Annual Report �006Part 1BUSINESSREPORT

ADRIA AIRWAYS

Table of contents

�. Summaries and highlights ..................................................................... 6�.�. Important events in �006 ...................................................................... 6�.�. Highlights of operations and key achievements in �006 ........................ 7�.3. Letter from the Management Board .................................................... ���.4. Report by the President of the Supervisory board ............................... �3�.5. Management bodies ........................................................................... �5�.6. Management of subsidiary companies ................................................ �8

�. General information ............................................................................. �9�.�. About the company ............................................................................ �9�.�. Company history ................................................................................. �9

3. Mission, vision and company strategy ................................................. �04. Ownership structure ........................................................................... �45. Fleet ................................................................................................... �46. Business report ................................................................................... �6

6.�. Operating conditions in �006 .............................................................. �66.�. Notes on the physical operating indicators .......................................... �66.3. Market communication strategy .......................................................... �76.4. Passenger transport ........................................................................... 3�

6.4.�. Scheduled flights ................................................................................ 3�6.4.�. Charter services .................................................................................. 3�

6.5. Cargo transport .................................................................................. 336.6. Aircraft maintenance for third parties ................................................... 336.7. Other activities .................................................................................... 376.8. Partnerships ....................................................................................... 38

7. Financial operations ............................................................................ 397.�. Revenue structure ............................................................................... 397.�. Expenses structure ............................................................................. 397.3. Asset structure ................................................................................... 437.4. Structure of liabilities ........................................................................... 437.5. Events after the balance-sheet date .................................................... 43

8. Risk management ............................................................................... 449. Key operating factors in �007 ............................................................. 47

9.�. Global and European economy in �006 — �007 ................................. 479.�. Tourism and traffic .............................................................................. 499.3. The key factors of the air traffic industry .............................................. 5�9.4. The key factors of the company’s operation ........................................ 53

�0. Cooperation with Star Alliance ........................................................... 55��. Employees and human resource policy ............................................... 56��. Corporate communication .................................................................. 60�3. Environmental responsibility ................................................................ 6�

�3.�. Impact on the social environment........................................................ 6��3.�. Impact on the natural environment ...................................................... 6�

�4. Safety ................................................................................................. 6��5. Quality assurance ............................................................................... 63�6. Research and development ................................................................ 63�7. Who’s who, contacts .......................................................................... 66�8. Organisational structure of the company ............................................. 67�9. Adria offices and points of sale ........................................................... 68

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1. Summaries and highlights

1.1. Important events in 2006

• 3.3.�006, the Supervisory Board accepted the resignation of Iztok MalaËiË, M.Sc., from the position of the president and management board member and appointed president of the management board for a temporary mandate Tadej Tufek M.Sc., former management board member for finances.

• 0n 8.5.�006, the supervisory board designated the management, structured as follows: Tadej Tufek M.Sc., president of the management board, and Mar-jan Ravnikar M.Sc., vice-president of the management board.

• The management board approved the business strategy and the business plan of the company for the period �007—�0��.

• In March �006, the company signed a seven-year contract on engine main-tenance and on costs payment according to the hours flown with a particular engine with Airbus A-3�0 IAE, the engine manufacturer; the advantages of this contract being: cash flow unburdening, particularly in �006, equal distribution of costs over seven years, and lower maintenance costs.

• In March �006, a contract as signed on wet-leasing of one Airbus A-3�0 for a one-year period beginning 3�.3.�006.

• Bearing in mind the fuel prices in �005, a reduction of EUR 4 million fuel costs could be realised.

• Enhanced competition at the line to London due to entry of a second low-cost airline, WizzAir.

• Leasing of two aircrafts Boeing 737-500, one of them for 5 moths, and the other one for the period April �006—March �007, while simultaneously leasing one Airbus A-3�0 aircraft out, we improved the passenger cabin efficiency and achieved lower costs.

• Extension of the operative aircraft lease CRJ-�00 for one year under very favo-urable conditions.

• Introducing four new flights with Summer Timetable: Barcelona, Rome, Tirana, Birmingham, and Kiev in the end of December

• Sales and operational leasing of a spare engine IAE-V�500.• In June �006, financial leasing of one SAAB 340 cargo aircraft, and in Septem-

ber, operational leasing of one SAAB 340 aircraft.• We have also begun with active marketing activities for the fuselages and have

already implemented one contract. • The quality of our services was put in the forefront of marketing communica-

tion — a friendly flight attendant as a core person of our advertising is also a holder of our values: kindness, safety and cosiness.

• Newly introduced cargo flights in �006: Frankfurt, Liege, Zagreb, Sarajevo and Beograd.

• In November, e-ticketing was introduced, which reached �4 % of total sale in

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the following month already.• Lowering of costs of the sales network in Kosovo while simultaneously selling

the license for performing sales activities.• In November, signing of the contract with Bombardier to purchase two new

86-seat aircraft CRJ-900; introduction in the Adria Airways fleet in May �007.• The “magic number” of � million passengers flown was exceeded for the first

time after Slovenia gained independence. In December, a media event was prepared and a female passenger was given a present on a flight to Moscow.

1.2. Highlights of operations and key achievements in 2006

Item Unit �006 �005 �004

Revenues SIT ‘000 38,�9�,668 3�,763,337 3�,595,4�6

Net profit/loss SIT ‘000 �6,799 (�,�93,�83) 4�,468

Assets SIT ‘000 �9,39�,90� �8,6�7,��7 �5,633,650

Equity capital SIT ‘000 7,��0,055 7,6�4,435 9,9�8,340

Equity finance % �4 �7 39

Number of passengers flown �,0�8,007 9�8,66� 884,86�

Number of aircrafts �� �0 9

We entered �006 with extensive loss from the year �005 and with the urge of reor-ganisation of business operation whose implementation began in the end of �005. In addition to its difficult situation the company experienced continuous changes in mana-gement in the first few months; the management finally stabilised in May �006.

Total revenue growth of the company totalled to 5,4�8,33� SIT ‘000, which is �7 % more than the preceding year. In �006, costs were higher by 9 %; growth of operative costs was however slower than the revenue growth. Using appropriate corrective acti-ons to restore financial loss from �005, totalling to SIT �.3 billion, the profit of SIT �6.8 million was reached.

We flew over a million passengers for the first time after Slovenia gained independence, which presents ten-percent growth in passenger numbers in comparison to �005. The number of aircraft increased, as well as the number of the employees - bearing in mind that new employments took place only in operative services while the number of the employees in supporting services was reduced. New systematisation and organisation of work posts resulted in a mere 3 % increase in labour costs despite the 9 % growth of number of the employees. Stimulating salary system with variable part of the salary was introduced and financing costs were reduced despite the larger fleet. The company has undertaken to organize effective controlling particularly by introducing profit- and cost centres.

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Ready to take off into the future.

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In our business plan, increase in flights by 9 % and �� % in the number of passengers carried, and �7 % growth in operating revenues were planned. 8 % more flights were achieved, �0 % more passengers and �5 % higher operative income, which we believe qualifies as a plan successfully implemented.

Our special offers were a way of continuous adaptation to the market and the competi-tion so as to increase the interest for flying with our company (e.g. the “99 EUR” sale).

In the aircraft maintenance sector, �� new contracts for servicing other airlines’ aircraft were signed and achieved the income, increased by �0 %.

Marketing revenues were increased by 6� % while along the existing media (the In-flight magazine and aircraft interior), marketing of numerous new media was introduced; one of the most noticeable attributes being the exterior image of the aircraft. The first pro-ject of such kind was implemented hand in hand with the company Hit d.d. in �006.

In the beginning of �006, changes in passenger service were introduced, which had no significant effects on the quality of our services or diminish our competitive advantage in any way; however, they had significant impact on reduction of costs.

Contracts with individual airports were revised and significant saving was achieved in �006 already. The commission cost on ticket sale per passenger was also reduced and e-ticketing was introduced intensely. In �006, significant saving was achieved in financing costs due to refinancing long-term loans and the cash-flow was improved due to the moratorium on repayment of the principal.

�004 �005 �006

32,5

95,4

27

32,7

63,3

37

38,1

91,6

68

Rev

enue

s S

IT '0

00

Index 109 101 117

Growth of the scale of operations of Adria

Airways d.d.

0

�

5,00

0,00

0

30,

000,

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�004 �005 �006

884,

861

928,

662

1,01

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Num

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of p

assa

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Index 105 110

A growing number of trusting pas-

sengers.

0

50

0,00

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,000

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�004 �005 �006

55,1

8

59,8

7

63.5

4

Load

fact

ors

- sc

hedu

led

fligh

ts Index 108 106

Continuous improvingof load factors.

0

�0

40

60

80

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1.3. Letter from the Management Board

Ladies and Gentlemen!

The Adria Airways trademark is not a mere synonym for air transportation and aircraft. Our name reflects a brand new, fresh energy and evokes associations with travel, tou-rism, and connectedness of countries, continents and of the World; it evokes associa-tions with speed and accessibility, width of services and a new lifestyle. We have risen amongst the largest players in the sky, flying safely, pleasantly and comfortably.

In �006, we stabilised our operations, managed our expenses and improved our in-ternal organisation in accordance with our vision in which we had written our wish to become a successful traditional European network air carrier with a modern fleet which is in constant development and growth. Refinancing the long-term loans brought us substantial savings in terms of financing costs. Due to the optimisation of our fleet, we have begun to lease out our aircraft with staff abroad. Since the hundred-seat aircraft had proved the most suitable, an order was placed for two new CRJ-900 aircraft which are coming in this spring. However, these are merely the organisational and technical points of view in business rationalisation. The focus of our reflection is primarily put on the people, our employees, business partners, service users and passengers.

We have adapted to global trends by building new, better relations with all our partners, while simultaneously establishing new relationship with the users of our services, touri-sts and travellers. The conventional forms of communication to them such as interac-tive website, possibility to buy e-tickets and personalized treatment are slowly growing into completely new communication paths.

Since good relations with our partners begin with ourselves, we pay special attention to our employees. Values like safety, friendliness and comfort are felt and experienced every day in our working environment. To satisfy the senses entirely we improved our graphic corporate image and complemented it with new style image of our flight at-tendants who became the announcers of our values. We have become an air carrier who is recognized for kindness of the staff and attentiveness towards passengers while distinguishing for our responsiveness, adaptability and personal approach.

Aircraft fuselage as a means of communication and an advertising space is certainly one of these new marketing approaches. The first of our aircraft now carries the cor-porate image of our business partner and new arrangements are to follow. Enhanced marketing activities have also contributed to our second large last-year success. We carried more than one million passengers for the first time after Slovenia’s gaining in-dependence.

Business year �006 was finished with profit. The number of passengers has increased, cost-efficiency of the company has improved, and the first fleet optimisation measures

Tadej Tufek M.Sc.,Presidentof the Management Board & CEO

Marjan Ravnikar M.Sc., Vice Presidentof the Management Board

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Marjan Ravnikar M.Sc.,Vice Presidentof the Management Board

Tadej Tufek M.Sc.,Presidentof the Management Board & CEO

have come in force, which all will enable easier adaptation to market needs. Flights to Barcelona, Rome, Tirana, Birmingham and Kiev were added to the existing flights. Scheduled flights are complemented with charter flights in both, summer and winter seasons. We decided for more intensive development of cargo transport services and our aircraft maintenance unit is also very successful and has become the maintenance crew for CRJ type of aircraft for all European CRJ operators. We have successfully en-tered the market for maintenance of Airbus A3�0 type of aircraft. We have used many projects to upgrade and successfully take advantage of our membership in the Star Alliance strategic network.

We look at our future with confidence and we are sure that our way of adaptation to changes in our dynamic business environment is the right one. A leap from 70th posi-tion to 50th on the scale of most respectable companies in Slovenia which is prepared every year by the Kline&Kline is the proof of that. All the employees of Adria Airways, who have recognised the difficulty of the situation and have supported the efforts for collective success, have contributed their part.

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1.4. Report by the President of the Supervisory board

Financial year �006 was of a key importance for business operations and restructuring of Adria Airways, so the supervisory board actively participated in adoption and super-vision over implementation of important business decisions.

The term of a member of the supervisory board, Mrs. Mirjana Gaspari, expired on �3 August �006, and the supervisory board on the following day appointed to the post Mr. Anton Grabeljšek.

Situation in which the company found itself in the end of the financial year �005 (SIT �,3 billion loss) demanded a joint effort from all members of the supervisory board, who met at nine scheduled, two extraordinary and one correspondence meeting.

On 7 March �006, the supervisory board relieved Iztok MalaËiË from the post of the president of the management board and temporarily appointed Tadej Tufek M.Sc., to the post. On the basis of a call for applications for the president of the management board, the supervisory board at a meeting held on 8 May appointed Tadej Tufek M.Sc., the president of the management board with a five-year term, and Marjan Ravnikar M.Sc., vice-president of the management board, also for a five-year term.

After the replacement and confirmation of the new president and deputy president of the management board, the new supervisory board was acquainted with the current physical and financial operating indicators and measures for the improvement of busi-ness operations.

On �6 January, the supervisory board adopted the business plan of the company for �006, and at a meeting on �9 June confirmed the annual report of Adria Airways d.d. for the financial year �005 with auditing report and supplementary plan for �006, which was drafted by the management board due to change in operating conditions in the first three months (fleet structure, fuel costs).

The business plan for �007 was confirmed on �4 December �006.

Due to poor operating results, the new supervisory board requested from the mana-gement board to draft a programme of measures for the improvement of business operations. The supervisory board requested an immediate implementation of the pro-gramme and consistent realisation of sanitation measures in all areas. After the pro-gramme of measures has been made, the supervisory board closely monitored the time schedule and adequacy of implementation of sanitation measures put forward by the management board.

The supervisory board requested from the management board to resume negotiations with trade unions on reduction of wages, and called on both parties to reach an agre-

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ement as soon as possible. The supervisory board requested from the management board a report on the measures for the improvement of the business operations with data on expected and realised financial effects.

In the beginning of �006, the supervisory board paid particular attention to introduction of EMB-��0 aircraft into the fleet and requested from the management board answers about leasing of aircraft through an intermediary and about negative reports in the me-dia. The supervisory board established a special commission to inspect and report on the mentioned deals, whose report was discussed at the subsequent meetings.

The management board also adopted directives of the operating strategy of Adria Air-ways for the �007-�0�� period, for which the management board set new foundations for the optimisation of the fleet. The supervisory board, in accordance with the ope-rating strategy, monitored the introduction of the own cargo operation and gave the management board its consent for leasing or purchase of new aircraft.

The supervisory board has already discussed possible capital injection in the company, giving it a positive opinion, because it would enable the optimisation of Adria Airways’ fleet.

On a wish from the company’s owners, the supervisory board requested from the ma-nagement board to call an extraordinary session of general meeting in order to confirm extraordinary auditing of the company for the last five years of business operations. Report on extraordinary auditing was presented at the ��st general meeting.

The supervisory board was also acquainted with the evaluation of the final profit or loss statement of Adria Airways d. d. for �006. The company ended the financial year with a minor net profit.

President of the Supervisory Board Franc Branko Grošl

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1.5. Management bodies

Management Board At its �nd correspondence session 9 March �006, the supervisory board made

a decision to:

• dismiss starting 3 March �006 Iztok MalaËiË from his duty as a president of the management board and as a member of the management board of Adria Airways d.d.

• appoint Tadej Tufek M.Sc. as president of the management board; the appo-intment came in force on 7 March �007 on temporary basis until the appoint-ment of a new president of the management board.

At its �4th regular session on 8 May �006, the supervisory board appointed:

• Tadej Tufek M.Sc., as president of the management board of Adria Airways for a five year term, in compliance with the call for applications.

• new member of the management board and new vice-president of the mana-gement board, Marjan Ravnikar M.Sc., for a five-year term.

The president of the management board represents the company together with the member of the management board — the vice-president.

Supervisory Board

There are six members in Adria Airways supervisory board, its main activities being:

• to oversee the commercial management of the company,• to verify the annual report,• to appoint and dismiss the president and other members of the management

board,• to deliberate over the company’s investment, commercial and financial plans.

Members of the supervisory board, shareholder representatives:

• Branko Franc Grošl, president form ��.7.�005• Bogdan Znoj, PhD, deputy president from ��.7.�005• Aleš Vehar, member from ��.7.�005• Anton Grabeljšek, member from �4.8.�006• Mirjana Gaspari, member till �3.8.�006

Members of the supervisory board, employee’s representatives:

• Deana Potza, member from �7.6.�004• Tomaž PeËnik, member from ��.6.�004

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We’re headed far - that’s why the world gets closer every day.

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We’re headed far - that’s why the world gets closer every day.

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1.6. Management of subsidiary companies

The Adria Airways Group comprises of:

- Adria Airways d.d., Ljubljana — parent company- Amadeus Slovenija d.o.o., Ljubljana — subsidiary (95 % interest)- Adria Airways Kosovo d.o.o. — subsidiary (�00 % interest) — dormant corpo-

rationAdria Airways does not compile a consolidated annual report, since the inclusion of the financial statements of the two subsidiaries in the consolidated report is not significant for a true and fair presentation of the financial statements of the Adria Airways as a whole.

Amadeus Slovenija d.o.o., Ljubljana

Director: Mladen VesnaverNumber of employees: �5

The main lines of business of the subsidiary company Amadeus Slovenija d.o.o. are distribution, marketing, maintenance of the reservation system and Amadeus software for airlines and agents completing reservations and selling air tickets. These services are provided in Slovenia, Macedonia and Albania.

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2. General information

2.1. About the companyAddress: Adria Airways, Slovenski letalski prevoznik, d.d.(abbreviated to: Adria Airways d.d.)

KuzmiËeva 7, �000 Ljubljana, SlovenijaTelephone: +386 � 369 �000, Fax: +386 � 43 69 �33Website address: www.adria-airways.com

2.2. Company history

1961 establishment of the charter airline Adria Aviopromet, operating DC- aircraft, end of the sixties purchase of DC-9 aircraft. 1970—1980 Adria is one of the most reliable charter airlines in Europe.1980—1990 Domestic scheduled flights within Yugoslavia start of international scheduled services. Adria becomes a member of the IATA. Fleet: DC-9, MD-80 and Dash 7 aircraft. Fleet: DC 9, MD 80, Dash 7 aircraft. 1989 Purchase of first Airbus A3�0 aircraft. 1991 On �5 June, the Republic of Slovenia declares independence, for political reasons Adria is grounded for three months. 1992 End of January operations restarted in a significantly reduced market. The structure of operations is markedly changed, from primarily a charter airline to a mainly scheduled service carrier.1995 Start of cooperation with Lufthansa, inclusion in European integration processes.1996 Financial consolidation of company.1998 Purchase of three new Canadair Regional Jet �00 aircraft. 2000—2004 Focus on operating regional scheduled flights primarily across Europe, continuous addition of new destinations and frequencies on existing services. Intensive cooperation with European airlines, especially Lufthansa.2000 Purchase of fourth CRJ �00. 2001 In November, the first scheduled flight in the EU, from Vienna to Frankfurt.2002 Adria selected as first European authorised Bombardier maintenance centre for CRJ aircraft.2004 In December Adria joins the global association of airlines, Star Alliance, as a regional member.2005 In January, purchase of fifth new Canadair Regional Jet �00 aircraft.2005 In June, opening of a new hangar.2006 In June, Adria introduces the first SAAB-340A cargo aircraft in its fleet.2006 In November, Adria starts introducing e-ticketing.2006 In December, Adria carries more than one million passengers for the first time in the independent Slovenia.

2Number of employees as at 31. 12. 2006: 59�Year of establishment: �96�Registration number: 5�56505VAT number: SI5�049406

Companies register number: �00�084�7Entry number: 06�/�0�35�00Share capital: SIT 8��,436,000Nominal value of share: SIT �,000

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3. Mission, vision and company strategy

Adria Airways considers its company strategy, which is in compliance with the accep-ted vision and the mission of the company, as the means of implementing its business goals.

Mission We are a company that:

• brings together knowledge and skills in aviation;• offers customers top-quality services;• achieves top-quality services through the innovative work of satisfied employe-

es;• provides an appropriate return to shareholders;• operates in harmony with the environment.

Vision We wish to be a successful European airline with a modern fleet that is developing and growing, an airline that by achieving the highest level of quality in its services enjoys the satisfaction of its passengers and other clients, while maintaining the recognisable profile of its own trademark.

