key passenger pleasing characteristics. Energy! The cabin crew gets a better working climate. Cair Provided by 17

Sales and marketing strategy ZONAL DRYING SYSTEM As a result of the Boeing B787 agreement, our Zonal Drying System has received a technical necessity and functional stamp of approval that simplifies the sales process.we no longer need to convince the customer about the function or the need for our system but can concentrate the discussion on the investment calculation. This enables us to forecast a reduction in lead times. The aviation industry is a cyclic sector and just now at peak. An economic boom, high fuel costs, the Boeing agreement as well as the knowledge about the advantages of our system provide us with a unique opportunity to sell the Zonal Drying System in large numbers.to be able to do this in a short space of time requires a number of sales people who can continuously be present at many locations where they can permanently work and maintain contact with the customers. We have decided that the best way to reach a large number of customers in the short term is to engage an organisation that has sales staff present in all parts of the world. Having evaluated this alternative during the past year we signed an agency agreement with Satair A/S that has 37 sales personnel across the globe. Together with our own sales team, they should ensure that we reach out to as many customers as possible with increased sales as their objective. Although we intend to continue working directly with the aircraft manufacturers ourselves our strengthened presence will raise the awareness of the Zonal Drying System amongst an even larger number of airlines who, in turn, will raise it in discussions with the manufacturers. CAIR The attention Airbus and Boeing have generated with their A350XWB and B787 is of great benefit for us. Possibly for the first time, Airbus and Boeing are not marketing their new aircraft with words such as faster, longer, larger, stronger, etc., but with terms such as passenger pleasing, dreamliner, comfort, sound, light, cabin quality, etc. Consequently, the focus is primarily on the passengers experience with these new aircraft.this has created enormous interest amongst the media, travellers and airlines for these factors when flying. Our Cair system falls in line with this trend and we are convinced that humidification in aircraft will develop positively. As our target groups are long-haul aircraft and larger executive aircraft, marketing and promotion of Cair is focused on airline marketing departments,vip completion centres, and directly to the manufacturers (Airbus, Boeing, Bombardier, Gulfstream and Embraer). AIRCRAFT LEASING COMPANIES During the past twelve months we have also sold a number of Zonal Drying Systems to operators who lease their aircraft from aircraft leasing companies (such as GECAS, ILFC and RBS). In these cases, the leasing companies own the aircraft and the system and charge an extra fee to the operators for use of the system.we intend to visit the larger aircraft leasing corporations to inform them about our system and the advantages it offers both as operator and aircraft owner with the goal of convincing them to select the Zonal Drying System as a standard in their aircraft specifications. By way of our arrival on the aircraft leasing market we have automatically become involved in the second-hand market. New airlines operate the aircraft in which our system is installed, meaning that the new operator must become aware of the system s existence and updated about the benefits.the sales objective is to get these new CTT operators to buy the system for their other aircraft and attain a uniform status throughout the fleet. The most valuable (c)air you can offer. Energy! Aaah! Everyone on board feels better. $$$ Your reputation improves. Zzzzz! Passengers sleep better. Zest! Food and drink tastes better. The cabin crew gets a better working climate. Provided by 18

Customer and product overview Zonal Drying System has been supplied for the following aircraft types: B767, MD-11, MD-80, A330, A340, CRJ, B737NG, B757, B747, A320 family. Development in progress for B787 and A300. Cair has been supplied to VIP aircraft types BBJ1, BBJ2,A320 as well as B767, B747SP, A340-300 and A340-500. Zonal Drying System Aircraft type Total ordered Delivered Customers B737NG 69 64 Sterling, Hapag-Lloyd, Air Berlin, Transavia, Luxair, Sun Express, Excel Airways B757 20 11 Icelandair, JetAviation, First Choice, Thomas Cook, Monarch B767 21 20 Martinair, KLM, JetAviation, Monarch B747 1 1 Lufthansa BBJ 1 1 Jet Aviation A320/A321 20 10 First Choice, Monarch, Martinair A330 7 5 Emirates, LTU, Monarch A300 4 0 Monarch MD80 2 2 Austrian MD11 33 33 KLM, Swiss, Martinair CRJ-100/200 65 65 Lufthansa Cityline, Adria Airways, Tyrolean/Lauda TP84 1 1 Swedish Airforce 244 213 per August 16, 2006 Cair Aircraft type Total ordered Delivered Customers B767 2 2 AAC, Jet Aviation B747 1 1 Jet Aviation BBJ 13 12 Lufthansa Technik, Jet Aviation A340 9 2 Qatar Airways, Air Mauritius A330 1 0 Qatar Airways A320 1 1 Jet Aviation 27 18 per August 16, 2006 19

Competition DEHUMIDIFIER SYSTEMS CTT is currently the only supplier of active dehumidifier systems for the aviation industry. Hitherto, aircraft manufacturers have tackled the problem of condensation in aircraft with the following measures: Cover the cabin with fibreglass blankets Install gutters to lead away the water Fasten pieces of rubber foam to rods, etc, to catch running water Adhere felt to roof panels, etc, to catch water which should then evaporate Install bilge trays to raise insulation in the hold of the aircraft enabling condensation to run underneath The SPUD system that blows relatively dry ECS air into the crown area during flight only. These methods do not prevent condensation. In the short-term, they stop water from entering the cabin, but water will still be present in the fuselage with the problems this entails: increased weight, corrosion, mould and fungus in the insulation, and the risk of disturbance to the electrical system and components. HUMIDIFIER SYSTEMS There are currently three other suppliers of humidifier systems for aircraft: HAMILTON SUNDSTRAND Hamilton Sundstrand (USA) has developed a humidifier in which water diffuses through a membrane system. This humidifier is available as an option for Boeing 777 and 747 aircraft. LIEBHERR-AEROSPACE Liebherr-Aerospace (Germany/France) develops a humidifier that uses a heat exchanger to generate steam with the help of hot air emitted from the aircraft s engines.the system is available as an option for the Bombardier Global Express business jet. LE BOZEC FILTRATIONS & SYSTEMS Le Bozec Filtrations & Systems (France) has developed a humidifier that utilises electrical power to generate steam. Le Bozec offers the system to airlines for the humidification of the cockpit and for business jets. These products have the following in common: relatively complicated technology, unable to meet performance expectations, low reliability, and cause condensation problem 20

Background, organisation, environment and quality BACKGROUND CTT can trace its origins to the concept dehumidifiers in aircraft that was presented by the company s founders, Christer Nordström, Thomas White and Thomas Axelsson. Although military aircraft had long been dehumidified with ground equipment this was no solution for civil aircraft with long flight times. After a number of years of prototype production and demonstrations of the concept to, amongst others, the civil aviation authority and various airlines, CTT Systems AB was established in August, 1991, to patent and further explore the idea. In 1997, the company obtained its first global certification based upon a system for the Boeing 767. Later that year, CTT received an SBI listing (now NGM) and joined the O-list on the Stockholm Stock Exchange in 1999. Whereas we had only sold to aircraft already in service, retrofit installations, up until 2004, the recent signing of four agreements has enabled the company to realise its strategic goal of evolving as an OEM contractor. The agreements concerned are: Zonal Drying System as an option for the B737NG Humidification as an option for A380 crew rest compartments Zonal Drying System as a standard for the B787 Humidification of the crew rest compartments and cockpit as an option for the B787 FURTHER DEVELOPMENT LED TO A COMPLETE MOISTURE MANAGEMENT SYSTEM In the autumn of 1999, development of a moisture management system, aimed at increasing passenger and crew comfort, was initiated.the humidifier system is combined with the Zonal Drying System to prevent condensation during humidification of the aircraft interior.this integrated concept is now marketed under the name Cair as a registered trademark. ORGANISATION AND PERSONNEL The company organisation is designed to match the airlines structure and safeguard growth opportunities and production. CTT has recruited strategically important key individuals with core competencies within the areas of engineering, mechanics, air systems, avionics, and airworthiness administration, as well as financial matters and administration of listed companies. Several employees have long experience within the Swedish and international aviation industry. Production personnel plan and administer manufacturing that is, for the most part, subcontracted. During the last year, we have recruited a number of new staff that has led to an increase in staff turnover.there are a total of 33 employees, seven of whom are women.their ages are evenly distributed from 23 to 55 years. Sick leave and staff turnover are low. EFFECTS ON THE ENVIRONMENT The Zonal Drying System enables airlines to minimise weight, in the form of condensation, in their aircraft.this weight reduction translates into improved fuel economy that has a positive effect on carbon dioxide (CO2) emissions in the atmosphere. CTT seeks to co-operate with partners and subcontractors who observe various environmental aspects and are committed to environmental improvement. 21

