Market Outlook

Outlook for the Second Half of 2011

The demand for software products and services is estimated to grow in the automotive industry and EB's net sales is expected to increase in the Automotive Business Segment. Due to the strengthened demand, the net sales of EB's Wireless Business Segment is expected grow.

EB expects for the second half of 2011 that net sales will be higher than in the second half of 2010 (EUR 75.6 million, 2H 2010) and that the operating result will be positive (operating loss of EUR -19.2 million, 2H 2010). Due to the seasonality of EB's business and due to the holiday period during the third quarter, the net sales and operating result in the fourth quarter are expected to be higher than in the third quarter of 2011.

The profit outlook for the second half of 2011 is based on the assumption that there will be no further bookings of impairments of EB's accounts receivable from TerreStar Networks Inc. and TerreStar Corporation. It is possible that, based on later information related to reorganizations of TerreStar Networks and TerreStar Corporation, this outlook may need to be reconsidered. Due to the uncertainties related to the outcome of reorganization processes of TerreStar Networks and TerreStar Corporation, the credit risk may still grow during the second half of 2011. More specific market outlook is presented under the "Business Segments' development during July-September 2011 and market outlook" section, and uncertainties regarding the filings for reorganization of TerreStar Networks and TerreStar Corporation, the amount of receivables and collecting the receivables as well as other uncertainties regarding the outlook under "Risks and Uncertainties" section.

Information on TerreStar Networks' and TerreStar Corporation's reorganizations are presented in the October 20 and 25, November 20, December 30, 2010, and February 17, 2011, stock exchange releases as well as in EB's interim reports and financial statement at www.elektrobit.com.

Automotive Market Outlook

The majority of the innovation and differentiation in the automotive industry is brought about by software and electronics. The share of electronics and software in cars has grown significantly during the past years. It is expected that the use of software in automotives continues to increase. The estimated annual automotive software market long-term growth rate in passenger cars is some 15% (Frost & Sullivan). The underlying world automotive market is also expected to grow steadily with a yearly rate of about 6% between 2010 and 2015 (CSM).

The increasingly sophisticated and networked features and growing performance foster the complexity of automotive electronics. At the same time consumers expect the same richness of features and user experience they know from the internet and mobile devices also from within the car. These development trends are driving the industry towards gradual separation of software and hardware in electronics solutions. Hence it is necessary for managing the architectural software layer appropriately and to aim for efficiency in innovation and implementation. The use of standard software solutions is expected to increase in the automotive industry. This enables faster innovation, improves quality and development efficiency and reduces complexity related to deployment of software.

The fundamental industry migration and consequent growth of the automotive software market will continue. Cost pressures of the automotive industry are expected to accelerate the need of productized and efficient software solutions EB is offering.

EB's net sales cumulating from the automotive industry are currently primarily driven by the development of software and software platforms for new cars. Hence the dependency of EB's net sales on car production volumes is currently limited, however, the direct dependency is expected to increase as a result of the EB's transition towards software product business models over the forthcoming years.

Wireless Market Outlook

In the mobile infrastructure market the use of LTE standard, which improves the performance of radio channel and mobile phone networks, is expected to continue to gain strength. EB's business driven by LTE is expected to increase. Mastering of multi-radio technologies and end-to-end system architectures covering both terminals and networks has gained importance in the complex wireless technology industry. Fast implementation of LTE technology and a wide spectrum of bandwidth needed are creating opportunities for EB.

The growth of demand for smart phones and transitions in the related software architectures and platforms are expected to continue during 2011. The R&D services market for smart phones continues to be challenging and the continuing price pressure drives increasing off-shoring in the industry. The overall demand for R&D services for smart phones is expected to decrease in the future due to changes in the market environment. However, OEMs are expected to continue utilizing outsourcing for their R&D flexibility, which can create new business opportunities for EB.

The market for communications, interference and intelligence solutions targeted for public authorities is estimated to remain stable. EB's competence and long experience in software radio based solutions is expected to bring new business opportunities. The trend of adopting commercial technologies, such as LTE, is expected to continue on special verticals such as public safety. The networks used by public authorities often utilize dedicated spectrum blocks outside the commercial frequency bands, which generates the need for special user terminal variants for these networks.

The mobile satellite communication service industry is introducing new data and mobile communication services with new operators being formed and traditional ones upgrading their solutions and offerings. The market demand has been expected to move from the current reference design phase towards the launch of commercial products and services during the next few years. The filing for reorganization of TerreStar Networks Inc. has, however, delayed and brought uncertainties to the market development. Based on the current understanding the business relationship between EB and TerreStar will not continue.

The performance of radio channel is going to increase quickly when introducing new LTE technologies. This will create demand for advanced development tools during the next few years. The test tool market is expanding from the performance testing of LTE base stations to LTE terminals, where the over-the-air (OTA) technology will be widely used. EB provides world leading channel emulation tools for the development of MIMO based LTE, LTE-Advanced and other advanced radio technologies.