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Dear Fellow Shareholders:

Year 2006 was an unprecedented period of challenges and opportunities for our company. Unfortunately, financial results fell short of our expectations for several reasons, but our spirit is unbroken. The year produced many notable achievements for our diversified operations:

Our flagship business venture and largest subsidiary, New Direction Cruise Line Ventures, broke new ground in 2006 with the establishment of a series of minority partnerships with cruise boat operations from Colombia, Morocco, Paradise Island, Cyprus, and the Kingdom of Liechtenstein. Our new partners have taken an equity position in New Direction in exchange for financial incentives and guaranteed payments. Although revenues streams are not expected until 2007, these new relationships attest to the strength of our business model and promise to deliver financial rewards in due course.

2006 marked the launch of our highly anticipated Internet casino portal, CyberGaming-eBetNetwork.com Online (www.cybergaming-ebetnetwork.com). Development costs, licensing difficulties, and software enhancements delayed the launch until November; further beta testing of the site was required after unexpected payouts occurred under the Caribbean Stud Poker and Craps modules. Full functionality was achieved in mid-December, with revenues reaching $114,000 for the two-month live period. We expect the operation's net 2006 loss of $6.4 million to be substantially reduced in 2007 and future years.

NDG's entertainment arm, Birdhouse Records (formerly Octopus Recordings), continued to make investments in technology and promising new artists, adding a recording facility in Wilsonville, Oregon and licensing recordings from the critically acclaimed Unknown Mystery 60's Group. Birdhouse Records expects to release the Unknown Mystery 60's Group's third CD, Volume III, in mid 2007; early sales projections are promising and should go a long way to diminishing the operations 2006 net loss level of $2.3 million.

Dietary supplements produced by our LifeLovers, Inc. subsidiary enjoyed a significant upswing in shelf exposure in 2006. LifeLovers has negotiated marketing partnerships with three major health food/supplement chains on a nonguaranteed/inventory-returnable basis enabling a wider audience of supplement shoppers to gain exposure to LifeLovers' front line products, including Herbal Blast, ZincBomb 2007, and Vitamin See. Revenues are expected to exceed marketing fees in the foreseeable future.

The Company has settled a number of class action suits, which the Company has consistently contended were without merit. Rather than continue these costly legal battles, NDG has agreed to provide a combination of cash and stock equal to 20% of the market capitalization of the company to settle these nuisance suits. These assets will be placed in escrow until distribution is order by the appropriate courts.

As a result of dilution caused by the class action settlements, equity investments by our Cruise Line partners, and the decrease in the price of NDG stock -- NDG's stock has suffered along with many others during the current bear market -- our Board approved a 1-for-10 reverse stock split plan which was completed in early 2007. NDG management is, of course, sensitive to the impact of this plan on current shareholders, but we are committed to delivering superior value to shareholders over the long haul. We feel strongly that the 92% decrease in the price of NDG stock since our Initial Public Offering in 1997 is in no way reflective of the real underlying value of our diversified business operations.

Financial Results

The net consolidated loss for 2006 increased 40 percent to $24.6 million, or about $0.47 per diluted share (after reflecting the 1-for-10 reverse split). Results include one-time charges of $7.6 million for class action settlements, $3.3 million for acquisition costs associated with our new Wilsonville recording facility, and $2.6 million in severance costs associated with the negotiated termination of our former CFO, Dr. Richard Nidorf. Excluding these one-time costs, NDG's operating loss was $11.1 million, or about $0.21 per diluted share.

Highlights of results of our subsidiaries were:

