COLT Telecom Group Plc Announces Results for the Three and Six Months Ended 30 June 2004


LONDON, July 21, 2004 (PRIMEZONE) -- COLT Telecom Group plc (COLT), a leading pan-European provider of business communications solutions and services said today that its second quarter results were in line with the position indicated in the Trading Update of 1 July.

Highlights of the quarter compared with the corresponding period of the prior year include:


 -- Turnover of GBP301.2 million, up 8% (1) on a constant currency
     basis
 -- Gross margin before depreciation of 31.9%
 -- EBITDA (2) up 1% to GBP38.3 million
 -- Loss for the period (3) decreased by 24% from GBP34.5million to
     GBP26.3 million
 -- Positive free cash flow (4) of GBP4.5 million; second consecutive
     quarter of positive free cash flow
 -- Strong financial position with cash and liquid resources of
     GBP794.0 million
 -- Significant new contract wins with SunGard, lastminute.com and
     EDS

 (1)  Excluding Fitec, which was disposed of in December 2003.

 (2)  EBITDA is earnings before interest, tax, depreciation,
       amortisation, foreign exchange and exceptional items.

 (3)  Before exceptional items.

 (4)  Free cash flow is the net cash inflow from operating activities
       less net cash outflows from returns on investments and
       servicing of finance and from capital expenditure and financial
       investment.

Since the publication of its first quarter results on 21 April, COLT has experienced tougher than expected trading conditions. In addition, there has been slower than anticipated uptake of its data products and the performance of some higher margin voice products has been disappointing. During the second quarter, revenue growth has therefore come mainly from the lower margin segments of the business. As a result, even though costs continued to be under tight control, overall margins were under pressure. COLT has taken action to improve revenues and is continuing to improve its sales capability and develop new products, particularly in the higher margin data segments. These initiatives are expected to have a positive impact in the longer term.

Commenting on the results, Chairman of COLT, Barry Bateman, said:

"Whilst we grew revenue, EBITDA and free cash flow compared to the same quarter last year, the overall results were disappointing. This was partly due to the continuous pricing pressure within the industry but we also made less progress than we would have liked in growing higher margin data services whilst much of our growth in voice revenues was from lower margin products.

"Nevertheless much progress has been made in the last two years in positioning the company for the future. Costs have been reduced, capital expenditure is well controlled and success driven, and free cash flow is consistently improving. We are well on track to achieve our goal of being free cash flow positive on a sustainable basis during 2005. Additionally, many of the building blocks are in place in terms of development of new products and services that should positively impact revenue in the medium and longer term.

"We are announcing today the appointment of Jean-Yves Charlier as President, Chief Executive Officer and Director of COLT, with effect from 30 August, succeeding Steve Akin who is returning to Fidelity in Boston. On behalf of the Board I would like to thank Steve for the exceptional job he has done in leading COLT through a period of great change in a challenging operating environment and to add my personal thanks for his wholehearted support and commitment to COLT.

"The appointment of Jean-Yves Charlier and plans we have in place to further strengthen the senior management of our sales organisation should, I believe, help position COLT well to meet the challenges going forward in building higher margin revenue streams."

Steve Akin, President and Chief Executive Officer, said:

"Our strong customer base and industry leading customer service, combined with tight management of costs and strong financial position, are enabling us to withstand a challenging operating environment.

"Second quarter revenues, EBITDA and free cash flow were all ahead of the second quarter of last year and we have now been free cash flow positive on a cumulative basis for the past 12 months.

"During the quarter, volume growth remained robust but overall revenues continued to be affected by price erosion and revenue mix was disappointing. Building on the initiatives taken over the past two years we are taking further action to improve revenues and develop new products, particularly in the higher margin data segments. These initiatives are expected to have a positive impact in the medium term."


 KEY FINANCIAL DATA               Three months        Six months
                                  ended 30 June       ended 30 June
                                  2003      2004      2003      2004
                                  GBP m     GBP m     GBP m     GBP m

 Turnover                         293.0     301.2     564.7     602.3

 Interconnect and network costs  (195.5)   (205.0)   (375.9)   (403.1)

 Gross profit before depreciation  97.5      96.2     188.8     199.2

 Gross profit before
 depreciation  %                   33.3%     31.9%     33.4%     33.1%

 Network depreciation             (51.6)    (45.7)   (100.1)    (92.5)

 Gross profit                      45.9      50.5      88.7     106.7

 Loss for the period (before
 exceptional items)               (34.5)    (26.3)    (75.4)    (46.1)

 Loss for the period (after
 exceptional items)               (27.3)    (26.3)    (67.8)    (46.1)

 EBITDA (1)                        37.9      38.3      71.9      84.7


 (1) EBITDA is earnings before interest, tax, depreciation,
     amortisation, foreign exchange and exceptional items.

Financial Review

Unless otherwise stated all comparisons are between the three and six months ended 30 June 2004 and 30 June 2003.