StrategyThe primary objective of our operations is to maximise the return per unit of sharehol-ders’ equity.

With regard to the commercial strategies to date and our entry into the Star Alliance, we have pursued the commercial model of a network carrier linked to partner airlines and offering its passengers a global flight network. We are convinced that the selected commercial model represents a competitive advantage, and for this reason it must be improved and enhanced, and adapted to the competitive circumstances; however, it should not be substituted for the low-cost model.

The commercial strategy is marked by:• the renewal demanding the knowledge and understanding of changes in the

environment, highly motivated and responsive senior management, determi-nation for overcoming obsolete mind-sets, capability for reaching new goals on all levels, and competent management which will include all employees in the implementation of these goals.

• growth, where the primary goal is to increase the market share; growth and optimisation of capacities and development of the company as a whole;

• rationalisation which demands distinctive focusing on the primary business activity, where supporting processes are less important; it demands strong financial control while restricting the financial expenditure in all areas.

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Values One of the biggest challenges in adapting to the new commercial circumstances is harmonising the values of our employees, which for most of them were formed in es-sentially different commercial conditions. These values (especially those of key figures in the company) must therefore be harmonised, and in line with the organisational hi-erarchy we must ensure the motivation of all employees. The more people accept the objectives of the company or of individual organisational units as their own, the greater their commitment to work and results will be.

Chosen strategyThe primary commercial strategy of Adria Airways, d.d., is conducting the business policy of a network carrier distinguished by individual approach, responsiveness and adaptability. The company is developing into an airline that is recognised for the fri-endliness of its staff and its sensitive attention to the passenger. We operate flights to attractive destinations with a relatively high frequency for various types of traveller. Our responsiveness is reflected in the introduction of new flights connecting to locations that are attractive both for business and tourism. In formulating our timetables we acti-vely cooperate with passengers and work to suit their needs.

We will strive for:• focusing the activities to satisfying and systematic checking of needs of the

utmost number of passengers; our flight network will be built according to the passengers’ needs thus maintaining competitive edge, i.e. the relatively large number of scheduled direct and charter flights from the home airport;

• performing marketing communication activities with the intention to distinguish ourselves from our competitors;

• focusing on passengers’ needs;• performing services of high quality and safety, proven by the IOSA certificate.

The marketing activities of Adria Airways will consider: • given the current market circumstances and development of competition in

the EU, further development of partnership in the strategic Star Alliance net-work is relevant to be able to meet the needs of the majority of passengers in the Slovenian market for network flights.

• due to the segmentation of the sector, the competition from low-cost air carriers and small domestic market, further building of the direct flight network from Slo-venia and restraining of passenger outflow to the other carriers is necessary.

• the expectation that all air carriers form the area of the former Yugoslavia will not be capable of successful competition against growing foreign competition in their domestic markets; these markets should be considered perspective and therefore connections via home Ljubljana airport should be enhanced.

• with Slovenia’s entry to the EU, Adria Airways has gained the possibility to per-form air transport anywhere within the EU; business risks, which are a result of increased competition in the domestic market, can be lowered significantly by developing such services.

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More than a million passengers in safe hands.

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Remaining the best air travelling option for the passengers who travel to and from Slo-venia is important for Adria Airways, as it is also important, because of the small dome-stic market, to decrease its business risks by entering those profitable foreign markets where quality of their services for a reasonable price and business flexibility can assure long-term business success.

Alternative strategiesTaking segmentation of the sector into consideration, change of business model into low-cost concept could present an alternative. A few typical European air carriers have tried changing their models or establishing low-cost models within the same company; however, the results have not been not evident. We believe that Slovenian market is too small and thus the business risk of changing the model is too high.

4. Ownership structure• The share capital of Adria Airways d.d. is divided in 406,��8 ordinary shares

with a nominal value of SIT �,000.• As at 3�.��. �006, the company had 55 shareholders.

5. FleetThe optimal fleet is a key element of adaptation of Adria Airways to competitive circum-stances in the liberalised European air transport market. Due to too large gap between the Canadair CRJ-�00 and the Airbus A-3�0 aircraft, we leased two intermediary capa-city aircraft with crew in �006. In �006, we leased one Airbus A-3�0 aircraft for a one-year lease abroad to achieve optimal capacity utilization and dynamic adjustment to market circumstances. We leased one Boeing 737-500 ���-seater for an equal period and for additional six months a Boeing 737-500 �08-seater was leased.In �006, our fleet had 7 Canadair Regional Jet CRJ �00 LR aircraft from the Canadian manufacturer Bombardier Aerospace Canada (5 owned and � leased), 3 Airbus A-3�0 and � Boeing 737-500 aircraft (both leased). According to the decision on developing cargo transport, two cargo SAAB-340A aircraft were included in our fleet (one financial and one operative lease).

Ownership structure3�.��.�006 in %

Kapitalska družba 56 % Slovenska odškodninska družba �0 % NFD � �0 % Infond ID d. d. 5 % NFD Holding d. d. 7 % Individa d. o. o. � % Natural persons — other �%

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Airbus A-3�0:

CRJ �00 LR:

SAAB 340A cargo:

Airbus A A-320

Number 3

Length 37.57 m

Height ��.75 m

Wing-span 34.� m

Cruising speed 900 km / h

Max. altitude ��,700 m

Range 3,890 km

Seat capacity �6�

CRJ 200 LR

Number 7

Length �6.77 m

Height 6.�� m

Wing-span ��.�� m

Cruising speed 860 km / h

Max. altitude ��,496 m

Range 3,�85 km

Seat capacity 48/50

SAAB 340A cargo

Number �

Length �9.73 m

Height 6.97 m

Wing-span ��.44 m

Cruising speed 5�8 km / h

Max. altitude ��,300 m

Range �,450 km

Capacity 3650 kg

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6. Bussines report

6.1. Operating conditions in 2006

Business operation in �006 was denoted by high growth of oil price in the global mar-kets, which slowed down as late as in September. In August, record price 78 USD per barrel was reached. After calming down of the Lebanon crisis, a significant decrease was noticeable in September, which meant 60 USD/barrel in the end of September.

According to the expectations, market shares of low-cost carriers are increasing in Europe; however, there was still no selection among network carriers despite those same expectations. Considering the intention of Italian Government to sell its share in the Italian national carrier Alitalia, we are looking in the face of better times in the area of free competition in Europe in the future.

In �006, our competitors were trying to improve poor business results from �005 by reorganisation. Due to globalisation in the sector some takeovers are expected in ad-dition to growing competition as well.

The international association IATA has announced better business results for air ope-rators as compared to �005 due to the general increase in demand. While the AEA reports the 4.5 % average growth of the number of passengers carried, Adria carried �0 % more passengers in �006 than in �005.

6.2. Notes on the physical operating indicators

• In �006, the company carried �,0�8,007 passengers on ��,4�0 flights. Com-pared to �005 the number of passengers carried increased by �0 %. Despite the general world crisis in aviation, the increased competition and the small market, since �00� Adria has been increasing the number of passengers car-ried. The number of passengers carried on scheduled services grew by �� %, while the number of passengers flying on charter services fell by � %.

• Load factors on scheduled services grew by 6 % in �006 compared to �005, indicating that the company optimised the planning of aircraft per individual flight in respect of the number of passengers on that flight.

• The average daily use of aircraft amounted to 9.45 hours per air day, represen-ting a 3 % growth from �005.

• Labour productivity, measured by the number of passengers per employee, increased by 3 % compared to �005, since with the number of employees increased by mere 5 % we carried �0 % more passengers.

6

�7

• Average fuel consumption per hour of flying grew by � % compared to �005, which is primarily the result of increasing the proportion of hours flown by 5 % and fuel consumption increased by 7 %.

• We are one of the more punctual European airlines; in �006 we recorded an average of �0.7 minutes of delay on all flights; comparing the number of Adria Airways scheduled flights delayed more than �5 minutes with the average for the 30 European carriers grouped into the AEA (Association of European Air-lines) shows that our average is low, since �� % of AEA flights were delayed more than �5 minutes in �005, while just �8 % of Adria’s flights were more than �5 minutes late.

Despite the entry of competitor airlines (Turkish Airlines, Wizzair) to the Slovenian mar-ket, we have managed to maintain our market share measured in total number of all passengers carried on Adria flights from Ljubljana (73 %). Our position is maintained by marketing communication activities, constant contact with the market and expanding of the flight network through the Ljubljana Airport. In �006, new scheduled flights were introduced: Barcelona with two weekly flights, Birmingham with one-week frequency, Rome with four and Tirana with six flights per week; on Zurich line we added three weekly frequencies; in the end of the year, flight Ljubljana—Kiev was introduced; to-tal number of flights was increased by 8 %. In the foreign markets we are trying to improve our presence and recognizability with help of different strategic partnerships with domestic and foreign tourist service providers and within the Star Alliance we are becoming more and more recognizable in the foreign markets as a reliable air carrier of excellent quality.We are going to maintain our position in �007 as well, mainly with focusing our activities to satisfying the needs of our passengers and systematic checking of the needs of the largest number of passengers possible. Our flight network will be built and upgraded according to the passengers’ needs thus maintaining competitive edge, i.e. the relati-vely large number of scheduled direct and charter flights from the home airport. By per-forming marketing communication activities we will inform the passengers about our competitive advantages and flight offer (including the offer of the global flight network which is offered through our partnership with the Star Alliance) and about services of high quality and safety.

6.3. Market communication strategy

While planning our market communication strategy in �006, we followed the planned strategic goals of marketing for the mid-term period:

• building a clearer and more attractive image of Adria Airways in the eyes of the public,

• enhancing the internet sale at home and abroad,• increasing the revenues from marketing our own media,• strengthening the loyalty of our passengers.

�8

�9

Welcome to our homeabove the clouds.

30

The main objectives of the market communication strategy in �006 were:• promoting the new scheduled flights,• raising awareness about the good price deals offered by Adria Airways,• raising awareness of our improved product owing to membership of the Star

Alliance,• promoting our website as the primary medium of communication.

We were sending the message to passengers that the World is smaller and more accessible with Adria for a more favourable price. Despite its special price deals, Adria Airways remains an airline distinguished by its extensive network of flights, high-quality services and its emphasis on passenger care.

Marketing and communication activities in Slovenia and abroadMarketing and communication activities were mainly focused on promotion of the new scheduled flights that we introduced in �006. A communication strategy was made for that intention which we followed in our publications in Slovenian and foreign media. We have been addressing our target audience with recognizable visual and verbal constant with the image of a female flight attendant and the slogan “Home above the clouds”. Intensified marketing activities took place in Slovenia and in the foreign markets of Al-bania, Italy, Spain, Russia, Great Britain, Germany, Bosnia and Herzegovina and Mon-tenegro. Market communication in the foreign markets was founded on promotion of Slovenia as a tourist destination and Adria as a carrier which can offer the best connection to Slovenia with its quality services and accessible air ticket prices. In the foreign markets, promotion was performed autonomously or in partnership with the Slovenian Tourist Board. We prepared special acquaintance trips for foreign reporters and agents in Slo-venia and presented ourselves at tourist fairs and workshops abroad.In June �006, the renewed website www.adria-airways.com. was introduced. The website enables a better overview of current price offers and novelties in business ac-tivities of the company. The renewal of the website was not a closed project for us; its contents are being constantly adjusted to the passengers’ needs and desires. Our passengers’ satisfaction with the services of Adria Airways is monitored twice a year by measuring satisfaction on flights and through the Centre for passenger relati-ons. The loyalty of our passengers is strengthened by the activities in the “Miles&More” programme, whose member we are as of December �005.In �006, the scale of payments for passenger claims has risen by 7� per cent in com-parison to �005. Growing number of passenger claims for compensation is a result of the introduction of the EC Regulation No �6�/�004 which broadened passengers’ rights to compensation in case of cancellation, delay or commercial decision on sel-ling higher number of tickets than there are seats on a particular airplane. Taking into consideration passengers’ observations during two years of validity of this regulation who observe that the right to claim for compensation can be executed only in certain special circumstances thus the number of such claims can be expected to decline in the future.

3�

Marketing of Adria Airways mediaIn �006, Adria Airways increased the volume of revenues from marketing its own media by 6� per cent. The reason for such expansive growth is the number of media that we are marketing. The number of the issues of the Inflight Magazine which remains the most attractive medium for the advertisers was increased to 5 issues a year; for the first time, we have been marketing the advertising space on the aircraft surface and some other surfaces in the passenger cabin. When using different media we always carefully consider the standing of our own Adria trademark.

6.4. Passenger transport

6.4.1. Scheduled flights

Scheduled passenger transport is our main line of business, and in �006 this generated 70 % of net sales revenues. The trend of falling air ticket prices around the world has also been reflected in the average value of tickets sold for Adria Airways scheduled services, which fell in �006 by � %.

Definition of marketsIn terms of geographical location, the markets in which Adria Airways operates can be divided roughly into:

• the Slovenian market and bordering regions (Istria, Zagreb with its outskirts, Ri-jeka with its outskirts, the Italian and the Austrian frontier belts) - transport of passengers from Slovenia to destinations in western and south-eastern Europe;

• the markets of western Europe - transport of passengers from western Euro-pean destinations to Slovenia and via Slovenia to destinations in south-eastern Europe, and transport of passengers between EU countries;

• the markets of south-eastern Europe - transport of passengers from south-eastern European destinations to Slovenia and via Slovenia to destinations in western Europe;

• the “off-line” markets in which we have our own representatives but in which we do not fly to destinations.

Market position and new featuresIn �006, despite the growing competition we maintained our market position in all our defined markets. We expanded our network of flights to include Spain, Italy (in cooperation with the Ita-lian partner AirOne), Ukraine, and again Albania.We strengthened and expanded our activities in the US, Canadian and Australian mar-kets. Off-line markets represent just a small proportion of our volume of business, but we take the view that, in addition to our partnership in Star Alliance, through our own

3�

activities we can contribute to an increase in revenues from these markets.

Growing automation In Adria Airways, we are constantly trying to offer our passengers the simplest and most transparent product of purchasing our services possible. We follow global deve-lopments and in the first half of November �006, we introduced e-ticketing on �� sche-duled flights, first were the destinations where only Adria was involved and two weeks later, Interline E-ticketing (IET) with two important partners was introduced: Austrian Airlines and Swiss International Airlines. As at the end of December �006, �6 % of tickets issued were of electronic type. In �007, introduction of �5 more IETs is planned. E-ticket offers many advantages — saving time and lower fees for passengers, and for us — faster process which lowers the possibility for abuse.

6.4.2. Charter services

Charter services remain complementary services to the scheduled services and are aimed at optimising returns and not primarily at increasing the volume.In �006, relatively high growth in the market for tourism services and products in both Slovenian and foreign markets where we market our services has continued. Both areas influenced the growth in the number of Adria’s charter flights. In the previous year, �,0�4 charter flights were performed with 9 % growth rate compared to �005, representing �0 % share of all Adria’s flights and �5 % share of total revenues from passenger transport.Slovenian tourist market has remained traditional with prevailing role of tour operators, while in a part of European market the role of low-cost operators is given more and more emphasis in the segment of charter flights. Domestic and foreign tour operators represent key buyers in the charter service segment, since currently 70 % of flights are performed for the five our largest tour operators - Kompas, Intelekta, Atlas Airtours, Gulet and Globtour.Despite maintaining our position of a leading charter operator in the domestic market, we are facing growing competition of foreign charter operators, which is why we inten-sified our sales in the foreign markets in �006 too. We focused mainly to selling charter flights for different target groups, the so-called “incentive flights” on the CRJ aircraft and have achieved �0 % of all revenues in the charter segment with these services. The third important group is the group of charter flights for foreign tourist, coming to Slovenia (incoming). In the previous year, we were flying to Tel Aviv twice a week and to Larnaca once a week.Existing and new destinations are dependent on technical characteristics of the fleet on one part, and on tourist flow for the Mediterranean and North-African area on the other. Merely a smaller part of operations is focused on European destinations outside the li-sted regions. Greece was the most important destination in the summer, where we flew �5 times a week and the only all-year-round destination was Sharm el Sheikh (Egypt).

33

6.5. Cargo transport

Already in �005 and �006 we have faced decreasing scope of cargo transport which was performed on scheduled flights of the company; with the optimisation of the fleet and leasing out the Airbuses abroad the possibilities for increase in this sector were even more reduced. In accordance with our business strategy we started our own cargo operation in �006. Initial problems were the result of the deficiency of airport takeoff and landing slots at the end airports, deficiency of air crew for transport operation with cargo aircraft and problems in leasing aircraft.Despite all said, in cooperation with our partners (Bridges, FedEx, and UPS), we mana-ged to increase the traffic and generate the conditions for building a cargo junction in this part of Europe; the following flights were introduced:

• Frankfurt — Ljubljana• Ljubljana — Sarajevo• Ljubljana — Zagreb• Ljubljana — Beograd• Liege — Ljubljana.

In cargo we see the opportunity and the potential for further expansion and effective operation; however, every beginning is hard and associated with initial costs and in-vestments (education, stocks, aircraft, etc.) but it has the potential — and we are sure of that — to bring added value in years to come. In interpretation of the graph below it should be considered that cargo operation began as late as June �006.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

700,000

600,000

500,000

400,000

300,000

�00,000

�00,000

0

2005

2006

Revenue — cargo transport in EUR

6.6. Aircraft maintenance for third parties

The year �006 can be marked as the year of new products and expanding of mainte-nance services on the Airbus A-3�0 aircraft. The AMS (Aircraft Maintenance Sector) is successful in reaching its development strategy goals. We are proud of the results of our own direct sale to customers since we gained 95 % of all turnover on foreign mar-kets independently; in �006, the share of turnover for Bombardier was only 5 %.The market we operate on and our offer have the following trends:

• the majority of our customers come from Germany, France and Austria - the countries where air traffic is growing,

• the Airbus A-3�0 aircraft fleet is also growing in Europe,• the share of outsourcing in Europe is growing.

34

35

A safe journey above the clouds begins on solid ground.

36

New products in 2006We started an expansive examination on Adria’s Airbus aircraft — the Airbus A-3�0 (S5-AAB) in the beginning of �006; we also started offering maintenance services of CRJ900 aircraft.We have acquired new customers for maintenance of Airbus A-3�0 aircraft (Ger-manwings, Hellas Jet), the CRJ900 (AirNostrum, AirOne, MyAir, MAT) and for CRJ�00 (AtlasJet, Georgian National Airlines). AMS strategy Our intention is to maintain the leading position in maintenance of CRJ100/200/700/900:Adria is present in the CRJ aircraft maintenance market as the Bombardier centre for Europe where we managed to gain 95 % share in maintenance available for outsour-cing from �00� to the date. In �006, these revenues totalled to 73 % (app. EUR 7.8 million) of all revenues from maintenance for third parties, since our offer ranges from A-checks to 8-year checks.The CRJ fleet in Europe is stable for now so we have maintained our former customers while gaining some new ones. Adria has signed a �0-year contract with Austrian Airli-nes for their entire CRJ fleet, and similarly with Eurowings. At present, we are negotia-ting a long-term contract with Lufthansa CityLine. Expansion on the C-checks market for Airbus A-319/320/321 aircraftThe year �005 was the year of entry to the field of C-checks for the Airbus A3�0 aircraft, where we performed �5 C-checks for four customers working independen-tly, while in �006, marketing of these services was even more successful — a �3 % increase. The share of turnover from maintenance for third parties in �006 was �7 % (EUR �.9 million) and we intend to increase this share. We are especially proud of the two new customers gained in �006 — Germanwings (5 year contract) and HellasJet. A contract with Wizzair is already concluded for �007 and a five-year contract with Air Berlin is in its final stage.

Growth In �006, we provided maintenance for third parties for 96 aircraft (�3 % growth), of which �0 were Airbuses. Total turnover for third parties has increased by �0 % and we intend to continue this level of growth in �007 also. Growth in foreign markets is limited due to comprehensive checks on the Adria fleet in �006 and partly also in �007.

Key success factors: • high level of motivation and professional competence of the staff,• high quality, short time periods for checks and competitive prices,• flexibility,• determination to achieve targets,• geographical location and EU membership.