  • New Direction Cruise Line Ventures experienced an operating loss of $1.1 million in 2006, primarily comprised of the amortization of the premium paid for partnerships created in 2006. In addition, 22 million shares of NDG common stock, equal to 42.3% ownership stake in NDG, were obtained by NDG's Cruise Line partners in exchange for concessions in pricing and exclusivity co-arrangements and availability guarantees extending through 2010. No charge to earnings resulted from the provision of this ownership stake. The $1.1 million charge also includes a $300,000 provision for legal fees expected in connection with defense against a suit brought against NDG by certain shareholders claiming that the Cruise Line transactions were made with related parties, not at arm's length. NDG vigorously denies these claims.
  • CyberGaming-eBetNetwork.com Online posted a net loss of $6.4 million in 2006, with software and development expenses comprising the bulk of the net loss. Revenues grew from $0 to $114,000 in 2006, with a strong month of December ($62,000) portending a more favorable result in 2007. Expense levels in 2007 are expected to grow by 20% to 40% to allow for executive recruiting and development, and fees associated with strategic marketing and "click-through" partnerships with offshore matchmaking and adult entertainment websites.
  • Birdhouse Records posted a loss of $2.3 million before consideration of $3.3 million in acquisition costs for the Wilsonville facility. Continuing royalty arrangements and guaranteed payments to the Birdhouse stable of artists are expected to create continued losses through 2008, with revenues increasing steadily to allow for pro-forma EBITDA profits beginning in 2007. Birdhouse is also currently examining a number of strategic acquisitions in Japan and the former Soviet republics which could produce additional one-time charges in 2007. Revenues are expected to climb impressively in 2007, but the level of increase is dependent on market reaction to the CD release, Unknown Mystery 60's Group: Volume III - LOVE SONGS . Initial interest in the CD appears to be exceeding our first-blush expectations.
  • LifeLovers, Inc. posted a net operating loss in 2006 of approximately $1.3 million. A portion of the loss was attributable to the discontinuation of formerly popular performance-enhancing products Stero-Soy Substitute and ScatMaster Gold. These products were discontinued based on difficulties with FDA licensing and less than favorable media coverage in certain target markets. One-time charges associated with these discontinuations (about $700,000 excluding class action settlements charged at the NDG Corporate level) are nonrecurring; 2007 results will improve by their absence.
  • Corporate SG&A and other charges totaled $10.2 million, comprised of one-time settlement and severance charges detailed above -- general SG&A of $2.7 million was offset by an equal level of reversal of stock-based compensation charges taken in prior years. The settlement with Dr. Richard Nidorf, a package consisting of cash, annuity, and stock payments totaling $2.6 million, included an ironclad confidentiality/noncompete clause that should help to alleviate public relations issues associated with certain disclosures made by Nidorf to several national tabloid publications.

Stock Performance

In accordance with SEC disclosure requirements, the following chart provides comparisons between NDG and relevant market indices over the 5-year period ending December 31, 2006:

Comparisons between NDG and relevant market indices over the 5-year period ending December 31, 2006

As discussed above, NDG management is committed to delivering shareholder value and encourages its shareholders to look beyond short-term measures and focus on our long-term strategy, which promises to provide strong, diversified income streams and corresponding share price appreciation. It is important to remember, however, that this may contain information which is forward-looking and involves risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.


The departure of Dr. Richard Nidorf created a crucial gap in management which NDG set about filling expeditiously. We are please to announce that Mr. Buddy Whelan has accepted the position of Chief Executive Officer of NDG effective June 1, 2006. Mr. Whelan has extensive personal experience in the online gaming, musical entertainment, and dietary supplement markets - experience we feel he can leverage fully in his new position with NDG. Mr. Whelan's educational background includes an eclectic assortment of institutions and areas of intellectual interest that make him perfect for our diverse array of business pursuits. Details of Mr. Whelan's compensation package, which will result in a one-time charge for sign-on payments and stock-based compensation in 2006 of approximately $1.6 million and ongoing SG&A costs of approximately $700,000 per year, will be detailed in NDG's 2007 Proxy filing with the SEC.

Strategic Outlook

Despite the excellent prospects for enhanced shareholder value represented by NDG's current portfolio of companies, NDG management is never reticent in its pursuit of attractive acquisition candidates. Areas of particular interest include:

  • Racehorse Development -- Our analysis indicates that, after an extended downturn in public interest in horse racing and associated wagering, popularity of this sport is on the rebound and companies "first to market" in providing quality entries at major racetracks stand to benefit greatly. We are in talks with a number of small but growing horse breeding and training operations on the East Coast; furthermore, in anticipation of potential deal(s) with these operations, we have made an opportunistic acquisition of a prodigious quantity of thoroughbred horse semen at an attractive price that can be funneled directly into future partnerships.
  • Toxic Waste Disposal -- The inauguration of our 43rd President, George W. Bush, ushered in a new era of balance between environmental concerns and the need for practical solutions to society's maintenance problems. Our Washington lobbying consultants, Pickelschlickman, and Associates, inform us that the Bush administration is considering toxic waste "piggybacking" on potential energy exploration efforts in erstwhile "off-limit" national preserves. NDG believes that strategic acquisitions of waste operations in the vicinity of the Alaskan wilderness refuge, the Grand Canyon, and Yosemite National Park could quickly lead to highly profitable waste disposal rights with minimal start-up costs and no competition in the medium term.

NDG management is tireless in its pursuit of visionary business developments that will develop shareholder value today, tomorrow, and far into the future. No opportunity is too grand or too far afield; NDG casts a wide net in its quest for excellence in enterprise.

On behalf of the Board of Directors we thank you, as always, for your support.

Joseph Haskell, CPA
Chief Financial Officer
New Directions Group, Inc.
May 15, 2007