Turnover

Turnover for the three and six months was GBP301.2 million and GBP602.3 million, increases of 8% and 9% on a constant currency basis and excluding the turnover contributed by Fitec, which was disposed of in December 2003. The increase in turnover was driven by demand for COLT's services from existing and new customers and new service introductions.

Corporate

Turnover from corporate customers for the three months was flat at GBP171.2 million and, for the six months, increased by 3% to GBP344.9 million. Turnover from corporate customers represented 57% of total turnover in the three and six months ended 30 June 2004 compared with 58% and 59% in the equivalent periods of 2003. Switched turnover for the three and six months was GBP80.3 million and GBP163.4 million, a decrease of 4% and increase of 4% respectively and non-switched was GBP90.8 million and GBP174.4 million, increases of 4% and 2% respectively.

Wholesale

Turnover from wholesale customers for the three and six months was GBP130.1 million and GBP257.5 million, increases of 7% and 12% respectively. Turnover from wholesale customers represented 43% of total turnover in the three and six months ended 30 June 2004 compared with 42% and 41% in the equivalent periods of 2003. Switched turnover for the three and six months was GBP107.4 million and GBP205.2 million, increases of 15% and 18% respectively and non-switched was GBP22.7 million and GBP52.2 million, decreases of 21% and 6% respectively.

Cost of Sales

Cost of sales for the three and six months were GBP250.8 million and GBP495.7 million, increases of 1% and 4% respectively.

Interconnection and network costs for the three and six months were GBP205.0 million and GBP403.1 million, increases of 5% and 7% respectively reflecting the overall increase in switched revenues and ongoing cost containment measures.

Network depreciation for the three and six months was GBP45.7 million and GBP92.5 million, decreases of 11% and 8% respectively. The decreases reflected the effect of some assets being fully depreciated, partially offset by further investment in fixed assets to support the growth in demand for services and new service developments.

Operating Expenses

Operating expenses for the three and six months were GBP64.9 million and GBP129.3 million, decreases of 7% and 5% respectively.

Selling, general and administrative (SG&A) expenses for the three and six months were GBP57.9 million and GBP114.5 million, decreases of 3% and 2% respectively. SG&A as a proportion of turnover for the three and six months was 19.2% and 19.0% compared with 20.3% and 20.7% in the equivalent periods of 2003 reflecting the scale effects of the business and the benefits of the ongoing cost containment programmes.

Other depreciation and amortisation for the three and six months was GBP6.9 million and GBP14.8 million, decreases of 30% and 24% respectively. The reduction reflected the effect of some assets being fully depreciated, partially offset by increased investment in customer service and other support systems.

Interest Receivable, Interest Payable and Similar Charges

Interest receivable for the three and six months was GBP5.2 million and GBP11.0 million, decreases of 23% and 22% respectively as a result of reduced average balances of cash and investments in liquid resources.

Interest payable and similar charges for the three and six months were GBP17.0 million and GBP34.6 million, decreases of 25% and 23% respectively. These decreases were due primarily to the reduction in debt levels following the purchase and redemption of some of the Company's outstanding notes during 2003.

Interest payable and similar charges for the three and six months included: GBP8.4 million and GBP16.8 million respectively of interest and accretion on convertible debt; GBP8.6 million and GBP17.4 million respectively of interest and accretion on non-convertible debt; and GBPnil million and GBP0.4 million respectively of other interest and unwinding of discounts on provisions. Interest payable and similar charges for the quarter comprised GBP11.3 million and GBP5.7 million of interest and accretion respectively.

Gain on Purchase of Debt

There were no purchases of debt in the three and six months. Gains arising on the purchase of debt during the equivalent periods of 2003 were GBP7.2 million and GBP7.6 million.

Exchange Gains (Losses)

For the three months ended 30 June 2004, there were no exchange gains or losses compared to gains of GBP5.1million in the equivalent period in 2003. For the six months ended 30 June 2004 there were exchange gains of GBP0.1 million compared to GBP3.2 million in the equivalent period in 2003. The exchange gains in the prior year were due primarily to movements in the British pound relative to the U.S. dollar on cash and debt balances denominated in U.S. dollars.

Tax on Loss on Ordinary Activities

COLT had no taxable profits in the six months ended 30 June 2003 and 2004.

Financial Needs and Resources

Free cash flow, the sum of the net cash inflow from operating activities less net cash outflows from returns on investments and servicing of finance and from capital expenditure and financial investment, improved from outflows of GBP13.3 million and GBP25.7 million in the three and six months ended 30 June 2003 to inflows of GBP4.5 million and GBP18.2 million in the three and six months ended 30 June 2004.

The improvement in free cash flow for the three and six months ended 30 June 2004 compared to the equivalent periods in 2003 was driven by reduced purchases of tangible fixed assets, lower net interest, improvements in working capital and higher EBITDA for the six months ended 30 June 2004.