37

Restrictions The main problem in implementation of the planned and partly also the performed bu-siness operation is the capacity shortage, and for this reason we are planning:

• building of a new hangar which should be built by the end of October �007,• additional training and employment of young mechanics to achieve yearly ca-

pacity of �50,000 productive hours,• additional employment of other staff in sales, engineering and other supporting

services. Training for own needs and selling these servicesConsidering the expansion of its activities, Adria is an important employer in its en-vironment. However the Slovenian public schooling system does not enable training for young mechanics and technicians, therefore Adria is forced to perform it. We also offer this type of services to customers other than Adria. Mainly, this means educating and training young and promising staff that has excellent conditions for development in such an active environment. The fact that we are facing severe deficiency of this type of staff on global scale at present also speaks in favour of advantageous perspective of this job. Studies show that eight to ten thousand aircraft mechanics are needed in order to satisfy current global needs in the field.Because of the needs for the workers mentioned, other possibilities are presenting themselves:

• employment of highly professional staff, mainly in supporting segments,• continuous additional education and training of mechanics already trained

for maintenance of other types of aircraft thus enhancing competitiveness in aircraft maintenance,

• increasing and strengthening of market share in particular segments (types of aircraft),

• increasing economic stability due to greater diversification and greater range of services.

6.7. Other activities

In addition to scheduled routes we also offer passengers personal services such as:• panoramic flights over Slovenian towns and regions

38

• transport of passengers by Piper Turbo Arrow PA-�8R-�0�T aircraft with three passenger seats to all major locations with recreational airfields in Slovenia and to nearby airports in neighbouring countries.

6.8. Partnerships Since December �004 Adria Airways has been a regional member of the global airline group Star Alliance. Adria has code share agreements with the following airlines: Lu-fthansa, Austrian Airlines, Aeroflot, Montenegro Airlines, and Swiss International Airlines in LOT Polish Airlines, Air One and Ukraine International Airlines. These agreements provide the passengers with better connections and Adria with the access to distribu-tional and marketing paths of the partners mentioned. We have commercial ties with more than �00 foreign airlines, allowing passengers to travel throughout the world on an Adria ticket.

Membership in international aviation organisations:

IATA — International Air Transport Association, since �984AEA — Association of European AirlinesERA — European Regions Airline Association MITA — Multilateral Interline Traffic Agreements (pax), since �984MITA — Multilateral Interline Traffic Agreements (cargo), since �984

As the Slovenian national airline we participate in forums of international organisations of which Slovenia is a member:

ICAO — International Civil Aviation OrganizationECAC — European Civil Aviation ConferenceECAA — European Common Aviation AreaJAA — Joint Aviation Authorities.

Piper Turbo Arrow PA-28R-201T Aircraft

Number �

Length 7.6 m

Height �.4 m

Wing-span �0.7 m

Take-off Mass �3�5 kg

Engine power �00 HP

Speed ��0 km/h

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7. Financial operations

7.1. Revenue structure

• Net sales revenues increased in �006 by �3 % over the previous year, and were � % less than the planned amount. The shortfall from the planned amount was recorded primarily in revenues from charter services.

• The biggest proportion of net revenues comes from scheduled passenger transport.

• Revenues from scheduled passenger services grew in this period by 8 %; the reasons are a larger number of passengers and maintained value of travel coupons. Trends in scheduled services in �006 dictated the price reduction owing to the increasingly stiff competition, which we attempted to halt through careful monitoring and “revenue management” and in this way to maintain the value of travel coupons on the �005 level. We also increased our flight frequen-cies to existing destinations and optimised the use of capacities in line with the availability of crews and fleet maintenance.

• Revenues from charter services increased, despite the strong competition in this sector; there were a higher number of “ad-hoc” flights, which offer the biggest commercial return, and we also continued charter flights within the EU.

• Revenues from cargo transport grew by 47 % compared to �005. Throu-ghout several preceding years cargo transport had been decreasing, for this reason the company began, in accordance to its �006 business strategy, its own cargo operation with the SAAB aircraft.

• Revenues from maintaining aircraft for third parties grew by �0 % despite growing number of checks on our own fleet and have exceeded the values from �005; Adria is becoming an important maintenance centre not only for the CRJ aircraft but also for the Airbus aircraft family. In �006, we renewed the existing contracts with our existing customers on both maintenance fields, namely the CRJ and the A-3�0.

• In order to optimise our fleet, we began to lease out our aircraft with staff abro-ad in �006 and have achieved quite high revenues in this field.

7.2. Expenses structure

• Production costs, distribution costs and general and administrative costs inc-reased by �� % over �005.

• Costs of materials increased by �9 % over �005, owing chiefly to the high prices of aviation fuel.

7

�005 �006

Revenue structure %

Scheduled flights - passengers Aircraft maintence for

third parties Leasing aircraft out Charter flights - passengers Scheduled flights - cargo Other

70

��

7 8

3

743

37

�3

40

Direct, clearly defined routes toward a common objective.

4�

4�

• Fuel costs show an index of ��4; the increase is attributable to the record pri-ces of oil on world markets in �006, particularly between May and September when the consumption is the highest. On the assumption that oil prices stayed the same, 900 SIT million cold be saved in �006 compared to �005.

• Airport costs grew by 8 % in �006 and are under constant control. These costs are managed by seeking competitive offers at individual airports and through greater use of CRJ aircraft for flights. In �006, there were significant savings in this area since in the opposite case the costs would increase significantly due to increased scope of flights and to own cargo operation.

• Navigation costs show an index of �00 relative to �005, and although the num-ber of flights increased the “unit rates” decreased in different countries, which resulted in lowered prices for individual destinations due to increased traffic in the Eurocontrol area.

• Aircraft maintenance costs fell by �8 % relative to the previous year, although this includes the costs of maintaining our own fleet and also the costs related to servicing aircraft for other clients.

• Aircraft leasing costs were 33 % higher than in �005 and comprise of whole-year lease for two CRJ-�00/�00 aircraft, a nine-month lease and a five-month lease for two Boeing 737-500 aircraft, cargo aircraft leases, namely one ope-rative lease of SAAB aircraft from September onwards, and other cargo leases as well as occasional subcharters.

• Costs of amortisation and depreciation were 6 % higher than in �005, since the aviation sector is very investment-intensive, and this demands high depre-ciation costs.

• Distribution costs maintained the same level as in �005; these include the costs of our own domestic and foreign sales network, all agency commissions, costs of the reservation system and the costs of employees in sales and mar-keting. Despite increased operational costs these costs did not grow because the company ahs dedicated significant attention to lowering the commissions and rationalisation of distribution network.

• General and administrative costs (index of 88 compared to �005) include ad-ministration, the finance and accounting division, human resources and legal affairs, corporate communication, safety and security and the quality assuran-ce division and show extensive rationalisation in this area since the company has lowered the costs in general supporting areas while also strengthening its operative services.

• Our expenses on interest payments fell by �4 %, which was a consequence of refinancing expensive long-term loans for aircraft in the end of �005, which lowered the costs of debt capital.

�005 �006

Asset structure %

Fixed assets Stock Receivables Other assets

803

3�4

82

��3

3

43

7.3. Asset structure

• As at 3� December �006, total assets were 3 % higher than at the end of the previous year.

• Fixed assets account for 80 % of the company’s total assets, while �4 % are receivables and inventories are just 3 %.

• The company’s fixed assets are for the most part tangible fixed assets, of whi-ch the major proportion is aircraft (84 %).

• Operating receivables grew by �0 % compared to �005, and this is a result of the greater volume of sales, especially through foreign air tickets, where receivables take 30 days to clear (Clearing House). All receivables are real and collectible.

7.4 Structure of liabilities

• The breakdown of liabilities shows a lower proportion (by 3 %) of capital com-pared to �005, owing to the covering of losses from previous years which was generated due to the adaptation to the new SRS �006 (provisions created). The capital was also decreased due to negative surplus from revaluation wi-thin the valuation of implemented financial instruments which are intended for maintaining the cash flow in �007.

• Long-term financial and operating liabilities (representing 98 % of long-term liabilities) fell by mere � % compared to �005, since there were still moratori-

ums for principal payments and in the beginning of �007, new long-term loans for current assets were raised.

• Short-term financial and operating liabilities grew by 6� % compared to �005 due to the increase in the short-term part of the long-term loans and con-sequent expiry of the moratorium on principal payments in �007; in addition we have raised a short-term loan to pay for the first advance payment for the two new CRJ-900 aircraft.

7.5. Events after the balance-sheet date

• In January �007, the company leased out the second Airbus A-3�0 aircraft according to the plan for �007, in this way making the first step towards opti-misation of the fleet and balancing seasonal fluctuation in operations.

• On �9 February �007 at the ��nd shareholders’ meeting, the shareholders passed the vote on regular company capital increase thus confirming capital increase totalling to �� EUR million.

• On �7 February �007, Slovenian public was informed at the main press con-ference about business result in �006, our plans for �007 and introduction of the new CRJ-900 86-seater aircraft into Adria Airways’ fleet.

�005 �006

Liabilities structure %

Equity Long-term liabilities Short-term liabilities Short-term operating

liabilities Other liabilities

24�

�9

27�

�96

47

469

44

8. Risk management

Owing to its international orientation, Adria Airways is exposed to certain kinds of finan-cial risk, which we strive to identify and control as part of the risk management process, which is aimed at

• achieving stability and predictability of operations and reducing exposure to individual risks;

• increasing the value of the company and raising the company’s creditworthi-ness;

• increasing financial revenues and reducing financial expenses; and• eliminating or reducing the effects of extreme and damaging events.

In order to achieve effective and systematic risk management, at the end of �005 the com-pany adopted a strategy of financial risk management which was implemented in �006.The company divides financial risk into the following types: currency, credit, interest-rate, liquidity, risk in insuring interests and property and risk associated with changes in fuel prices.

Currency riskIn view of the geographical spread of its business operations, the company is expo-sed to currency risk, where changes in the exchange rate of an individual currency can impair the company’s commercial benefits. The two key currency pairs in �006 were EUR/USD and EUR/SIT; however we also monitor the following two pairs whose open positions were relatively low: EUR/CHF, EUR/GBP. The company is in a net short position and thereby most exposed to fluctuations in the dollar rate since USD affects business transactions of the company the most due to its association with: purchase of aviation fuel, aircraft and spare parts as well as lease and investment maintenance of the aircraft; also, inflows of dollars are scarce.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

��0,000

��0,000

�00,000

�90,000

�80,000

�70,000

0

2004

2006

Fluctuatuins in USD rate between 2004-2006

2005

We are attempting to reduce our exposure in the long term through natural means of protection (restructuring all long-term loans into euros), in other words by balan-cing inflows and outflows, while in �006 on the basis of the adopted strategy we also protected our short position by purchasing currency options which at the time of the transaction required no outflow of funds.

8

45

In �007 we also anticipate a net short position in dollars, which we have hedged through currency options. These options provide an effective hedge against larger adverse movements of the euro/dollar exchange rate.

Credit risk• Credit risk relates primarily to the risk of default on payment of operating rece-

ivables by customers in Slovenia and abroad, and the company successfully manages this by:

• having a wide spread of customers;• analysing the financial operations of customers and assessing risk

prior to signing contracts for deferred payment;• operating through the IATA (International Air Transport Association),

which includes all the airlines with which we cooperate; the majority of our partner travel agents also have IATA authorisation to sell tickets; IATA members are subject to control, and are punished for non-adherence to the terms of payment;

• having additional insurance on higher-risk receivables through bank guarantees and bills;

• systematically and actively pursuing the collection of receivables.

Interest rate risk• Risks relating to interest rate changes are defined as the uncertainty associ-

ated with the future values of reference (variable) interest rates, LIBOR for the dollar and EURIBOR.

• As at 3� December �006, all long-term loans were therefore denominated in euros (EUR) and thus bound mainly on EURIBOR of, as well as on the 3- and 6-month rate. The purchase of financial derivatives in �005 afforded us a hedge for a portion of our new loans, and as at 3� December �006 we had secured 48 % of long-term loans against the risk of interest rate changes; we are continuing to hedge in �007 on the basis of the adopted strategy.

Liquidity risk• Liquidity risk, or the risk of inability to settle current liabilities, is managed by

coordinating the due dates for receivables and liabilities through the monitoring of cashflows. The company makes daily, weekly and also monthly liquidity plans. In order to stay on top of liquidity issues, in �006 the company raised short-term revolving liquidity loans.

Insuring interests and property• The extent and intensiveness of insurance cover change with the growth of

property, the use of new technologies and markets, and at the same time there are changes in risk exposure.

• The extent of insurance cover indicates against what danger a thing is insured, and the intensiveness indicates the extent to which damage will be reimbursed.

46

• In avoiding damage and exposure, the company operates preventively:• by additionally equipping aircraft with anti-intrusion doors, so as to

increase the safety of passengers, crew and property;• by installing enhanced ground proximity warning systems (EGPWS);• by purchasing work platforms and stairs for safer work by

contractors and preventing damage to aircraft;• through twice-yearly refresher courses for flight personnel on a

simulator;• through continuous training of employees in fire safety and safe

work;• by linking up fire safety systems with Ljubljana Airport and the

security services;• through regular medical check-ups for employees.

• The company insures aircraft, spare parts, goods in transit, all liability regar-ding passengers and possible injury to third persons in line with the valid inter-national regulations and conventions (Montreal Convention).

• The company’s business operations are backed up by all the aforementioned insurance.

Risk associated with fuel price changes

The cost of fuel is the second biggest cost of airlines, and movements in oil prices the-refore have a major impact on airline operations.

The price of kerosene, like the price of crude oil, is subject to enormous fluctuations. After a period of relatively cheap oil, between $�0 and $30 a barrel, since the middle of �004 we have seen rapid growth in oil prices, which had reached $70 a barrel by �005.

The rise in prices had a negative impact on the company’s operations, despite the fact that we were able to mitigate the high prices of kerosene through certain measures:

• selecting the most competitive offer from aviation fuel suppliers at international airports and demanding transparency of prices offered by the domestic fuel supplier;

• planning the use of aircraft appropriate to the number of passengers;• adding a surcharge to our own sales prices for the increased cost of fuel.

At the end of �005 the company adopted a strategy of protection from the risk of fluc-tuating fuel prices, which envisages protection through the use of financial derivatives. We started implementing this strategy in January �006.

47

9. Key operating factors in 2007

9.1. Global and European economy in 2006 — 20071

Global economy in �006 operated more favourable and in much better conjuncture conditions than initially expected. There are much higher growth rates of world trade and higher average economic growth rates in the discipline. Asian economies are the ones which operate the most dynamically — especially China — and the economies which are bound to the production of raw materials and oil. Both oil prices and prices of raw materials grew faster in �006 than expected. Euro kept strengthening its position as a global currency in the world currency markets so that the dollar/euro ratio was slightly fluctuating, however it should have reached the average around �.�5 dollar per � euro in �006.

Trends of conjuncture indicators — World, rates in real terms, in percentages (%)

�005 �006Assessment

�007Forecast

Economic growth GDP — World 4.9 5.� 4.9

- USA 3.� 3.4 �.6

- Japan �.7 �.8 �.3

- China 8.� �0.� 9.3

- India �0.� 7.9 7.�

- Russia 6.4 6.5 6.5

- European Union — EU �5 �.7 �.8 �.4

Euro area* �.4 �.6 �.�

Germany 0.9 �.� �.4

Price increase rate Euro area �.� �.� �.�

World trade growth (goods) 7.5 9.6 7.5

Oil price, US$/barrel (Brent) 55 66 60

� EUR=US$ ratio �.�4 �.�5 �.�5

The European economies marked a satisfying economic growth rate. The euro area states reached on average �.6 per cent economic growth rate in �006, while for �007 these predictions are somewhat lower. For �007, other global trends forecast a quite favourable world conjuncture, which might be slightly lower than in �006. There are no hostility focal points or any high risks to further development in sight. Risks, spoken about by the professionals, are less explicit. These are mainly the predictions about possible shortages in certain raw-material markets such as metals, exchange rates, oil prices and impact of the deficit of certain large countries. In the economy of the USA, where quarterly indicators show decline of economic growth, 3.4 per cent growth rate is possible this year, while in �007 it can be somewhat lower than in the preceding period, namely �.6 per cent.

9

Source: assessments and forecasts of SKEP GZS**, on basis of foreign sources (AIECE, IMF, EC), November �006* from �007, Slovenia also in the EMU** (SKEP GZS - Conjuncture and Economic Policy Service of Chamber of Commerce and Industry of Slovenia)

1 Summarized and adapted from the peer review Konjukturna gibanja (Conjuncture trends), November 2006 GZS (Chamber of Commerce and Industry of Slovenia)

48

Higher and faster productivity growth of the USA and competitiveness in global markets are still a challenge for Europe. The impact of Asian competitors is continuously growing while on the other hand, the European Union itself represents a large and accelerating operating market, which gives important impulses to the conjuncture. The EU economy should grow by �.5 % yearly rate in the period �006-�007. This is of extreme importan-ce for Slovenian economy too, since the major part of our exchange takes part with the EU countries. Countries which are not members of the euro area are also expected to perform sound economic activity. These are: Great Britain, Sweden and Denmark, as well as some other non-EU countries, such as Norway, and recently also Switzerland. In addition to export results, domestic demand and domestic conjuncture are the features giving them the impulse. Denmark, Sweden, Great Britain, Switzerland and Norway are expected to reach growth rates between �.5 and 3 % in �006 and �007.

In the euro area, where Slovenia is entering in �007, the most important feature for us will be economic growth in the larger states. �.� per cent growth is anticipated for this year for Germany, and for �007 the forecasts vary between � and �.7 %. The last months of �006 brought some slowing down for France which recorded some acce-leration during the year in both domestic demand and the export and this trend should continue in �007 also. The expected economic growth rates are �.3 % for �006 and below � % for �007. The latest indicators for Italy show the onset of economic growth. After a period of weaker preceding years, Italy is recording positive influences of dome-stic and export demand and gradual growth in industrial activity. It also improves the labour market. The expected growth rates are around �.8 %.

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

65

50

35

�0

2003 2004 2005 2006

Brent oil price movements Dtd 2003-2006. Monthly averages in US$ per barrel

Source: IEA, WB SKEP GZS

Global oil price reached record value of 78 dollars a barrel on international stock exchanges in summer of �006. High price is a reflection of extreme sensitivity of the oil market to every marketing or non-marketing sign that could have impact on the price. After a longer period, positive signs of lowering the price prevailed in the oil market be-ginning of autumn: stable autumn weather, agreeable political conditions, stable offer, and decline of demand and increase of stocks. Price of oil decreased in October to so-mewhat below 60 dollars per barrel. The decision of OPEC members to decrease the production as from November onwards and thus prevent further lowering of the prices was therefore anticipated. OPEC countries represent 40 % of global oil production.

49

High oil price is mainly favourable for countries producing oil; however, high profits that that these countries earn spill over to the countries which are not producers also. The latter is shown mostly in favourable export demand for European goods and direct investments of “oil profiteers” in the European countries and in the USA. Contrary to the 70s “oil crisis”, current high oil price did not prove as a critical factor of economic growth for Europe and the World. World economy’s dependency on oil had decreased significantly since then.

99/�

99/4

00/�

00/4

0�/�

0�/4

0�/�

0�/4

03/�

03/4

04/�

04/4

05/�

05/4

06/�

06/4

07/�

07/4

08/�

�50

�00

�50

�00

50

Oil and coal prices movements 1999-2008. HWWA index, �000 = �00 (forecast)

coal oil

Source: AIECE, Raw Materials Expert Group, October �006 SKEP GZS

9.2. Tourism and traffic2

In the first eight months of �006, Slovenia earned EUR �,0�9 million with foreign tou-rism, which is 3 % more as compared to the same period of �005. Tourist companies earned 9 % more and casinos � % more than the previous year. Extra spending of tourist foreign exchange has increased by �0 %. Increased consumption of foreign to-urists is also a proof of our successful investments in quality development of our tourist offer. Relatively low growth of tourist foreign exchange inflow is attributed mainly to the large 45 % downfall of cash inflows from border shops. Slovenes have spent 6�5 EUR millions for tourist travels abroad in this period, which is 9 % more than the previous year. The number of tourists grew by � % in the first nine months this year. The ave-rage time period of stay is still shortening and the total number of overnight stays has decreased by � %.

