Republic of the Philippines COMMISSION ON AUDIT Commonwealth Avenue, Quezon City, Philippines STATE AUDITORS REPORT ON THE FINANCIAL

STATEMENTS The Board of Directors Subic Bay Metropolitan Authority Subic Bay Freeport Zone, Olongapo City We have audited the accompanying balance sheet of Subic Bay Metropolitan Authority as of December 31, 2006, and the related statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Authoritys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted state auditing standards in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable bases for our opinion. Receivables and deferred credits were overstated by P81.92 million due to the recognition of security deposits for which cash was not received. Inventory accounts of P70.30 million, even though nonexisting and reclassified to non performing assets in 2005 were reverted to the inventories account. The appropriate disposition/required procedural processes to establish accountability for these assets were not implemented/ observed. Tax positions aggregating P63.18 million are uncertain at year end, pending the completion of the BIR examination and realization of receivables from locators. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary on the matters discussed on the preceding paragraphs, the financial statements referred to above present fairly, in all material respects, the financial position of Subic Bay Metropolitan Authority as of December 31, 2006 and the results of its operation and its cash flows for the year then ended in conformity with applicable generally accepted state accounting principles in the Philippines. COMMISSION ON AUDIT By:

MA. CRISTINA DIZON-DIMAGIBA Director IV March 26, 2007