Net cash inflow from financing for the three and six months ended 30 June 2004 was GBP0.1 million and GBP0.5 million compared with outflows of GBP23.3 million and GBP23.8 million in the equivalent periods in 2003. COLT had balances of cash and investments in liquid resources at 30 June 2004 of GBP794.0 million compared with GBP802.4 million at 31 December 2003.



        Consolidated Profit and Loss Account

                           Three months ended 30 June
            2003         2003        2003           2004       2004
            Before       Exceptional  After
            Exceptional  Items        Exceptional
            Items                     Items

            GBP'000      GBP'000      GBP'000      GBP'000     $'000

 Turnover    292,967          --      292,967     301,233    546,015

 Cost of sales
 Interconnect
 and network (195,477)        --     (195,477)   (205,028)  (371,634)
 Network
 depreciation (51,616)        --      (51,616)    (45,736)   (82,901)
             (247,093)        --     (247,093)   (250,764)  (454,535)
 Gross profit  45,874         --       45,874      50,469     91,480
 Operating
 expenses
 Selling,
 general and
 administra-
 tive         (59,564)        --      (59,564)    (57,946)  (105,033)
 Other
 depreciation
 and
 amortisation  (9,897)        --       (9,897)     (6,946)   (12,590)

              (69,461)        --      (69,461)    (64,892)  (117,623)
 Operating
 loss         (23,587)        --      (23,587)    (14,423)   (26,143)

 Other income
 (expense)
 Interest
 receivable     6,705         --        6,705       5,174      9,378
 Interest
 payable
 & similar
 charges      (22,724)        --      (22,724)    (16,983)   (30,783)
 Gain on
 purchase
 of debt           --      7,240        7,240          --         --
 Exchange
 gain/(loss)    5,115         --        5,115         (34)       (62)

              (10,904)     7,240       (3,664)    (11,843)   (21,467)

 Profit/(loss)
 on ordinary
 activites
 before
 taxation     (34,491)     7,240      (27,251)    (26,266)   (47,610)
 Taxation          --         --           --          --         --
 Profit/(loss)
 for
 period       (34,491)     7,240      (27,251)    (26,266)   (47,610)
 Basic and
 diluted
 loss per
 share       GBP(0.02)   GBP0.00     GBP(0.02)   GBP(0.02)    $(0.03)

There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents. All of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements.



                 Consolidated Profit and Loss Account

                              Six months ended 30 June
                2003        2003         2003        2004        2004
                Before      Exceptional  After
                Exceptional Items        Exceptional
                Items                    Items

                GBP'000     GBP'000      GBP'000    GBP'000     $'000

 Turnover        564,687        --      564,687    602,343  1,091,807

 Cost of sales
 Interconnect
 and
 network        (375,943)       --     (375,943)  (403,118)  (730,692)
 Network
 depreciation   (100,062)       --     (100,062)   (92,544)  (167,745)

                (476,005)       --     (476,005)   (495,662) (898,437)

 Gross profit     88,682        --       88,682     106,681   193,370
 Operating
 expenses
 Selling,
 general &
 administrative (116,799)       --      (116,799)  (114,501) (207,545)
 Other
 depreciation
 and amortisation(19,491)       --       (19,491)   (14,792)  (26,812)
                (136,290)       --      (136,290)  (129,293) (234,357)
 Operating loss  (47,608)       --       (47,608)    (22,612) (40,987)
 Other income
 (expense)
 Interest
 receivable       14,176        --        14,176      11,037   20,006
 Interest
 payable
 & similar
 charges         (45,168)       --       (45,168)    (34,595) (62,707)
 Gain on
 purchase
 of debt              --     7,589         7,589          --       --
 Exchange gain     3,179        --         3,179         118      214
                 (27,813)    7,589       (20,224)    (23,440) (42,487)

 Profit/(loss)
 on ordinary
 activites
 before
 taxation         (75,421)   7,589       (67,832)    (46,052) (83,474)
 Taxation              --       --            --          --       --
 Profit/(loss)
 for period       (75,421)   7,589       (67,832)    (46,052) (83,474)

 Basic and
 diluted
 loss per
 share           GBP(0.05) GBP0.00      GBP(0.05)   GBP(0.03)  $(0.06)

There is no difference between the loss on ordinary activities before taxation and the retained loss for the periods stated above, and their historical cost equivalents. All of the Group's activities are continuing. The basis on which this information has been prepared is described in Note 1 to these financial statements.



