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NetServices PLC (ACM)

  Print      Mail a friend       Annual reports

Thursday 23 November, 2006

NetServices PLC

Maiden Preliminary Results

NetServices PLC
23 November 2006


FOR IMMEDIATE RELEASE                                           23 November 2006
                                                                            


                                NETSERVICES PLC


                    MAIDEN PRELIMINARY RESULTS ANNOUNCEMENT


                     For the 12 months ended 31 August 2006


NetServices plc, (AIM:NSV) the specialist provider of voice and data converged
business infrastructure solutions announces its maiden preliminary results for
the year ended 31 August 2006.


Key Highlights


   •Turnover up 46% to £16.2m (2005 : £11.1m)
   •Gross margin of £3.4m (2005 : £3.7m)
   •EBITDA loss of £2.3m
   •Loss before tax of £3.0m
   •Infrastructure investment for launch of Voice4IP : £1.5m
   •Exceptional bad debt charge of £1.0m
   •'free' broadband impact
   •Associated costs with founder and redundancy charges of £0.3m
   •Year end cash balances of £1.3m
   •Monthly overhead costs base reduced by £120k per month since the Summer
   •Board Changes : Philip Wedgwood appointed Sales Director



Commenting on outlook, Chris Townsend, Non-Exec Chairman said: 'With our new
products, revised approach and operating structure the Directors believe
NetServices is now in a stronger position and looks forward to a significantly
improved performance in 2007'.



For further information, please contact:


NetServices                                       Today on Tel No: 020 7466 5000
Mark Vickers, Chief Executive
Steven Hartley, Finance Director             Thereafter on Tel No: 0870 753 0900


Buchanan Communications                                    Tel No: 020 7466 5000
Lisa Baderoon


Arbuthnot Securities                                       Tel No: 020 7012 2000
Tom Griffiths




CHAIRMAN'S STATEMENT



I am pleased to announce NetServices' maiden results following the company's
admission to trading on AIM in March of this year. The last few months have been
one of the most challenging periods that the company has had to endure, adapting
to public life together with the changing dynamics of our business environment.
The results of which are, that as announced in our pre-close trading statement
on 13 September 2006, the financial targets set at the time of our flotation
have not been achieved.

Our results for the year to 31 August 2006 were therefore disappointing when
compared to our expectations at the beginning of the year. Turnover of £16.2m
(2005: £11.1m) represents an increase of 46%, with a gross margin of £3.4m
(2005: £3.7m). Consequently and together with the cost of the growth in our
overhead base necessary to support our sales target, our investment in Voice4IP
software and the expense of becoming a public company, we have reported an
EBITDA loss of £2.3m (2005: £0.3m) and a loss for the year of £3.0m (2005:
£0.8m). At the year-end the company had cash balances at the bank of £1.3m
(2005: £1.0m).


The year has seen many changes both within the company and the marketplace in
which we operate.

At the beginning of the financial year we were digesting the acquisition
of Telefonica UK (since renamed WAN Services Limited), we appointed a new Sales
Director and were aggressively hiring sales staff, programmers and developers
for Voice4IP. The management and operating structure of the Group were being
restructured and we were planning our flotation on AIM. In March 2006 we
completed the IPO raising approximately £4.0m net of expenses for the company
and £6.0m for the exiting founder.


Within four weeks of our admission to AIM our core wholesale revenue base was
shaken with the announcement that broadband was now 'free'. This signalled the
beginning of a rush of activity by the major carriers to secure customers,
particularly retail consumers, for the future. The impact was immediate with
over 30% being wiped off the value of our comparator companies. Consolidation
amongst the owners of the biggest broadband customer books has continued apace
since then and valuations have fluctuated wildly.


