Message to shareholders

During the first half of 2008, total revenues and other operating income for the Group were slightly up compared to the first half 2007, despite the transition process underway in the digital TV segment and the strong dollar depreciation. Good results in the Public Access segment as well as a successful OpenTV turnaround have partially compensated for the development of the digital TV segment. At constant first half 2007 exchange rate however, Digital TV results would have grown by 5,4%.

Establishing the Kudelski Group as leading player in the digital TV business has been a consistent priority of the Board of Directors of Kudelski SA. More recently, we put particular focus on positioning the Group as a turnkey solutions provider and extending our leadership onto emerging platforms. We are well on our way in implementing this strategy: today, the Kudelski Group is the only technology supplier with proven scalable deployments in cable, satellite, terrestrial, IPTV and mobile. Our Group’s breadth of supported devices, including not only set-top boxes but also CA modules, mobile phones and portable media players, is unparalleled; our network-agnostic deployments of modular solutions are recognized and valued by several operators as ground-breaking. In parallel with this structural transformation, the Group has decided to migrate a majority of its active smart card/module base from the sale to the service mode.

In adopting this strategy, the Board was well aware that there would be a price to pay for this transition in the short term - a strongly reduced operating result. The decision to migrate to service mode was based on the fundamental economic benefits of this mode and in particular on the fact that this model is expected to optimize the profitability of the digital TV business in the medium and long term.

As at mid-2008, the migration is proceeding well and the most complex phase of the process has been completed. The majority of the card replacement programs, including the transitions to service mode, are in the deployment phase, including operators such as EchoStar/Dish, Bell ExpressVu, Canal Satellite, Premiere and Sogecable. While most of the migration of active cards is planned to take place during the second half of the year, development and installation objectives to date have been broadly achieved.

Another important development to be noted is the significant extension of the Group’s footprint in Asia. In addition to the launch of Reliance’s BIG TV satellite bouquet, Nagravision has won a contract as the conditional access provider for mobile TV in China, with gradual deployment in China’s principal cities starting in the second half of 2008 - probably the most ambitious project ever in the mobile TV sector. Further, OpenTV has been chosen by Skylife, Japan’s leading satellite television operator, for its middleware and interactivity solutions.

Profitability is expected to improve during the second half of the year, aided by the contribution of the Public Access segment which continues to grow with a seasonality pattern positively impacting second half results.

The outlook for the full year remains unchanged with total revenues projected in the range CHF 1.030 -1.050 billion and an operating income of CHF 5 -10 million. The massive smart card migration to service mode will have a significant positive impact from 2009 on.

We would like to thank our teams for their sustained high level of commitment and our shareholders for the trust they have placed in our Group during this complex and promising transition phase.

André Kudelski