 Consolidated Statement of Total Recognised Gains and Losses

         Three months ended 30 June         Six months ended 30 June
            2003     2004       2004        2003      2004      2004
         GBP'000  GBP'000      $'000     GBP'000   GBP'000     $'000

 Loss for
 period  (27,251) (26,266)   (47,610)    (67,832)  (46,052)  (83,474)
 Exchange
 differ-
 ences     1,133    2,316      4,198      25,495   (19,240)  (34,875)

 Total
 recognised
 losses  (26,118) (23,950)   (43,412)    (42,337)  (65,292)  (118,349)


  Consolidated Reconciliation of Changes in Equity Shareholders' Funds

         Three months ended 30 June         Six months ended 30 June
            2003     2004       2004        2003      2004      2004
         GBP'000  GBP'000      $'000     GBP'000   GBP'000     $'000

  Loss   (27,251) (26,266)   (47,610)    (67,832)  (46,052)  (83,474)
  for
  period
  Issue        1       84        152           1       742     1,345
  of
  share
  capital
  Shares      55       --         --        (112)     (215)     (390)
  to be
  issued
  Transfer    --       --         --          --      (195)     (353)
  investment
  in
  own
  shares
  Exchange 1,133    2,316      4,198      25,495    (19,240)  (34,875)
  differences
  Net    (26,062) (23,866)   (43,260)    (42,448)   (64,960) (117,747)
  changes
  in
  equity
  shareholders'
  funds
  Opening 938,624  821,799 1,489,593     955,010    862,893 1,564,080
  equity
  shareholders'
  funds
  Closing 912,562  797,933 1,446,333     912,562    797,933 1,446,333
  equity
  shareholders'
  funds

                     Consolidated Balance Sheet

                                       At 31       At 30 June 2004
                                    December
                                        2003
                                     GBP'000     GBP'000        $'000

  Fixed assets
  Intangible fixed assets (net)        9,493       8,031       14,557
  Tangible fixed assets (cost)     2,934,503   2,877,241    5,215,287
  Accumulated depreciation        (1,590,218) (1,631,456)  (2,957,177)
  Tangible fixed assets (net)      1,344,285   1,245,785    2,258,110
  Investments in own shares              195          --           --
  Total fixed assets               1,353,973   1,253,816    2,272,667

  Current assets
  Trade debtors                      199,849     188,610      341,874
  Prepaid expenses and other debtors  66,834      48,470       87,857
  Investments in liquid resources    742,143     721,440    1,307,682
  Cash at bank and in hand            60,239      72,536      131,479
  Total current assets             1,069,065   1,031,056    1,868,892

  Total assets                     2,423,038   2,284,872    4,141,559

  Capital and reserves
  Called up share capital             37,754      37,776       68,473
  Share premium                    2,315,904   2,316,624    4,199,112
  Merger reserve                      27,359      27,359       49,591
  Shares to be issued                    215          --           --
  Profit and loss account         (1,518,339) (1,583,826)  (2,870,843)
  Equity shareholders' funds         862,893     797,933    1,446,333

  Provisions for liabilities and      62,860      51,594       93,519
  charges

  Creditors
  Amounts falling due within one
  year                               352,736     332,887       603,392
  Amounts falling due after more
  than one year
  Convertible debt                   700,131     677,247     1,227,578
  Non-convertible debt               444,418     425,211       770,737
  Total amounts falling due after
  more than one year               1,144,549   1,102,458     1,998,315
  Total creditors                  1,497,285   1,435,345     2,601,707
  Total liabilities, capital and   2,423,038   2,284,872     4,141,559
  reserves

                    Consolidated Cash Flow Statement

         Three months ended 30 June        Six months ended 30 June
             2003      2004      2004       2003      2004     2004
          GBP'000   GBP'000     $'000    GBP'000   GBP'000    $'000

  Net      37,324    41,565    75,341     67,688    88,031  159,565
  cash
  inflow
  from
  operating
  activities

  Returns
  on
  investments
  and
  servicing
  of
  finance
  Interest  6,747     5,119     9,279     14,255    10,352   18,764
  received
  Interest(23,646)  (14,417)  (26,132)   (32,295)  (23,261) (42,163)
  paid,
  finance
  costs
  and
  similar
  charges

  Net     (16,899)   (9,298)  (16,853)   (18,040)  (12,909) (23,399)
  cash
  outflow
  from
  returns
  on
  investments
  and
  servicing
  of
  finance

  Capital
  expenditure
  and
  financial
  investment
  Purchase(33,762)  (29,214)  (52,953)   (75,391)  (60,771)(110,153)
  of
  tangible
  fixed
  assets
  Sale of      --     1,430     2,592         --     3,884    7,040
  tangible
  fixed
  assets

  Net     (33,762)  (27,784)  (50,361)   (75,391)  (56,887)(103,113)
  cash
  outflow
  from
  capital
  expenditure
  and
  financial
  investment

  Management
  of       31,585    10,377    18,809     42,843    (3,905)  (7,078)
  liquid
  resources

  Financing
  Issue of      1        84       152          1       527      955
  ordinary
  shares
  Purchase(14,166)       --        --    (14,166)       --       --
  of
  convertible
  debt
  Purchase (9,182)       --         --    (9,606)       --       --
  of
  non-
  convertible
  debt

  Net     (23,347)       84        152   (23,771)      527      955
  cash
  (outflow)
  /inflow
  from
  financing

  (Decrease)(5,099)   14,944     27,088    (6,671)   14,857   26,930
  /increase
  in cash

Notes to Financial Statements

1. Basis of presentation and principal accounting policies

COLT Telecom Group plc ("COLT" or the "Company"), together with its subsidiaries, is referred to as the Group. Consolidated financial statements have been presented for the Group for the three and six months ended 30 June 2003 and 2004.