Change in dynamics of tourist flow is evident. Visits from German guests have fallen rapidly, as much as by �� %. Visits form Austrian guests have fallen by � %. Visits from Italian visitors, which are the first on the list, are still growing; by the end of September, they generated � % more overnight stays than last year. It seems that after several ye-ars of exceptional growth, rapid increase of the number of British visitors has stopped. This year, the increase of their visit is merely � per cent. However, we are recording favourable growth of visits from more remote western countries: Belgium (�� %) and Spain (�0 %); and from Scandinavian countries (except Denmark). Visit growth rate of the middle- and east-European countries is characteristic: Croatia 8 %, Hungary 3 %,

Higher and faster productivity growth of the USA and competitiveness in global markets are still a challenge for Europe. The impact of Asian competitors is continuously growing while on the other hand, the European Union itself represents a large and accelerating operating market, which gives important impulses to the conjuncture. The EU economy should grow by �.5 % yearly rate in the period �006-�007. This is of extreme importan-ce for Slovenian economy too, since the major part of our exchange takes part with the EU countries. Countries which are not members of the euro area are also expected to perform sound economic activity. These are: Great Britain, Sweden and Denmark, as well as some other non-EU countries, such as Norway, and recently also Switzerland. In addition to export results, domestic demand and domestic conjuncture are the features giving them the impulse. Denmark, Sweden, Great Britain, Switzerland and Norway are expected to reach growth rates between �.5 and 3 % in �006 and �007.

In the euro area, where Slovenia is entering in �007, the most important feature for us will be economic growth in the larger states. �.� per cent growth is anticipated for this year for Germany, and for �007 the forecasts vary between � and �.7 %. The last months of �006 brought some slowing down for France which recorded some acce-leration during the year in both domestic demand and the export and this trend should continue in �007 also. The expected economic growth rates are �.3 % for �006 and below � % for �007. The latest indicators for Italy show the onset of economic growth. After a period of weaker preceding years, Italy is recording positive influences of dome-stic and export demand and gradual growth in industrial activity. It also improves the labour market. The expected growth rates are around �.8 %.

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Jul

Sep

65

50

35

�0

2003 2004 2005 2006

Brent oil price movements Dtd 2003-2006. Monthly averages in US$ per barrel

Source: IEA, WB SKEP GZS

Global oil price reached record value of 78 dollars a barrel on international stock exchanges in summer of �006. High price is a reflection of extreme sensitivity of the oil market to every marketing or non-marketing sign that could have impact on the price. After a longer period, positive signs of lowering the price prevailed in the oil market be-ginning of autumn: stable autumn weather, agreeable political conditions, stable offer, and decline of demand and increase of stocks. Price of oil decreased in October to so-mewhat below 60 dollars per barrel. The decision of OPEC members to decrease the production as from November onwards and thus prevent further lowering of the prices was therefore anticipated. OPEC countries represent 40 % of global oil production.

1 Summarized and adapted from the peer review Konjukturna gibanja (Conjuncture trends), November 2006 GZS (Chamber of Commerce and Industry of Slovenia)

50

5�

The right choice for one’s first steps into the world.

5�

Russian Federation 5 %, Serbia �� %, Bosnia and Herzegovina �4 %, Czech Republic �5 %, Poland �4 %, and from Slovak Republic �3 %. Also characteristic is a very high growth rate of visits from other continents: From USA �� %, Australia �7 %, Japan 66 %, and Canada �� %. Our capital Ljubljana is one of our characteristic tourist destinations which records excep-tional growth in visits, as much as �4 %. Ljubljana is becoming one of the most popular tourist capitals in Europe. Growth rate in spas was � %, and in other places 5 %.

According to information from Statistical Office of the RS, the most important activities among transport activities were passenger transports in public road traffic with a 7� % share, although in the mentioned period the number of passengers carried decre-ased by 6.� % compared to the same period of a preceding year. Just the opposite the number of passengers carried in air transport increased in the mentioned period by 8.5 % and the trend is improving. In airport passenger transport a �0.3 % increase in passenger numbers was observed, while in railway transport increase was �.� %. It can be concluded that, based on the number of registered personal vehicles, which has increased by 58.85 in the last fifteen years, people are increasingly using their per-sonal vehicles for transport, which is made possible by improved road infrastructure and connections.

40

35

30

�5

�0

�5

�0

5

0

-5

-�0

-�5

-�0

-�5 �00� �00� �003 �004 �005 �006

PASSENGERS AND GOODS TRANSPORT AND TRAFFIC. Growth rates in %

Road haulage - goods Railroad transport - goods Maritime transport - goods Road haulage - passengers Railroad transport - passengers Air transport - passengers

Source: Statistical Office of the RS SKEP GZS

The scope of the goods carried has, as opposed to passengers carried, increased the most in road haulage (by 8.5 %) in the first half of �006. In railway transport, 3.4 % more goods were transported, while in maritime transport 0.5 % fewer goods were transported compared to the last first half of the year.

9.3. The key factors of the air traffic industry

The analysis of the Association of European Airlines (AEA) shows that the air traffic industry is marked by the following key factors:

53

• high level of demand,• increased capacities are entirely absorbed by the demand,• the traditional carriers are approaching the efficiency of the low cost airlines.

Differences between traditional and the low-cost airlines in Europe are decreasing. The increased capacities of the low-cost airlines have practically no impact on the number of the seats offered by the traditional airlines. The growth of the number of passengers who travel with low-cost airlines is decreasing. Out of forty-three established European low-cost airlines, operating for two years on the average, only five are successful.

The fact that the decrease of the percentage of business passengers has stopped in the Europe is pleasing; it means that the traditional airlines have adapted to the new set of market conditions mainly through the policy of more intensive price and services differentiation.

The average ticket price will continue to decrease in the future. Increasing the capaciti-es, achieving the economies of scope alongside with active growth of sales, is the only possible response to such conditions. Nevertheless, the traditional business model is more complex than the low-cost one.According to the AEA forecast the fuel price will stabilise in �007 at $65 a barrel. It is important that the airlines keep on controlling their expenses while maintaining labour costs at the current level and in this way increasing their efficiency as well. In the con-ditions of stabilised fuel prices market pressure to decrease the fuel additives can be expected, which might be the element of market competitiveness among the airlines. The main challenges that European airlines will face in �007 are:

• the impact of the aviation fuel to the price strategies;• trends of the revenues per passenger-kilometre on flights inside Europe;• imbalanced relationships with the suppliers;• additional costs due to payments for external consequences of emissions;• harmonisation of positions in regard of covering the safety costs;• establishing of common an fair operating conditions;

• prevention of unfair competition;• finalised Open Skies Agreement between the EU and the USA;• EU external relations policy compliance.

9.4. The key factors of the company’s operation

The first key factor in Adria Airways’ adaptation to competitive conditions in the air transportation market is the optimisation of the fleet. Changes in the fleet structure will be implemented to maintain competitive strength and ensure long-term development, which in �007 means introduction of two new CRJ-900 aircraft. The optimised fleet will improve the efficiency of aircraft operation in the existing network of flights while simultaneously adding new, marketable and attractive destinations.

54

Development and expansion of aircraft servicing industry for other airlines is unima-ginable without investments in increased capacities, which means building of a new hangar.

Due to the favourable trends of the anticipated cargo transport it is important for Adria Airways to take advantage of this business opportunity and ensure long-term succes-sfulness in this segment.

We should mention the automation of operation where the project of e-ticket should be emphasized which has become a necessity because of both, the requirements of Star Alliance, the airports, the IATA organisation, as well as because simplification of sales, faster, simpler and more accurate data acquisition on sold and used tickets, thus creating a quality basis for right decision making and action. We will follow the trend of encouraging internet sale and other modern sales channels. Because of our outdated IT support in the finance and accounting sector, we are currently introducing a new IT system (Navision) which will provide more up-to-date, quality information for decision making and will contribute to improved work efficiency.

Also important is the project of building the new business building and centralisation of the company in one place as well as more efficient monitoring of planning deviations and sharing the responsibility for every expense as well as development of the profit and expense centres in the overall organisation of the company.

In �007 our plans are:• successful introduction of two new 86-seat CRJ-900 aircraft which will help

increase and optimise our capacities mainly on the routes to Brussels, Mos-cow, Paris, London, Skopje, Vienna, Munich and Frankfurt;

• increase in flights by 7 % and 3 % in the number of passengers carried, and 4 % growth in total revenues;

• relative to turnover in �006 we intend to increase the number of weekly flights, by �� % in the summer timetable and 9 % in the winter timetable compa-red to the turnover in winter �005/�006 and by �6 % compared to winter �004/�005;

• the frequency of scheduled flights will be increased on routes to Brussels, Zu-rich, Skopje, Amsterdam, Copenhagen, Warsaw and Kiev while at the same time the timetable will be more stabilised and less flights will be cancelled - less extensive inspections of our own aircraft.

• We plan to sell charter flights on the domestic market where the aim is to main-tain and consolidate our position as the leading charter carrier and at the same time make further inroads into foreign markets.

55

10. Cooperation with Star Alliance

In December �004 Adria Airways joined the strategic international airline group Star Alliance as a regional member under the sponsorship of Lufthansa. In order to get the best possible use out of membership in this alliance, in �006 we worked on the follo-wing projects:

• a second workshop at which the sponsor (LH) presented the regional mem-bers all the products and projects of the Star Alliance;

• establishing contacts for inclusion in the joint purchasing of fuel, aircraft and spare parts;

• finishing the installations for Star Alliance - Premium Customer Care Handling; adequately upgrading the check-in system on Ljubljana and other airports where Adria uses the DCS — EDS;

• intensely working on setting up and enhancing IT platforms and mechanisms to connect up different reservation systems and flight networks; producing a commercial assessment if IT service offers for introducing e-tickets;

• concluding the negotiations on join the Common IT platform project — CITP;• receiving significant support for commercial association in the environment of

e-ticketing;• “Endorsement Waiver Agreement” among the Star Alliance carriers;• acquiring an integral analysis from the Star Alliance work groups regarding the

selection of the most efficient “regional jet” in the 60-��0 seat class;• arrangement on conditions for entering code share agreements with Scandi-

navian Airlines, Spain Air and Blue One;• Cooperation in the area of further designing of the regional membership con-

cept in the Star Alliance and the procedures for communication between the sponsor, the regional member and the full members of the alliance.

10

56

11. Employees and human resource policy

At the end of �006 the company had 59� employees, 9 % more than at the end of �005. The largest increase of the employees happened in the aircraft maintenance sector where we employed a large number of mechanics and in the flight operations sector where a large number of new pilots and cabin staff have joined us.

Comparison of the shares of employees by sectors in 2005 and 2006

Situation in % on date 31. 12. 2005 31. 12. 2006

Marketing and sales �5 �5

Ground operation and procurement 9 7

Aircraft maintenance �6 3�

Flight operations 37 38

Finance and accounting 6 6

Organisation and human resources � �

General support 4 0

Management and headquarter services � �

Total 543 persons 592 persons

Newly employed in 2006 + 11 %

Disemployed in 2006 - 7 %

Of which:

Situation on date 31. 12. 2005 31. 12. 2006 Difference %

Piloti pilots �06 ��8 ��

Cabin staff 65 77 �8

Mechanics �4� �8� �8

With a significant number of new coming employees we also “grew younger” in �006. The average age of employees in �006 decreased to 4�.55 years compared to �005, when it was 4�.� years.

11

57

Intensive support and cofinancing of obtaining a higher formal education from the pre-vious years have resulted in improved educational structure of the employees.

Comparison of the educational structure in 2001, 2005 and 2006

Level of education

primary school

secon-dary

vocati-onal

secon-dary

two-year

tertiary

four-year

tertiary

univer-sity

mas-ters

docto-rate

Year �00� 6 % �8 % 37 % �� % 3 % �4 %

Year �005 � % �0 % 4� % �4 % 5 % �6 % � %

Year �006 � % 7 % 4� % �5 % 8 % �6 % � %

Further 3 % of the employees attend the process of obtaining formal education who are presumed to finish their schooling in the next two years. Continuous improvement of educational structure means also input of new knowledge and practices in the working process, which has immense impact on growth of productivity and motivation of the employees.

However, �006 was marked by fundamental reorganisation of the so-called suppor-ting sectors and introduction of more flexible remuneration of those employees who have direct influence on acquiring revenues and cost management. In addition to re-organisation, we performed new systematisation of nearly half of work posts in the company and introduced a larger share of variable remuneration that is bound to the sales results of the company. Reorganisation has also included the disemployment and redeployment of the employees in the former general support sector to other emplo-yees, which perform services of supply with office material, general procurement and maintenance for the company.

Due to rationalisation of operation, two sales and representative offices in Koper and Maribor were closed in the area of sales and marketing and our representative offices abroad were reorganised.

Notwithstanding the growing number of employees, we managed to prevent the pro-portionate growth of salaries with these rationalisation projects.

Due to the process of consolidation of operation in �006 the funds intended for edu-cation and training were limited so as to enable our employees only the statutory edu-cation courses. The largest part of education was performed by the employees of operative services in flight operative and maintenance.

58

Committed to each and every individual.

59

60

12. Corporate communication

The corporate communication department strives for effective communication with a variety of target audiences associated with the company: internal and external groups — the media, passengers, decision-makers, financial circles and so forth. Some of our audiences overlap, and ultimately of course they and we can all be regarded as (poten-tial) Adria passengers.

Our goal is to, through our activities, contribute as much as possible to implementation of business objectives and to growing reputation of our company thus contributing to its successfulness. Our attention is also devoted to current issues in aviation. Our prin-ciples in communication are: openness, advancing cooperation, transparency, two-way communication, quick responsiveness and permanence.

The guidelines for the targets in �006 were set out on the basis of strategic orientations and the business plan for this year. Our communication has constantly emphasized direct flights, the large number of scheduled flights and frequencies, and good connec-tions with flights operated by other airlines, especially with Star Alliance members, and the optimum price deals. The achievements of recent years such as joining the Star Alliance and successful operation of the maintenance centre have been very important. Given the increased threat of terrorist attacks and the changed safety measures in the European Union, we perceived a greater need to communicate about these topics and also through the year to communicate about the tougher operating conditions. We also experienced certain crisis situations where a proactive and transparent approach is extremely important.

We also communicated on subjects that are common to the aviation sector, to Europe-an airlines and members of the association, something that we perform in cooperation with the IATA, AEA and Star Alliance.

Throughout the �006 we approached our internal and external public with help of nu-merous communication tools and performed several activities and events.

In �006, Adria’s web sites were renovated and made more transparent and user-friendly.

Adria’s websites have become an every-day address of the employees; they are the place where they obtain information needed in their work, as well as information about occurrences in the company and current aviation issues. We have also performed two yearly meetings of all employees.

We realise that through their constant role of communicating and seeking information, the media have become an increasingly important factor in forming public opinion. By im-plementing an effective communication strategy we can ensure an understanding of our company’s operation. Analysis of appearances in the Slovenian media has shown that �50� articles mentioning Adria in �006, the company enjoyed primary publicity (Adria was the main topic) in 5� % of these articles, and of this, 60 % was planned or supplied by our department. A total of 9� % of all articles about Adria were favourable or neutral.

12

6�

We published five issues of the Adria In-Flight Magazine, which seeks to increase familiarity with Adria and with Slovenia. Passengers and various institutions respond enthusiastically to the magazine, which is also used to promote Slovenia abroad. The main publication for business and financial circles was the annual report.

13. Environmental responsibility

13.1. Impact on the social environment

Social responsibilityAs the only Slovenian airline, Adria Airways has since its very establishment been in-tensively involved in the overall social environment in which it operates. Despite incre-asingly harder operating conditions and consequent lowering of costs, investing in the wider social community is the guiding principle that we observed in �006.Through grants and sponsorships we are helping and cooperating with various groups, institutions and individuals, sharing common values with them and in this way maintai-ning a responsible attitude to wider and narrower social issues. Our contribution most frequently takes place in the form of participation in travel costs. In this way, we are bringing our services closer to those that do not have easy access to them, while we are contributing to implementation of events, meetings and actions that are important for the development of the community on the local and the national levels.

• We participated in the UNICEF campaign Change for Good and Povej (Speak up). • We cooperate in various humanitarian campaigns to help at-risk children and fa-

milies, and in �006 our cooperation also included donations to Caritas, the Slove-nian Red Cross, and the Centre for Autism and the Child neurology Foundation.

• In the area of culture we provided financial supports in �006 to various artists and organizers, renowned institutions such as Ljubljana Festival and the projec-ts of the young and perspective artists: Mladi levi, Breakbeatnikk and other.

• In the area of sports we provided financial supports to various Slovenian sports people, and cooperated successfully on the national level with the Slovenian Olympic Committee, the athletic Federation of Slovenia and the Football Asso-ciation of Slovenia.

• In �006 we served as the official airline in support of more than �0 international presentations and conferences on medicine, culture, education and business.

13.2. Impact on the natural environment

Adria Airways is an environmentally aware company. We are actively working towards continuously reducing fuel consumption, towards reducing gas emissions and redu-cing noise. All the aircraft in our fleet comply with ICAO (International Civil Aviation Or-ganization) environmental and other requirements. Both types of engine used by Adria fleet aircraft operate within 70 % of the permitted values of gas and smoke emissions laid down by ICAO.

13

6�

The process of aircraft maintenance involves the use of various hazardous chemicals, but only in small amounts. These are specific chemicals that are used exclusively for our own requirements. For these operations the company has specially organised staff that provide annual reporting on the entry of such chemicals into the country, safe storage and regular collection and removal of waste, which is provided for Adria by a suitably registered organisation. Workers who come into contact with these chemicals undergo formal courses in familiarisation with hazardous chemicals, the conditions of their sto-rage and procedures and guidelines for first aid in the event of an accident at work with chemicals. We separate paper from other waste and it is removed for recycling.

14. Safety

Flight safetyTe major step to improvement of flight safety has been the upgrading of software Flight Data Monitoring System (FDM) with our own know-how. This system enables us to analyse exhaustively every performed flight and we managed to include to the analysis report the projection of the flight to the Earth surface in three levels, which enables the three-dimensional following of the flight simultaneously to the instruments recording. The statistical treatment of the recorded flights with automatic following of individual trends of events has been updated, which enabled us prompt perception of increased risks, short reaction time and timely preparation of safety recommendations. Incident Reporting System (IRS) was successfully integrated in the FDM, which enabled the implementation of the Safety Management System (SMS) which provides prompt, in-tegral and efficient risk management. Adria’s safety improvement measures, especially implementation of the SMS, place Adria Airways among leading and the safest airlines in Europe.

Safety TeamAdria Airways has a highly trained and professional Safety Team, which has the job of monitoring the level of safety in the company. It cooperates professionally within the working bodies of the Association of the European Airlines, mainly those from the area of flight safety whose aim is to improve safety level in the European airspace. The Adria airways Safety Team has given the initiative for Slovenian aviation authority to set up a consulting group for aviation safety and in the past year managed to establish active participation of all who have direct or indirect influence to the safety in Slovenian aviation (Air Traffic Control, airport managements, regulating authority, etc.); the achi-evements of this group in the �006 have had significant impact on the improvement of aviation safety level in the country. The Safety Team also actively monitors develo-pment trends in the area of safety standards in the industry and actively involves in their design if necessary.

14

63

15. Quality assurance

In �006 we continued to maintain and develop the quality assurance system. In �003 Adria received the ISO 900� quality certificate from the Slovenian Institute for Quality and Metrology. By obtaining the ISO 900�:�000 certificate the company completed the cycle of establishing comprehensive quality assurance system. In March �005 we included in Part-�45 of the quality system the Part-�47 system of quality in the area of training aircraft maintenance personnel, on the basis of which Adria can itself provide training in the area of aircraft maintenance that is recognised and valid throughout Europe. Alongside the system of quality management in line with ISO 900�:�000, this also includes the Part-�45 quality assurance system for aircraft maintenance, for which we obtained a certificate in �999 and on the basis of which in �00� Adria became one of two authorised service centres in the world for the CRJ series of aircraft.The overall system of quality also includes the JAR-OPS � quality assurance system for commercial air transport, for which we obtained a certificate in �00� and on the basis of which at the end of �00� we started operating services within the European Union. Safety always comes first. Adria’s quality in this area has been confirmed by the re-newed IOSA (IATA Operational Safety Audit Registry) assessment in December �005, something that needs to be performed every two years by an IATA accredited asses-sment organisation. The IOSA standard determines the level of company organisation, operating procedures, flight safety and company security. Following our business decisions, in �007 the largest emphasis lays on quality assuran-ce of external flight providers to satisfy the needs of the passenger and cargo transport process, since it is our duty to assure the same level of safety and quality as provided with our own aircraft; we will also continue our endeavours for such work methods in the future.