QUALITY CTT complies with Swedish Civil Aviation Authority rules and regulations applying to Quality Assurance in the aviation industry. Quality control is applied at every level, from design via production to testing and delivery, follow up checks and customer support. QUALITY SYSTEMS AND THIRD PARTY APPROVAL CTT currently holds certification from the Swedish Civil Aviation Authority in accordance with the common European standards issued by the EASA (European Aviation Safety Agency); Part 21 resp. Part 145. These authorizations together mean that CTT is qualified to manufacture and maintain airworthy material. CTT is also certified in accordance with ISO 9001:2000 by DNV and in more recent years has succeeded in attaining certification in accordance with the aviation sector s own quality strand, EN9100. CERTIFICATION Each aircraft sold has a Type Certificate (TC). All retrofit equipment must be approved with a Supplement Type Certificate (STC).This certification is a comprehensive, timeconsuming process as it is specific for QUALITY POLICY C T Customer Satisfaction Technical Excellence individual aircraft types. An STC means that the certifying civil aviation authority (usually in the country where the aircraft is registered) has approved both the system and its installation from an airworthiness viewpoint. The process is further complicated by process routines varying from one country to another. As the USA has traditionally led the aviation industry, American certification has the highest status. Certification by the FAA (Federal Aviation Administration) is in reality the same as global certification. Certification in European countries has gained in status in recent years.the European authority, EASA, now acts as a coordinator for the European civil aviation authorities. CTT and Lufthansa Technik have reached an agreement regarding certification.with regard to certification, this agreement means that Lufthansa Technik, as a rule, acts as CTT s formal design organization and maintains STCs for CTT s products in return for royalties on systems sold. This agreement is very useful in the sales process as Lufthansa Technik has an excellent reputation for certification, and affords the possibility of obtaining both EASA and FAA STCs. Our quality assurance policy is based on the company s name, CTT. It shall be the absolute focus of CTT Systems to keep its customers satisfied by all employees doing the utmost to ensure that we meet or exceed customer requirements. CTT Systems products and systems shall be designed, produced and overhauled to meet or exceed specified requirements, performance and reliability. PRODUCTION CTT s production strategy is to perform final assembly, tests and maintenance of its own products. Many of the system components are standard components from the aviation industry, which are purchased from reputable suppliers. In the case of key components, long-term agreements have been signed to ensure competitive prices even for short production runs. Processing and assembly is subcontracted to carefully selected suppliers.this enables CTT to increase sales rapidly without investing heavily in machinery or personnel. INSTALLATION To date, CTT systems have been purchased for retrofit, i.e. installation in operational aircraft.the systems have therefore, been installed by airline personnel in conjunction with conversion or maintenance checks in accordance with CTT s drawings and instructions.to facilitate initial installations, CTT provides on-site instruction for airline personnel. Installation of this kind of Zonal Drying System requires between 70-150 man-hours. Installation of a complete Cair system requires some 200-250 man-hours.the formal responsibility for the installation rests with the airlines. The agreements with Airbus and Boeing mean that, in future, installation will also take place directly during the production process of newly built aircraft.this took place at a Boeing production plant for the first time in March 2004. Responsibility for the installation during the production process rests with aircraft the aircraft manufacturers. T Total Quality To effectively ensure CTT Systems long-term growth and survival our dominating factors to focus on are: Continuous Improvement in all areas Truly committed and motivated personnel Thriving relationship with suppliers & partner 22

ZONAL DRYING SYSTEM STCs ATTAINED FAA/EASA STC on B737-700/800 FAA/EASA STC on B767-200/300 EASA/LBA/FAA STC on B757-200 JAA STC A320/A321 JAA/LBA STC A330 JAA STC CRJ JAA STC B747 Combi RLD/FOCA STC MD11 Austro Control STC MD80 CAIR STC ATTAINED EASA STC A340-300 Normally, humidifier systems have been sold for VIP aircraft and subsequently certified as a part of the cabin interior. Systems of this kind have been developed for the following aircraft types: A340-500 BBJ B737-700/800 B767-300 B767-200 B747SP Risk and exposure analysis RISKS All business and share-ownership involves some measure of risk.the following list highlights some of the factors that may be significant for the future development of CTTT. Factors are not listed in order of priority and do not claim to cover all aspects. DEPENDENCE ON KEY PERSONNEL For the foreseeable future, CTT will be dependent on a number of key personnel.these people have the knowledge, experience and contacts that form the basis of the company. CTT s future development is notably dependent on these key people remaining within the organisation.the departure of one or more of these persons would have a negative effect on the company s business. DEPENDENCE ON MAJOR CUSTOMERS CTT has broadened its customer base, thereby decreasing its dependence on any single customer. However, CTT still has relatively few customers, which means the actions of each customer can have major consequences for the company. For instance, a customer requesting postponement of delivery or cancellation of an order could have a negative, if albeit short-term, effect. However, the company has established long-term relationships with its key customers, all of whom have shown long-term perspective and stability in their actions. FLUCTUATIONS IN TURNOVER AND INCOME CURVES Future income is largely dependent on a small number of major orders, significantly affecting turnover and profits. It is difficult to forecast and influence when these orders are awarded which is why there may be fluctuations in the future development of turnover and results.with the signing of OEM agreements with Boeing and Airbus, the risk for loss of turnover will decrease successively. FUTURE CAPITAL REQUIREMENTS The company currently has a negative cash flow that is expected to become positive and increase in the financial year 2007/2008. Until then, the company is dependent on external capital contributions. During the course of the year, the company has secured bank financing totalling SEK 25 million.the company believes that this credit will cover the capital requirement until the business generates a positive cash flow. As the company s products are utilised in aircraft over a long period of time, it is important that it has sufficient reserves to maintain the confidence of customers and co-operation partners.therefore, it cannot be ruled out that the company may have to execute additional new stock issues in the future. PRODUCT LIABILITY Any kind of accident that can be linked to CTT s products would have major consequences for the company. The risks for accidents have been minimised by implementing extensive safety measures and stringent certification for installation. CTT has, moreover, taken out comprehensive product liability insurance providing economic protection for any party possibly injured and CTT itself. ECONOMIC CLIMATE CTT s development is dependent on factors beyond its control, such as the general economic climate, market conditions for customers, and the advent of new competing products. These factors will affect future results both positively and negatively. CURRENCY EXPOSURE Due to the international nature of its activities, the company is exposed to currency fluctuations. Company purchases are mainly made in domestic and European currencies (SEK, and EURO) while products are sold in US dollars. In the event of major delivery contracts CTT implements hedging in USD. The European aviation industry has partly begun to invoice in Euros. CTT is monitoring developments and may also commence invoicing in EUR if it is judged to be advisable. 23

The CTT Share SHARE CAPITAL Share capital in CTT amounts to SEK 8,538,929 distributed among 8,538,929 shares with a nominal value of SEK 1. All shares give the same entitlement to the company s assets and income. Each share entitles the holder to one vote. At the AGM, each person entitled to vote may vote for the full number of shares he owns and/or represents without limitation of voting rights. 140 120 100 80 60 40 20 CTT Systems Share SAX All-share Index No. of shares traded in thousands (includes late entries) 6000 4500 3000 GROWTH IN SHARE CAPITAL Since the company was formed in 1991, the share capital has developed as illustrated on next page. 5 98 99 00 01 02 03 04 05 06 (c) SIX 1500 OWNER STRUCTURE The tables on next page illustrate ownership in CTT based on information from VPC per June 30, 2006. The number of shareholders has increased during the financial period from 3,400 to 3,800. SHARE LISTINGS Shares in CTT were first listed on the SBI list in 1997, but were transferred to the O-list of the Stockholm Stock Exchange in 1999. Listing means, amongst other things, that CTT follows the Stockholm Stock Exchange s rules regarding stock market information.the company thus publishes financial reports and other stock market information, and follows other rules and practices, which apply, to a listed company. The highest price for shares, SEK 71.50 (recalculated for the new issue), was noted February, 7, 2006 while the lowest price, SEK 15.40 was noted August, 15, 2005. On June 30, 2006, the final price was SEK 49.50 (SEK 18.00). Share price development and turnover per month through August 2006. INFORMATION POLICY CTT management has established an information policy that takes into account the rules set out by the Stockholm Stock Exchange in the listing agreement. Apart from the Chairman and President, the Financial Director is also authorised to make statements on the company s reports and officially communicated business. The company distributes all its reports, including the Consolidated Sales Review and press bulletins via Waymaker.The company s website, www.ctt.se is updated simultaneously with the same information, and also contains the annual report for download. DIVIDEND POLICY To date, CTT has not distributed any dividend.the standpoint of the Board is that the dividend should, in the long-term, be well balanced between the company s need for capital (with regard to its financial goals) and the desire for a good direct return on investment. At the present time, it is not deemed meaningful to quantify the size of dividends in relation to future profits. In view of the future expansion plans the Board forecasts for CTT, it is judged that the dividend policy will continue to be restrictive in the coming years. There is currently no non-restricted equity. According to the Articles of Association, no dividend may be distributed before the conditional shareholders contribution of SEK 4.9 million has been repaid to Volito AB. SHAREHOLDERS AGREEMENT To the Board s knowledge, no shareholders agreement exists between shareholders in CTT. 24