The financial statements for the three and six months ended 30 June 2003 and 2004 are unaudited and do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. In the opinion of management, the financial statements for these periods reflect all the adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods in conformity with generally accepted accounting principles in the U.K. All adjustments, with the exception of the exceptional items described in Note 4, were of a normal recurring nature. The balance sheet at 31 December 2003 has been extracted from the Group's 2003 statutory accounts.

Accounting policies and presentation applied are consistent with those applied in preparing the Group's financial statements for the year ended 31 December 2003 except for the adoption of UITF 38 "Accounting for ESOP trusts". Applying the UITF has resulted in the balance sheet reclassification of the GBP195,000 investment in own shares from fixed assets to the profit and loss account.

Certain British pound amounts in the financial statements have been translated into U.S. dollars at 30 June 2004 and for the periods then ended at the rate of $1.8126 to the British pound, which was the noon buying rate in the City of New York for cable transfers in British pounds as certified for customs purposes by the Federal Reserve Bank on such date. Such translations should not be construed as representations that the British pound amounts have been or could be converted into U.S. dollars at that or any other rate.

2. Segmental information

North Region comprises Belgium, Denmark, Ireland, The Netherlands, Sweden and UK. Central Region comprises Austria, Germany and Switzerland. South Region comprises France, Italy, Portugal and Spain.

Switched turnover comprises services that involve the transmission of voice, data or video through a switching centre. Non-switched turnover includes managed and non-managed network services, and bandwidth services.

Wholesale turnover includes services to other telecommunications carriers, resellers and internet service providers (ISPs). Corporate turnover includes services to corporate and government accounts.

For the three months ended 30 June 2003 and 2004, turnover by segment was as follows:



                 Three months ended 30 June 2003
        Corporate   Wholesale     North   Central     South     Total
                                 Region    Region    Region
          GBP'000     GBP'000   GBP'000   GBP'000   GBP'000   GBP'000

  Switched 83,792      93,059    53,342    82,199    41,310   176,851
  Non-     87,370      28,575    42,145    40,923    32,877   115,945
  switched
  Other       142          29        36        15       120       171
  Total   171,304     121,663    95,523   123,137    74,307   292,967



                 Three months ended 30 June 2004
        Corporate   Wholesale     North   Central     South     Total
                                 Region    Region    Region
          GBP'000     GBP'000   GBP'000   GBP'000   GBP'000   GBP'000

  Switched 80,321     107,401    54,911    92,070    40,741   187,722
  Non-     90,822      22,651    41,194    41,242    31,037   113,473
  switched
  Other        29           9         4        15        19        38
  Total   171,172     130,061     96,109  133,327    71,797   301,233



  For the six months ended 30 June 2003 and 2004, turnover by
  segment was as follows:

                 Six months ended 30 June 2003
        Corporate   Wholesale     North   Central     South     Total
                                 Region    Region    Region
          GBP'000     GBP'000   GBP'000   GBP'000   GBP'000   GBP'000

  Switched 163,367    174,435   103,255   155,688    78,859   337,802
  Non-     170,407     55,786    82,224    78,587    65,382   226,193
  switched
  Other        377        315        81       332       279       692
  Total    334,151    230,536   185,560   234,607   144,520   564,687



                 Six months ended 30 June 2004
        Corporate   Wholesale     North   Central     South     Total
                                 Region    Region    Region
          GBP'000     GBP'000   GBP'000   GBP'000   GBP'000   GBP'000

  Switched 169,908    205,166   109,485   185,378    80,211   375,074
  Non-     174,387     52,193    81,390    82,875    62,315   226,580
  switched
  Other        576        113       116       124       449       689
  Total    344,871    257,472   190,991   268,377   142,975   602,343

3. Loss per share



               Three months ended 30 June     Six months ended 30 June
                2003       2004      2004      2003    2004       2004
             GBP'000    GBP'000     $'000   GBP'000  GBP'000     $'000

  Loss for   (27,251)  (26,266)  (47,610)  (67,832) (46,052)  (83,474)
  period

  Weighted 1,507,507 1,510,888 1,510,888 1,507,371 1,510,664 1,510,664
  average
  number
  of
  ordinary
  shares
  ('000)
  Basic    GBP(0.02)  GBP(0.02)   $(0.03) GBP(0.05) GBP(0.03)  $(0.06)
  and
  diluted
  loss
  per
  share

4. Exceptional items

Gain on purchase of debt

During the first half of 2003, the Group purchased some of its debt for a cash outlay of GBP23.8 million, resulting in exceptional gains of GBP7.6 million.

