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Serco Group PLC (SRP)

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Thursday 31 August, 2006

Serco Group PLC

Interim Results

31 August 2006

Six Months of Strong Growth

Serco Group plc - 2006 Interim Results

                                           2006      2005            
Revenue                                 £1,236m   £1,075m    up 15.0%
Profit before tax and amortisation       £52.5m    £43.7m    up 20.1%
Earnings per share before                 8.06p     6.78p    up 18.9%
Profit before tax                        £44.8m    £37.3m    up 20.1%
Earnings per share                        6.69p     5.61p    up 19.3%
Dividend per share                        1.05p     0.91p    up 15.4%
Group free cash flow                     £25.8m    £19.4m    up 33.0%

Strong Performance

  * £1.3bn of contracts signed in the period, including Docklands Light Railway
    rebid (£400m), London Development Agency (£69m) and Acacia Prison
  * Appointed preferred bidder on £1.9bn of contracts, including Future
    Provision of Marine Services (£1.0bn) and Forth Valley (£450m)
  * Maintained rebid win rate at over 90% and continued to win one in two new
  * Group EBITDA to cash conversion of 80% resulting in increased Group free
    cash flow
High visibility of future revenues

  * Forward order book of £13.5bn at 30 June 2006
  * Contracts valued at an additional £3.6bn at preferred bidder stage
  * Visibility of 99% of planned revenue for 2006, 85% for 2007 and 75% for
Outlook - continuing strong growth and increasing margins

  * Governments' need to improve service quality and reduce costs continues to
    drive existing markets and open up new opportunities
  * £22bn of opportunities identified
  * Confident of double-digit growth for the foreseeable future
  * Future margin growth driven by selective bidding, portfolio management and
Commenting on the results, Kevin Beeston, Executive Chairman of Serco said:

"The unrelenting rise in citizens' expectations together with an
ever-increasing requirement for value-for-money public services leaves Serco
confident of continued double-digit growth. Favourable markets allow us to bid
selectively, which together with improvements in operating efficiencies means
margins will continue to rise."

Note: Group free cash flow is cash flow from subsidiaries and joint venture
dividends (see section 4 of the Finance Review). Group EBITDA is earnings from
subsidiaries (excluding joint ventures) before interest, tax, depreciation and
intangible amortisation. Cash conversion is the ratio of Group operating cash
flow to Group EBITDA. Group operating cash flow is operating cash flow from
subsidiaries (excluding joint ventures - see section 4 of the Finance Review).

                                   - Ends -                                    

For further information please contact Serco Group plc: +44 (0) 1256 745 900

Richard Hollins, Head of Investor Relations

Graham Capper, Head of Media and Public Relations

Dominic Cheetham, Corporate Communications Director

Further announcements

In a separate release today (Changes to Board Responsibilities), Serco has
announced that Executive Chairman Kevin Beeston will move to Non-Executive
Chairman from 1 September 2007.


A presentation for investors and analysts will be held at City Presentation
Centre, 4 Chiswell Street, Finsbury Square, London EC1Y 4UP at 10.30am

Six Months of Strong Growth

In the first half of 2006 Serco delivered another strong performance. Revenue
grew by 15.0% to £1,236m and profit before tax and intangible amortisation
(PBTA) by 20.1% to £52.5m, representing an increased margin of 4.2%.

Excluding ITNET (now Serco Solutions) and RCI (now part of Serco Inc), which we
acquired in 2005, revenue grew by 10.0% and PBTA (before the associated funding
costs) rose by 16.8%.

Earnings per share before intangible amortisation also grew strongly, with an
increase of 18.9% to 8.06p. After intangible amortisation, we delivered growth
in profit before tax of 20.1% to £44.8m and growth in earnings per share of
19.3% to 6.69p.

The Group delivered another robust cash performance in the first six months.
Group EBITDA to cash conversion was 80% (2005: 70%), which contributed to Group
free cash flow of £25.8m (2005: £19.4m).

Our policy is to increase the dividend broadly in line with the organic growth
in earnings. We will therefore pay an interim dividend of 1.05p, a 15.4%
increase on last year's 0.91p.

Building long-term relationships with customers has always been fundamental to
Serco's business model. The rebid win rate remained above 90% during the first
half. Of particular note, we signed the contract to operate the Docklands Light
Railway in London, valued at around £400m over nine years, and were appointed
preferred bidder for the UK Ministry of Defence's Future Provision of Marine
Services contract, valued at around £1bn over 15 years. Both these renewed
contracts incorporate significantly expanded services.