CLASSIFICATION OF No. of No. of SHAREHOLDERS shares shares in % Swedish individuals 3 814 299 44.7 Swedish organizations 3 641 158 42.6 Overseas individuals 0 0.0 Overseas organizations 1 083 472 12.7 Total 8 538 928 100.0 NO. OF SHARES/ No.of No.of No. of SHAREHOLDERS owners shares shares in % 1 1000 3 098 911 955 10.7 1 001 10 000 634 1 747 207 20.5 10 001 50 000 43 995 952 11.7 50 001 100 000 12 979 869 11.5 100 001 13 3 903 945 45.7 In total 3 800 8 538 928 100.0 MAJOR SHAREHOLDERS No.of Capital and PER 2006-06-30 shares shares in % Volito AB 1 103 000 12.9 Trulscom AB 450 000 5.3 IF Skadeförsäkrings AB 426 000 5.0 Nordea Bank Finland ABP 409 700 4.8 Banco Småbolagsfond 284 800 3.3 Matts Stenberg 255 000 3.0 Handelsbanken Småbolagsfond 187 100 2.2 EFG Private Bank S.A. 149 498 1.8 Roburs Småbolagsfond Sverige 139 500 1.6 Dan Johansson 132 349 1.6 Investors Trading AB 131 200 1.5 Handelsbanken Nordiska 120 000 1.4 SEB Private Bank S.A., NQI 115 798 1.4 AMF Pensions Aktiefond-Småbolag 100 000 1.2 Anette Almgren White 98 250 1.2 Svenska Handelsbanken S.A. 95 041 1.1 Christer Nordström 92 321 1.1 Länsförsäkringar Småbolagsfond 88 900 1.0 SIS Segaintersettle AG 87 683 1.0 Banco Teknik & Innovation Pension 80 000 0.9 Anders Svensson 76 000 0.9 Tomas Stenberg 75 000 0.9 Svante Berger 66 666 0.8 Carl-Axel Rosén 60 692 0.7 Total 4 824 498 56.5 Other shareholders 3 714 431 43.5 Total no. of shareholders 3 800 100.0 Total no. of shares 8 538 929 SHARE CAPITAL. Transaction Change in Total Increase Total Nominal DEVELOPMENT no. of no. of share capital share capital amount shares shares SEK SEK SEK 1991/92 New issue 2 670 2 670 267 000 267 000 100 1994/95 New issue 2 670 5 340 267 000 534 000 100 1995/96 New issue 594 5 934 59 400 593 400 100 1996/97 New issue 5 934 11 868 593 400 1 186 800 100 1997/98 New issue 11 868 23 736 1 186 800 2 373 600 100 1997/98 Split 100:1 2 349 864 2 373 600 2 373 600 1 1997/98 New issue 690 000 3 063 600 690 000 3 063 600 1 1998/99 New issue 1 021 200 4 084 800 1 021 200 4 084 800 1 2000/01 New issue 1 021 200 5 106 000 1 021 200 5 106 000 1 2003/04 New issue 1 276 500 6 382 500 1 276 500 6 382 500 1 2004/05 New issue 2 127 500 8 510 000 2 127 500 8 510 000 1 2005/06 New issue 28 929 8 538 929 28 929 8 538 929 1 25

Administrative report OPERATIONS IN GENERAL CTT Systems AB is a Swedish technology company operating in the aviation industry.the business idea is to solve the two moisture problems currently encountered in commercial aircraft, namely preventing the creation of condensation between the cabin and the aircraft s outer skin, reducing the health risks, and improving levels of comfort and well-being for passengers and crew by raising the cabin humidity level. CTT s products, Zonal Drying System and Cair create conditions facilitating improved profitability and flight safety as well as considerably enhanced comfort for passengers and cabin personnel. CTT supplies these systems to aircraft manufacturers for installation during production of new aircraft and to airlines for existing aircraft fleets.the company has its business premises in Nyköping and has been listed on Stockholm Stock Exchange s O-List since 1999. YEAR S OPERATIONS The financial year 2005-2006 was CTT s most successful year to date. With the signing of the agreement with Boeing, the Zonal Drying System recorded its commercial breakthrough and sales of the system to retrofit market rose substantially. During the course of the year, we received orders for systems for 42 aircraft from six different airlines with a total value of SEK 20 million.total order intake rose to SEK 51 million during the year, SEK 22 million the previous year. This highly encouraging development can be explained in part by the continued high fuel prices.the other major contributory factor is the market recognition of CTT that prompted Boeing to introduce the Zonal Drying System as a standard in the new B787. A very interesting success was the order received from the British airline, Monarch.This is the first time an airline has decided to install the Zonal Drying System in all of its aircraft regardless of type and manufacturer. CTT s status as a supplier of dehumidification and humidification systems has been further strengthened over the past year. Our OEM relationships with Boeing and Airbus have deepened and we are conducting negotiations with a view to the implementation of our systems in a couple of other future aircraft projects. As the Zonal Drying System is now an established product, opportunities for increased market coverage are being created through agent agreements. During the summer, we entered a co-operation with Satair with the prime aim of increasing sales of the system to airlines outside Europe. Series deliveries of Cair humidifiers for Airbus A380 aircraft commenced during the year.the first of a total of eight Cair systems was installed in an Air Mauritius A340 aircraft in June, 2006. Zonal Drying systems have been sold to Boeing, Sun Express, Excel Airways, Luxair, Martinair, and Monarch during the past year. Cair has been sold to Air Mauritius and Jet Aviation. During the previous financial period, CTT has also participated at a number of aviation trade fairs around the globe including Hong Kong Aircraft Interior, Dubai Airshow, Singapore Airshow and Hamburg Aircraft Interior. The workforce has increased from 21 to 34 people during the financial period. Most of the new employees were recruited to strengthen the company s Development Department. During the coming twelve months, we will be primarily recruiting for production activities to keep pace with rising delivery volumes. We have also made large investments in our business premises, increased the number of office places and, above all, expanded our production facilities to meet the accelerating pace of deliveries in coming years. KEY EVENTS DURING THE FINANCIAL PERIOD In July, 2005, the Luxembourg airline Luxair, ordered the Zonal Drying Systems for installation in three of its B737-700 aircraft.two systems were installed during the autumn, 2005, and the third system will be delivered during 2006. In August, 2005, Boeing appointed CTT as a supplier for the Boeing 787 Dreamliner.The agreement embraces development and production of a) the Zonal Drying System that will be standard equipment on all newly-built aircraft and b) humidifiers which will be offered as an option to increase humidity on flight decks and on crew rest compartments. Boeing hopes to build around 3,000 of this aircraft type over a 20- year period commencing in 2008. It is estimated that the total income earning potential, based on the aircraft s total lifetime (around 20 years production and an operational service life averaging 20 years for each aircraft) amounts to a minimum of SEK 1.9 billion, inclusive of after sales. As reported earlier, development work for the B787 project is financed and has been accounted for from the first quarter of the financial period 2005-2006, and will continue to be accounted for until the end of the financial period 2006-2007. Liquidities for the development work were paid to CTT at the end of 2005. Deliveries of the system will commence early 2007. In September, 2005, Martinair of Holland ordered a Zonal Drying System for a Boeing 767-300 aircraft. The system was delivered during the winter 2005/2006. In October, 2005, CTT received an order for Zonal Drying Systems to be installed in two new B737-800 aircraft, which will be operated by Excel Airways in the UK.The company that owns the aircraft and ordered the systems is a large aircraft leasing 26

corporation. Both the leasing company and Excel Airways are new customers for CTT. Boeing installed the systems in the autumn, 2006. In the same month, employees subscribed to 28,929 new shares in the company in accordance with the incentive programme in the form of subscription options as agreed at the Annual General Meeting 2002.When the programme has ended, company employees will thereby, via the subscription of new shares (at a subscription rate of SEK 43.20) have injected around SEK 1.25 million into the company.the company s share capital has increased by SEK 28,929. In November, 2005, Martinair ordered Zonal Drying Systems for three of its A320 aircraft.the systems were delivered spring, 2006. In the same month, Air Mauritius increased its order for Cair from five to eight aircraft. CTT signed a Letter of Intent with Air Mauritius in April 2004 regarding the installation of the Cair system in five A340-500 aircraft.the partners have now converted the Letter of Intent to a leasing agreement. Air Mauritius will be the first airline in the world that offers its passengers improved comfort through increased humidity in the first-class and business class cabins.the first system was installed during the summer 2006 with the others expected to continue until the end of 2007. In January, 2006, CTT received an order for the Zonal Drying System from yet another new customer, Sun Express of Turkey.The order concerns systems for two B737-800 aircraft that were delivered in the spring, 2006. In the same month in Switzerland, CTT received an order for a Cair system for an A320 VIP aircraft from Jet Aviation AG. Delivery was made during the summer 2006. In February, 2006, CTT received its largest order from a single airline to date for the Zonal Drying System.The order, with a list price value of around SEK 16 million, was from Monarch Airlines from the UK.The order concerns systems for its whole fleet of 27 aircraft. (6 x A320, 7 x A321, 7 x B757, 4 x A300, 2 x A330 and 1 x B767) Deliveries have commenced and will be completed by the end of 2007. At the beginning of May, 2006, a Zonal Dryer in service on an aircraft caused over heating in an air pipe leading out of the apparatus.the Zonal Dryer is an older type that is used in MD11, B747 and B767 aircraft. CTT have found a solution to the problem and, pending its introduction, we recommend operators to keep the Zonal Drying System turned off. CTT believe that the Zonal Dryer in CRJ aircraft can also cause an over heating and therefore recommend operators to keep the Zonal Drying system turned off until further notice. Lufthansa Technik, that is responsible for certification of most CTT systems, and the civil aviation authorities affected share CTT s opinion and have requested the affected airlines to follow CTT s recommendations. CTT will commence with modifications to the apparatuses involved during the autumn. It should also be pointed out that this problem does not affect the Zonal Drying System that is a newer variant and installed in the aircraft types B737, B757 and A320/321. In June, 2006, CTT received an order for Zonal Drying systems for three new B737-800s, which will be operated by Excel Airways of the UK. The owners of the aircraft who have ordered the systems are two aircraft leasing corporations. Boeing will execute installation during the financial period 2006/2007. KEY EVENTS AFTER THE FINANCIAL PERIOD In July, 2006, CTT received an order from Lufthansa Technik for a Cair system for a B737 VIP aircraft.the system will be delivered autumn, 2006. In the same month, CTT won an order for a Zonal Drying System for a B737-800 of Transavia in The Netherlands.The system will be installed by Boeing during final assembly at the beginning of 2007.Transavia has now ordered Zonal Drying Systems for a total of 23 B737 aircraft. Also in the same month, CTT signed an agency agreement with Satair A/S, Denmark, regarding support and sales of CTT s Zonal Drying System. Through its global network of facilities and international sales team, Satair A/S will be able to work with airlines in co-operation with CTT s sales department. Mid-August, 2006, saw CTT, together with an industrial partner, sign an agreement with one of the world s leading aircraft manufacturers to develop the Cair system for humidification of the first-class cabin in a type of long-haul aircraft.the system will be operated by one of the world s largest airlines.the Cair system will include a humidifier and a Zonal Drying System. CTT s industrial partner will be responsible for the systems and also develop the control system technology. The systems will be installed by the aircraft manufacturers during the final assembly phase.the first of these will be delivered to the aircraft manufacturer at the beginning of 2007 with deliveries of the airline s aircraft continuing over a period of two years. For CTT, the order value for this airline is, exclusive of after market sales, around SEK 10 million. In October, the next large deal arrived when Continental ordered the Zonal Drying System for its 41-strong fleet of B757 aircraft.with this contract we have succeeded in breaking into the North American market. Continental is the fourth largest airline in the USA with a fleet totalling some 360 aircraft. We now have the opportunity to show the American airlines the advantages of our Zonal Drying System. 27

