Chairman's Statement for 12 months ended 31 December 2005

09 March 2006

Overview

Stilo provides specialist content engineering software and services to help our customers design, build and manage e-Publishing solutions.

These solutions are of critical importance to our customers. This is true whether they operate in the aerospace sector and need to provide the very latest maintenance and technical documentation, are a commercial publisher that needs to expand progressively the range of products offered to customers or a government body that needs to meet stringent public reporting requirements.

We integrate best-of-breed content management tools with our own technology components in order to automate the acquisition of content, its conversion and enrichment, prior to publication via online portals, CDROM, print or mobile devices.

The growing adoption of XML (Extensible Markup Language) has made it increasingly important for organizations to implement solutions and content processing technologies capable of working not only with XML but also with historically used content formats which continue to be deployed for compelling business reasons. Stilo's technology, expertise and solutions are perfectly suited to exploiting this environment and their importance continues to grow.

Operations

2005 was a year of consolidation following closure of the UK Knowledge Engineering Division and the acquisition of Xia Systems (Content Engineering Division), Canada, in December 2004. It also represented a time of change for the Company, evolving from a software tools vendor to becoming a provider of e-Publishing solutions.

At the end of 2005 the Company employed 25 staff, with 15 based in Ottawa, Canada, 4 in the UK and 6 in Europe. With a development team in Ottawa, and sales and professional services personnel based in North America and Europe, we serve a global customer base.

Results

Following the closure of the Knowledge Engineering Division and the acquisition of XIA Systems (Content Engineering Division) at the end of 2004, there was a slow start to the year. However, the business then improved significantly.

The full year trading loss, before goodwill amortisation and exceptional costs, was £185,000 (2004: £663,000). This was made up of a loss for the first half of the year of £237,000, and a profitable second half of the year. This represented a much improved performance over the previous year and a step closer to achieving annual profitability.

A 9% increase in sales revenues to £2.099m (2004: £1.916m) included a significant increase in service income to £567,000 (2004: £276,000), as our new solutions strategy became effective and the successful impact of the Xia Systems (Content Engineering Division) acquisition was felt in North America. Income from maintenance contracts increased by 16% to £800,000 (2004: £688,000).

Operating expenses, excluding exceptional items, were reduced to £2.510m (2004: £2.928m), with savings from the closure of the Knowledge Engineering Division being partially offset by the acquisition of XIA Systems' personnel.

The goodwill amortisation of £301,000 relates to the purchase of OmniMark Technologies Corporation in 2001, and to the purchase of XIA Systems (Content Engineering Division) in 2004.

Non-recurring exceptional costs for the year totaled £101,000, consisting of staff redundancy costs and further write-downs from the closure of the Knowledge Engineering Division.

The Group retained a positive cash balance of £373,000 at 31 December 2005 (2004: £659,000; 30 June 2005: £340,000).

Products, Services and Solutions

Products

Stilo's core technology, OmniMark, is a highly respected and well-established content processing platform and the preferred choice of many blue-chip customers for converting, enhancing and publishing rich content assets. Users of OmniMark products are able to reduce significantly the time and costs of developing and maintaining new content processing applications. Ongoing product development is undertaken by our development team based in Ottawa, Canada. OmniMark 8 was successfully released in Q4 2005.

There were 215 customer contracts for annual OmniMark maintenance at 31 December 2005.

Services

Stilo's core professional services competencies include:

• Enterprise content management solution design
• Content analysis and XML schema definition
• Content processing application development
• Complete content lifecycle process deployment and optimization

Over the last twenty years, Stilo personnel have built up a number of specializations that are quite unique in the marketplace. For example, Stilo employees were at the vanguard when CD ROMs became a widespread e-Publishing phenomenon and it was Stilo expertise that made possible some of the most successful commercial offerings in this area. In the Aerospace and Defence sectors, Stilo has provided core technology and critical inputs to the largest projects of standardization as illustrated by the recent provision of consulting services to Boeing in North America.

The acquisition of XIA Systems (Content Engineering Division), Canada, in December 2004, significantly improved Stilo's services capabilities and its successful integration helped grow services revenues in North America from £63,000 in 2004 to £341,000 in 2005.

e-Publishing Solutions

In 2005 Stilo embarked upon a strategy of providing customers with e-Publishing solutions to address particular business problems in the areas of technical documentation, content conversion to XML and reference publishing. Stilo's products, expertise and re-usable technology components, along with leading third party content management tools, provide 'total solutions' which acquire, manage and publish content to multiple delivery channels.

Initial solutions offerings include:

Stilo iTIP (interactive Technical Information Platform)

Stilo's iTIP distributes complex technical information to large and widely disseminated communities of users. The iTIP solution provides an integrated approach to delivering technical documentation using simple web browsers so that organizations can maximize the benefits of electronic distribution, provide easy to use feedback mechanisms to enhance knowledge acquisition and quality improvements, whilst keeping deployment costs low.

The combination of these capabilities makes the iTIP environment a complete solution for organizations which create, manage and deliver technical information across the full product lifecycle, including mission-critical equipment systems in the aerospace and defence, automotive, transportation, manufacturing and process engineering sectors.

Stilo Conversion Factory

The Stilo Conversion Factory reduces cost, improves quality, reduces risk and shortens schedules for content conversion projects. As an increasing number of enterprise applications come to rely on rich content, which is encoded in XML, the need has emerged for a scalable and adaptable conversion capability, which can be tightly integrated with existing processes and tools. The Stilo Conversion Factory provides this capability, converting any legacy document or source format into any new target format.

Customers

With offices in the UK, North America and France, Stilo supports customers in a broad range of market sectors including publishing, aerospace, automotive, telecommunications, IT, government and defence. Our customers include LexisNexis, Boeing, Lockheed Martin, Airbus, Alcatel, IBM, SAP, BAe Systems, European Parliament, Italian Parliament and the International Atomic Energy Agency.

Prospects

In 2005 significant changes were made to the management team to support the execution of the newly introduced e-Publishing solutions strategy. This is having a major positive impact upon operations and sales. Several development team members have been transferred to services to support a growing order book.

After several years of reducing losses, the Company is moving closer to annual profitability. Sales have increased, overheads have been reduced and the cash position stabilized. The outlook is very positive.

We have begun 2006 in a much stronger position than 2005, with a solid pipeline of services income, maintenance contracts and improved software orders in the first two months of the year, and running ahead of budget. Our new solutions strategy will improve the effectiveness by which we take our products and services to market in the future, and will enable us to build up our intellectual property based upon solving critical customer problems.

The Board is committed to an aggressive growth strategy. We will actively pursue acquisition and partnering opportunities that complement our growing range of products, services and solutions.

Barry Welck
Chairman
7 March 2006

Enquiries:

Les Burnham, Chief Executive, Stilo International plc +44 (0) 01793 441444

Russell Cook, Charles Stanley & Co. Limited +44 (0) 020 7739 8200