The knock on effect, particularly for NetServices, was a stalling of the new
business market. This led to the failure of a number of our resellers leading to
a bad debt charge of £1.0m (2005: £0.1m) in the year to 31 August 2006.
In addition, the expected future revenues from these companies dropped out of
our annuity book. We reviewed our position within the wholesale area of our
business and explored various options, including an outright sale. However,
after careful consideration and following discussions with third parties the
Directors concluded that shareholder value, longer term, would best be served by
its retention. The board remains committed to seeking opportunities to enhance
shareholder value.


During the year and consistent with our strategy to focuss on the higher margin
voice and data solutions, we continued to develop our core Voice4IP product, our
hosted soft switch solution which was launched during the year. We have
continued developing new features and functionality and will release version 2
at the end of this month. Our focus is on securing revenue and profit
opportunities through our targeted reseller base where we are confident that
this product will differentiate us in the converged market.


We continue to win new business in the hosting and WAN areas, albeit more slowly
than we had predicted. This has caused us to reassess our short term targets and
to change the structure and personnel in our sales function. In October 2006
Philip Wedgwood joined the board as Sales Director and I am pleased with the
impact this is beginning to have with our resellers. At the same time David
Garner left the company.


With our new products, revised approach and operating structure the directors
believe the company is now in a stronger position and looks forward to a
significantly improved performance in 2007.


Finally I would like to thank all the staff at NetServices for their efforts in
what has been an extremely difficult and challenging period and to express my
belief that their efforts will be rewarded with success this year and in the
future.



C. Townsend
Chairman
23 November 2006





CHIEF EXECUTIVE REPORT - BUSINESS REVIEW



Introduction

NetServices specialises in providing innovative voice, data and converged
business infrastructure solutions. We operate an indirect business model selling
products and services through a base of strategic partners and reseller
organisations. Through this channel, NetServices serves a range of both small
and medium sized enterprises as well as large telecoms companies including BT
and Kingston Communications.

Our heritage in networking infrastructure as well as our in-house development
skills makes NetServices one of the most advanced players in the emerging
converged marketplace. We have developed a comprehensive portfolio of products,
encompassing wide area networking, wholesale broadband, voice and hosting
services to complement that of our channel partners.

Routes to market

NetServices has always operated within the indirect channel and with our
movement to more complex product solutions our channel has also evolved. In
addition to our volume resellers (primarily wholesale broadband) we are
developing more strategic partnership relationships with a range of partners who
provide managed services to their customers.

Partners vary from those providing LAN management who want to extend their
services into the WAN arena, those with voice wishing to add data to their
portfolio and software houses requiring networking ability to deliver their
services to customers. Using the NetServices range of products these
organisations can effectively broaden the portfolio of services they offer
providing them with deeper customer relationships, additional revenue streams
and, vitally, the ability to meet the needs of a converged market.

Our comprehensive product portfolio combined with our network infrastructure
(NetServices have both IPStream and DataStream networks) ensures we are ideally
positioned as the 'convergence enabler for the channel'. This allows us to sell
higher value complex networking, voice and converged services and thus enables
our partners to be confident in our joint ability to deliver converged
solutions. This strategy remains key to our future growth.

In tandem with the development of these strategic partners we are looking at how
we reduce our exposure to the consumer market via our wholesale broadband
resellers who operate in this environment. We believe that by reducing our
exposure and risk to this highly commoditised area of the market and focusing on
resellers who target the business environment we can continue to operate
successfully within this area. Though consolidation in the consumer broadband
market is likely to continue it is our belief that the business environment will
continue to be served by a range of local and regional providers.



Results for the year

All areas of the business have shown growth when compared to the 2005 results.
Turnover of £16.2m represents a significant increase of 46% over 2005's figure
of £11.1m, although this is lower than projected at the time of the company's
IPO. Analysis of the turnover and gross margin in each of the four key product
areas is detailed in the product performance review below:

We stated in our pre-close announcement on 13 September 2006 that the results
were expected to produce an EBITDA loss of £2.3m and a loss before tax of £3.0m
and that there were a number of significant items to be noted when considering
the implications of the results in more detail. The result has not changed as a
result of the audit process. However, it is important that I summarise the true
impact of these items.