FINANCES The year saw net sales climb to SEK 23.7 million, almost double last year s SEK 12.8 million. Having begun the period at 7.85 USD/SEK, the Dollar went on to peak at SEK 8.25 USD/SEK in November before falling back to a low of 7.09 USD/SEK in June and ending the financial year at a rate of 7.26 USD/SEK. CTT s dependence on the USD rate is significant as virtually all invoicing is made in USD whereas costs are for the most part in SEK. By actively working with hedging we are able to reduce the risks to our business activities but the movement of rates is of great importance for the development of earnings. By and large, gross earnings margins are unchanged from the financial last year. External expenses and personnel costs have risen due to the work resulting from the preparations CTT is making in the run up to forthcoming B787 deliveries. Taken as a whole, this has meant that the result of SEK 13.4 million is more or less unchanged from the previous year s figure of SEK 13.3 million. Funds of SEK -5.9 million are an improvement on last year s SEK -18.8 million, prior to financing activities. During the course of the year, the company has secured bank financing totalling SEK 25 million and the company believes that this credit will cover the capital requirement until the business generates a positive cash flow. The value of new orders received during the year rose to SEK 51 million, an improvement on last year s SEK 22 million. As of August 22, 2005, when the Consolidated Sales Review was delivered, the value of the order stock totalled SEK 58 million (SEK 22 million). INVESTMENTS During the financial period, investments of SEK 2.9 million (SEK 4.5 million) were made in tangible assets, primarily in developments for the Airbus A380 aircraft. Development work for the Airbus A380 is very comprehensive and was expected to be completed during the course of 2005. However, delays to the project will mean that the work will continue into 2007. Investments in tangible fixed assets, primarily for the build-up of increased production capacity, totalled SEK 4.0 million (SEK 0.4 million).total investments thus amount to SEK 6.9 million (SEK 4.9 million). Whilst this was expected to be completed during the course of 2005, increased demands mean that the work will probably continue into 2006. Depreciation on investments related to the Airbus A380 programme has not been initiated and therefore does not burden the result for the financial period. THE WORK OF THE BOARD The CTT Board of Directors consists of five members and a deputy chosen at the Annual General Meeting.The members comprise persons representing the major shareholders in CTT as well as independent persons.the members have long and varied experience from areas of business that are highly relevant to the company and its operations. The board elects its officer immediately after the Annual General Meeting. At this meeting, the Board s agenda is set, as well as directives for the President in order to secure the development of the company and fulfil the Board s requirements for information and supervision of daily operations. During 2005/2006 there were four Board meetings. The four regular meetings comply with an agenda that requires inclusion of the following points: the preceding protocol, marketing and current situation reports, finances, organisation, and other matters. Matters discussed by the Board during the year included strategies, business plans, entered agreements, budgets, interim reports, and the company s equity requirements. Remuneration totalling SEK 87,000 has been paid to Board members, SEK 30,000 thereof to the Chairman. NOMINATION AND WORK OF THE COMMITTEE CTT holds its Annual General Meeting on November, 16. Nomination and replacement matters are discussed beforehand by representatives for the major shareholders in consultation with the Chairman, Karl-Axel Granlund. In view of the company s size and number of shareholders, the appointment of a nomination and replacement committee has not been deemed necessary. Instead, opinions and nominations are willingly accepted and can be forwarded to the Chairman at the following address:volito AB, S. Förstadsgatan 4, SE-122 43 Malmö, Sweden. Given the company s limited complexity, an audit committee has not been appointed.the external auditors have been, by virtue of their presence at Board meetings and testifying of written reports, conveying their viewpoints. ACCOUNTING PRINCIPLES The annual accounts have been drawn up in accordance with the Swedish Annual Accounts Act and RR 32:05, accounting for legal entities. In accordance with the recommendation, juridical persons shall prepare their financial reports in accordance with the IFRS/IAS whereby a number of exemptions and additions to this principle are permitted upon adoption as listed in the recommendation. PROPOSED DISPOSITION OF ACCUMULATED DEFICIT From company s accumulated deficit 0 Deficit for the year 13 359 579 Accumulated deficit for disposition 13 359 579 Proposed disposition Reduction from statutory reserve 13 359 579 Total 13 359 579 28

The exemptions applied are: - IFRS 1: First time adoption of IFRS: the company has elected not to present the opening balance sheet under IFRS or to apply the provisions retrospectively. - IAS 1: Presentation of Financial Statements: the company applies with the Annual Accounts Act presentation format. - IAS 17: Sales and Leasebacks with Repurchase Agreements: All leasing agreements are shown in accordance with the rules for operational leasing agreements. - IAS 19: Employee Benefits: the company s pension plans are shown in accordance with rules for defined contribution pension plans. In accordance with the transition regulations of RR32:05, the company has chosen not to apply certain parts of IFRS/IAS which have not had any effect on the company s equity. Consolidated financial statements have not been prepared as the holdings have not been active and are thus deemed to be insignificant in order to give a correct picture of the company in accordance with ÅRL 7:5. The financial reports were approved for issue by the Board September, 27, 2006. FUTURE DEVELOPMENT Turnover will continue to rise during the financial period 2006-2007.This increase is primarily a result of increased sales of the Zonal Drying System on the retrofit market. CTT s costs will also increase as a result of the growing workforce and development projects the company has entered.taken together, this will mean that whilst the result improves it will continue to remain negative. The time to globalize sales is ideal. Not only do we have high fuel costs as a driving force, but we also have the B787 agreement serving as a stamp of approval and many airline operators are witnessing a positive economic development that provides them with an opportunity to invest in new technology.thanks to the agent agreement with Satair A/S and access to its global network of facilities and international sales team, we will be able to approach still more airlines, especially in areas outside Europe. The order of Cair for the firstclass cabin of one of the world s leading airlines that CTT won after the financial period closed in August could prove itself to be the system s breakthrough into the passenger aircraft market. Our Cair system enjoys a very good reputation on large VIP aircraft where it is has won considerable attention and approval amongst the passengers. It is therefore natural that airlines become more interested in introducing humidifiers in the passenger cabins of long-range aircraft.we are very pleased that one of the aircraft manufacturers has endeavoured to meet the airline s wishes and together with CTT and our partner develop Cair for this specific aircraft type. A successful launch of the system with the airline will pave the way for further sales to other operators of this aircraft type. In the longer-term it is likely that aircraft manufacturers will be compelled, as a result of competition, to offer humidification of first and business-class in other long-range aircraft types. CTT is in an excellent position to win a very large share of this market. At the beginning of 2007, we will deliver the first Zonal Drying System for Boeing s B787 prototype. Deliveries of the first humidifiers for the B787 will commence early summer, 2007, and deliveries of series production systems in the autumn of the same year.we are a little unsure how the deliveries of humidifiers for the A380 will develop in the near future. Airbus has given notice of lower delivery output during 2007 and 2008 than initially advised.this will also have an effect for CTT. RESEARCH AND DEVELOPMENT Product development has concentrated on the B787 order as well as production of the A380 humidifier and the development of Cair for Air Mauritius. Development work on the counterflow dehumidifier has been pursued within the framework of the European research project FACE (Friendly Aircraft Cabin Environment). 29