We continued to win more than one in two new bids, reflecting our ability to
select the most suitable opportunities, the strength of our reputation and the
ability to leverage skills across the Group. Notable wins in the first half
included a contract to operate Acacia Prison in Western Australia, valued at
around AUS$155m over five years. We were also appointed preferred bidder to
provide support services to the Forth Valley Acute Hospital, which will be
valued at around £450m over 30 years. In aggregate, in the first half we signed
contracts and extensions valued at around £1.3bn and were appointed preferred
bidder for a further £1.9bn of contracts.

We remain pleased by the progress of Serco Solutions and RCI. In the first
half, they contributed £202.1m to revenue and £14.6m (£6.5m after funding
costs) to PBTA. We have continued to invest in Serco Solutions' capacity and
capability, ahead of the expected rapid expansion of the UK local and central
government shared services market, as well as implementing a planned
restructuring to enhance Serco Solutions' ability to grow. Serco continued to
benefit from the skills and capabilities Solutions has brought to the Group. It
played a key role in winning a business support agreement with the London
Development Agency, valued at around £69m over four years. This followed last
year's award of the £125m Small Business Service contract. RCI's strong
relationships and service performance have enabled it to continue to renew and
win human resource related contracts. We are now bidding for larger,
longer-running, service-based contracts which previously would have been out of
reach of both RCI and Serco. RCI has seen a delay to some task orders, although
we expect the task order flow to return to normal levels in due course.

The visibility of our future revenues remains excellent. At 30 June 2006, the
forward order book stood at £13.5bn, we had contracts valued at around £3.6bn
at the preferred bidder stage and a further £2.3bn of bids where we have been
shortlisted to the final two or three bidders. We have identified a pipeline of
further opportunities estimated at more than £22bn. At the end of June we had
visibility of 99% of planned revenue for 2006, 85% for 2007 and 75% for 2008.

Continued focus on the efficiency of our operational cost base is delivering
benefits. Initiatives in place or under way include centralising standard
procurement, providing a common shared services function for some internal
administration functions and streamlining the management structure. The
implementation of the Group-wide SAP financial system is proceeding to plan.

We continue to review the funding and investment profile of our main Group
defined benefit pension scheme. It is our intention to inject around £70m into
the scheme over the course of the next 12 months. We also intend to review
employer and employee contributions to the scheme, with a plan to pay off the
remaining deficit over ten years.

As noted in our announcement of 7 August 2006, we are in discussions with
potential investors regarding the formation of a strategic partnership and the
disposal of a number of our PFI investments. This would provide Serco with a
large and lower-cost pool of capital and allow us to bid for future PFIs
without using our own equity. For the disposed PFIs, Serco would retain the
associated long-term operating contracts and would also provide management
services to the investment partner. There are several steps that need to be
completed before any transaction can be finalised and we will make further
announcements as appropriate.

Broad portfolio delivers strong organic growth

The first six months of 2006 have seen strong organic performance across Serco.
The key developments in each of our markets are discussed below.

Civil Government

Civil Government is our largest business segment and encompasses home affairs,
health, regional and local government, education and consulting. Segmental
revenue increased by 15% to £458m, representing 37% of first half revenue.
Growth in the half benefited from the inclusion of Serco Solutions for a full
six months. It was first consolidated from 3 February 2005.

In home affairs - which encompasses offender management, law enforcement, civil
resilience and immigration control - we secured our first Australian contract,
to manage and operate Acacia prison in Western Australia, valued at around
AUS$155m over five years. Acacia accommodates 800 inmates and is the only
privately run prison in Western Australia. During the first half we also began
work on our contract to electronically monitor offenders in Scotland, which we
were awarded in October 2005.

Our UK health business was appointed preferred bidder to provide support
services for the new NHS Forth Valley Acute Hospital. The contract is valued at
around £450m over 30 years, with services beginning in summer 2009. We have
drawn on our healthcare experience to influence the design of the new hospital,
thereby improving patient privacy and comfort as well as enhancing management
of infection control.

Serco's portfolio of UK primary healthcare contracts continues to expand. With
the award of a three-year contract in Cornwall, valued at around £23m, we now
provide out-of-hours medical services to more than one million people. We have
also signed a medical services contract with West Yorkshire police, valued at
around £15m over five years, as well as three-year contracts to supply medical
services at HMP Cardiff and HMP Bullingdon.

