Message from the Chairman and President

Dear Valued Shareholders,

The year 2010 marked a significant milestone in the history of your Company. We marked our tenth anniversary in January. After a decade of progress, we have achieved much but there is still much more to be done and many more opportunities to be seized.

We remain ever optimistic as we move into our second decade.  The events of 2010 demonstrated that we are laying the foundation for continued aggressive growth in the years to come.

• Record-Setting Milestones

  We began 2010 by teaming up with ISM Communications Corporation to invest in Acentic GmbH, a German- registered company that provides video on demand and high-speed Internet access to a network of over 180,000 hotel rooms in Europe. We believe that we can offer our gaming products on this network, and are working on solutions for this new market. Acentic is our first foray outside our native shores, but by no means our last.
  
  We also formed two companies with an eye towards new markets, PhilWeb International Gaming Corporation and PhilWeb Asia-Pacific Corporation. In August, we received our first license to conduct gaming outside of the Philippines – a Cambodian license to launch a 6/49 lottery product in both mobile and kiosk formats. We hope to launch this and other new products in that country by early 2011.
  
  On the local front, the most important development of 2010 was our signing of a new contract with PAGCOR in December. This new agreement gives us the ability to open a minimum of 100 new PAGCOR e-Games (or PEGS).
  
  All these events contributed to making 2010 a record-setting year for your Company.
  
  For the fifth straight year, we set new highs in both Revenues and Net Income. For the first time ever, Revenues were over a billion pesos, totaling P1.04 billion, a 27% increase versus the previous year. Net Income came in at P709 million, also a record at 29% higher than the P551 million achieved in 2009. Our Income Statement remains outstanding, with a remarkable profit margin of 68%.  Our balance sheet remains strong.  We continue to generate a substantial amount of cash and have no debt.
  
  In December 2010, ISM sold 40% of its 77.7% stake in Eastern Communications to Vega Telecom, a unit of San Miguel Corporation. Vega will further strengthen Eastern’s telecommunication services and provide cash for their capital requirements. The sale enabled ISM to realize a P269 million gain for the year, of which PhilWeb equitized a profit of P65 million.
  
  Moreover, with the high cash levels on our balance sheet, we declared and paid a dividend of P0.10 per share in 2010. This is the first time in our history that we have paid a dividend, so 2010 was truly a year of firsts. We fully expect to be able to continue to pay regular dividends to our stockholders from now on.
  
  Financial performance, of course, is a reflection of excellent execution on the business side.

• PAGCOR e-Games Cafés

  Our core business, the PEGS Cafés, had a good year, despite opening only 19 new cafés all year. We began 2010 with 171 cafés, but after the May elections and the new Aquino government took over, no new cafés were approved as the new PAGCOR administration understandably had to study the business and assess it for themselves.
  
  Meanwhile, the pipeline of interested PEGS operators ballooned, and the pent up demand was such that within a week of the signing of our new contract with PAGCOR, two new cafés immediately opened, bringing the total number of PEGS cafés to 190 at the end of 2010. As of this writing, we have over 100 new PEGS in the pipeline waiting to open.
  
  The new PAGCOR administration has seen the remarkable profitability of the PEGS business for them, noting that we remitted a total of P1.3 billion to them in 2010. This amount comes without a centavo of capital expenditure
  or operating expense on PAGCOR’s part, and therefore flows directly to their bottom line.
   
  This year, 2011, will be a banner year for the PEGS business. Not only are we poised to open up more PEGS cafés than we have ever done in a year but the sites have already been identified and implementation is on-going.
  
  Additionally we continue to invest in café improvements and expansion. Among our improvements in 2010 were the introduction of a second gaming software in the PEGS network and the planned introduction of a third gaming software early this year. More games mean more customer choices, and we believe this will greatly enhance our customers’ satisfaction as we complete our software installations.

• BigGame cafés

  Our second largest business segment is now our BigGame cafés. BigGame, Inc. is a wholly owned subsidiary of PhilWeb, through which we operate 13 PEGS cafés directly.
  
  We treat BigGame, Inc. as an R&D laboratory for PEGS, testing the ideas and product improvements within BigGame, Inc.’s smaller network before presenting the results to the entire network of PEGS operators. Among the enhancements tested in Big Game, Inc. which have successfully rolled out to other operators have been the introduction of larger LCD screens, upgrading to wider cubicles, installation of ATM machines within PEGS, and others.
  
  In 2010, BigGame, Inc. revenues reached a total of P143 million, 43% more than the P100 million achieved in 2009. We are expecting even bigger growth from BigGame, Inc. in 2011.

• Other Revenue Centers

  Our other businesses also did well during 2010. Our Internet Sports Betting Stations, a network of over 175 kiosks where punters can bet on sporting events, now has a total of four different products to sell - Basketball Jackpot, Basketball 38, NBA Ending and MegaSportsWorld.
  
  Basketball Jackpot is our longest-running sports betting product and is still the biggest of the four. The two other basketball-based betting variants are still in their launch phases and are just in the initial stages of market acceptance. MegaSportsWorld enables bettors to place wagers on any sporting event in the world, using odds from Las Vegas bookmakers.
  
  Our first revenue-generating mobile product, Premyo Sa Resibo or PSR, had one of its best years in 2010. Now five years old, this text-based raffle that we manage on behalf of the Bureau of Internal Revenue is one of their long-running, tax collection programs and one that shows no sign of any slowdowns. We are proud that PSR has now generated over 172 million total text entries and given away over P159 million in prizes. Over 140 people have become instant millionaires, all thanks to Premyo Sa Resibo.

• Asia Pacific Expansion

  Among the most exciting developments on your Company’s horizon is our Asia Pacific expansion. We have on-going projects in ten countries, including Cambodia, Laos, Vietnam, Nepal, India, Sri Lanka, Guam, Saipan, Palau and Timor Leste. These projects range from setting up variations of our Internet gaming cafés to running lotteries and other gaming products.
  
  As noted, we have received our first gaming license, for a 6/49 lottery in Cambodia, and will soon be launching this product in the region. Cambodia is a young republic bordered by three countries with large, affluent populations, Thailand to its west, Vietnam to its east and China to its north. It has much potential to become a regional gaming hub and we are excited to be part of that growth.
  
  In late 2010, we opened our first foreign office, in Phnom Penh, which we foresee will be our hub for the Indochina region. Last year was a year of office openings. We began the year completing our move to our new offices occupying three floors of the Alphaland Southgate Tower in Makati.

• Forbes Asia's Best Under a Billion

  As we push forward towards more aggressive growth, it is good to be able to occasionally look back and see what we have accomplished on behalf of you, our Stockholders.
  
  It is even better when our progress is noticed by others. Late last year, Forbes Asia magazine included us in their list of the 200 Best Under a Billion, a listing of companies throughout the region, all with market capitalizations under a billion U.S. dollars, that they deemed to be the cream of the crop. When we attended the awards ceremony in Hong Kong, we found out that we had been one of three companies slated to receive an extra award. PhilWeb was also awarded as the Most Profitable of the 200, based on our profit margins.
   
  Despite all these achievements, there is much left to do, and as we move forward into 2011 and beyond, we will count on your continued support of our management initiatives to be able to realize our vision to be the dominant gaming solutions provider in the Asia Pacific region.