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Five-year summary (SEK Thousands) 2005/2006 2004/2005 2003/2004 2002/2003 2001/2002 Income statement Income 28 946 19 551 25 242 20 017 22 141 Expenses 38 697 31 020 36 643 35 674 26 130 Depreciation 3 478 2 040 2 128 2 019 3 263 Profit/loss after depreciation 13 229 13 509 13 529 17 676 7 252 Financial income 209 344 895 1 705 1 459 Financial expenses 340 103 207 385 450 Profit/loss for the financial year 13 360 13 268 12 841 16 356 6 243 Balance sheet 06-06-30 05-06-30 04-06-30 03-06-30 02-06-30 Assets Intangible fixed assets 8 572 7 892 4 075 1 776 2 543 Tangible fixed assets 4 831 2 095 3 122 3 510 2 815 Financial fixed assets 101 101 101 101 1 Other current assets 19 851 15 845 13 342 11 583 12 167 Cash and bank balances 8 987 13 735 18 499 13 917 30 898 Total assets 42 342 39 668 39 139 30 887 48 424 Shareholders equity and liabilities Shareholders equity 20 161 32 339 29 393 18 603 34 959 Allocations 1 181 1 026 612 650 640 Long-term liabilities 79 79 85 2 592 4 500 Short-term liabilities 20 921 6 224 9 049 9 042 8 325 Total shareholders equity and liabilities 42 342 39 668 39 139 30 887 48 424 Key ratios Share of risk capital % 48 82 75 60 72 Return on equity % 51 43 54 61 16 Return on total assets % 32 33 36 40 11 Return on employed capital % 49 40 45 49 13 Liquidity ratio % 94 333 305 233 450 Interest coverage ratio 38 128 61 42 13 Operating margin % 56 106 64 90 34 Debt ratio 0,0 0,0 0,1 0,2 0,2 Equity capital ratio % 48 82 75 60 72 Profit margin % 56 104 61 87 30 Personnel No. of personnel, average 29 22 22 20 19 Income per employee, SEK thousands 1 016 889 1 147 1 001 1 165 Salaries, SEK thousands 10 436 9 171 9 231 8 625 7 316 Share data Earnings per share, SEK 1,57 1,92 2,18 3,20 1,22 Earnings per share, after conversion 1,57 1,92 2,18 3,20 1,22 Equity per share, SEK 2,36 3,80 4,61 3,64 6,85 Equity per share, after conversion,sek 2,36 3,80 4,61 3,64 6,85 Cash flow per share, SEK 0,55 0,69 0,72 3,33 0,43 Number of shares 8 538 929 8 510 000 6 382 500 5 106 000 5 106 000 Number of shares after conversion 8 538 929 8 510 000 6 382 500 5 106 000 5 106 000 Average number of shares during the period 8 528 091 6 914 375 5 882 392 5 106 000 5 106 000 Share rate on balance sheet date, SEK 50 18 18 17 35 Dividends per share, SEK 1) 0 0 0 0 0 1) 2005/2006 refers to proposed dividends 31

Income statement (SEK Thousands) Note 2005-07-01 2004-07-01 2006-06-30 2005-06-30 Net sales 1 23 748 12 803 Capitalized expenditure on product development 2 935 4 526 Other operating income 2 263 2 222 28 946 19 551 Operating expenses Raw materials and necessities 6 626 3 769 Other external expenses 2 14 741 13 186 Personnel costs 3 16 178 13 614 Depreciation of tangible and 3 478 2 040 intangible assets Other operating expenses 1 153 451 Total operating expenses 42 176 33 060 Operating profit/loss 4 13 229 13 509 Results from financial investments Other interest income and similar 209 344 Interest expenses and similar 340 103 Net profit/loss for the year 5 13 360 13 268 Earnings per share, SEK 6 1,57 1,92 Earnings per share after conversion, SEK 6 1,57 1,92 Definitions SHARE OF RISK CAPITAL Equity plus deferred tax liabilities divided by total assets. RETURN ON SHAREHOLDERS EQUITY Profit/loss after net financial items as a percentage of average shareholders equity. RETURN ON TOTAL ASSETS Profit/loss after net financial items plus financial expenses as a percentage of average total assets. RETURN ON EMPLOYED CAPITAL Profit/loss after net financial items excl. financial expenses as a percentage of average employed capital. SHAREHOLDERS EQUITY PER SHARE Shareholders equity in relation to the number of shares on balance sheet date. INCOME PER EMPLOYEE Operating income divided by the average number of employees. CASH FLOW PER SHARE Funds in relation to the number of shares on balance sheet date. LIQUIDITY Current assets excluding stock but including any approved overdraft facilities divided by short-term liabilities. EARNINGS PER SHARE Profit/loss after net financial items divided by average number of shares. INTEREST COVERAGE RATIO Income after net financial items plus financial expenses divided by financial expenses OPERATING MARGIN Profit/loss after depreciation as a percentage of net sales for the year. DEBT RATIO Interest bearing liabilities divided by shareholders equity. EQUITY CAPITAL RATIO Equity as a percentage of total assets. PROFIT MARGIN Profit after net financial items as a percentage of net sales for the year. 32

Balance sheet (SEK Thousands) ASSETS Note 2006-06-30 2005-06-30 FIXED ASSETS Intangible fixed assets Capitalized expenditure on development 7 8 572 7 892 8 572 7 892 Tangible fixed assets Plant and machinery 8 0 0 Inventories, tools, fixtures and fittings 9 4 831 2 095 4 831 2 095 Financial fixed assets Shares in group companies 10, 11 101 101 101 101 Total fixed assets 13 504 10 088 CURRENT ASSETS Inventories 12 Raw materials and necessities 10 406 10 735 Goods in production 964 880 Finished goods and goods for resale 700 234 12 070 11 849 Short-term receivables Accounts receivable 13 4 093 1 802 Tax receivable 14 279 243 Other receivables 1 624 541 Prepaid expenses and accrued income 15 1 785 1 410 7 781 3 996 Cash and bank balances 8 987 13 735 Total current assets 28 838 29 580 Total assets 42 342 39 668 SHAREHOLDERS EQUITY AND LIABILITIES SHAREHOLDERS EQUITY 20 Restricted equity Share capital 8 539 8 510 Share premium account 37 097 Statutory reserve 24 982 0 33 521 45 607 Non-restricted equity Loss brought forward 0 0 Profit/loss for the year 13 360 13 268 13 360 13 268 Total equity 20 161 32 339 PROVISIONS Provisions for warranty commitments 16 1 181 1 026 Total provisions 1 181 1 026 LONG-TERM LIABILITIES Liabilities to financial institutions, interest bearing 0 0 Other liabilities, non-interest bearing 79 79 Total long-term liabilities 79 79 SHORT-TERM LIABILITIES Advance payments from customers 17 11 497 196 Accounts payable, trade 4 369 2 167 Other short-term liabilities 792 579 Accrued expenses and prepaid income 18 4 263 3 282 Total short-term liabilities 20 921 6 224 Total equity and liabilities 42 342 39 668 MEMORANDUM ITEMS Security pledged Floating charges 19 3 000 3 000 33

Shareholders equity (SEK Thousands) Share- Share premium Statutory Non-rextricted Changes in shareholders equity capital account reserve equity Total Shareholders equity June 30 2004 6 383 35 851 0 12 841 29 393 New issue 2 128 14 893 17 020 Issue expenses 1 188 1 188 Reduction in share premium accont 12 841 12 841 0 Repaid VAT for issue expenses 382 382 Profit/loss for the year 13 268 13 268 Shareholders equity June 30 2005 8 510 37 097 0 13 268 32 339 New issue 29 1 221 1 250 Issue expenses 68 68 Transfer to share premium discount 13 268 13 268 0 Transfer from share premium discount 24 982 24 982 0 Profit/loss for the year 13 360 13 360 Shareholders equity June 30 2006 8 539 0 24 982 13 360 20 161 Cash flow statement (SEK Thousands) Note 2005-07-01 2004-07-01 2006-06-30 2005-06-30 OPERATING ACTIVITIES Payments from customers, etc 21 35 295 16 246 Payments to suppliers and employees 22 34 103 29 720 Funds from operating activities before interest and income taxes 1 192 13 474 Interest received 148 318 Interest paid 312 105 Funds from operating activities 1 028 13 261 CAPITAL EXPENDITURE Acquisition of intangible assets 2 935 4 526 Acquisition of tangible assets 3 994 325 Funds from capital expenditures 6 929 4 851 FINANCING ACTIVITIES New issue 1 181 15 832 Amortization 0 2 506 Funds from financing activities 1 181 13 326 Funds this year 4 720 4 786 Ready funds at beginning of year 23,24 13 735 18 499 Exchange rate difference in ready funds 28 22 Ready funds at year-end 23,24 8 987 13 735 34