5. Cash flow reconciliations

5a. Reconciliation of operating loss to net cash inflow from operating activities



                Three months ended 30 June   Six months ended 30 June
                 2003      2004      2004      2003     2004     2004
              GBP'000   GBP'000     $'000   GBP'000  GBP'000    $'000

  Operating   (23,587)  (14,423)  (26,143)  (47,608) (22,612) (40,987)
  loss
  Depreciation 61,513    52,682    95,491   119,553  107,336  194,557
  and
  amortisation
  Exchange        (20)      521       945       143      902    1,636
  differences
  (Increase)/    (882)     (420)     (761)    3,814   21,193   38,414
  decrease in
  debtors
  Decrease/     4,498     6,595    11,954     4,260   (9,333) (16,917)
  (increase)
  in
  creditors
  Movement in  (4,198)   (3,390)   (6,145)  (12,474)  (9,455) (17,138)
  provisions
  for
  liabilities
  and charges
  Net cash     37,324     41,565    75,341   67,688   88,031   159,565
  inflow
  from
  operating
  activities

5b. EBITDA reconciliation



           Three months ended 30 June        Six months ended 30 June
                2003      2004       2004        2003     2004    2004
            GBP'000   GBP'000      $'000     GBP'000  GBP'000   $'000
  Net cash   37,324    41,565     75,341      67,688   88,031 159,565
  inflow
  from
  operating
  activities
  Adjusted
  for:

  Exchange       20      (521)      (945)       (143)   (902)  (1,636)
  differences

  Movement in   882       420        761      (3,814) (21,193)(38,414)
  debtors
  Movement   (4,498)   (6,595)   (11,954)     (4,260)   9,333  16,917
  in
  creditors

  Total
  working    (3,616)   (6,175)   (11,193)     (8,074) (11,860)(21,497)
  capital
  adjustments

  Movement
  in          4,198     3,390      6,145      12,474    9,455   17,138
  provisions
  for
  liabilities
  and charges
  EBITDA     37,926    38,259     69,348      71,945   84,724  153,570

6. Changes in cash and investments in liquid resources



              Three months ended 30 June      Six months ended 30 June
                  2003    2004       2004     2003     2004      2004
               GBP'000  GBP'000     $'000  GBP'000  GBP'000     $'000


  Beginning    953,970 786,123  1,424,927  934,882  802,382 1,454,398
  of
  period
  Net          (31,585)(10,377)   (18,809) (42,843)   3,905     7,078
  (decrease)/
  increase in
  investments
  in liquid
  resources
  before
  exchange
  differences
  Effects of     3,302   2,896      5,248   32,551  (24,608)  (44,605)
  exchange
  differences
  on
  investments
  in liquid
  resources
  Net           (5,099) 14,944     27,088   (6,671)  14,857    26,930
  (decrease)/
  increase in
  cash before
  exchange
  differences
  Effects of       (69)    390        707    2,600   (2,560)   (4,640)
  exchange
  differences
  on cash
  End of       920,519 793,976  1,439,161  920,519  793,976 1,439,161
  period

7. Summary of differences between U.K. Generally Accepted Accounting Principles ("U.K. GAAP") and U.S. Generally Accepted Accounting Principles ("U.S. GAAP")

a. Effects of conforming to U.S. GAAP -- impact on net loss



               Three months ended 30 June    Six months ended 30 June
                2003     2004       2004     2003     2004       2004
             GBP'000   GBP'000     $'000  GBP'000   GBP'000      $'000
  Loss for   (27,251)  (26,266)  (47,610) (67,832)  (46,052)  (83,474)
  period
  Adjustments:

  Deferred      (253)      (65)     (118)    (523)     (131)     (237)
  compensation
  (i), (ii)
  Amortisation   547       498       903    1,068     1,006     1,823
  of
  intangibles
  (iii)
  Capitalised   (641)     (910)   (1,649)  (1,553)   (2,006)   (3,636)
  interest,
  net of
  depreciation
  (iv)
  Profit on      261       261       473      522       522       946
  sale of IRUs
  (v)
  Warrants       141      (260)     (471)     (16)     (577)   (1,046)
  (vi)
  Installation  (636)    1,651     2,993   (1,271)    3,397     6,157
  revenue
  (vii)
  Direct costs   636    (1,641)   (2,974)   1,271    (3,384)   (6,134)
  attributable
  to
  installation
  revenue
  (vii)
  Impairment  (2,805)   (2,805)   (5,086)   (5,610)   (5,610) (10,167)
  (viii)

  Loss for   (30,001)  (29,537)  (53,539)  (73,944)  (52,835) (95,768)
  period
  under
  US GAAP
  Weighted 1,507,507 1,510,888 1,510,888 1,507,371 1,510,664 1,510,664
  average
  number of
  ordinary
  shares
  ('000)
  Basic and GBP(0.02) GBP(0.02)   $(0.04) GBP(0.05) GBP(0.03)  $(0.06)
  diluted loss
  per share

(i) The Group acquired ImagiNet in July 1998 and Fitec in July 2001. The consideration for both of these purchases included deferred shares and payments. The final elements of the consideration were paid in July 2003.