16. Research and development

• We are continuously developing and enhancing our technical and managerial skills and experience in all areas of civil aviation.

• In the future, too, we will continue to cooperate intensively with various profes-sional institutions.

• For over �0 years now, Adria has been cooperating with the Faculty of Me-chanical Engineering in Ljubljana. In �00� we signed a new contract with this faculty, as required by the amended legislation (EASA IR). We became a prac-tical education provider for students completing their theoretical studies at the faculty. At our aviation school young pilots can obtain:

16

15

64

Safety is our primary concern.We never leave anythingto chance.

65

66

• PPL — Private Pilot Licence• CPL — Commercial Pilot Licence• certification to fly by instruments (IR — Instrument Rating) and• ATPL — Airline Transport Pilot Licence.

• With regard to the Part-�47 certificate obtained from the Slovenian and British aviation authorities, in the technical education department we are providing training for our own needs and also for foreign clients.

• At the same time preparations are also underway for our cooperation on future European aviation projects.

17. Who’s who, contacts

Company management:

Tadej Tufek M.Sc., President of the Management Board & CEO / tadej.tufek@adria.siMarjan Ravnikar M.Sc., Vice President of the Management Board / marjan.ravnikar@adria.si

Management associates:

Peter Kolar M.Sc., Assistant President of the Management Board, Director Ground Operations / peter.kolar@adria.siTomaž Kostanjšek, MBA Director Sales and Marketing / tomaz.kostanjsek@adria.siPavel Prhavc Director Aircraft Maintenance / pavel.prhavc@adria.siDejan Slodej Director Flight Operations / dejan.slodej@adria.siSilvestra Stopar Director Finance and Accounting / silva.stopar@adria.siJulija Pirc Director Human Resources / julija.pirc@adria.si

17

67

18. Organisational structure of the company

General meeting

Supervisory Board

MANAGING BOARDPresident

and Vice-President

Amadeus Slovenija d.o.o.

Adria Airways Kosovo d.o.o.

SUBSIDIARIES

Strategic planning and development

IT, procurementand controling

Corporate lawand insurances

Quality systems (ISO 900�, JAR-OPS�,

part �45, �47)

Safety and security(JAR-OPS�, at work)

Sales and marketing

Flightoperations

Aircraftmaintenance

Finance and accounting

Ground operations

Human resources and organisation

18

68

19. Adria offices and points of sale

LJUBLJANA, SloveniaAdria Airways d.d.Information and bookings:KuzmiËeva 7�000 Ljubljana, Slovenia Phone: 386 (0)� 36 9� 0�0 —Call centreFax: 386 (0)� 43 68 606E-mail: booking@adria.siFree phone number in Slovenia:080 �3 00

Adria Airways Ticket sales:

Gosposvetska 6�000 Ljubljana, SloveniaFree phone number in Slovenia:080 �3 00Fax: 386 (0)� �3 �� 668E-mail:adr.gosposvetska@adria.si

Ljubljana AirportFree phone number in Slovenia:Phone: 080 �3 00Fax: 386 (0)4 �3 63 46�E-mail: adr.prodaja@adria.si

AMSTERDAM, NizozemskaP.O. BOX 75644 ���8 ZR Schiphol Airport Phone: 3� �0 6�5 �� �� Fax: 3� � 753 �3 37

Amsterdam Schiphol AirportPenauille Servisair Terminal 3, check-in �0 Phone: 3� �0 79 5� 600 Fax: 3� �0 79 5� 60� E-mail: adr.amsairport@adria.si

BARCELONA, SpainKompas Turistik Espana S.A.,C/Valencia, 494, Esc. Dcha. A,��Barcelona, SpainPhone: 0034 93 �4 66 777Fax: 0034 93 �45 4� 88E-mail: adr.barcelona@adria.si

BIRMINGHAM, United Kingdom*See London, United Kingdom

BRUSSELS, Belgium Adria AirwaysBrussels Airport - Box 4�930 ZaventemPhone: 3� (0)� 75 3� 336Fax: 3� (0)� 75 3� 337E-mail: adr.brussels@adria.si

Adria Airways Ticket Desk Airport Zaventem / Brussels Phone: 3� (0)� 75 3� 335

COPENHAGEN, DenmarkAdria AirwaysAntello AB, Tings Gatan ��56 56 Helsingborg, SWEDENPhone: 46 (0)4� �8 47 78Fax: 46 (0)4� �4 47 78Mobile: 46 708 �8 47 78 E-mail:adr.copenhagen@adria.si

Adria Airways Airport Ticket Office, Copenhagen AirportTerminal �, Floor �, Office �30�770 Kastrup, DenmarkPhone & Fax: 45 (0)3� 5� 59 59Mobile: 46 708 �8 47 78E-mail:adr.copenhagen@adria.si

DUBLIN, Ireland *See London, United Kingdom

FRANKFURT, GermanyAdria Airways Airport Frankfurt, Terminal �, Building �0�, Room �0� . 4043/4044P.O. Box 03960547 Frankfurt am MainPhone: 49 (0)69 �69 56 7�0 �69 56 7�� Fax: 49 (0)69 �69 56 730E-mail: adr.frankfurt@adria.si

Adria Airways Airport Ticket DeskAirport FrankfurtTerminal �, Hall B, Sales Desk 307P.O. Box 039, 60547 Frankfurt am Main Phone: 49 (0)69 �69 56 7��

ISTANBUL, TurkeyAdria Airways Ordu Cad No. �06/� 34470 Laleli, IstanbulPhone: 90 (0)��� 5� �4 �3�Fax: 90 (0)��� 5� �4 �34 5� �5 436E-mail: adr.istanbul@adria.si

KIEV, UkraineAviareps, Town officeChervonoarmijska St. 9/�Office No �Kiev 0�004Phone: 38 044 �87 07 47Fax: 38 044 490 65 04E-mail: adr.kiev@adria.si

Borispol International AirportTicketing agent: AQUAVITA Phone: 38 044 �87 07 47

LONDON, United KingdomAdria Airways49 Conduit StreetLondon W�S �YSPhone: 44 (0)�0 7 73 44 630 7 43 70 �43Fax: 44 (0)�0 7 �8 75 476E-mail: adr.london@adria.si

Adria AirwaysLondon Gatwick AirportTicketing agent: Skybreak North Terminal Ticket DeskPhone: 44 (0)��93 507 �8�Fax: 44 (0)��93 507 �44 Flight Supervision:KLA Ltd. (Airline Services)Phone: 44 (0)��93 568 004Fax: 44 (0)��93 567 005Mobile: 44 7899 95 �3 49

MOSCOW, RussiaAdria Airways Derbenevskaja 4��3 ��4 MoscowPhone: 7 (495) 7�7 08 85 Fax: 7 (495) 7�7 08 88E-mail: adr.moscow@adria.si

Adria Airways Sheremetyevo AirportTicketring Desk6th floor, room No. 4� (6.4�)Phone: 7 (495) 578 80�4

19

69

MUENCHEN, GermanyAdria AirwaysAirport Munich, Terminal �Reisemarkt Sud, Ebene 03, Raum 6738 (counter 355, 356)85356 München-FlughafenP.O. Box �4��33, 85334 München Phone: 49 (0)89 975-9��9�, 9��9�Fax: 49 (0)89 975-9��96E-mail: adr.munich@adria.si

OHRID, MacedoniaAdria Airways, AAMGeneral Sales Agent, Town officePartizanska broj 6, 6000 OHRIDPhone: 389 (0)46 �6 �0 �6 Phone & Fax: 389 (0)46 �5 0� 90E-mail: aamohrid@mt.net.mk

Adria Airways Airport Ticket Desk, Airport Ohrid-OperatorPhone: 389 (0)46 �6� 503, �5� 8�0, �5� 8�� ext. for AAM ��5E-mail: adr.ohrid@adria.si

PARIS, FranceAdria Airways38 Avenue de l’Opera7500� ParisPhone: 33 (0)� 47 4� 95 00 Fax: 33 (0)� 47 4� 00 67 E-mail: adr.paris@adria.si

PODGORICA, Montebegro Adria Airways,General Sales AgentOki Air International Ivana VujoševiËa 468�000 PodgoricaPhone: 38� (0)8� �0� �0�Phone & Fax: 38� (0)8� �4� �54 Mobile: 38� (0)67 �4� �54E-mail: adr.podgorica@adria.si

Adria Airways Airport Ticket Desk Airport Podgorica, Oki Air InternationalPhone & Fax: 38� (0)8� 6�3 �3�Mobile: 38� (0)67 �4� �54E-mail: adr.podgorica@adria.si

PRI©TINA, Kosovo Adria Airways,General Sales AgentAdria Airways Kosovo LLCQamil Hoxha Nr. ��38000 PrištinaPhone: 38� (0)38 �46 746Phone & Fax: 38� (0)38 �46 747

Mobile: 00 377 44 �6 50 84E-mail: adr.pristina@adria.siAdria Airways Airport Pristina Ticket DeskPhone & Fax: 38� (0)38 548 437Mobile: 00 377 44 50� �40Mobile: 00 377 44 50� �4�

ROME, ItalyKompas Tour OperatorVia Fraini 9(Piazza Dell’ Esquilino 8/g)RomePhone: 39 06 47 44 666Fax: 39 06 489� 604�E-mail: adr.rome@adria.si

Airport Fiumicino, Terminal BA.R.E.Phone: 39 06 65 95 5695

SARAJEVO, BiHAdria AirwaysFerhadija �3/�, 7�000 SarajevoPhone: 387 (0)33 �3 �� �5 387 (0)33 �3 �� �6 Fax: 387 (0)33 �3 36 9�E-mail: adr.sarajevo@adria.si

Adria Airways Airport Ticket Desktel in Fax: +387 (0)33 46 43 3�E-mail: adr.sarajevo@adria.si

SKOPJE, MacedonijaAdria AirwaysAAM, General Sales AgentUlica Dame Gruev, Gradski Zid, blok II bb, 9�000 SkopjePhone: 389 (0)� 3� �7 009 389 (0)� 3� �9 975Fax: 389 (0)� 3� 65 53�E-mail: adr.skopje@adria.si

Adria Airways Airport Ticket Desk, Airport SkopjePhone & Fax: 389 (0)� �5 6� �79

TEL AVIV, Israel Adria AirwaysMirus Services (�996) Ltd. General Sales Agent 8 Mendele Str. Tel Aviv 6343� Phone: 97� (0) 3 5� �3 �6� Fax: 97� (0) 3 5� 40 895 Adria Airways Ticket desk Ben Gurion Airport Laufer Aviation Ltd. Phone: 97� (0) 3 97 74 300 Fax: 97� (0) 3 97 �� 0��

TIRANA, AlbanijaAdria AirwaysGeneral Sales AgentEuropean Trade Center-town officeStreet Bajram Curri No.�9, TiranaPhone: 355 (0) 4 �7� 666Fax: 355 (0) 4 �7� 666E-mail: adr.tirana@adria.si

VIENNA, AustriaAdria Airways AirportTicket Office�300 Airport ViennaPhone: 43 (0)� 70 07 36 9�3Fax: 43 (0)� 70 07 36 9�4Mobile: 43 664 30 87 8�3E-mail: adr.vienna@adria.si

WARSAW, PolandGlobair Polska sp, Z.O.O. Ul.Grzybowska �, Room �� 00-�3� WarszawaPhone: +48 �� 330 94 45 Fax: +48 �� 330 94 5� E-mail: adr.warsaw@adria.si

ZAGREB, CroatiaAdria AirwaysPraška 9, �0000 ZagrebPhone: 385 (0)� 48 �0 0�� 385 (0)� 48 �0 0�6Fax: 385 (0)� 48 �0 008E-mail: adr.zagreb@adria.si

ZURICH, SwitzerlandAdria AirwaysLoewenstrasse 54/II.800� ZurichPhone: 4� (0)44 �� �6 393 4� (0)44 �� �6 394Fax: 4� (0)44 �� �5 �66E-mail: adr.zurich@adria.si

Adria Airways Airport Ticket Office, Airport ZurichTerminal B-�-5��Phone: 4� (0)� 8� 64 437

Purchase tickets online:www.adria-airways.com

70

New voyages through new communication channels.

7�

7�

Annual Report 2006Part 2FINANCIAL STATEMENTS

ADRIA AIRWAYS

Table of contents

1. General information ........................................................................... 762. Statement of responsibility by the Management Board ...................... 773. Auditors’ report ................................................................................. 784. Financial Statements ......................................................................... 79

4.1. Balance Sheet ................................................................................... 794.2. Income Statement ............................................................................. 804.3. Cash Flow Statement for the year ended 31 December 2006 ........... 814.4. Statement of Changes in Equity for the year ended 31 December 2006 . 82 Statement of Changes in Equity for the year ended 31 December 2005 . 834.5. Retained earnings ............................................................................. 83

5. Summary of significant accounting policies ....................................... 846. Classifications and notes to the financial statements ......................... 94

6.1. Additional disclosures of the balance sheet items .............................. 946.1.1. Intangible assets and long-term deferred costs and accrued revenue ..... 946.1.2. Property, plant and equipment .......................................................... 946.1.3. Investment property .......................................................................... 976.1.4. Long-term investments ..................................................................... 976.1.5. Inventories ........................................................................................ 996.1.6. Short-term investments ..................................................................... 996.1.7. Short-term operating receivables ...................................................... 996.1.8. Cash ............................................................................................... 1016.1.9. Short-term deferred costs and accrued revenue ............................. 1016.1.10. Equity.............................................................................................. 1016.1.11. Provisions and long-term accrued costs and deferred revenue ....... 1026.1.12. Financial liabilities ............................................................................ 1026.1.13. Long-term operating liabilities .......................................................... 1046.1.14. Short-term operating liabilities ......................................................... 1046.1.15. Short-term accrued costs and deferred revenue ............................. 1056.1.16. Off balance sheet assets/liabilities ................................................... 1056.1.17. Financial instruments ....................................................................... 106

6.2. Additional disclosures of the income statement items ..................... 1076.2.1. Net sales ......................................................................................... 1076.2.2. Costs of goods, materials and services ........................................... 1086.2.3. Labour costs ................................................................................... 1096.2.4. Write-downs ................................................................................... 1096.2.5. Financial revenue ............................................................................ 1106.2.6. Financial expenses .......................................................................... 1106.2.7. Income tax ...................................................................................... 1116.2.8. Net profit or loss ............................................................................. 111

7. Other disclosures ............................................................................ 1127.1 Information on groups of persons.................................................... 112

8. Events after the balance sheet date ................................................ 1129. Financial Statements - expanded format ......................................... 113

9.1. Balance sheet - expanded format under SAS .................................. 1139.2. Income statement - expanded format under SAS ........................... 116

76

1. Generalinformation

Company profile

ADRIA AIRWAYS d.d.KuzmiËeva 71000 LjubljanaSlovenija

Nature of business and primary activities

• The two most significant lines of business of Adria Airways d.d. are scheduled air transport and charter air transport. In addition, the Company is involved in the transport of cargo, aircraft servicing for third parties, aircraft charter, and training of aircraft personnel.

Employees

• Number of employees at 31 December 2006: 592• Average number of employees per groups in terms of professional qualificati-

on:

Professional qualification level I. II. III. IV. V. VI. VII. VIII. IX. Total

Total - 9 3 39 251 143 142 5 - 592

1

77

Tadej Tufek, M.Sc.President of theManagement Board & CEO

Marjan Ravnikar, M.Sc. Vice President of theManagement Board

22. Statementofresponsibilitybythe ManagementBoard

The Management Board confirms the financial statements for the financial year ended 31 December 2006 on pages 79 to 83 and pages 113 to 116, and the accounting po-licies and notes to the financial statements on pages 84 to 112 of the annual report.

The Management Board is responsible for the preparation of the annual report that gives a true and fair presentation of the financial position of the Company and of its financial performance for the year ended 31 December 2006.

The Management Board confirms that the appropriate accounting policies were con-sistently applied, and that the accounting estimates were made under the principle of prudence and the diligence of a good manager. The Management Board also confirms that the financial statements and notes thereof have been compiled under the assump-tion of a going concern, and in accordance with the current legislation and Slovene accounting standards.

The Management Board is also responsible for the appropriate accounting system and adoption of measures to secure the assets, and to prevent and detect fraud and error.

April, 2007

78

3. Auditors’report3

79

4. FinancialStatements

4.1. Balance Sheet1

(in TSIT) Notes 31.12. 2006 01.01.2006 31.12. 2005

Assets 29,391,901 28,647,542 28,627,117

A/ Long-term assets 23,917,968 23,669,695 23,649,270

I. Intangible assets and long-term deferred costs and accrued revenue 6.1.1. 217,958 43,102 43,102

II. Property. plant and equipment 6.1.2. 23,345,766 23,249,029 23,308,153

III. Investment property 6.1.3. 57,143 59,123 -

VI. Long-term investments 6.1.4. 206,495 271,349 250,923

V. Long-term operating receivables 90,606 47,092 47,092

B/ Current assets 5,262,949 4,719,816 4,719,816

II. Inventories 6.1.5. 937,437 822,750 822,750

III. Short-term investments 6.1.6. 39,094 47,255 47,255

IV. Short-term operating receivables 6.1.7. 4,056,310 3,728,524 3,728,524

V. Cash 6.1.8. 230,108 121,287 121,287

C/ Short-term deferred costs and accrued revenue 6.1.9. 210,984 258,031 258,031

Off balance sheet assets 6.1.16. 18,479,374 15,795,442 15,795,442

Equity and liabilities 29,391,901 28,647,542 28,627,117

A/ Equity 6.1.10. 7,120,055 7,250,811 7,624,435

I. Share capital 812,436 812,436 812,436

II. Capital surplus 4,937,607 4,937,607 3,630,211

III. Revenue reserves 1,505,197 1,862,022 1,862,022

IV. Revaluation surplus (135,185) 12,370 1,319,766

V. Retained earnings - (373,624) -

VI. Net profit of the year - - -

B/ Provisions and long-term ac- crued costs and deferred revenue 6.1.11. 371,542 398,064 4,015

C/ Long-term liabilities 13,521,673 13,407,956 13,407,956

I. Long-term financial liabilities 6.1.12. 13,519,222 13,405,506 13,401,306

II. Long-term operating liabilities 6.1.13. 2,451 2,450 2,450

D/ Short-term liabilities 8,327,012 7,346,759 7,346,759

II. Short-term financial liabilities 6.1.12. 2,710,982 1,658,191 1,658,191

III. Short-term operating liabilities 6.1.14. 5,616,030 5,688,568 5,688,568

E/ Short-term accrued costs and deferred revenue 6.1.15. 51,619 243,952 243,952

Off balance sheet liabilities 6.1.16. 18,479,374 15,795,442 15,795,442

The notes are a constituent part of the Financial Statements.

4

1 For the expanded version of the balance sheet, refer appendix 10.1.

80

4.2. Income Statement2

(in TSIT) Notes 2006 2005

1. Net sales 6.2.1. 36,508,891 32,190,502

2. Production costs of goods sold (including depreci- ation and amortisation) or cost of goods sold 6.2. (32,038,057) (28,148,407)

3. Gross profit from sales 4,470,834 4,042,095

4. Selling costs (including depreciation and amortisation) 6.2. (3,938,323) (3,957,573)

5. General and Administrative Expenses (including Amortization and Depreciation) 6.2. (911,940) (1,036,855)

6. Other operating revenue (including revaluation operating revenue) 6.2. 582,495 47,366

7. Financial revenue from shares and interests 6.2.5. 63,971 49,382

9. Financial revenue from operating receivables 6.2.5. 582,684 466,236

10. Financial expenses due to impairment and write-off of investments

6.2.6. (40,836) -

11. Financial expenses for financial liabilities 6.2.6. (718,835) (1,185,563)

12. Financial expenses for operating liabilities 6.2.6. (482,217) (709,525)

13. Other revenue 453,627 9,851

14. Other expenses (44,661) (18,697)

15. Income tax - -

17. Net profit or loss of the year 6.2.8. 16,799 (2,293,283)

The notes are a constituent part of the financial statements.