Accounting principles and notes CTT SYSTEMS AB (PUBL.) REGISTRATION NUMBER 556430-7741 CONFORMITY TO STANDARDS AND LAWS The annual accounts have been prepared in accordance with the Swedish Annual Accounts Act and recommendation RR32:05: Accounting for Legal Entities of the Swedish Financial Accounting Standards Council. Consolidated financial statements have not been prepared as the holdings have not been active and are thus deemed to be insignificant when providing a correct picture of the company in accordance with ÅRL 7:5. Since July 1, 2005, the company has applied the Swedish Financial Accounting Standards Council recommendation RR32:05, Accounting for Legal Entities. In accordance with the recommendation, legal entities whose securities are listed on the Swedish Stock Market or other authorized market places should present their financial reports in accordance with IFRS/IAS, but with the exemptions and amendments to this principle listed therein. The exemptions applied are: - IFRS 1: First time adoption of IFRS: the company has elected not to present the opening balance sheet under IFRS or to apply the provisions retrospectively. - IAS 1: Presentation of Financial Statements: the company applies with the Annual Accounts Act presentation format. - IAS 17: Sales and Leasebacks with Repurchase Agreements: All leasing agreements are shown in accordance with the rules for operational leasing agreements. - IAS 19: Employee Benefits: the company s pension plans are shown in accordance with rules for defined contribution pension plans. The transition and application of RR32:05 and certain parts of IFRS/IAS have not had any effect on the company s equity. STATEMENT OF COMPLIANCE Financial assets and liabilities are valued at the historical acquisition value unless stated otherwise. Receivables and liabilities in foreign currencies have been translated at the balance sheet closing day exchange rate.when preparing financial reports in accordance with RR 32:05 and application of certain parts of IFRD/IAS, the company management must make estimations, assessments and assumptions that affect the accounting principles and the reported amounts in the balance sheets and income statements. INCOME RECOGNITION Accounting of income is made in accordance with IAS 18. Products are not installed by the company but by the customer, whereby the risk is transferred to the customer at delivery. Revenue is therefore reported upon delivery. RECEIVABLES, LIABILITIES AND READY FUNDS IN FOREIGN CURRENCY Monetary assets and liabilities in foreign currencies have been converted at the exchange rates applying on the balance sheet date. Non-monetary assets and liabilities have been converted at the exchange rates applicable on date of purchase. In hedging via forward foreign exchange contracts, the relevant receivable or liability has been valued according to the forward rate.the company purchases primarily in SEK and European currencies although products are sold in USD. In major delivery contracts, CTT implements hedging in USD. STOCK Stock has been valued at the lower purchase value in accordance with the first in first out principle and actual value. Actual value is equal to sales value, less sales overheads. SEGMENT REPORTING CTT Systems AB (publ) has a single identifiable business area, which encompasses the activities of the company as a whole.the business area covers sales of products and services for humidity control in aircraft. Company sales have hitherto been to a limited number of countries on the global market of the aviation industry. All invoicing, with the exception of a minor amount in SEK, is in USD. No major differences as regards risks or possibilites exist in the various countries. No accounting per segment has thus been deemed necessary. GROUP FINANCIAL STATEMENTS CTT Systems AB (Publ.) is the parent company for wholly owned subsidiaries CTT Systems Incentive AB (556635-4857) headquartered in Nyköping, Sweden, and CTT Systems Inc. headquartered in Delaware, USA. Neither subsidiary has been active. No purchases or sales have taken place between group companies. As the holdings are not significant in order to give a correct picture of the company s results and position, no consolidated financial accounts have been established. RECEIVABLES Receivables are reported at the amount expected to be collected after individual assessment. 35

FIXED ASSETS Tangible and intangible assets are depreciated systematically on the basis of an assessed economic life of five years. However, data processing equipment acquired with effect from the accounting period 2004/2005 is depreciated over three years. Expenses for improving property owned by someone else are depreciated for the remainder of the lease after said investment. WRITEDOWNS Assets are written down when the reported value exceeds the recoverable value. Recoverable value refers to the greater of an asset s net sales value and the usage value. R&D EXPENDITURE Direct expenses for the company s research and development are capitalized until it is likely that the financial advantages associated with possession will accrue to the company. Expenses for day-to-day maintenance, adaptation and modification of existing products are entered directly. Linear depreciation is applied over a period of five years. LEASING Leasing agreements are reported as legal entities according to regulations for operational leasing agreements. The purchaser and seller bear the full risk of the leasing item. It means that leasing fees and rental are entered directly and that leasing income is accrued and reported linearly for the duration of the agreement. WARRANTY COMMITMENTS Provision for warranty commitments is made at a standard rate based on the company s system sales. LOAN EXPENSES Loan expenses are charged in the period to which they relate. FINANCIAL ASSETS AND LIABILITIES Financial instruments accounted for in the balance sheet include, on the asset side, liquid assets, account receivables and other receivables (financial assets). On the liability side are accounts payable (trade) and loans (credit institutions). A financial asset or liability is adopted in the balance sheet once the company becomes a party to the instrument s contractual terms.trade accounts payable are adopted in the balance sheet once the invoice has been sent. A liability is adopted once the counterparty has performed and a contractual obligation to pay exists, even if the invoice has not yet been sent. A financial asset is removed from the balance sheet once the rights in the contract are fulfilled, expire or the company loses control thereof. This also applies for a part of a financial asset. A financial liability is removed from the balance sheet when the contractual obligation is fulfilled or resolved in some other manner.this also applies for a part of a financial liability. Acquisition and divestment of financial assets are accounted for on the date of transaction that is also the date the company commits itself to acquire or divest the asset. The company classifies its financial assets and liabilities as follows: - Financial assets and liabilities are valued at their real value via the income statement. Assets and liabilities in this category are successively valued to their real value with fluctuations accounted for in the income statement. Liquid assets do not belong in this category. - Account receivables and loan receivables: Assets in this category are valued at the accrued acquisition value. - Financial assets that are readily sellable: Assets in this category are valued at the real value when the write down is accounted for in the income sheet. - Other financial liabilities: Liabilities in this category are valued at the accrued acquisition value.the company s loan liabilities and accounts payable do not belong in this category. 36

NOTE 1 NET SALES Leasing income Net sales include leasing income related to Zonal Drying System rentals to the amount of SEK 717,000 (SEK 702,000). Leasing is invoiced in USD. Estimated future leasing income has been converted at the exchange rates applying on balance sheet date. Remaining leasing income amounts to SEK 1,231,000 (SEK 1,170,000) due as shown below: Leasing income (SEK Thousands) 2005/2006 2004/2005 Within 1 year 647 583 Within 1-5 years 584 587 Later than 5 years 0 0 1 231 1 170 NOTE 2 OTHER EXTERNAL EXPENSES Auditors expenses (SEK Thousands) Lindebergs Grant Thornton AB 2005/2006 2004/2005 Auditors work 324 141 Other work 53 64 377 205 Auditors expenses The item Other external expenses includes fees and remunerations to auditors as follows. Fees in respect of auditors work amount to SEK 324,000 (previous year SEK 141,000). Fees in respect of other work amount to SEK 53,000 (previous year SEK 64,000). Auditors work is defined as examination of the annual report and accounts, the administration of the Board and President, other work performed by the company s auditor and advice or other assistance rendered necessary by observations in the course of such examination or execution of other work of this nature. All further expenses relate to other work. Leasing charges The item Other external expenses includes rent expenses of SEK 1,301,000 (previous year SEK 1,250,000). The remaining leasing charges, including rent expenses for premises, amount to SEK 5,865,000 (previous year SEK 1,810,000).These fall as shown below: Leasing charges 2005/2006 2004/2005 Within 1 year 1 254 939 Within 1-5 years 4 611 871 Later than 5 years 0 0 5 865 1 810 NOTE 3 PERSONNEL 2005/2006 2004/2005 Average number of employees Women 4 5 Men 25 17 Company total 29 22 Board Women 0 0 Men 5 5 5 5 Management and President Women 1 1 Men 6 4 7 5 Salaries and remunerations Board and President 1 330 1 164 Other senior executives 3 378 2 282 Other employees 5 729 5 725 10 436 9 171 Social security expenses Pension charges for Board and President 332 162 Pension charges for other senior executives 584 245 Pension charges for other employees 524 379 Other charges 3 775 3 212 5 215 3 998 37

CONT D. NOTE 3 PERSONNEL Remuneration and benefits for Chairman of the Board and President Remunerations paid to the President and Board are in accordance with the AGM.There is no special remuneration for committee work.tomas Torlöf has waived remuneration for his work on the Board. Remuneration to the President consists of basic salary, adjustable compensation, company car benefits, pension benefits and financial instruments. PRESIDENT 2005/2006 2004/2005 Basic salary 1 270 1 068 Adjustable compensation 0 0 Car benefits 59 60 Pension benefits 332 162 Financial instruments 0 0 1 661 1 290 Chairman of the Board Board retainer 30 30 Other senior executives Basic salary 3 378 2 282 Adjustable compensation 0 0 Company car benefits 124 83 Pension benefits 584 245 Financial instruments 0 0 4 085 2 610 Agreement on future pension The company s President and other senior executives are entitled to a life-time pension from the age of 65 in accordance with the ITP plan.the pension is earned successively and is paid in full if employment continues until the agreed date of retirement. Adjustable compensation Adjustable compensation refers to a bonus system for the President, entitlement to which is related to the company s operative cash flow and comprises a percentage based on the aforementioned cash flow.there are no further agreements regarding pension age or future pension for the President or other senior executives.the company subscribes to a pension plan for the individual where the company s commitment is limited to paying the agreed premium during the period of employment. Termination of employment and severance pay The President and certain executives are covered by agreements on severance pay if the person is obliged to leave his/her position at the company s request. Severance pay, including salary during the period of notice, for the President amounts to two years salary and in no case exceeds six months salary for other executives. Sick leave 2005/2006 2004/2005 Sick leave in total 5,1% 3,4% -sick leave for men 6,1% 4,1% -employees 30-49 years 7,2% 4,8% Information on long-term sick leave is not included as this may be traced to the individual, nor is information regarding groups of 10 or fewer. NOTE 4 OPERATING INCOME 2005/2006 2004/2005 Exchange differences affected operating income as below: Exchange differences on receivables and liabilities of an operational nature 1 070 35 NOTE 5 PROFIT/LOSS FOR THE YEAR 2005/2006 2004/2005 Exchange differences affected profit/loss for the year as below: Exchange differences on receivables and liabilities of an operational nature 1 070 35 Exchange differences on receivables and liabilities of a financial nature 322 1 748 36 38 NOTE 6 EARNINGS PER SHARE Earnings per share are calculated as result for the year divided by the average number of shares outstanding during the period.the average number of shares was 8,528,091 (6,914,375).