The delayed launch of Voice4IP together with the cost of investment in staff and
of retaining the DataStream network acquired as part of WAN Services as a
platform for Voice4IP, contributed approximately £1.3m of the EBITDA loss
referred to above.

The sales drive to secure voice resellers who, we expect, will have to diversify
their business models to sell VoIP solutions in the future has cost
approximately £0.2m between January 2006 and the year-end. We have acquired
eight new voice resellers.

The results include an exceptional bad debt charge in respect of wholesale
resellers of approximately £1.0m (2005: £0.11m). Of this £0.2m was included
in our half year results to 31 March 2006 announced in May 2006. The 'free'
broadband offer which arose immediately after our IPO has impacted more reseller
businesses than anyone in the sector appears to have anticipated, ourselves
included. We believe that there may be scope for recovery of some of the bad
debt provisions in the future, but cannot place any reliance or expectation on
this at this time.

During the year our wholesale business consumed a disproportionate amount of
management and accounting resource. We were required to issue credits to a
significant number of customers following billing systems issues in spring 2006.
However, following the restructuring and the introduction of new approaches to
credit and fair usage of the network we are confident that it is now generating
positive contribution and cash flow to the Group.

The result also includes £0.2m of costs associated with the founder and
redundancy charges of £0.1m incurred in June 2006 when 17 staff left the Group.

The acquisition of WAN Services in May 2005 brought a new sales team which we
further augmented to take advantage of the more complex solutions market and to
prepare for the launch of Voice4IP. Our sales function has been significantly
restructured and reduced since the year-end.

As a result of the changes we have made, the monthly overhead cost base
excluding depreciation and bad debt charges, has been reduced from a peak of
£0.48m in May 2006 to a normalised rate of £0.36m in October 2006.

Product performance review - wholesale broadband

In the second half of the year following the first of the 'free' broadband
announcements we undertook a comprehensive review of our wholesale broadband
business to determine its current and potential future value and the options
available to us. Our conclusions were that uncertainty would prevail in the
market for at least the remainder of this calendar year. However, the result of
our analysis was that we should retain our wholesale broadband business, in part
due to a clearer view of its revenue and margin contribution and also because it
provides us with an important infrastructure from which we can deliver our
higher value networking services. The inability of the 'free' suppliers to meet
customer expectations and the growing awareness of business versus consumer
quality of service requirements seems to have stemmed the price driven deflation
in our business to business target market place.

During the year, wholesale broadband and dial up products remained our principal
revenue source generating £11.0m (2005: £7.0m). Dial up revenues represent
approximately 10% of this. Margins decreased to £2.1m (2005: £2.4m) reflecting
both the gross loss made on old Telefonica contracts and the lower prices in the
market place. We ended the financial year with more than 50,000 end users,
a small increase compared to the previous year.


Performance review - wide area networking

In parallel and based on our strategy of moving into higher value contracts
we successfully progressed our plans to secure a higher proportion of WAN
business. As a consequence revenues in this area grew substantially to £2.7m
(2005: £0.9m). Whilst individual contract margins fell the gross profit
generated from this activity rose by 71% from £0.7m to £1.2m. Our average
managed WAN contract value in this area is £0.1m and typically includes ten to
30 sites with approximately 350 users.

Product performance review - hosting services

From our two data centres in Salford we provide a portfolio of hosting services
ranging from co-location to fully managed and bespoke software support services.
Our revenues from these clients grew by 10% during the year to £1.1m (2005:
£1.0m) with margins of 50%.

Product performance review - Voice4IP

During the year we continued to invest in our core voice application, the hosted
'soft switch', a telephony software application to replace the traditional pbx
hardware. Whilst the product was initially launched at the beginning of the year
the full roll out was delayed, to enable us to modify the functionality within
the product set in light of feedback from beta test customers and our reseller
base. We have now successfully contracted eight new resellers and are beginning
to generate fee paying customers. Turnover for the period was modest at £0.16m.