Under U.K. GAAP, the deferred shares and payments were included in the purchase consideration. The excess purchase consideration over the fair value of assets and liabilities acquired was attributed to goodwill and is being amortised over its estimated economic life.

Under U.S. GAAP, these deferred shares and payments were excluded from the purchase consideration and recognised as compensation expense in the profit and loss account over the period in which the payments vested. Total compensation charge for the three and six months ended 30 June 2003 was GBP0.2 million and GBP0.3 million respectively. Because no payments were outstanding in the six months to 30 June 2004, the total compensation charge for the period was GBPnil.

(ii) The Group operates an Inland Revenue approved Savings-Related Share Option Scheme ("SAYE Scheme"). Under this scheme, options may be granted at a discount of up to 20%. Under U.K. GAAP no charge is taken in relation to the discount. Under U.S. GAAP, the difference between the market value of the shares on the date of grant and the price paid for the shares is charged as a compensation cost to the profit and loss account over the period over which the shares are earned.

Also under U.S. GAAP, an employer's offer to enter into a new SAYE contract at a lower price causes variable accounting for all existing awards subject to the offer. Variable accounting commences for all existing awards when the offer is made, and of those awards that are retained by employees because the offer is declined, variable accounting continues until the award is exercised, forfeited or expires unexercised. New awards are accounted for as variable to the extent that the previous, higher priced options are cancelled.

The total expected compensation cost is recorded within equity shareholders' funds as unearned compensation and additional paid in share capital, with unearned compensation being charged to the profit and loss account over the vesting period. The total compensation charge for the three and six months ended 30 June 2003 and was GBP0.1 million and GBP0.3 million respectively and for the three and six months ended 30 June 2004 was GBP0.1 million and GBP0.1 million respectively.

(iii) Under U.S. GAAP, goodwill with an indefinite useful life is not amortised but is tested for impairment annually. Under U.K. GAAP goodwill is amortised on a straight line basis over its useful economic life.

The Group had unamortised goodwill of GBP7.8 million at 30 June 2004, which is no longer amortised under U.S. GAAP but will be assessed for impairment annually. Amortisation expense related to goodwill, under U.K. GAAP, was GBP0.5 million and GBP1.1 million for the three and six months ended 30 June 2003 and for the three and six months ended 30 June 2004 was GBP0.5 million and GBP1.0 million respectively.

(iv) Adjustment to reflect interest amounts capitalised under U.S. GAAP, less depreciation for the period.

(v) In 2000 and 2001 the Group concluded a number of infrastructure sales in the form of 20-year indefeasible rights-of-use ("IRU") with characteristics which qualify the transactions as outright sales under U.K. GAAP. Under U.S. GAAP, these sales are treated as 20-year operating leases. The adjustment reflects the recognition of profit under U.S. GAAP on the sale of IRUs concluded in prior years.

(vi) The Group has received warrants from certain suppliers in the ordinary course of business. Under U.K. GAAP, warrants are treated as financial assets and recorded at the lower of cost or fair value. Hence for U.K. GAAP purposes the warrants have been recognised at nil. Under U.S. GAAP, the warrants are recorded at fair value with unrecognised gains and losses reflected in the profit and loss account.

(vii) In accordance with SAB 101 "Revenue Recognition in Financial Statements", for the three and six months ended 30 June 2003 and 2004, customer installation revenues together with attributable direct costs are recognised over the expected customer relationship period. At 30 June 2004, the cumulative increase in net losses under SAB 101 was GBP0.7 million, representing cumulative deferred installation revenues of GBP50.7 million and costs of GBP50.0 million.

(viii) During the quarter ended 30 September 2002, the Group recorded charges of GBP443.8 million under U.S. GAAP to reflect the impairment of goodwill, network and non-network fixed assets, resulting in a GAAP difference of GBP107.2 million. For the three and six months ended 30 June 2004 depreciation in the amount of GBP2.8 million and GBP5.6 million was recorded in respect of the assets which had not been impaired for U.S. GAAP purposes.

(ix) The Group operates a number of employee share schemes on which it incurs employer payroll taxes. Under U.K. GAAP, the cost of employer payroll taxes is recognised over the period from the date of grant to the end of the performance period. Under U.S. GAAP, the cost is recognised when the tax obligation arises.

b. Effects of conforming to U.S. GAAP -- impact on net equity



                                                  ------------------
                                                    At 30 June 2004
                                                  ------------------
                                                 GBP'000        $'000
  Equity shareholders' funds under U.K. GAAP     797,933    1,446,333
  U.S. GAAP adjustments:
  Adjustment for deferred compensation (i), (ii) (10,897)     (19,752)
  Unearned compensation (i), (ii)                   (148)        (268)
  Additional paid in share capital (i), (ii)      11,045       20,020
  Amortisation of intangibles (iii)                7,022       12,728
  Warrants (vi)                                      474          859
  Payroll taxes on employee share schemes (ix)       385          698
  Impairment (viii)                               87,559      158,711
  Profit on sale IRUs (v)                        (17,201)     (31,179)
  Capitalised interest, net of depreciation (iv)  35,874       65,025
  Deferred profit on installations (vii)            (749)      (1,358)
  Approximate equity shareholders' funds under
  U.S. GAAP                                      911,297    1,651,817