In local government, we signed a new streetscene services partnership with
Welwyn Hatfield Council. Our services include refuse collection, recycling,
street cleaning, vehicle maintenance and landscaping. The contract is valued at
around £50m over ten years. In April we commenced a streetscene partnership
with Restormel Borough Council, valued at £45m over ten years. Serco's
innovative `One Pass' refuse and recycling solution was key in freeing up
savings for reinvestment in a full range of improvements in the local
streetscene. We are well placed to address similar opportunities with adjacent
local authorities.

Serco's strengthened IT and IT-enabled services capability has opened up
further opportunities. Serco Solutions, in conjunction with our Science
business, secured a grant agreement with the London Development Agency to
provide advice and support services to London's 600,000 small and medium-sized
enterprises. We are now in the transitional phase and will take on full
operation of the London Business Link in April 2007. The programme is valued at
£69m over four years, with an option to renew for two additional years. It
follows the award to us in November 2005 of a contract valued at up to £125m to
provide web-based information services to the UK's small businesses.

Serco Solutions has also won new work and extensions for the provision of IT
and other services to customers including the Foreign & Commonwealth Office,
Bedfordshire County Council, the London Borough of Enfield and Cambridge City
Council, contracting more than £35m of business over the period. Two new areas
of focus have yielded benefits. First, our customer access proposition has
enabled Serco Solutions to deliver contact centre infrastructure to both the
London Borough of Ealing and Coventry City Council. Second, our social
wellbeing offering has enabled the safeguarding of vulnerable citizens,
supporting Hertfordshire County Council in building the strategy for the next
20 years of adult care and enabling the London Borough of Enfield to share
appropriate information with key professionals regarding the safety and support
of children and young people.

Serco's consulting business is growing strongly and by providing high-value
advisory services it raises awareness of Serco and enhances our reputation with
potential and existing customers. New awards during the first half included
work with the BBC, the Home Office, HM Revenue & Customs and the Department for
Environment, Food and Rural Affairs.


Revenue in Defence increased by 22% to £307m, representing 25% of first half
revenue. Growth in the period benefited from the inclusion of the former RCI
business for the full six months. It was first consolidated from 21 March 2005.

The principal development in the UK defence market was the publication by the
Ministry of Defence (MoD) of the Defence Industrial Strategy (DIS). The DIS
emphasises a shift from new platform design and development to the upgrade and
maintenance of equipment, to enhance capability and availability
`through-life', and the subsequent need for new partnering arrangements between
Government and industry.

Serco is committed to the successful implementation of the DIS, and a number of
our recent new business wins support its objectives. We signed a 25-year
manpower services contract valued at £125m with Agusta Westland, under the
Integrated Merlin Operational Support (IMOS) programme. Serco will undertake
aircraft maintenance and operational support for the MoD's EH101 Merlin
Helicopter Fleet, playing a vital role in helping to sustain the Merlin's
defence mission success at home and aboard. IMOS will transform logistics
support for the EH101 aircraft platform while improving availability and
reducing `through-life' support costs for the platform. This represents a
significant development of Serco's integrated operational support strategy,
which will now be developed across the defence industrial base.

Our selection as preferred bidder for the MoD's Future Provision of Marine
Services contract will enhance the operational capability of the Royal Navy at
Portsmouth, Devonport and the Clyde. The contract is valued at around £1bn over
15 years, a substantial increase from the previous contract, and will be
delivered by Serco Denholm, a 90:10 joint venture between Serco and J&J

In addition, in July we signed a strategic partnership with the UK Defence
Science and Technology Laboratories (Dstl), for which we were appointed
preferred bidder in 2005. The contract, valued at around £400m over 15 years,
will see us manage the design and build of new facilities and provide IT and
support services across the Dstl estate.

In North America, our defence business continues to extend and expand existing
contracts and win new work. We were chosen by the US Army HR Command to be a
worldwide issuer of secure digital identification cards, used to access
automated systems and networks. The one-year contract, with options for two
additional years, is valued at around $25m in total.

We successfully rebid an expanded contract to provide engineering, technical,
logistical and management services to the US Navy's Space & Naval Warfare
Systems Command Centre. This contract, first awarded in 2000, has a base year
and four one-year options. The total value is around $20m over the full five
years. Serco has also been awarded a new contract to provide family assistance
services to the Commander of Navy Installations Fleet and Family Support
Program. The contract is valued at around $10m over a period of up to two

Serco Sodexho Defence Services (SSDS) - our joint venture with Sodexho Alliance
- was announced as the successful tenderer for the Australian Defence Forces
National Clothing Stores contract. The contract will give us a presence on
every operational and training base in Australia, presenting considerable
opportunities for organic growth. The contract is valued at up to AUS$60m to
SSDS over six years.

