2006 has been another excellent year for Steamships, with a net profit after tax and minorities of K47.5 million. Your directors are proud to present this result, which demonstrates the strength of the Company and its ability to take advantage of the opportunities presented in Papua New Guinea.

Sales, at K336 million, decreased by 9.19% against 2005 sales of K370 million, largely because of the disposal of the Merchandise Division, offset in part by the full year's trading from businesses acquired during 2005. Depreciation in 2006 was K31,872,000 against K29,769,000 in 2005, and interest on borrowings was K1,473,000 against K3,482,000 in the previous year. The reduction in interest expense reflects the strong operating cash-flows of the Company, leading to lower average borrowings across the year. Capital expenditure, excluding the purchase of new businesses, was K70,168,000 against K42,555,000 in 2005. In addition, K43,445,000 was spent in the acquisition of new businesses in 2005.

This result reflects the continuing improvement in results from most businesses within the Group. 2006 also represents the first full year of trading for the companies acquired in 2005 (principally Laga Industries, East West Transport and the remaining shareholdings in Melanesian Soap Products and Trade Winds Liquor), and the first full year without the Merchandise Division. All divisions have benefited from careful control of operating expenses. The Hotels and Property Divisions have also benefited from very high occupancy levels, reflecting the high demand for the quality of service provided and the value for money perceived to be offered by the Group. Hardware has continued its improvement in product lines, service and speed of

reaction to the needs of the community it services. The Manufacturing Division has now been amalgamated into the Group, and synergies have been exploited. The two disappointing Divisions have been Shipping, which was hit by unexpectedly high dry-docking costs for some older vessels and a number of grounding incidents on the Fly River which led to off-hire time, and Transport which has suffered very badly from the poor tea and coffee harvests in 2006 and the continued deterioration in the Highlands Highway. The state of this road, and of law and order along it, is a cause for ever-increasing concern. Not only do these issues have an immediate effect on our businesses that provide or rely on transport to and from the Highlands, their impact on the overall economy of PNG and on the lives of the significant proportion of the population which lives in the Highlands should not be underestimated.

“The continued solid performance of the PNG economy, with its stable exchange rate and lower interest rates, has meant that, as in previous years, the Group has been able to continue to invest with confidence in new projects and assets”

The continued solid performance of the PNG economy, with its stable exchange rate and lower interest rates, has meant that, as in previous years, the Group has been able to continue to invest with confidence in new projects and assets, particularly in the Shipping, Property, Transport and Hotel Divisions, which is reflected in the capital expenditure figures. This investment is crucial to grow the Company and provide future opportunities. A significant number of new projects in all divisions are forecast and budgeted for 2007, which will represent an investment in future earnings growth and will keep the Company a vibrant and exciting contributor to the life and economy of PNG.

Directors anticipate that 2007 will be another year of growth for the Company provided the current benign political and economic conditions persist. This is an election year, and this year's elections will be the first under the new system of preferential voting. It is hoped that this will lead to social and political stability and thereby reduce the uncertainties that elections often bring.

A final dividend of 75 toea per share has been declared and will be paid following the Annual General Meeting on 21st May, 2007. This brings the total dividend paid for 2006 to 1 Kina per share, which represents some 65% of the post-tax profit of the Company. This is a significant increase on previous years' dividends and reflects the confidence of the directors in the performance and future prospects of the Company.

As will be apparent, the format of this Annual Report differs significantly from earlier years. There are no pictures, and the presentation is lowkey. In part, this is an exercise in environmental responsibility in that we are trying to reduce the size and use of resources represented by the report.

To this end, it is printed largely on recycled paper, with a consequent reduction in the environmental impact. In addition, however, this year's format reflects the fact that a History of Steamships has been commissioned from James Sinclair, which is expected to be launched towards the end of 2007 in preparation for the 90th Anniversary, in 2008, of Captain Fitch's initial venture into PNG which was to grow into the Company we see today. This History will be a major work, both in terms of its charting of the 20th Century history of Papua New Guinea and of its recording of the events that have shaped Steamships. The directors feel, therefore, that it is appropriate to issue a simplified report for 2006.