2 For the expanded version of the balance sheet, refer appendix 10,2

81

4.3. Cash Flow Statement for the year ended 31 December 2006 In TSIT

No. 2006 2005

A/ Cash flows from operating activities

a) Cash flows derived from the income statement items 2,404,447 953,088

1. Operating revenue (except from revaluation) and finan-cial revenue from operating receivables 37,585,837 32,711,479

2.Operating expenses excluding depreciation and amor-tisation (except from revaluation) and financial expen-ses from operating liabilities

(35,181,390) (31,758,391)

3. Income tax and other taxes not included in operating expenses - -

b)Changes in net operating assets in balance sheet items (including accruals and deferrals, provisions and deferred tax assets and liabilities)

(821,360) 824,350

1. Opening less closing operating receivables (284,701) (386,294)

2. Opening less closing deferred costs and accrued revenue 47,047 (38,014)

3. Opening less closing deferred tax assets - -

4. Opening less closing assets (disposal groups) held for sale - -

5. Opening less closing inventories (114,687) (63,675)

6. Closing less opening operating liabilities (250,164) 1,228,787

7. Closing less opening accrued costs and deferred re-venue, and provisions (218,855) 83,546

8. Closing less opening deferred tax liabilities - -

c) Net cash from operating activities (a+b) 1,583,087 1,777,438

B/ Cash flows from investing activities

a) Cash receipts from investing activities 590,741 818,426

1. Interest and dividends received from investing activities (43,090) 12,637

2. Cash receipts from disposal of intangible assets - -

3. Cash receipts from disposal of property, plant and equipment 571,364 118,421

4. Cash receipts from disposal of investment property - -

5. Cash receipts from disposal of long-term investments 24,617 -

6. Cash receipts from disposal of short-term invest-ments 37,850 687,368

b) Cash disbursements from investing activities (2,515,755) (5,656,716)

1. Cash disbursements to acquire intangible assets (205,089) (25,250)

2. Cash disbursements to acquire property, plant and equipment (2,309,784) (5,619,393)

3. Cash disbursements to acquire investment property - -

4. Cash disbursements to acquire long-term investments (599) (12,073)

5. Cash disbursements to acquire short-term invest-ments (283) -

c) Net cash from investing activities (a+b) (1,925,014) (4,838,290)

82

Share capital

Capital surplus Revenue reserves

Revalua-tion

surplus

Retained earnings

Net profit of the year

Capital revaluation adjustments Total

(in TSIT)

Sha

re

capi

tal

Sal

utat

ory

rese

rves

Oth

erre

venu

ere

serv

es

Ret

aine

d

earn

ings

Net

pro

fit

of th

e ye

ar

Gen

eral

cap

ital

reva

luat

ion

adju

stm

ent

Spe

cific

cap

ital

reva

luat

ion

adju

stm

ent

A/ Balance at 31.12.2005 812,436 3,630,211 134,551 1,727,471 1,307,396 12,370 7,624,435

B/ Transition to SAS 2006 1,307,396 12,370 (373,624) (1,307,396) (12,370) (373,624)

C/ Balance at 1,1,2006 812,436 4,937,607 134,551 1,727,471 12,370 (373,624) - - - 7,250,811

B/ Movements to equity

d) Net profit of the period 16,799 16,799

C/ Movements within equity -

b) Loss settlement (356,825) 373,624 (16,799) -

D/ Movements from equity d) Decrease of revaluati- on surplus

(147,555) (147,555)

D/ Balance at 31.12.2006 812,436 4,937,607 134,551 1,370,646 (135,185) - - - - 7,120,055

RETAINED PROFIT/LOSS 356,825 (373,624) 16,799 - - 0

C/ Cash flows from financing activities

a) Cash receipts from financing activities 6,473,961 16,414,273

1. Cash proceeds from paid-in capital - -

2. Cash proceeds from increase in long-term liabilities 1,632,796 11,404,668

3. Cash proceeds from increase in short-term liabilities 4,841,165 5,009,605

b) Cash disbursements from financing activities (6,023,213) (13,569,994)

1. Interest paid on financing activities (531,885) 116,359

2. Cash repayments of equity - -

3. Cash repayments of long-term financial liabilities (1,395,382) (9,653,794)

4. Cash repayments of short-term financial liabilities (4,095,946) (4,032,559)

5. Dividends and other profit shares paid - -

c) Net cash from financing activities (a+b) 450,748 2,844,279

d) Closing balance of cash 230,108 121,287

1. Net cash inflow or outflow for the period 108,821 (216,573)

2. Opening balance of cash 121,287 337,860

4.4. Statement of Changes in Equity for the year ended 31 December 2006

83

Statement of Changes in Equity for the year ended 31 December 2005

4.5. Retained earnings

Retained earnings (in TSIT) 2006

Net profit of the year + 16,799

Loss brought forward - 373,624

Decrease in other revenue reserves + 356,825

Retained earnings 0

Accumulated Loss (TSIT) 2005

Net profit of the year - 2,293,283

Retained Earnings + 75,373

Decrease in revenue reserves + 2,217,910

Accumulated loss 0

Share capital

Capital surplus Revenue reserves Retained

earningsNet profit of

the yearCapital revaluation

adjustments Total

(in TSIT)

Sha

re

capi

tal

Sal

utat

ory

rese

rves

Oth

erre

venu

ere

serv

es

Ret

aine

d

earn

ings

Net

pro

fit

of th

e ye

ar

Gen

eral

cap

ital

reva

luat

ion

adju

stm

ent

Spe

cific

cap

ital

reva

luat

ion

adju

stm

ent

A/ Balance at 31.12.2004 812,436 3,630,211 134,551 3,870,009 129,511 21,234 1,307,396 12,992 9,918,340

B/ Movements to Equitys ( 2,293,283 ) (2,293,283)

d) Net profit of the period f) Specific capital revaluation adjustment

( 2,293,283 ) ( 2,293,283 )

C/ Movements within Equity ( 2,142,538 ) ( 129,511 ) 2,272,049 -

b) Allocation of net profit based on decision of the shareholders’ meeting

75,372 ( 75,372 ) -

c) Loss settlement ( 2,217,910 ) ( 75,373 ) 2,293,283 -

f) Other allocations of equity 21,234 ( 21,234 ) -

D/ Movements from equity ( 622 ) ( 622 )

c) Decrease for impair- ment of assets previ- ously subject to strengthening

( 622 ) ( 622 )

E/ Balance at 31.12.2005 812,436 3,630,211 134,551 1,727,471 - - 1,307,396 12,370 7,624,435

84

5. Summaryofsignificantaccounting policies

Basis of financial statement preparation• The financial statements in this report and notes thereto have been prepared in

accordance with Slovene accounting standards 2006, issued by the Slovene Institute of Auditors.

• The general rules on the classification of the balance sheet and the income statement items, the valuation of the financial statement items, the content of notes to the financial statements and the requirements with regards to the business report have been applied in the compilation of these financial sta-tements, which is sufficient for true and fair presentation of the Company's performance in the annual report. The fundamental accounting assumptions of accrual and a going concern have also been considered.

• The qualitative characteristics of the financial statements and hence the entire accounting system are primarily understandability, relevance, reliability, and comparability.

• Adria Airways d.d. keeps its analytical records also in accordance with the re-commendations of the ICAO (International Civil Aviation Organization), of which Slovenia is a member.

• The financial statements are compiled in Slovene tolars, rounded to thousand units. For reasons of rounding up, calculation differences may occur.

Exchange rate and translation into the local currency• Adria Airways d.d. converts all purchase and sale transactions, investments,

long-term and short-term liabilities, as well as long-term and short-term rece-ivables in foreign currencies into Slovene tolars at the Bank of Slovenia middle exchange rate prevailing on the transaction date, while at the balance sheet date, these are translated at the final Bank of Slovenia middle exchange rate effective on 31 December 2006.

• Exchange rate gains and losses arising from the conversion are recognised in the income statement.

Reporting by business and regional segments• The business segments represent scheduled passenger services, cargo ser-

vices, charter passenger services, aircraft servicing for foreign clients, aircraft charter services, and miscellaneous.

• In terms of segment reporting, the Company reports net sales revenue that can be directly attributed to individual segments, while other data is not disclosed.

• The Company has no regional segments.

5

85

Intangible assets • Intangible assets are recognised at costs and are amortised over their useful life

which is a maximum of four years. The Company holds no assets with indefinite useful life.

• Intangible assets are not restated to account for value gains.

Property, plant and equipment• Property, plant and equipment represent land, buildings, manufacturing plant,

and other equipment. Small tools that are ready for use whose useful life is more than a year and whose individual value does not exceed tolar equivalent of 500 eur, are also considered items of property, plant and equipment. The pertaining replacement parts are also classed as property, plant and equipment under construction or in acquisition. Equipment acquired under financial lease and depreciated under depreciation rates applicable to equipment of the same or similar class, is also recognised as property, plant and equipment. At the end of the financial lease, the title to the assets is transferred to the lessee.

• The Company applies the cost model whereby property, plant and equipment is carried at cost of purchase, reduced by accumulated depreciation. Proper-ty, plant and equipment are depreciated over their useful lives. Depreciation expenses are charged against the relevant operating costs.

• The cost of an item of property, plant and equipment comprises its purchase price and all directly attributable costs to bringing the asset to the condition necessary for the intended use. Subsequent expenditure that enable the exten-sion of useful life of the asset over the originally assessed useful life, reduce the accumulated depreciation. The land is valued at historical cost or assessed cost if the former is not known.

• Property, plant and equipment are derecognised in the books of account and in the balance sheet on their disposal or when they are permanently withdrawn from use as no future economic benefits are expected from them. Proceeds from disposal of property, plant and equipment are recognised as revaluation operating revenue, whilst the present value is recognised as the revaluation operating expenses.

• Property, plant and equipment expressed in a foreign currency are translated into the local currency at the Bank of Slovenia middle exchange rate prevailing on the transaction date. Any subsequent exchange rate differences arising on settlement are recognised as financial revenue or expenses.

• Advances for property, plant and equipment are recognised at the notional amounts.

• Interest on loans raised for the acquisition and construction of property, plant and equipment do not increase their cost, but are recognised as financial expenses.

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Amortisation and depreciation expense• The carrying value of intangible assets and property, plant and equipment is

reduced through depreciation and amortisation. Depreciation and amortisation begin on the first day of the month following the month when the asset was made available for its use. Land, advances paid for property, plant and equi-pment and assets under construction or manufacture, are not depreciated.

• Amortisation and depreciation are accounted for individually under the straight-line depreciation method applied over the useful life of an individual asset.

• In 2006, the Company applied the following amortisation and depreciation rates:

Intangible assets and P, P, & E Minimum (%) Maximum (%)

Intangible assets Computer software applications 25.00 50.00Property, plant and equipment Real estate Buildings 1.50 2.50 Other structures 2.00 12.50 Plant and equipment Plant - aircraft 4.38 10.00 Plant - replacement parts 10.00 10.00 Other equipment 8.30 20.00

Computer equipment Hardware 25.00 25.00Motor vehicles Vans and Trucks 12.50 14.30 Cars 12.50 15.50Other P, P, & E - small tools 25.00 33.00

Investment property

• An investment property is initially measured at cost comprising its purchase price and any attributable costs of acquisition. Following the initial recognition, investment property is recognised under the cost model and depreciated at the annual rate of 2.20 %.

Investments

Investments in associates• Investments in associates are recognised under the equity method. An asso-

ciate is an entity in which the parent company has a significant influence and which is neither a subsidiary nor a joint venture of the investor. The financial statements of associates provide the basis for the application of the equity method. The reporting date of associates is the same as the reporting date of Adria Airways. All the associates apply unified accounting policies as used by Adria Airways. Investments in associates are recognised in the balance sheet at their cost increased to recognise any changes (following the acquisition) in the equity of the associate and decreased by any impairment of the value. The

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relevant share of the profit or loss of the associate is disclosed in the profit or loss of the parent company. When the changes are recognised directly in the equity of the associate, Adria Airways recognises the proportionate amount of these changes and discloses any significant changes in the statement of changes in equity.

Investments• Investments of Adria Airways d.d. are classified as : • Financial assets at fair value through profit or loss,• Investments held to maturity, • Available-for-sale investments, loans and receivables. Investment classification depends on the purpose for which the investment

was made.

Recognition of financial assets• On initial recognition, all investments except for investments designated at fair

value through profit or loss are recognised by Adria Airways d.d. at fair value inclusive of costs directly associated with the acquisition. Investments classi-fied at fair value through profit or loss are recognised at fair value (excluding directly attributable costs of acquisition).

Financial assets at fair value through profit or loss• Financial assets classified at fair value through profit or loss are measured at

fair value. Gains or losses on investments classified at fair value through profit or loss are recognised directly in the income statement. The fair value of in-vestments actively traded on the organised stock markets is the quoted stock market price at the end of trading on the balance sheet date. The fair value of investments in equity instruments that do not have a quoted market price is determined on the basis of a similar financial instrument, or as the net present value of future cash flows expected by Adria Airways d.d. to flow from a cer-tain investment. Purchases and redemptions of financial assets classified at fair value through profit or loss are recognised on the trading day; i.e. the day when the Company undertakes to either purchase or sell an individual financial asset.

Investments held to maturity• Financial assets with fixed or determinable payments and fixed maturity that

are not derivative financial instruments are recognised by Adria Airways d.d. as financial assets held to maturity if the Company has the positive intention and ability to hold the investments to maturity. Investments held by the Com-pany for an indefinite period of time are not included in this class. Investments recognised as financial assets held to maturity are measured at amortised cost using the effective interest method. The amortised cost is calculated by allocation of the premium or discount granted on acquisition over the period

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until the investment maturity. Any gains and losses on investments measured at amortised costs are recognised in the profit or loss (disposal, impairment, or the effects of amortisation of a premium or a discount). Investments classified as held to maturity are recognised on the settlement date.

Available-for-sale investments• After the initial recognition, all investments made by Adria Airways d.d. are de-

termined as available-for-sale investments measured at fair value or cost, if the fair value cannot be reliably determined. Any gains or losses on available-for-sale investments are recognised in equity as net realised capital gains on avai-lable-for-sale investments until the investment is sold or otherwise disposed of. In the event of investment impairment, the impairment is recognised in profit or loss. Purchases and sales of individual investments designated as availa-ble-for-sale are recognised on the trading day i.e. the day when the Company gives an undertaking to either purchase or sell an individual financial asset.

Investments in subsidiaries and joint ventures• Investments in subsidiaries are recognised by Adria Airways d.d. at cost, redu-

ced by any impairment.

Loans and receivables• Loans and receivables are financial assets with fixed or determinable payments

that are not quoted in an active market. They include loans and receivables acquired by the Company as well as loans and receivables derived from the Company. Loans and receivables are measured at amortised cost using the effective interest method and are recognised on the settlement date.

• Long-term and short-term investments are reported separately. • Amounts of long-term investments in loans that mature within a period of one

year from the balance sheet date are recognised as short-tern investments.

Receivables• Operating receivables may be long-term or short-term receivables comprising:

trade receivables, other receivables associated with operating revenue, rece-ivables associated with financial revenue, receivables associated with equity payments and other receivables.

• Receivables of all categories are initially recognised at amounts recorded in the relevant documents under the assumption that they will be collected.

• Receivables believed not to be settled or not settled within the set period and which are subject to a dispute are recognised as doubtful and disputed re-ceivables. Allowances of the total amount are made against doubtful and di-sputed receivables. The likelihood of receivable recovery is determined on a monthly basis and at the end of the year per individual customers.

• Receivables due from foreign legal or natural entities are translated into the local currency on the accrual date. Exchange rate differences arising by the

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settlement date or the balance sheet date are recognised as financial revenue or expenses.

Taxes

Current taxes• Current tax is the amount of income tax Adria Airways d.d. expects to pay or

recover in respect of the present and past periods. Current income tax payable or recoverable is measured on the basis of tax rates applicable at the balance sheet date.

Deferred taxes• Deferred tax assets and liabilities are accounted for under the balance sheet

liability method. Only deferred tax assets and liabilities arising from temporary differences are recognised. At the balance sheet date, the Company recogni-sed no deferred tax assets or liabilities.

Inventories• Inventories are carried at cost. • The use of materials is accounted for under the FIFO method.• At the year-end, inventories are checked for obsolescence and allowances of

the total amount are made against all obsolete inventories.• Inventory allowances are made to account for inventory value reduction to the

recoverable value. Inventory allowances are included in operating expenses.

Cash• Cash comprises ready cash, deposit money and cash in transit. Ready cash is

cash on hand in the form of bank notes, coins and cheques received. Deposit money is cash in bank accounts or deposited with another financial institution to be used for payments. Cash in transit is the cash being transferred from a cash register to a relevant account in a bank or another financial institution, and is not credited to that account on that same day.

• An item of cash is initially recognised at the amount arising from the relevant document after the verification of its nature.

• Cash expressed in a foreign currency is translated into the local currency at the Bank of Slovenia middle exchange rate prevailing on the date of receipt.

Equity• Total equity is the entity’s liability to owners. It is determined by both the amo-

unts invested by the owners and the amounts generated in the course of ope-ration that belong to the owners.

• Total equity consists of share capital, capital surplus, revenue reserves, reva-luation surplus, retained earnings or accumulated loss, and undistributed net

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profit for the financial year. • Share capital is carried in the local currency.

Liabilities• Liabilities are long-term or short-term financial or operating liabilities. • Initially short-term and long-term liabilities of all categories are recognised at

amounts recorded in the relevant documents under the assumption that cre-ditors demand their repayments.

• Long-term liabilities are reduced by repaid amounts and any potential other settlements agreed with the creditor. They are also reduced by the amount maturing within a period of less than one year and which are disclosed as short-term liabilities.

• Operating liabilities expressed in a foreign currency are translated into the local currency on the accrual date. Exchange rate differences arising up to the ba-lance sheet date are recognised as financial revenue or expenses.

• Prior to the preparation of the financial statements, the Company reviews the fair value of the short-term operating liabilities on the basis of the contracts, account balance confirmations, and other financial tools.

Short-term accrued and deferred items• Deferred costs and accrued revenue comprise short-term deferred costs or

short-term deferred expenses and short-term accrued revenue. Short-term deferred costs or short-term deferred expenses are amounts incurred but not yet charged against an entity's activity. Short-term accrued revenue arises when payments have not been received and invoices could not have been is-sued, but where an entity has good reasons to include the revenue in its profit or loss.

• Accrued costs and deferred revenue comprise short-term accrued costs or short-term accrued expenses and short-term deferred revenue. Accrued costs or accrued expenses arise from charging the expected and not yet in-curred costs against an entity's profit or loss. Short-term deferred revenue arises when services to be rendered in the future have been already invoiced. Revenue may also be deferred when at the time of the sale, entitlement to revenue recognition is doubtful.

Finance and operating leases• Adria Airways d.d. recognises a finance lease when substantially all the risks

and rewards incidental to the ownership of an asset are transferred to Adria Airways d.d. Finance lease is recognised in the balance sheet as an asset and a liability in the amount which on initial recognition, equals the fair value of an asset obtained under finance lease or the present value of the minimum amo-unt of rent, whichever is the lower. Rent repayments are allocated to financial expenses and reduce the outstanding amount of the liability. Financial expen-ses are allocated over the whole of the lease period to derive to the effective

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interest rate applicable to the remaining balance of a liability of each individual lease period. Financial expenses are recognised directly in profit or loss. As-sets obtained under the finance lease are depreciated over the shorter of the estimated useful life or duration of the finance lease.

• Operating lease is a lease where the lessor retains substantially all the risks and rewards incidental to the ownership of an asset Lease payments are recogni-sed by Adria Airways d.d. in profit and loss as expenses under the straight-line method over the lease period.

Financial instruments: derecognition • A financial instrument is derecognised in the books of account when the en-

tity has no longer control of the contractual rights that comprise that asset. A financial liability is derecognised on its repayment, expiration or when it falls under the statute of limitation.

Derivative financial instruments• Adria Airways d.d. applies financial instruments such as forward contracts and

interest swaps to hedge against the risks associated with interest rate chan-ges, foreign currency fluctuations, and aviation fuel price oscillation. Derivative financial instruments are recognised at fair value.