NOTE 7 CAPITALIZED EXPENSES FOR RESEARCH AND DEVELOPMENT 2006-06-30 2005-06-30 Opening acquisition value 19 313 14 787 Purchases 2 935 4 526 Closing accumulated acquisition value 22 248 19 313 Opening depreciation 11 273 10 564 Depreciation for the year 2 255 709 Closing accumulated depreciation 13 528 11 273 Opening writedowns 148 148 Writedowns for the year 0 0 Closing accumulated writedowns 148 148 Closing planned residual value 8 572 7 892 The capitalized amount relates to the development of humidification for the A380 as well as A380 First Class. As the A380 project is in progress, depreciation has not commenced. The following has been charged for Research & Development SEK 2.2 million (SEK 2.0 million). NOTE 8 PLANT AND MACHINERY 2006-06-30 2005-06-30 Opening acquisition value 875 875 Purchases 0 0 Disposals 0 0 Closing accumulated acquisition value 875 875 Opening acquisition value 875 875 Disposals 0 0 Depreciation for the year 0 0 Closing accumulated depreciation 875 875 Closing planned residual value 0 0 NOTE 9 INVENTORIES, TOOLS, FIXTURES AND FITTINGS 2006-06-30 2005-06-30 Opening acquisition value 9 158 8 917 Purchases 1 381 325 Expenses for improving other s property 2 615 0 Disposals 146 84 Closing accumulated acquisition value 13 008 9 158 Opening depreciation 7 063 5 795 Disposals 109 62 Depreciation for the year, equipment, tools 1 130 1 275 Depreciation for the year, improvement expenses on other s property 93 55 Closing accumulated depreciation 8 177 7 063 Closing planned residual value 4 831 2 095 of which rented equipment: Opening acquisition value 891 891 Purchases 365 0 Closing accumulated depreciation 1 256 891 Opening depreciation 572 296 Depreciation for the year 266 276 Closing accumulated depreciation 838 572 Closing planned residual value 419 319 NOTE 10 SHARES IN GROUP COMPANIES 2006-06-30 2005-06-30 Opening acquisition value 101 101 Purchases 0 0 Closing accumulated acquistion value 101 101 Closing book value 101 101 39

CONT D. NOTE 10 SHARES IN GROUP COMPANIES The amount of SEK 1,000 refers to the North American sales company that is currently resting, and SEK 100,000 refers to CTT Systems Incentive AB which administers the incentive programme for current and future employees. NOTE 11 SHARES IN GROUP COMPANIES Company HQ No. of shares Capital share Book value CTT Systems Inc. Delaware 100 100% 1 CTT Systems Incentive AB Nyköping 1000 100% 100 101 NOTE 12 STOCK 2006-06-30 2005-06-30 Stock raw materials 9 573 9 924 Stock with suppliers 833 811 Products in production 964 880 Stock of finished goods 700 234 12 070 11 849 NOTE 13 ACCOUNTS RECEIVABLE Accounts receivable comprises in its entirety of outstanding receivables for goods delivered to customers.there are no reservations and customer losses totalled SEK 0 (previous year SEK 0). NOTE 14 TAX RECEIVABLE The company has non-utilized fiscal deficiencies amounting to SEK 122 million (previous year SEK 108 million). No deferred tax receivable has been calculated on these deficiencies.there is no difference between nominal and actual tax.there is also no due date on non-utilized fiscal deficiencies. NOTE 15 PREPAID EXPENSES AND ACCRUED REVENUE 2006-06-30 2005-06-30 Accrued income interest 71 10 Prepaid rents 334 101 Prepaid insurance charges 323 294 Prepaid leasing 62 115 Accrued leasing revenue 306 258 Prepaid maintenance and licence fees 187 228 Receivables, EU project 128 67 Receivables, pending customer orders 0 0 Prepaid STC expenses 0 0 Prepaid trade fair expenses 56 107 Other interim receivables 319 230 1 785 1 410 NOTE 16 PROVISIONS FOR WARRANTY COMMITMENTS 2006-06-30 2005-06-30 Opening provisions 1 025 612 Amount exploited 435 1 364 Provisions for year 591 1 777 Closing provisions 1 181 1 025 The expected outflow of allocated funds is judged to be in line with the percentage provision for the corresponding period during which system sales occur.the provision is expected to be utilised over the coming four-year period. Closing provisions will continue to grow in line with increased system sales and rising number of systems with warranty commitments. NOTE 17 ADVANCE PAYMENTS FROM CUSTOMERS The item SEK 11,497,000 consists of SEK 10,861,000 for the development of systems. 40

NOTE 18 ACCRUED EXPENSES AND PREPAID REVENUE 2006-06-30 2005-06-30 Vacation pay liability 1 285 1 189 Accrued social security charges 415 386 Accrued salary tax 540 380 Accrued commission and royalty 916 492 Accrued sales discount 0 0 Prepaid EU subsidy 0 0 Accrued consultancy fees 162 85 Other interim liabilities 945 750 4 263 3 282 The Swedish Industrial Development Fund is entitled to a royalty corresponding to 1.75% of the net invoice value of sold units of the products and all other remuneration attributable to the products. A royalty of 25% is also payable on all other revenues earned by CTT as a result of agreements with third parties regarding options on obtaining rights, or on disposition of rights to licensed manufacture, or sale of the products or other remuneration attributable to the products. CTT has an obligation to pay royalties to the Development Fund until the end of 2006. NOTE 19 FLOATING CHARGES Floating charges refer to security for the company s approved bank overdraft facility of SEK 3 million.this facility was not utilized at close of books. NOTE 20 SHAREHOLDERS CONTRIBUTION Volito AB has provided a conditional shareholders contribution of SEK 4,900,000. In accordance with the articles of Association, no dividend may be distributed before the amount has been repaid to Volito AB. NOTE 21 PAYMENTS FROM CUSTOMERS, ETC 2005/2006 2004/2005 Net sales according to the income statement 23 748 12 803 Other operating revenue according to income statement 2 263 2 222 Changes in account receivable 2 291 1 959 Changes in advance payments from customers 11 301 933 Changes in prepaid operating revenue 322 7 Changes in accrued operating revenue 48 202 35 295 16 246 NOTE 22 PAYMENTS TO SUPPLIERS AND EMPLOYEES 2005/2006 2004/2005 Raw materials and necessities according to the income statement 6 626 3 769 Capitalized expenses for product development 2 935 4 526 Other external expenses according to the income statement 14 741 13 186 Personnel expenses according to the income statement 16 178 13 614 Exchange differences of an operational nature 1 119 429 Changes in inventory 221 4 588 Changes of prepaid expenses 265 419 Changes in other receivables entries 962 109 Changes in trade debts 2 202 821 Changes in other liability entries 872 209 34 103 29 720 NOTE 23 READY FUNDS The ready funds entry in the funds statement equals Cash and bank balances on the balance sheet. 41

NOTE 24 FINANCIAL ASSETS AND LIABILITIES Presented below are the company s financial assets and liabilities in categories specified for the company: 2006-06-30 2006-06-30 2005-06-30 2005-06-30 Financial assets valued at the real value Actual Accounted Actual Accounted over the profit and loss account value value value value Ready funds in SEK 1 604 1 604 985 985 Ready funds in USD 2 344 2 344 358 358 Ready funds in EUR 3 3 1 1 Share in Nordea Institutional Money Market Fund 5 035 5 035 5 043 5 043 Share in Nordea Likviditetsinvest Fund 0 0 7 348 7 348 8 987 8 987 13 735 13 735 2006-06-30 2006-06-30 2006-06-30 Actual Accounted Maximum Accounts receivable and loan receivables value value credit risk Accounts receivable 4 093 4 093 4 093 Other short and long-term receivables 1 785 1 785 1 785 5 878 5 878 5 878 2005-06-30 2005-06-30 2005-06-30 Actual Accounted Maximum Accounts receivable and loan receivables value value credit risk Accounts receivable 1 802 1 802 1 802 Other short and long-term receivables 1 410 1 410 1 410 3 212 3 212 3 212 2006-06-30 2006-06-30 2005-06-30 2005-06-30 Actual Accounted Actual Accounted Other financial liabilities value value value value Accounts payable, trade 4 369 4 369 2 167 2 167 Other short and long-term liabilities 16 552 16 552 3 478 3 478 20 921 20 921 5 645 5 645 Financial assets that can be sold Financial foreign exchange contracts refer to rate changes of accounts receivable in USD, due for payment as shown below: Total 2006-11-30 560 000 2006-12-28 65 000 2007-03-03 130 000 2007-04-30 130 000 2007-05-30 160 000 2007-07-31 60 000 1 105 000 USD The market value of the aforementioned contracts, as calculated by Nordea, stood at SEK 509,000 as of 30th June, 2006. NOTE 25 TRANSACTIONS WITH ASSOCIATES No associate transactions have been executed during the year. NOTE 26 POLICY FOR FINANCIAL RISK MANAGEMENT The general aim of the company s financial organ is to provide cost-effective financing of the company s operations and to provide secure administration of assests with market returns on invested funds.the general aim in financial risk management is to minimize the risks for negative influence on the company s results.thus the company s financial investments shall have a low risk profile. If the risk exposure is greater, such as in exchange rate differences, hedging shall be applied. 42