In addition to the development of the core system we have identified
opportunities to utilise modules of the core application in the development of
additional solutions to generate further new revenue channels. Since
the year-end we have launched a new IP based business conferencing bridge. In
its simplest form this enables up to 120 concurrent attendees to participate in
a single conference. The bridge which is hosted on our network can be hired on a
'pay as you go' basis enabling our resellers to offer this as an additional
service to their clients without the need for direct capital investment on their
part.

Board changes

Since the year-end, Philip Wedgwood has joined the board as Sales Director and
David Garner resigned from the board and has left the company.

Philip Wedgwood joined NetServices in February 2005 to set up and launch
the Voice4IP business where he was Managing Director until July 2006. Phil has
more than ten years' experience in the IT and communications industry, holding
roles from Software Engineer to Managing Director. He has held senior roles in
BT and O2 and has a track record for driving sales and implementing and
executing business strategy. As Sales Director, his role is to capitalise and
leverage the momentum created in Voice4IP across the business to improve
efficiencies and drive growth.

Organisational restructure

In 2005 our internal organisation began to evolve to service our growth plans
and to introduce the internal controls required by a public company. The number
of employees grew significantly. However, during the summer it was clear that we
were not converting our order book into revenues at the rate we had expected and
we were subjected to a number of client failures leading to greater risk in our
growth plans. In short our cost base was too high. At the same time the greater
part of the Voice4IP development had been completed and consequently we
determined that we could now merge the development teams together into one
trading entity and safely rationalise the combined cost base with the aim of
ensuring we achieve positive EBITDA at the earliestopportunity. In June 2006 we
employed 99 staff. We now employ 74.

The most significant change has taken place in the sales team where
Philip Wedgwood has created three key roles to support and grow existing clients
and develop new business:

   • desk based account managers to service our broadband customer needs;
   • field account managers servicing our existing larger clients to protect
     and grow our premiums revenues; and
   • a team dedicated to developing new strategic reseller partner
     relationships.


Organisational restructure

This is the front end of our business and is well supported by a skilled
and experienced pre-sales team and by project management teams who manage
deployment and ensure service delivery both to the resellers and ultimately
their customers. Once a customer's solution is active they are supported by our
customer service desk. These teams are dedicated to ensuring the smooth running
of the account, particularly providing the technical second and third line
support to the reseller and intermediating between the customers and the
carriers.

Since the formation of this team in March 2006, we have instigated a continuous
service improvement programme which is monitored regularly by survey. Customer
feedback following the most recent survey was exceptionally positive with
Service Managers consistently exceeding client expectations. Based on this
scorecard analysis, level of service has increased by 113% in the last six
months. Customer perception of change management, which relates to how
NetServices' service desk manages requests for change and notifies customers of
planned maintenance, was also significantly up on the previous period, posting
an improvement of 106%. This programme is ongoing as it is our belief that high
levels of service will differentiate us from other providers in this market.

I am confident that with this new structure in place both in terms of sales and
customer service we will be able to exploit the exciting opportunities available
to us. Our software development teams have amalgamated and now operate from
a single office. With the exception of the data centre based engineers and
specific remote home workers all other staff are centralised into NetServices
House here in Salford.

Current trading and post balance sheet events

Last week BT announced the long awaited changes to their charging structures for
central pipes and for the rental of the end user tails, both of which are core
to our wholesale proposition and which are to be introduced in May 2007. The
announcement also includes a proposal to charge for MAC codes, effectively an
exit charge when changing suppliers. We have yet to see how this will impact the
sector and what the reaction of competitive suppliers will be. Overall, however,
we anticipate that these proposals will lead to a material improvement in the
gross margin we earn on this part of our business.

The impact of the decision made and announced last week to disconnect our
largest wholesale DSL customer, Biscit CSP Limited (formerly v21.co.uk ltd),
has yet to be determined. Initial indications are that about a quarter of
the customers have so far signed new contracts with EezeDSL, which will lead to
a shortfall in future monthly turnover; however, cost savings available in the
network are expected to offset this lost income.