• The fair value of a forward contract is designated as the current price of con-tracts with similar maturity. The fair value of interest rate swaps is determined as the market value of similar instruments. Hedge accounting is classified as fair value hedge i.e. the hedge of the exposure to changes in the fair value of recognised assets or liabilities, and as cash flow hedge i.e. the hedge of the exposure to variability of cash flows that is attributable to a particular risk associated with a recognised asset, liability or highly probable forecast tran-saction. The gain or loss from re-measuring the hedging instrument used as the fair value hedge is immediately recognised in profit or loss. The gain or loss associated with the re-measurement of the hedged item and associated with the hedged risk of the hedged item, is credited or debited to the hedged item and recognised in profit or loss. When the hedged item is an interest bearing asset or liability, the cumulative gain or loss is amortised over the period to maturity. In cash flow hedges, gains and losses on the hedging instrument that is determined to be an effective hedge are recognised in equity. The inef-fective portion is recognised in profit or loss. When a hedged firm commitment subsequently results in the recognition of a non-financial asset, the associated gains or losses that were recognised in equity are included in the asset. In all other circumstances gains or losses on hedging instrument are in the next years transferred to profit or loss and the effect of changes in the value of the hedged item is offset in profit and loss. The effects of re-measurement of de-rivative financial instruments which no longer meet criteria for hedge accoun-ting are recognised directly in profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold, or no longer meets the criteria

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for hedge accounting. The cumulative gain or loss on the derivative financial instrument recognised by Adria Airways d.d. in equity, remain in equity until the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the cumulative gain or loss on the hedging instrument that remains in equity is recognised in profit or loss of the current period.

Revenue recognition• The revenue is recognised if increases in economic benefits during the acco-

unting period are associated with increases in assets or decreases in liabilities, and those increases can be measured reliably.

• The sales revenue is measured at selling prices stated in invoices or other do-cuments relating to the services rendered and merchandise and materials sold during the accounting period if it can be reliably expected that cash receipts will flow from them to the entity. Selling prices are decreased by discounts and rebates granted at the time of sale or subsequently, including the value of returned goods.

• The revaluation operating revenue arises on disposal of intangible assets and property, plant and equipment as an excess of their sales value over their carrying amount reduced by the revaluation surplus resulting from a previous increase in the value of the assets.

• The financial revenue is the revenue generated by investment activities. Fi-nancial revenue arises in relation to investments, as well as in association with receivables. Financial revenue is recognised upon statements of accounts, ir-respective of receipts, unless their is a substantiated doubt as to their amount, maturity, or repayment. Interest is charged on a time proportion basis with regard to the principal outstanding and the applicable interest rate.

• Other revenue comprises unusual items. They are disclosed in the actual amo-unts.

Recognition of expenses• Expenses are recognised if decreases in economic benefits during the acco-

unting period are associated with decreases in assets or increases in liabilities and such decreases can be measured reliably.

• Revaluation operating expenses are recognised when the relevant adjustments are made irrespective of their impact on profit or loss. Revaluation operating expenses arise in association with intangible assets, property, plant and equi-pment, and current operating assets as a result of their impairment.

• Financial expenses are financing expenses and investment expenses. Revalu-ation financial expenses arise in association with the impairment of long-term and short-term investments as well as in association with the strengthening of long-term and short-term liabilities.

• Other expenses consist of unusual items. They are disclosed in the actual amounts incurred.

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Cash flow statement• The cash flow statement is compiled under the indirect method on the basis

of the balance sheet data as at 31 December 2006 and 31 December 2005, the income statement data for the year ended 31 December 2006, as well as additional information necessary to adjust the receipts and disbursements, and for the relevant classification of significant items.

Disclosures• In the annual report for the year ended 31 December 2006, the Company

has disclosed all the significant transactions, receivables, liabilities, expenses, revenue, and risks, as well as all significant events subsequent to the balance sheet date.

• The cost of aircraft is not disclosed. • The Company has not disclosed any information that is designated as confi-

dential, any personal data, or any other confidential information, which could be detrimental to the Company or an individual.

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6. Classificationsandnotestothefinancial statements

6.1. Additional disclosures of the balance sheet items

6.1.1. Intangible assets and long-term deferred costs and accrued revenue

Intangible assets and long-term deferred costs and accrued revenue represent softwa-re applications which are amortised under the straight-line basis at the annual rate of 25 %, pilot licences, and licences issued to the mechanics, all of which are amortised at the annual rates of 50 %, 33.33 % or 25 %.

(in TSIT) Licences

Long-term deferred

costs and accrued revenue

Assets being

acquired Total

Cost

Balance at 31 December 2005 - 244,265 - 244,265

Balance at 1 January 2006 - 244,265 - 244,265

Acquisitions - - 205,089 205,089

Transfer from assets in course of con-struction 148,796 56,293 (205,089) -

Balance at 31 December 2006 148,796 300,558 - 449,354

Accumulated amortisation

Balance at 31 December 2005 - 201,163 - 201,163

Balance at 1 January 2006 - 201,163 - 201,163

Amortisation charge for the year 10,541 19,692 - 30,233

Balance at 31 December 2006 10,541 220,855 - 231,396

Carrying amount at 31 December 2006 138,255 79,703 - 217,958

Carrying amount at 31 December 2005 - 43,102 - 43,102

Carrying amount at 1 January 2006 - 43,102 - 43,102

6.1.2. Property, plant and equipment

(in TSIT) 31.12. 2006 31.12. 2005

Land 166,343 166,343

Buildings 1,914,035 2,005,003

Equipment : 20,847,890 21,126,686

6

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* Plant and machinery 20,567,426 20,864,649

- Aircraft 19,785,674 20,089,022

- Replacement parts 781,752 775,627

* Other plant and equipmen 280,464 262,037

- Other equipment 278,686 259,742

- Small tools 1,778 2,295

Assets in process of acquisition of which: 417,498 10,121

*advancers for property, plant and equipment 416,896 10,121

*assets in course of construction 602 -

TOTAL 23,345,766 23,308,153

• In 2006, investments in property, plant and equipment amounted to TSIT 2,305,907. In terms of the value, the major share represents investments in the aircraft.

• In 2006, the Company acquired SAAB 340A cargo plane worth TSIT 285,764 under financial lease. At 31 December 2006, TSIT 1,554,459 of the amount due for aircraft purchases includes TSIT 285,764 due in respect of the financial lease.

• The major share of property, plant and equipment represent three Airbus A-320 aircrafts and 5 CRJ-200-LR regional aircrafts. The increase relates to the regular 16-year overhaul of A320, initial membership fee to the IAE, and inc-rease in the value of CRJ-200 aircraft resulting from the engine overhaul. The decrease represents depreciation accounted for under the straight-line basis at the rate of 4.38 % applied to A-320 aircraft and 5.00 % applied to CRJ-200-LR aircraft.

• The net sales value of the aircraft is verified twice a year based on the values reported in The Aircraft Value Reference issued by the Aircraft Value Analysis Company (AVAC). The Company assessed the value in use of its Canadair aircraft fleet as at 1 January 2006 (Canadair aircraft fleet represents an inde-pendent cash-generating unit); the valuation showed a significant excess of replaceable value over the carrying value. The Management Board believes there are no indications that the assets should be impaired.

• All the long-term financial liabilities of the Company are secured by first pled-ges on three A-320 aircrafts (S5-AAA, S5-AAB and S5-AAC), and on all five CRJ-200-LR regional aircrafts (S5-AAD, S5-AAE, S5-AAF, S5-AAG and S5-AAJ). All the aircraft pledged is owned by Adria.

• In 2006, five aircrafts were under the operating lease, namely: one each of CRJ-100 and CRJ-200 aircraft, both under operating lease for the whole of the year, one Boeing 737-500 was leased for a period of nine months and another for a period of five months, and one SAAB cargo plane which has been under operating lease since September 2006.

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Changes in property, plant and equipment in 2006

(in TSIT) Land Buildings Plant - aircraft

Repla-cement parts

Other equipment

Small tools

Assets under

construction

Advances for P,P&E Total

Cost

Balance at 31 December 2005 166,343 3,331,518 36,872,316 2,669,288 1,327,322 13,795 - 10,121 44,390,703

Balance at 1 January 2006 166,343 3,241,514 36,872,316 2,669,288 1,327,322 13,795 - 10,121 44,300,699

Acquisitions - - - - - - 1,896,970 408,937 2,305,907

Transfer from assets under construction - 53,770 1,554,459 208,087 80,102 428 (1,896,846) - -

Disposals - - - (413,196) (39,606) 101 - - (452,903)

Exchange rate differences - - (538,888) 673 - - 478 (2,162) (539,899)

Balance at 31 December 2006 166,343 3,295,284 37,887,887 2,464,852 1,367,818 14,122 602 416,896 45,613,804

Accumulated depreciation

Balance at 31 December 2005 - 1,326,515 16,783,294 1,893,661 1,067,580 11,500 - - 21,082,550

Balance at 1 January 2006 - 1,295,635 16,783,294 1,893,661 1,067,580 11,500 - - 21,051,670

Depreciation charge for the year - 85,614 1,863,159 180,459 56,623 923 - - 2,186,778

Disposals - - - (391,484) (35,071) (79) - - (426,634)

Acquisitions - - - - - - - - -

Exchange rate differences - - (544,240) 464 - - - - (543,776)

Balance at 31 December 2006 - 1,381,249 18,102,213 1,683,100 1,089,132 12,344 - - 22,268,038

Carrying amount at 31 December 2006 166,343 1,914,035 19,785,674 781,752 278,686 1,778 602 416,896 23,345,766

Carrying amount at 31 December 2005 166,343 2,005,003 20,089,022 775,627 259,742 2,295 - 10,121 23,308,153

Carrying amount at 1 January 2006 166,343 1,945,879 20,089,022 775,627 259,742 2,295 - 10,121 23,249,029

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6.1.3. Investment property

Investment property represents holiday apartments as well as other apartments used for the purpose of lease,

(in TSIT) Buildings Total

Cost

Balance at 31 December 2005 - -

Balance at 1 January 2006 90,003 90,003

Balance at 31 December 2006 90,003 90,003

Accumulated depreciation

Balance at 31 December 2005 - -

Balance at 1 January 2006 30,880 30,880

Depreciation charge for the year 1,980 1,980

Balance at 31 December 2006 32,860 32,860

Carrying amount at 31 December 2006 57,143 57,143

Carrying amount at 31 December 2005 - -

Carrying amount at 1 January 2006 59,123 59,123

6.1.4. Long-term investments

(in TSIT) 31.12. 2006 31.12. 2005

Investments in shares and interests in the group 190,114 224,753

Investments in shares and interests of associates 48 48

Other shares and investments 14,946 24,115

Long-term loans to others 1,387 2,007

TOTAL 206,495 250,923

• Adria Airways d.d. does not compile consolidated annual report as the inclusi-on of the separate financial statements of the two subsidiaries is not significant for the true and fair presentation of the financial statements of Adria Airways Group as a whole.

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Subsidiary(in TSIT Address Country

Share in equity at

31.12.2006

Equity of subsidiary at31 December

2006

Profit for the year2006

Share in subsidiaries

31.12.2006 31.12.2005

AmadeusSlovenija d.o.o.

Dunajska 122, Ljubljana

Slovenija 95 % 214,133 19,949 203,426 197,209

AAM EARServis d.o.o.

Gradski zidBlok 4/8, Skopje

Makedonija 27,454

AA Kosovo Eqrenz Qabey 119, Priština

Srbija 100 % 599 599

TOTAL 204,025 224,753

• Investments in shares and interests of associates include the investment in NMC d.o.o. Skopje where the Company holds a 5 % equity interest represen-ting TSIT 48.

Changes in long-term investments in 2006

(in TSIT) Groupcompanies Associates Other

companiesLoans to others Total

Balance at 1 January 2006 245,179 48 24,116 2,007 271,350

Acquisition 599 - - - 599

Disposal 55,664 - 6,762 620 63,046

Revaluation - - (2,407) - (2,407)

Balance at 31 December 2006 190,114 48 14,947 1,387 206,496

Impairment loss

Balance at 1 January 2006 - - 1 - 1

Acquisition

Disposal

Balance at 31 December 2006 - - 1 - 1

Net value at 1 January 2006 245,179 48 24,115 2,007 271,349

Net value at 31 December 2006 190,114 48 14,946 1,387 206,495

• Investments in shares and interests in the Group represent the investment in Amadeus Slovenija d.o.o. of TSIT 190,114. In 2006, the Company disposed of its investment in AAM EAR Servis d.o.o. Skopje.

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6.1.5. Inventories

(in TSIT) 31.12. 2006 31.12. 2005

Materials 1,502,182 1,750,879

Allowances (564,745) (928,129)

TOTAL 937,437 822,750

• The inventories mainly represent spare parts and materials used in the aircraft servicing. The value of inventories and their optimum use depend on the re-commendations of the aircraft manufacturers and the number of aircraft in the fleet.

• The carrying value of inventories is the same as their recoverable amount. • At the end of 2006, the Company checked the inventories and found no obso-

lete inventories. Accordingly, no additional inventory allowance was made.

6.1.6. Short-term investments

(in TSIT) 31.12. 2006 31.12. 2005

Short-term financial investments - in others - 7,194

Short-term loans - in others 39,094 40,061

TOTAL 39,094 47,255

• The majority of loans to others (TSIT 38,818) represent deposits placed at banks as collateral for bank guarantees and therefore the Company is limited as to their disposal.

6.1.7. Short-term operating receivables

(in TSIT) 31.12. 2006 31.12. 2005

Short-term operating receivables from subsidiaries - 96,451

Short-term operating trade receivables 2,890,751 3,098,064

Short-term interest receivable 2 -

Other short-term operating receivables 1,265,081 641,432

Allowances for short-term operating receivables (99,524) (107,423)

TOTAL 4,056,310 3,728,524

• Compared to the previous year, there was a 9 % increase in the short-term operating receivables primarily as a result of the increase in sales.

• Gross amount of short-term operating trade receivables represents receiva-bles due from foreign customers of TSIT 2,269,447, and TSIT 621,304 due by

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the local customers. The Company ensures regular control over its accounts receivables. All the receivables are reported at real values and are recovera-ble.

• Regular aircraft operators, members of the IATA (International Air Transport Association), account for their monthly receivables and liabilities through the Clearing House registered in Montreal, who provides monthly offsetting. In its own way the receivables are secured as non-compliance with the agreed con-tractual terms represents a severe breach against the airline and leads to the exclusion from the association. At 31 December 2006, TSIT 604,302 of rece-ivables towards IATA to be offset account for 21 % of all the receivables. The offsetting was made in January 2007.

• Adria Airways d.d. sells air tickets also through its representatives at home and abroad. A similar monthly account and payment discipline applicable to the airlines, also applies to the representatives and the receivables are offset thro-ugh a Bank Settlement Plan (BSP) set up in the locations where the air tickets are sold. BSP regularly verifies credit rating of all its business partners. If certain financial ratios are not met (these are different for each individual country) a collateral is required which is, in the event of payment default, shared among the airlines in proportion of the outstanding amount of the receivables. At 31 December 2006, receivables due from various BSP amount to TSIT 288,169, which accounts for 10 % of all the receivables.

• No receivables are due from Members of the Management and Supervisory Board, employees with special authorisations, or internal owners.

• Allowances are made against receivables in accordance with the criteria de-scribed under the Accounting policies section. In 2006, additional allowance of TSIT 9,408 was made against short-term operating trade receivables, while TSIT 1,178 of receivables that were previously written-off was recovered. In the financial year 2006, TSIT 45,551 of receivable allowances was debited directly to the revaluation expenses.

• 49 % of all short-term operating trade receivables are secured as follows: Clearing House (21 %), BSP (10 %), blank bills of exchange (15 %), deposits (2 %) and bank guarantees (1 %); 51 % of short-term trade receivables are not secured. According to the break-down of trade receivables per maturity, at 31 December 2006, 78 % of the receivables have not matured, while 22 % of the receivables are due and outstanding up to 30 days.

• Other short-term operating receivables represent short-term advances paid for leased aircraft warranties, VAT receivable, receivables due for income tax prepayments, receivables due from the sale outlets in respect of air ticket sa-les, and receivables from suppliers for credits recognised but not yet issued.

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6.1.8. Cash

(in TSIT) 31.12. 2006 31.12. 2005

Cash in hand and cheques 7,940 13,393

Cash at bank 222,168 107,894

TOTAL 230,108 121,287

6.1.9. Short-term deferred costs and accrued revenue

TSIT 210,984 represents short-term deferred costs and expenses on account of in-voiced rent of the aircraft and the engine, and costs of the passenger and aircraft insurances.

6.1.10. Equity

(in TSIT) 31.12. 2006 31.12. 2005

I. Called-up capital 812,436 812,436

1. Share capital 812,436 812,436

II. Capital surplus 4,937,607 3,630,211

III. Revenue reserves 1,505,197 1,862,022

4. Statutory reserves 134,551 134,551

5. Other revenue reserves 1,370,646 1,727,471

IV. Revaluation surplus (135,185) 1,319,766

V. Retained earnings - -

VI. Net profit for the year - -

TOTAL 7,120,055 7,624,435

• The called-up capital represents the share capital defined in the Company's statute, registered at the court, and subscribed to by the shareholders. The share capital of TSIT 812,436 is the same as the registered capital. It is divi-ded into 406,218 ordinary, fully paid-up shares with a nominal value of SIT 2,000.00. All the ordinary shares were a single issue.

• All the shares are of the same class, issued as dematerialised shares. During the year there were no changes to the number of shares.

• The company holds no treasury shares and did not hold any during the year. • At 31 December 2006, the carrying value of one share was SIT 17,527.67.• The net profit generated in 2006 was appropriated to cover losses brought

forward.• In its Statute, the revenue reserves are specified for the following purposes:

102

• The capital surplus was created during the privatisation and injection of the equity capital and is to be used under the conditions and for the purposes set out by the law; the capital surplus of TSIT 4,937,607 has been increased as a result of the transition to the SAS 2006 (transfer of the general capital revaluation adjustment).

• The revenue reserves represent statutory reserves of TSIT 134,551 created in the amount of 50 % of the net profit generated in the fi-nancial periods 2002, 2003 and 2004 in accordance with the provi-sions of the Statute. Other revenue reserves of TSIT 1,370,646 were in 2006 reduced by the amount allocated for loss settlement (TSIT 356,825). The statutory reserves may be used to cover losses, to in-crease the share capital, and as a capital expenditure. The other rev-enue reserves may be used for any purpose in accordance with the law, the Statute, and the Company’s business policy.

The revaluation surplus shows a negative amount as a result of the negative revaluation surplus from the valuation of derivative financial statements to be used as cash flow hedges in 2007.

6.1.11. Provisions and long-term accrued costs and deferred revenue

The provisions of TSIT 371,542 were made on account of pensions, jubilee benefits and termination benefits upon retirement: The provisions were calculated in accordan-ce with the provisions of the collective and individual employment contracts, taking into account the employees’ fluctuation in terms of their retirement age and the years of service in the Company.

6.1.12. Financial liabilities

Long-term Short-term TOTAL

(in TSIT) 2006 2005 2006 2005 2006 2005

Financial liabilities to banks 13,283,952 13,401,306 2,458,248 1,621,493 15,742,200 15,022,799

Other financial liabilities 235,270 4,200 252,734 36,698 488,004 40,898

TOTAL 13,519,222 13,405,506 2,710,982 1,658,191 16,230,204 15,063,697

Weighted average interest rates as at 31 December31.12. 2006 EUR

Financial liabilities to banks 4,88 %

31.12. 2005 EUR

Financial liabilities to banks 3,66 %

103

Disclosure of the interest rate risk per individual types of borrowings

Year ended31 December 2006(in TSIT)

Interest rate changes within 6 months

nterest rate changes

within 6-12 months

Interest rate changes

within 1-5 years

Over 5 years TOTAL

Total borrowings 14,594,734 - - 1,147,466 15,742,200

Interest rate swap effect (239,640) - - 239,640 -

TOTAL 14,355,094 - - 1,387,106 15,742,200

• The current amount of long-term borrowings that matures in 2007 in the amo-unt of TSIT 1,282,922, is reported under short-term financial liabilities.

• The current amount of long-term financial lease liabilities that matures in 2007 financial year in the amount of TSIT 36,938, is reported under short-term finan-cial liabilities.

• In 2006, the Company raised long-term loans of total TSIT 1,783,532 from local banks to finance current assets.

