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Online Gaming Regulations

Other Countries

Customers in other European countries generated, in aggregate, approximately eight per cent of PartyGaming’s revenue in 2005. There have been some attempts by regulators in such countries to limit the supply and advertising of gaming products and services by attempting to limit such supply to domestic, generally state-owned locally licensed operators. This approach is capable of generating significant taxation and gaming revenues for the relevant government. Within the EU, Article 49 of the Treaty of Rome provides that no Member State may impose restrictions on the freedom to provide services from one Member State to another. However, restrictions may be imposed by individual Member States in order to safeguard the public interest under certain conditions and in order to meet such an objective.

The European Court of Justice has ruled, in the Gambelli case, that national laws that restrict the supply of gaming services in this way constitute restrictions on the free movement of services and freedom of establishment. Such restrictions can only be justified on public policy grounds where they form part of a coherent and systematic approach by a member state to limit the opportunities for citizens to engage in gaming. Where the state allows domestic operators to freely conduct gaming or encourages the expansion of gaming activities, it cannot close off the national market to companies based within the EU. As a result of this conclusion, the European Commission has presented a statement of objections to a number of countries and there are currently seven infringement actions pending against European member states. The outcome of these may affect the direction and speed with which the existing status [OF REGULATION?] is affected in Europe. According to the relevant principles that apply, this ought to result in either (i) the maintenance of the state-monopoly situation accompanied by a reduction of or restriction on offerings THE GAMES OFFERED and advertising by the license-holder which would not improve the current situation for PartyGaming and may make enforcement against it more likely than at present in some countries, or (ii) a move towards a liberalisation of the market for the benefit of PartyGaming and other European-based operators to market their services without discrimination.

The Company anticipates that the consequences of the Gambelli decision and the events that may unfold over the course of 2006 and 2007 should enable PartyGaming to offer its services in many of these countries without the threat of legal claim. However, no assurance can be given that the application of laws and regulations in some or all of these European countries will not have an adverse effect on PartyGaming’s operations and the extent to which national courts will be willing to implement the Gambelli decision is still subject to doubt.

As a result, the Group and the Directors may face criminal or civil claims in these countries that could result in remedies such as injunctions and damages. If such an action were brought against the Group or the Directors, whether successful or not, the Group may incur considerable legal and other costs, management’s time and resources may be diverted, and the resulting dispute may damage the Group’s reputation and brand image and thereby reduce the Group’s revenue and operating profit.

Customers in the UK generated approximately two per cent of PartyGaming’s revenue in 2005. A wholly owned subsidiary in the UK provides certain marketing services to the Group. The Directors have been advised that these operations are in compliance with applicable law and regulations in the UK.

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

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

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

Reprinted with Permission From: © 2006 PartyGaming. All Rights Reserved