We have reviewed the provisions we made at the year-end and are satisfied that
we do not need further provisions at this stage. We can confirm that we have not
yet received notice of any legal proceedings against us, nor of any specific
dispute with the outstanding invoices for end user tails and we are confident
that should any proceedings be issued by Biscit in the future they will be
unsuccessful and we will be paid.

Summary and outlook

Whilst these last few months have been particularly intense and volatile for the
company and the sector as a whole, the board believes that we now have the
building blocks in place to establish NetServices as a leading player within our
market. This has also been acknowledged by our customers in our recent feedback
survey which in summary conveyed that our services had significantly improved in
recent months.

Our strategy remains focused on leveraging our network and skill base
to take advantage of opportunities in the more lucrative converging voice and
data markets. We have started this new financial year with annualised revenues
of £18.0m and we have launched new products and solutions focused on accruing
higher margins than achieved over the last financial year. Whilst we have
confidence these new products will create profitable growth our short term focus
is on achieving profit and positive cash generation.

Continued corporate activity in the sector has seen consolidation of most of the
larger DSL suppliers, including only last week BT making a recommended offer
for Plusnet plc. Whilst satisfied with our current trading performance we
continue to explore all opportunities to maximise shareholder value.
Cash balances at the end of October 2006 were £1.3m.

In closing it is important to acknowledge and express thanks for the support
both of our investors and employees. I look forward to updating the market on
our continued progress in due course.





M. Vickers
Chief Executive Officer
23 November 2006







GROUP CONSOLIDATED PROFIT AND LOSS ACCOUNT
- for the year ended 31 August 2006



                                                         Year to       Year to
                                                       31 August     31 August
                                                            2006          2005
                                                               £             £
------------------------                             -----------   -----------
Turnover                                              16,153,738    11,068,635
Cost of sales                                         12,774,148     7,324,497
------------------------                             -----------   -----------
Gross profit                                           3,379,590     3,744,138
------------------------                             -----------   -----------
Administrative expenses (before goodwill
amortisation, depreciation and research and
development)                                           5,349,093     3,789,302
Goodwill amortisation                                     38,536        12,845
Depreciation                                             588,384       380,599
Research and development                                 343,155       296,333
------------------------                             -----------   -----------
Total administrative expenses                          6,319,168     4,479,079
Other operating income                                    (8,283)      (10,247)
------------------------                             -----------   -----------
Operating (loss)                                      (2,931,295)     (724,694)
Interest receivable                                       10,718        13,277
Interest payable                                         (81,923)      (48,076)
------------------------                             -----------   -----------
(Loss) on ordinary activities before taxation         (3,002,500)     (759,493)
Tax on loss on ordinary activities                       101,508        20,834
------------------------                             -----------   -----------
Retained loss for the financial year after taxation   (2,900,992)     (738,659)
------------------------                             -----------   -----------
(Loss) per share
- basic and diluted (pence)                               (11.65)        (3.59)
------------------------                             -----------   -----------



The retained loss for the year arises from the group's continuing operations.

No separate statement of total recognised gains and losses is presented as all
such gains and losses have been dealt with in the profit and loss account.


GROUP CONSOLIDATED BALANCE SHEET
- as at 31 August 2006

                                                          2006           2005
                                                             £              £
---------------------------                        -----------    -----------
Fixed assets
Intangible assets                                      453,623        372,519
Tangible assets                                      2,092,853      2,223,674
Investments                                             59,357         59,357
---------------------------                        -----------    -----------
                                                     2,605,833      2,655,550
Current assets
Debtors                                              3,604,183      3,807,647
Cash at bank and in hand                             1,350,649      1,475,219
---------------------------                        -----------    -----------
                                                     4,954,832      5,282,866
Creditors
Amounts falling due within one year                  3,659,278      4,897,891
---------------------------                        -----------    -----------
Net current assets/(liabilities)                     1,295,554        384,975
---------------------------                        -----------    -----------
Total assets less current liabilities                3,901,387      3,040,525
Creditors
Amounts falling due after more than one year           566,676        573,039
Provisions for liabilities and charges               2,148,219      2,565,200
---------------------------                        -----------    -----------
                                                     1,186,492        (97,714)
---------------------------                        -----------    -----------
Capital and reserves
Called-up equity share capital                          72,573         51,443
Share premium account                                4,287,725        123,657
Profit and loss account                             (3,173,806)      (272,814)
---------------------------                        -----------    -----------
Equity shareholders' funds/(deficit)                 1,186,492        (97,714)
---------------------------                        -----------    -----------