(i) -- (ix) See note a. for description and adjustment.

c. Effects of conforming to U.S. GAAP -- stock options

At 30 June 2004 the Group had certain options outstanding under its Option Plan. As permitted by SFAS No.123, "Accounting for Stock-Based Compensation", the Group elected not to adopt the recognition provisions of the standard and to continue to apply the provisions of Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," in accounting for its stock options and awards. Had compensation expense for stock options and awards been determined in accordance with SFAS No.123, the Group's loss for the three months ended 30 June 2004 would have been GBP32.7 million ($59.2 million).

Additional Information

Constant currency turnover analysis

Turnover for the three months ended 30 June 2004, compared to the three months ended 31 March 2004 and 30 June 2003 and after excluding the impact of foreign exchange, is shown below:



                   Compared to Q1 2004           Compared to Q2 2003

           Q2 2004  Q2 2004      % Growth      Q2 2004     %  Growth
           GBP'000  GBP'000                    GBP'000
            Actual Adjusted  Actual Adjusted  Adjusted Actual Adjusted
                   (1)              (1)       (2)             (2)
  Corporate
  Switched  80,321   81,427   (10%)    (9%)    83,530    (4%)   0%
  Non-
  switched  90,851   92,010     8%      9%     94,517     4%    8%
  and Other
  Total    171,172  173,437    (1%)     0%    178,047     0%    4%

  Wholesale
  Switched 107,401  109,138    10%     12%    112,196    15%   21%
  Non-
  switched  22,660   23,020   (24%)   (22%)    23,641   (21%) (17%)
  and Other
  Total    130,061  132,158     2%      4%    135,837     7%   12%

  Total
  Switched 187,722  190,565     0%      2%    195,726     6%   11%
  Non-
  switched 113,511  115,030     0%      1%    118,158    (2%)   2%
  and Other
  Total    301,233  305,595     0%      1%    313,884     3%    7%

(1) Q2 2004 turnover has been restated using Q1 2004 exchange rates, and compared to turnover which was reported in Q1 2004

(2) Q2 2004 turnover has been restated using Q2 2003 exchange rates, and compared to turnover which was reported in Q2 2003



                               Q2 03   Q1 04   Q2 04  Growth   Growth
                                                      Q2 04-   Q2 04-
                                                      Q1 04    Q2 03
  Customers (at end of period)
  North Region                  5,287   5,796   5,736    (1%)      8%
  Central Region                6,385   7,213   7,929    10%      24%
  South Region                  5,662   5,813   5,940     2%       5%
                               17,334  18,822  19,605     4%      13%
  Customers (at end of period)
  Corporate                    16,363  17,841  18,432     3%      13%
  Wholesale                       971     981   1,173    20%      21%
                               17,334  18,822  19,605     4%      13%
  Switched Minutes (million)
  (for quarter)
  North Region                  1,490   1,605   1,489    (7%)      0%
  Central Region                2,784   3,752   3,593    (4%)     29%
  South Region                    971   1,092   1,114     2%      15%
                                5,245   6,449   6,196    (4%)     18%
  Private Wire VGEs (000)
  (at end of quarter)
  North Region                  9,526  11,179  11,737     5%      23%
  Central Region                9,964  11,993  13,013     9%      31%
  South Region                  3,857   5,298   5,642     6%      46%
                               23,347  28,470  30,392     7%      30%
  Headcount (at end of quarter)
  North Region                  1,648   1,536   1,568     2%      (5%)
  Central Region                1,519   1,370   1,361    (1%)    (10%)
  South Region                  1,150     928     928     0%     (19%)
                                4,317   3,834   3,857     1%     (11%)

North Region comprises Belgium, Denmark, Ireland, The Netherlands, Sweden and UK Central Region comprises Austria, Germany and Switzerland. South Region comprises France, Italy, Portugal and Spain. Customers represent the number of customers who purchase network and data solutions products. Headcount comprises active employees excluding temporary and contract workers.

Forward Looking Statements

This report contains "forward looking statements" including statements concerning plans, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. The Group wishes to caution readers that any such forward looking statements are not guarantees of future performance and certain important factors could in the future affect the Group's actual results and could cause the Group's actual results for future periods to differ materially from those expressed in any forward looking statement made by or on behalf of the Group. These include, among others, the following: (i) any adverse change in the laws, regulations and policies governing the ownership of telecommunications licenses, (ii) the ability of the Group to expand and develop its networks in new markets, (iii) the Group's ability to manage its growth, (iv) the nature of the competition that the Group will encounter and (v) unforeseen operational or technical problems. The Group undertakes no obligation to release publicly the results of any revision to these forward looking statements that may be made to reflect errors or circumstances that occur after the date hereof.



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