• All the long-term and short-term loans were raised from the local banks and are denominated in the Euro.

• The principal amounts and the interest are repaid in monthly instalments.• All the long-term financial liabilities are secured with a pledge placed on the

aircraft.

Maturity of borrowings

(In TSIT) 2006 2005

Within 12 months 2,458,248 1,621,493

Between 1 and 2 years 1,960,285 1,043,474

Between 2 and 5 years 5,747,720 5,161,963

Over 5 years 5,575,947 7,195,869

TOTAL 15,742,200 15,022,800

Short-term financial liabilities to banks

(In TSIT) 31.12. 2006 31.12. 2005

Current amounts of bank loans 1,282,922 712,277

Short-term financial liabilities to banks 1,175,326 909,216

TOTAL 2,458,248 1,621,493

• The current amount of loans extended by the local banks represents the amo-unts of long-term loans that mature within a period of 12 months.

• The short-term financial liabilities represent the amounts due to the local banks. Short-term loans are denominated in the Euro.

• The increase in short-term financial liabilities compared to the previous year ma-

104

inly represents a short-term liquidity loan raised to finance the down payment of the new CRJ-900 aircraft in the amount of TSIT 384,580.

• The current amount of long-term borrowings is secured with a pledge on the aircraft, while other short-term financial liabilities are secured with bills payable.

6.1.13. Long-term operating liabilities

(in TSIT) 31.12. 2006 31.12. 2005

Long-term operating liabilities for advances 2,451 2,450

TOTAL 2,451 2,450

6.1.14. Short-term operating liabilities

(in TSIT) 31.12. 2006 31.12. 2005

Short-term operating liabilities to the Group 24,036 12,325

Short-term operating liabilities to suppliers 4,403,358 4,745,344

Short-term operating liabilities for advances 247,897 72,595

Other short-term operating liabilities 940,739 858,304

TOTAL 5,616,030 5,688,568

Short-term operating trade liabilities (in TSIT) 31.12. 2006 31.12. 2005

Short-term operating liabilities to local suppliers 1,237,666 1,100,841

Short-term operating liabilities to foreign suppliers 3,165,692 3,644,503

TOTAL 4,403,358 4,745,344

• The short-term operating liabilities to suppliers represent amounts due to the suppliers of goods and services at home and abroad. The short-term opera-ting liabilities mature within a period of 8 to 60 days from the date of the supply of goods, the rendering of services, or the invoice date.

105

Other short-term operating liabilities

(in TSIT) 31.12. 2006 31.12. 2005

Short-term operating liabilities to the government 137,801 121,608

Short-term operating liabilities to the employees 512,522 426,903

Other short-term operating liabilities 290,416 309,793

TOTAL 940,739 858,304

• As at 31 December 2006, no operating liabilities are due to the management and the supervisory board or the employees, other than the amounts due for December 2006 wages and salaries.

• The other short-term operating liabilities mainly represent court damages due to JAT Airways Beograd.

6.1.15. Short-term accrued costs and deferred revenue

• These represent accrued costs or expenses of TSIT 51,619 on account of the interest due on borrowings, and amounts of daily allowances.

6.1.16. Off balance sheet assets and liabilities

(in TSIT) 2006 2005

Mortgages 17,970,038 14,917,675

Guarantees 502,512 610,622

Other 6,824 267,145

TOTAL 18,479,374 15,795,442

• The off balance sheet records represent mortgages (pledges) entered for the benefit of the local banks against long-term loans extended to the Company for the purchase of the aircraft, and a pledged entered for the benefit of the IAE in respect of a seven-year contract the Company agreed for the servicing of the A320 engines.

• As at 31 December 2006, the total amount of borrowings that are secured with mortgages is TSIT 14,566,874.

• The guarantees represent payment guarantees granted to the suppliers for the purchase of goods and services at home and abroad, and guarantees received as a receivable security.

106

6.1.17. Financial instruments

Fair value• The majority of investments recognised through profit and loss and as avai-

lable-for-sale investments, are recognised at fair value, whilst receivables and borrowings are reported at amortised cost. Since the majority of the receiva-bles, liabilities, and borrowings are short-term, the fair value of these financial instruments does not significantly deviate from their carrying value.

Derivative financial instruments At 31 December 2006, the Company reports the following open financial instruments:

Interest rate hedge instruments (in TSIT)

Instrument Notional amount Fair value

IRS 239,640 7,228

IRS - Collar 3,354,960 23,799

The interest rate swaps and collars are accounted for as the future cash flow hedges.

(in TSIT)

Instrument Notional amount Fair value

Interest rate cap 2,540,184 24,545

Interest rate caps are not accounted for as the hedge accounting.

Currency forwards (in TSIT)

Notional amount Fair value

Currency acquisition 9,890,743 (158,269)

Currency sales 10,089,582 140,874

Commodity futures

Period January -March

April - June

July - September

October - December

% of planned quantities of aviation fuel purchased un-der commodity futures

51 % 36 % 23 % 25 %

• At 31 December 2006, the fair value of commodity futures for the purchase of aviation fuel was reduced by TSIT 161,187. The effect is recognised through the equity of the Company.

107

Interest rate risk The interest rate risk, which the Group is exposed to arises primarily from the financing of the Group as disclosed under the financial liabilities section. Credit risk The Group is not exposed to any significant credit risk concentration.

6.2. Additional disclosures of the income statement items

• Costs in terms of functional groups

(in TSIT) 2006 2005

Production costs 32,038,057 28,148,407

Selling expenses 3,938,323 3,957,573

General and administrative costs 911,940 1,036,855

TOTAL 36,888,320 33,142,835

• Production costs of goods sold comprise direct costs of the airport and other services, costs of material, costs of labour, depreciation expenses, and pro-duction overheads.

• Selling expenses represent marketing costs, costs of sales made at home and abroad, and costs of agency sales at home and abroad (commission — other selling costs).

• General and administrative costs represent costs of administrative services for the whole of the Company.

Below revenue and costs are broken-down according to individual types.

6.2.1. Net sales

Net sales by business segment (in TSIT) 2006 2005

* Scheduled passenger services 25,720,951 23,733,658

* Schedule cargo services 1,242,785 843,232

* Charter passenger flights 4,422,628 4,272,350

* Aircraft servicing for third persons 2,257,889 2,154,199

* Aircraft charter services 1,534,789 -

* Other 1,329,849 1,187,063

TOTAL 36,508,891 32,190,502

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• The activity of the Company is classed as international air passenger service and accounts for 82.6 % of total sales revenue.

• 6.2 % of the sales revenue represents aircraft servicing for third persons which is becoming a significant line of the Company’s activities, while 3.4 % of the sales revenue accounts for cargo transport.

• 4.2 % of the net sales are achieved by the aircraft charter services.

Net sales - at home and abroad (in TSIT) 2006 2005

Sales revenue (home) 397,059 310,488

Sales revenue (abroad) 36,111,832 31,880,014

TOTAL 36,508,891 32,190,502

6.2.2. Costs of goods, materials and services

(in TSIT) 2006 2005

Costs of goods sold 164,365 129,612

Cost of materials 8,919,620 7,517,980

Cost of services 16,948,269 14,925,401

TOTAL 26,032,254 22,572,993

• Compared to the previous year, the costs of goods, materials and services have increased by 15 %, which is primarily due to the increase in the costs of aircraft rent as a result of the restructuring of the fleet, the increase in the price of aviation fuel, as well as the increase in the air transport services.

Costs of materials (in TSIT) 2006 2005

Aviation fuel 6,975,468 5,643,723

Merchandise and materials used in passenger care 598,152 689,045

Replacement parts used in aircraft servicing 933,394 786,227

Other costs of materials 412,606 398,985

TOTAL 8,919,620 7,517,980

Costs of services (in TSIT) 2006 2005

Airport costs 5,840,379 5,423,823

Navigation costs 1,870,161 1,876,678

Maintenance costs 1,820,314 2,232,753

Rent 3,507,743 1,505,628

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Bank charges and insurance premiums 280,807 283,980

Reimbursements of costs 405,427 346,631

Costs of transport services 351,044 338,690

Other costs of services 2,872,394 2,917,218

TOTAL 16,948,269 14,925,401

Other costs of services comprise costs of training, cargo, costs of student work, passenger tax, intellectual and personal services. The costs of the audit of the financial statements and the annual report for the financial year ended 31 December 2006 amount to TSIT 4,793.

6.2.3. Labour costs

(in TSIT) 2006 2005

Payroll costs 4,755,124 4,623,996

Social insurance costs 798,194 755,370

Retirement insurance costs 290,796 261,688

Other labour costs 1,240,497 1,307,803

TOTAL 7,084,611 6,948,857

• Other labour costs comprise holiday bonus, travel allowance, termination be-nefits, jubilee benefits, payroll taxes, and salaries of the staff employed at the representative offices abroad.

6.2.4. Write-downs

Amortisation and depreciation expense (in TSIT) 2006 2005

Amortisation and depreciation of intangible assets and property, plant and equipment 2,218,991 2,044,831

Revaluation expenses associated with intangibleassets and property, plant and equipment 12,837 67,835

TOTAL 2,231,828 2,112,666

Revaluation operating expenses from the current operating assets

• These mainly represent receivable allowance of TSIT 45,551.

110

6.2.5. Financial revenue

(in TSIT) 2006 2005

Financial revenue from shares and interests 63,971 49,382

- in companies in the Group 13,258 43,265

- in other companies 3,255 6,117

- from other investments 47,458 -

Financial revenue from operating receivables 582,684 466,236

- due from companies in the Group 1,794 2,976

- due from others 580,890 463,260

TOTAL 646,655 515,618

• Nearly all of the financial revenue represent interest and exchange rate gains.• The majority of other financial revenue from the short-term receivables repre-

sents interest of TSIT 13,169 and exchange rate gains of TSIT 566,449 arising on the foreign currency conversion.

6.2.6. Financial expenses

(in TSIT) 2006 2005

Financial expenses from impairment and write-off of investments 40,836 -

Financial expenses from financial liabilities 718,835 1,185,563

- loans from companies in the Group 1,309 18

- loans from banks 676,489 891,425

- from other financial liabilities 41,037 294,120

Financial expenses from operating liabilities 482,217 709,525

- to companies in the Group 2,056 2,652

- to suppliers 9,102 2,789

- from other operating liabilities 471,059 704,084

TOTAL 1,241,888 1,895,088

• The majority of the financial expenses represent interest paid on long-term borrowings (TSIT 676,489) and exchange rate losses of TSIT 471,059.

111

6.2.7. Income tax

• As a result of the settlement of tax loss incurred in 2006, the Company reports no income tax liability.

Reconciliation of tax and accounting profit, multiplied by the tax rate (In TSIT) 2006 2005

Profit before taxes 16,799 (2,293,283)

Expenses not recognised as expenditure 338,131 258,141

Allowances for inventories and receivables 45,652 15,942

Tax deductions (407,864) -

Other 7,282 13,827

Total 0 (2,005,373)

Income tax (25 %) 0 0

6.2.8. Net profit or loss

(in TSIT) 2006 2005

Net profit (loss) for the year 16,799 (2,293,283)

• In 2006, the Company generated TSIT 203,066 of operating profit which is in view of the loss incurred in the previous period, a very encouraging change and reflects the positive effect of the restructuring process of the Company.

• The Company reports financial loss of TSIT 595,233, which is significantly lo-wer than the loss incurred in the previous year. This is due to a considerable reduction in the costs of financing as a result of the refinancing of long-term borrowings raised to finance the aircraft purchases.

• The outcome is a minimum amount of the net profit of TSIT 16,799.

(in TSIT) CPI

Change 2.8 %

General revaluation adjustment 199,362

Loss after the revaluation to preserve the purchasing power of the equity (182,563)

• If equity was restated by the consumer price index, the result achieved by Adria Airways d.d. in 2006 would be lower by TSIT 199,362.

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7. Otherdisclosures

7.1. Information on groups of persons

Total earnings received in 2006 by groups of persons for holding office or the perfor-mance of tasks under Article 253 of the Companies Act:

(in TSIT) 2006

Management Board 64,339

Supervisory Board 13,934

- external — shareholders’ representatives 9,446

- internal — workers’ representatives 4,488

Employees on individual contracts 250,470

TOTAL 328,743

The amounts above are gross, excluding contributions payable by the employer.

• Receipts of the Management board comprise salaries, fringe benefits, holiday bonus, any other receipts and reimbursements of costs. Receipts of the staff on individual contracts to whom the collective agreement tariffs do not apply comprise salaries, fringe benefits, holiday bonus, reimbursement of costs and any other receipts such as jubilee benefits and termination benefits. Receipts of the Supervisory Board include session fees, travel allowance and fees for holding their office as determined by the Shareholders' meeting.

8. Eventsafterthebalancesheetdate

At the 22nd AGM of the Shareholders held on 19 February 2007, the Shareholders approved the regular increase of the share capital of the Company in the amount of EURO 11 million. Shares were fully registered and paid in three stages during March and April 2007.

7

8

113

99. FinancialStatements–expandedformat

9.1. Balance sheet - expanded format under SAS

(in TSIT) 31.12. 2006 1. 1. 2006 31.12. 2005

ASSETS 29,391,901 28,647,542 28,627,117

A. LONG-TERM ASSETS 23,917,968 23,669,695 23,649,270

I. Intangible assets and long-term deferred costs 217,958 43,102 43,102

1. Concessions, patents, licences and other rights 138,255 - -

2. Other long-term deferred costs 79,703 43,102 43,102

II. Property, plant and equipment 23,345,766 23,249,029 23,308,153

1. Land and buildings 2,080,378 2,112,222 2,171,346

a) Land 166,343 166,343 166,343

b) Buildings 1,914,035 1,945,879 2,005,003

2. Equipment and machinery 20,567,426 20,864,649 20,864,649

3. Other equipment 280,464 262,037 262,037

4. Property, plant and equipment being acquired 417,498 10,121 10,121

a) Property, plant and equipment in the course of construction 602 - -

b) Advances to acquire property, plant and equipment 416,896 10,121 10,121

III. Investment property 57,143 59,123 -

IV. Long-term investments 206,495 271,349 250,923

1. Long-term investments (except loans) 205,108 269,342 248,916

a) Shares and interests in group companies 190,114 245,179 224,753

b) Shares and interests in associates 48 48 48

c) Other shares and interests 14,946 24,115 24,115

2. Long-term loans 1,387 2,007 2,007

b) Long-term loans to others 1,387 2,007 2,007

V. Long-term operating receivables 90,606 47,092 47,092

3. Long-term operating receivables to others 90,606 47,092 47,092

114

B/ CURRENT ASSETS 5,262,949 4,719,816 4,719,816

II. Inventory 937,437 822,750 822,750

1. Materials 937,437 822,750 822,750

III. Short-term investments 39,094 47,255 47,255

1. Short-term investments (except loans) - 7,194 7,194

c) Other short-term investments - 7,194 7,194

2. Short-term loans 39,094 40,061 40,061

Loans to others 39,094 40,061 40,061

IV. Short-term operating receivables 4,056,310 3,728,524 3,728,524

1. Short-term operating receivables due from group companies - 96,451 96,451

2. Short-term operating trade receivables 2,791,227 2,990,641 2,990,641

3. Short-term operating receivables due from others 1,265,083 641,432 641,432

V. Cash 230,108 121,287 121,287

C/ SHORT-TERM DEFERRED COSTS AND ACCRUED REVENUE 210,984 258,031 258,031

Off balance sheet assets 18,479,374 15,795,442 15,795,442

EQUITY AND LIABILITIES 29,391,901 28,647,542 28,627,117

A/ EQUITY 7,120,055 7,250,811 7,624,435

I. Called-up capital 812,436 812,436 812,436

1. Share capital 812,436 812,436 812,436

II. Capital surplus 4,937,607 4,937,607 3,630,211

III. Revenue reserves 1,505,197 1,862,022 1,862,022

4. Statutory reserves 134,551 134,551 134,551

5. Other revenue reserves 1,370,646 1,727,471 1,727,471

IV. Revaluation surplus (135,185) 12,370 1,319,766

V. Retained earnings - (373,624) -

VI. Net profit for the year - - -

B/ PROVISIONS AND LONG-TERM ACCRUED COSTS AND DEFERRED REVENUE 371,542 398,064 4,015

1. Provisions for retirement benefits and similar obligations 371,542 394,049 -

2. Other provisions - 4,015 4,015

115

C/ LONG-TERM LIABILITIES 13,521,673 13,407,956 13,407,956

I. Long-term financial liabilities 13,519,222 13,405,506 13,405,506

2. Long-term financial liabilities to banks 13,283,952 13,401,306 13,401,306

4. Other long-term financial liabilities 235,270 4,200 4,200

II. Long-term operating liabilities 2,451 2,450 2,450

4. Long-term operating liabilities from advances 2,451 2,450 2,450

D/ SHORT-TERM LIABILITIES 8,327,012 7,346,759 7,346,759

II. Short-term financial liabilities 2,710,982 1,658,191 1,658,191

1. Short-term financial liabilities to companies in the group 37,213 35,904 35,904

2. Short-term financial liabilities to banks 2,458,248 1,621,493 1,621,493

4. Other short-term financial liabilities 215,521 794 794

III. Short-term operating liabilities 5,616,030 5,688,568 5,688,568

1. Short-term operating liabilities to companies in the group 24,036 12,325 12,325

2. Short-term liabilities to suppliers 4,403,358 4,745,344 4,745,344

4. Short-term operating liabilities from advances 247,897 72,595 72,595

5. Other short-term operating liabilities 940,739 858,304 858,304

E/ SHORT-TERM ACCRUED COSTS AND DEFERRED REVENUE 51,619 243,952 243,952

Off balance sheet liabilities 18,479,374 15,795,442 15,795,442

116

9.2. Income statement — expanded format under SAS

(in TSIT) 2006 2005

1. Net sales revenue 36,508,891 32,190,502

a) Net sales revenue on the local market - group companies 19 23,766

b) Net sales revenue on the local market - others 397,040 286,722

c) Net sales revenue on foreign markets - companies 885,069 937,721

d) Net sales revenue on foreign markets - others 35,226,763 30,942,293

2. Production costs of goods sold (including depre- ciation and amortisation), or costs of goods sold (32,038,057) (28,148,407)

3. GROSS PROFIT FROM SALES 4,470,834 4,042,095

4. Selling costs (including depreciation and amortisation) (3,938,323) (3,957,573)

5. General and administrative expenses (including depreciation and amortisation) (911,940) (1,036,855)

a) General and administrative costs (853,451) (953,078)

b) Revaluation operating expenses associated with intangible assets and property, plant and equipment (12,837) (67,835)

c) Revaluation operating expenses associated with current operating assets (45,652) (15,942)

6. Other operating revenue (including revaluation operating revenues) 582,495 47,366

7. Financial revenue from shares and interests 63,971 49,382

a) Financial revenue from shares and interests in the group 13,258 43,265

c) Financial revenue from shares and interests in other companies 3,255 6,117

d) Financial revenue from other investments 47,458 -

9. Financial revenue from operating receivables 582,684 466,236

a) Financial revenue from operating receivables due from the group 1,794 2,976

b) Financial revenue from operating receivables due from others 580,890 463,260

10. Financial expense due to impairment and write-off of investments (40,836) -

11. Financial expenses for financial liabilities (718,835) (1,895,088)

a) Financial expenses for financial liabilities to companies in group (1,309) (18)

b) Financial expenses for financial liabilities to banks (676,489) (891,425)

c) Financial expenses for other financial liabilities (41,037) (294,120)

12. Finance expense for operating liabilities (482,217) (709,525)

a) Financial expenses for operating liabilities to companies in the group (2,056) (2,652)

b) Financial expenses for trade payables and bills payable (9,102) (2,789)

c) Financial expenses for other operating liabilities (471,059) (704,084)

13. Other revenue 453,627 9,851

14. Other expenses (44,661) (18,697)

15. Income tax - -

17. NET PROFIT (LOSS) FOR THE YEAR 16,799 (2,293,283)

Publisher: Adria Airways, Slovenski letalski prevoznik d.d. / The Airline of Slovenia d.d.Design and realization: IMAGO, marketinška agencija / marketing agencyPhoto: Žiga Koritnik, Branko »eak, Imago and Adria Airways archivesTranslation: PSD d.o.o., Ernst & Young d.o.o.Printed by: Tiskarna Schwarz, August 2007