GROUP CONSOLIDATED CASH FLOW STATEMENT
- for the year ended 31 August 2006


                                                        Year to       Year to
                                                      31 August     31 August
                                                           2006          2005
                                                              £             £
---------------------------------                     ---------    ----------
Net cash (outflow) from operating activities         (3,765,911)   (2,019,753)
Returns on investments and servicing of finance
Interest received                                        10,718        13,277
Interest paid                                           (64,846)      (27,427)
Interest element of hire purchase                       (17,077)      (20,649)
---------------------------------                     ---------    ----------
Net cash (outflow) from returns on investments and
servicing of finance                                    (71,205)      (34,799)
Taxation                                                 31,216      (150,942)
Capital expenditure
Payments to acquire intangible fixed assets            (119,640)            -
Payments to acquire tangible fixed assets              (222,162)     (654,393)
Receipts from sale of tangible fixed assets                   -         5,879
---------------------------------                     ---------    ----------
Net cash (outflow) from capital expenditure            (341,802)     (648,514)
Acquisitions and disposals
Net cash acquired with subsidiary                             -     4,001,980
Acquisition                                                   -       (82,418)
---------------------------------                     ---------    ----------
Net cash inflow from acquisitions                             -     3,919,562
---------------------------------                     ---------    ----------
Cash (outflow)/inflow before financing               (4,147,702)    1,065,554
Financing
Issue of share capital                                4,185,198             -
Capital element of hire purchase                        (92,853)      (57,505)
Bank loans taken out in the period                              -     300,000
Bank loans repaid                                       (49,695)       (9,642)
---------------------------------                     ---------    ----------
Net cash inflow from financing                        4,042,650       232,853
---------------------------------                     ---------    ----------
(Decrease)/increase in cash in the year                (105,052)    1,298,407
---------------------------------                     ---------    ----------





NOTES:



1.            Accounting Policies


Basis of accounting

The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards.

Going concern

The financial statements have been prepared on a going concern basis, which
assumes that the group will continue to meet its debts as they fall due for the
foreseeable future.

Basis of consolidation

The consolidated accounts incorporate the accounts of the company and all group
undertakings. These are adjusted, where appropriate, to conform to group
accounting policies. Acquisitions are accounted for under the acquisition method
and goodwill on consolidation is capitalised and written off over its useful
economic life from the year of acquisition. The results of companies acquired or
disposed of are included in the profit and loss account after or up to the date
that control passes respectively. As a consolidated profit and loss account is
published, a separate profit and loss account for the parent company is omitted
from the group accounts by virtue of section 230 of the Companies Act 1985.

The group share of the profits of Datascape Online Ltd, an associate company,
has not been included in the consolidation on the grounds of immateriality.

Turnover

Turnover from the sales of equipment is recognised upon delivery to the
customer. Connection revenue and set-up income is recognised upon connection of
the customer to the network. Other contracted income, including customer rental,
is recognised over the contract period in proportion to the value of the service
provided.

Deferred income represents that portion of rental fees paid by customers but
relating to a future period.