CONT D. NOTE 26 POLICY FOR FINANCIAL RISK MANAGEMENT The company s risk exposure and management is described below: Currency risks The company mainly operates in Sweden but through its international operations it is exposed to currency fluctuations. Purchases are mainly made in domestic and European currencies (SEK, GBP and EUR) while products are sold in US dollars.the company s policy is to safeguard 70 % of the accounts receivable for the coming 12 month period, when the currency exposure is not balanced by equivalent liabilities in the foreign currency. Interest risks The company s interest risks refer to holdings of interest-bearing securities and the company s financing at financial institutions. Holdings of interest-bearing securities shall always be in bonds with high liquidity which can quickly be sold in the event of possible changes in the general interest situation. Market risks The company s market risks consist of holdings of market securities decreasing in value due to general changes in value. Holdings of market securities shall always be in bonds with high liquidity which can quickly be sold in the event of possible changes in the general interest situation. Credit risks The company s credit risks are primarily linked to customer receivables. Due to the close contact between the company and the customer prior to delivery, a good credit evaluation can be performed before delivery and can be continued as part of customer relations. Cash flow risks The company currently has a negative cash flow and is dependent on capital contributions from company shareholders. As the company s products are utilized in aircraft over a long period of time, it is important that the company has sufficient reserves to maintain the confidence of customers and partners.the company may have to execute new stock issues in the future. NYKÖPING SEPTEMBER 27, 2006 Karl-Axel Granlund Anders Helmner Lars Solin Chairman Tomas Torlöf Dag Waldenström Torbjörn Johansson President Our report has been issued on October 2, 2006. Håkan Andréasson Authorised Public Accountant Lindebergs Grant Thornton AB Göran Jonsson Approved Public Accountant Lindebergs Grant Thornton AB 43

Auditors report We have audited the annual accounts, the accounting records and administration of the Board of Directors and the President of CTT Systems AB (publ.) for the year July 1, 2005 to June 30, 2006. The Board of Directors and the President are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President and significant estimates made by the Board of Directors and the President when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any Board member or the President.We also examined whether any Board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company's financial position and results of operations in accordance with generally accepted accounting principles in Sweden.The consolidated accounts have been prepared in accordance with international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the company's financial position and results of operations.the statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the Annual General meeting of shareholders that the income statements and balance sheets of the company be adopted, that the loss of the company be dealt with in accordance with the proposal in the administration report and that the members of the Board of Directors and the President be discharged from liability for the financial year. Nyköping October 2, 2006 Håkan Andréasson Authorised Public Accountant Göran Jonsson Approved Public Accountant 44

Board of directors and auditors Members of the Board Karl-Axel Granlund born 1955, Master of Science in Industrial Engineering and Management, Linköping, Chairman since 1993. Chairman and principal owner Volito AB. Chairman of Avansys AB. Board member of PEAB AB. Volito AB own 1,103,000 shares in CTT. Anders Helmner born 1953, Master of Science, Lund, member of Board since 1996. Senior Vice President Telair, Narrow Body and Single Aisle Division. Owns 3,053 shares in CTT. Lars Solin born 1959, Master of Science in Thermodynamics, KTH, member of Board since 2000. Partner at Experia. Owns 1,666 shares in CTT. Dag Waldenström born 1957, Master of Science Aeronautical Engineering KTH, member of Board since 1996. Sales Director, Saab Aircraft Leasing AB. Member of Board of the trade organization, Svenskt Flyg. Owns 4,622 shares in CTT. Tomas Torlöf born 1967, Master of Science in Mechanical engineering, KTH, member of Board since 2001. Tomas Torlöf is member of Board at AppliedSensor, Columbitech and i3micro Technologies. Share holdings in CTT, direct and indirectly via companies, amount to 450,000. Deputy Anders Wehtje born 1964, Master of Business Administration, deputy member of Board since 2003. Vice President and Financial Director, Volito Group. Owns 5,000 shares in CTT. Auditors Håkan Andréasson Authorised public accountant, Lindebergs Grant Thornton AB. CTT accountant since 1998. Göran Jonsson Approved public accountant, Lindebergs Grant Thornton AB. CTT accountant since 1996. Tomas Torlöf Anders Helmner Lars Solin Karl-Axel Granlund Dag Waldenström Anders Wehtje 45

Senior executives Torbjörn Johansson President, born 1958. Master of Science in mechanical engineering, Linköping Institute of Technology. Engineer s education at SAAB aircraft division 1982 83. Development engineer on JAS39 Gripen, SAAB 1983 88. Development engineer/manager, EPI GmbH (now Telair), Germany 1988 91. Engineering Director, Elektrometall GmbH, Germany 1991 96. Technical Director, CTT Systems AB 1996 97. President of CTT Systems AB since 1997. No. of shares in CTT: 25,000. Ulf R. Liljenberg Director Sales and Marketing, born 1960. Master of Science in mechanical engineering Lund Institute of Technology. Market economics, IHM. Engineering Manager, Transwede Airways 1988-1990. Technical Manager, Transwede Airways 1990-1995. Marketing Manager, Europe, Credit Lyonnais/PK Airfinance (CLPK), Luxembourg 1995-2000. Joint owner, Director of Finance and Business Development, Eurowind AB 2000-2002. Director Sales and Marketing, CTT since 2002. Number of shares in CTT: 10,666. Stefan Hammar Production Manager, born 1959. Mechanical engineer. Konstruktion Studsvik Energiteknik AB 1984-1990. Group Manager design, manufactureing, electricity and electronics Studsvik Nuclear AB 1990-2001. Design Manager Studsvik Nuclear AB 2001-2005. Design and Laboratory Manager Studsvik Nuclear AB 2005. Production Manager CTT Systems AB from 2006. Number of shares in CTT: 0. Mikael Brate Financial Manager, born 1960. Master of Science in Industrial Engineering and Management Economics Linköpings Institute of Technology 1988, Institute engineer Measurement and Control technology Falun/Borlänge 1984. Project and Marketing Controller CelsiusTech Electronics AB 1988-1993, Financial Director Mälardiagnostik AB 1993-1996, Financial Director Camfil Components 1996-1997, Business and Management consultant Cap Gemini 1997-2004, Financial Director Catech AB (publ.) 2004-2006, Financial Director CTT Systems AB from 2006. Number of shares in CTT 1,000. Maria Wester Quality Manager and Personnel Manager, born 1966. High school engineer. Studies in quality engineering, economics and marketing at Mälardalen College. Postgraduate Programme Personnel AdministrationProject management/ sales, Trade Motion 1988 89. Technical/ financial assistant, Burndy AB/FCI 1990 95. Quality and Personnel Manager, Framatome Connectors Sweden AB 1995 99. Quality Manager, CTT Systems AB since 1999. Number of shares in CTT: 3,853. Peter Landquist After Market Manager, born 1958. Graduate industrial technology high school, 1976. Production and design AB Nyge Aero 1986 1993. Head of Design CTT Systems AB 1993 1998. Technical Director 1998-2004. Technical Sales 2004 2006. After Market Manager from 2006. Number of shares in CTT: 2,000. Ronnie Eriksson Design and Development Manager, born 1964. Institute Engineer - Mechanical Engineering 1984. Designer ABECE AB 1985-1988, Designer Södertälje Konstruktioner AB 1988-1989, Product Development Thorsman & Co AB 1989-1990, Designer Studsvik Nuclear AB 1990-1998, Designer ABECE AB 1998-1999, Design Manager CTT Systems AB 1999-2006, Design and Development Manager CTT Systems AB from 2006. Number of shares in CTT: 5,000. COMPLEMENTARY INFO IN ACCORDANCE WITH NBK S RECOMMENDATIONS There are no further agreeements regarding pension age, or future pension, for the President or other senior executives. The company subscribes to a pension plan for the individual where the company s commitment is limited to paying the agreed premium during the period of employment. NOTICE AND SEVERANCE PAY The President and certain executives have an agreement that permits severance pay if the executive is obliged to leave his post at the company s request. Such severance pay, including salary during the period of notice, does not exceed one year s salary. Peter Landquist Maria Wester Torbjörn Johansson Ronnie Eriksson Stefan Hammar Ulf R. Liljenberg Mikael Brate 46

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