Amortisation

Amortisation is calculated so as to write off the cost of an asset, less its
estimated residual value, over the useful economic life of that asset as
follows:

Goodwill -                 over ten years

Research and development - over life of associated product

Depreciation

Depreciation is calculated so as to write off the cost of an asset, less its
estimated residual value, over the useful economic life of that asset as
follows:

Freehold property        -  2% on cost
Long leasehold property  -  2% on cost
Plant and machinery      -  20% on cost
Fixtures and fittings    -  20% on cost
Motor vehicles           -  20% on cost
Computer equipment       -  20% on cost

Leasing and hire purchase commitments

Assets held under finance leases, which are leases where substantially all the
risks and rewards of ownership of the asset have passed to the company, and hire
purchase contracts, are capitalised in the balance sheet and are depreciated
over their useful lives. The capital elements of future obligations under the
leases and hire purchase contracts are included as liabilities in the balance
sheet.

The interest elements of the rental obligations are charged in the profit and
loss account over the periods of the leases and hire purchase contracts
and represent a constant proportion of the balance of capital repayments
outstanding.

Operating lease agreements

Rentals applicable to operating leases, where substantially all of the benefits
and risks of ownership remain with the lessor, are charged against profits
on a straight line basis over the period of the lease.

Deferred taxation

Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future or a right to
pay less tax in the future have occurred at the balance sheet date. Timing
differences are differences between the company's taxable profits and its
results as stated in the financial statements that arise from the inclusion of
gains and losses in tax assessments in periods different from those in which
they are recognised in the financial statements.

Deferred tax is measured at the average tax rates that are expected to apply in
the periods in which timing differences are expected to reverse, based on tax
rates and laws that have been enacted or substantially enacted by the balance
sheet date. Deferred tax is measured on a non-discounted basis.

Foreign currencies

Assets and liabilities in foreign currencies are translated into sterling at the
rates of exchange ruling at the balance sheet date. Transactions in foreign
currencies are translated into sterling at the rate of exchange ruling at the
date of the transaction. Exchange differences are taken into account in arriving
at the operating profit.

Financial instruments

Financial instruments are classified and accounted for, according to the
substance of the contractual arrangement, as either financial assets, financial
liabilities or equity instruments. An equity instrument is any contract that
evidences a residual interest in the assets of the company after deducting
all of its liabilities.

Research and development

Research and development expenditure is written off to the profit and loss
account in the year in which it is incurred.

Development expenditure is carried forward when its future recoverability can be
foreseen with reasonable assurance and is amortised in line with sales from the
related product. All research and other development costs are written off as
incurred.




2.            Turnover



The group's turnover and loss before taxation were all derived from its
principal activity which is the provision of internet services. 97.1% of the
turnover (2005: 99.4%) was attributable to the United Kingdom. As the level of
trade outside the United Kingdom was immaterial an analysis of the income,
result and net assets by geographical area has not been disclosed.


3.            Operating Loss



Operating loss is stated after charging:
                                                               2006       2005
                                                                  £          £
------------------------------------                     ----------  ---------
Amortisation of goodwill                                     38,536     12,845
Depreciation of owned fixed assets                          550,048    357,906
Depreciation of assets held under hire purchase              38,336     22,693
agreements
Loss on disposal of fixed assets                                  -      3,544
Auditors' remuneration
                              - as auditors                  38,000     35,000
                              - interim review                9,000          -
                              - Corporation tax compliance    6,500      2,500
                              - other                             -     12,500
Operating lease costs:
                              - land and buildings          189,621    234,076
Research and development                                    343,155    296,333
------------------------------------                     ----------  ---------


In addition, the auditors received £125,000 (2005: £nil) in respect of services
as reporting accountants which has been set against the share premium account.



4.             (Loss) per share


                                                   Year ended      Year ended
                                                    31 August       31 August
                                                         2006            2005
------------------------------------               ----------       ---------
Basic and diluted per share (pence)                    (11.65)          (3.59)
------------------------------------               ----------       ---------


The calculation of diluted loss per ordinary share is identical to that used for
the basic loss per ordinary share for the year ended 31 August 2006 and the year
ended 31 August 2005. This is because the exercise of the options would have the
effect of reducing the loss per ordinary share and is, therefore, not dilutive
under the terms of FRS 22.

Earnings and the number of shares used in the calculations of loss per share are
set out below:
                                                   Year ended      Year ended
                                                    31 August       31 August
                                                         2006            2005
                                                       £000's          £000's
------------------------------------               ----------       ---------
(Loss) for the year                                    (2,901)           (739)
------------------------------------               ----------       ---------

Weighted average number of shares used in the calculations of loss per share are
set out below:
                                                   Year ended       Year ended
                                                    31 August        31 August
                                                         2006             2005
                                                           No.              No.
------------------------------------               ----------        ---------
For basic and diluted loss per share               24,905,142       20,577,364
------------------------------------               ----------        ---------




5.            Reconciliation of movements in shareholders' funds


                                                           2006           2005
                                                              £              £
--------------------------------                   ------------    -----------
(Loss) for the financial period                      (2,900,992)      (738,659)
Share issue net of expenses                           4,185,198              -
--------------------------------                   ------------    -----------
Net addition to/(reduction) in funds                  1,284,206       (738,659)
Opening shareholders' equity (deficit)/funds            (97,714)       640,945
--------------------------------                   ------------    -----------
Closing shareholders' equity funds/(deficit)          1,186,492        (97,714)
--------------------------------                   ------------    -----------





6.            Notes to the cash flow statement

                                                          2006            2005
                                                             £               £
----------------------------------                  ----------      ----------
Operating (loss)                                    (2,931,295)       (724,694)
Amortisation of goodwill                                38,536          12,845
Depreciation                                           588,384         380,599
(Profit) on disposal of fixed assets                         -          (3,544)
Decrease/(increase) in debtors                         166,981        (433,939)
(Decrease) in creditors                             (1,313,044)       (896,020)
(Decrease) in provisions                              (315,473)       (355,000)
----------------------------------                  ----------      ----------
Net cash outflow from operating activities          (3,765,911)     (2,019,753)
----------------------------------                  ----------      ----------

Reconciliation of net cash flow to movement in net funds
                                                          2006            2005
                                                             £               £
----------------------------------                  ----------      ----------
(Decrease)/increase in cash in the year               (105,052)      1,298,407
Cash flow in respect of new hire purchase               92,853         (31,821)
Cash flow in respect of hire purchase and loans         49,695        (232,853)
----------------------------------                  ----------      ----------
Change in net funds resulting from cash flow            37,496       1,033,733
New hire purchase agreements                          (235,401)              -
Opening net funds/(debt)                               827,304        (206,429)
----------------------------------                  ----------      ----------
Closing net funds                                      629,399         827,304
----------------------------------                  ----------      ----------



Analysis of changes in net funds/(debt)


                                    At                                      At
                           1 September          Cash                 31 August
                                  2005         flows       Other          2006
                                     £             £           £             £
-----------------           ----------   -----------  ----------    ----------
Net cash:
Cash in hand and at bank     1,475,219      (124,570)          -     1,350,649
Bank overdrafts                (19,518)       19,518           -             -
-----------------           ----------   -----------  ----------    ----------
                             1,455,701      (105,052)          -     1,350,649
Debt:
Hire purchase agreements       (51,061)       92,853    (235,401)     (193,609)
Bank loans                    (577,336)       49,695           -      (527,641)
-----------------           ----------   -----------  ----------    ----------
Net funds                      827,304        37,496    (235,401)      629,399
-----------------           ----------   -----------  ----------    ----------

Other changes of £235,401 relate to new hire purchase agreements taken out
during the year.




7.            Report & Accounts


A copy of the 2006 Report and Accounts can be obtained from the Company's
registered office: 30 Modwen Road, Salford Greater Manchester, M5 3EZ from the
4th December 2006.




8.            Annual General Meeting


Notice is hereby given that an annual general meeting will be held at the
NetServices House, 30 Modwen Road, Salford, Greater Manchester M5 3EZ on 28
December 2006 at 11.00am.








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