SSDS has also been announced as the preferred tenderer for two other major
garrison support services contracts on the east coast of Australia with a
potential `through-life' value of over AUS$400m over nine years. These
contracts will require employment of over 750 personnel and are greenfield
locations for SSDS.


Transport revenues grew by 2% to £267m, representing 22% of first half revenue.

In the UK, key developments in the first half included signing the new
franchise agreement to continue to operate, maintain and support the Docklands
Light Railway in London. The seven year contract may be extended for a further
two years and is valued at around £400m over this extended period. The new
franchise will generate further improvements for passengers including more
frequent trains, enhanced security and higher targets for punctuality, customer
satisfaction and availability of services such as ticket machines, escalators
and information displays.

Our two joint ventures with NedRailways - Northern Rail and Merseyrail -
continue to deliver strong service performance and are growing passenger
numbers on the back of rising levels of customer satisfaction. At Northern
Rail, train punctuality and reliability have been consistently above target.
Merseyrail continues to deliver the levels of service which have made it one of
the UK's best performing franchises.

In Australia, we have launched a new timetable for The Ghan, with both weekly
services now crossing the continent between Adelaide and Darwin, a one-way
journey of almost 2,000 miles. To position for further revenue growth, we have
committed to a fleet expansion programme, currently in the design phase, which
will provide additional capacity from late 2007.

Serco operates the National Traffic Control Centre (NTCC) on behalf of the
Highways Agency. While full implementation has taken longer than expected, we
were delighted that Transport Secretary Alistair Darling officially opened NTCC
on 30 March 2006. We continue to work closely with the Highways Agency to
achieve full implementation. NTCC is a world-first facility, giving a real-time
picture of what is happening across England's motorway and trunk road network
and helping drivers to plan their journeys better.

In Hong Kong, we retained our contract to manage, operate and maintain the Kai
Tak and Lion Rock tunnels, important links in Hong Kong's road network. Our
services include traffic control, emergency response, vehicle recovery,
environment systems, tunnel equipment maintenance and tolls collection. The
contract value is around AUS$75m over six years.

In the United Arab Emirates, we successfully renewed our contract to provide
air traffic control and engineering services at the Emirates Area Control
Centre, based in Abu Dhabi. The new contract is valued at £11.5m over three
years, a substantial increase from the previous contract. We also won contracts
for advanced integrated security solutions with the Abu Dhabi Amiri Flight and
the Ruler's Court of Dubai.

In the US, we extended our successful utility fleet maintenance relationships
with two leading electric utilities - E.ON US's Louisville Gas & Electric and
Dayton Power & Light - with contracts totalling around $22m over the life of
the agreements and involving more than 2,600 vehicles.


Science revenues grew by 26% to £204m, representing 16% of first half revenue.

Growth in the first half was driven by the continued expansion of our joint
venture with BNFL and Lockheed Martin, to operate the UK's Atomic Weapons
Establishment. Since it commenced in 2002 the contract has seen substantial
growth, which was boosted further by a three-year uplift from July 2005, valued
at £350m to Serco.

Our knowledge transfer business goes from strength to strength. In addition to
the London Development Agency Business Link grant agreement, we successfully
rebid our Envirowise contract. Envirowise advises and supports UK businesses in
minimising waste and reducing environmental impact. This new and significantly
expanded contract is valued at £12m over two years, with a possible three-year
extension, and follows last year's new contract to develop and manage the UK
Government's web portal.

The Serco-run National Physical Laboratory is consolidating its position as a
world centre of excellence in micro and nano technologies. By combining this
technical excellence with our leadership in knowledge transfer, we have secured
the position of preferred bidder to run a microsystems technology centre for
the Northwest Development Agency, under a contract that could exceed £20m in
value over five years.

We are a leading service provider to the European Space Agency and have been
awarded a new contract to deliver highly-specialised engineering and scientific
support to the Directorate for Human Spaceflight, Microgravity and Exploration.

Market development

Governments throughout the developed world face the twin demands of increased
public expectation and tightening of spending. It is this pressure which
creates and expands the market for Serco. By bringing in the private sector, as
the last 20 years of experience in the UK demonstrate, public bodies can
deliver improved services more efficiently.

Now the UK example is being followed by more countries around the world, and is
being studied carefully by many others. The UK is in effect the leading
exporter of public service contracting know-how.

Serco has built a portfolio of contracts and opportunities, broad in terms of
geography and sector spread. This breadth allows us to select our
opportunities, focus resources where they promise the best long-term returns
and mitigates risks in individual sectors.

This time last year, the bombings in London had served to further heighten
awareness of security issues. The events which have dominated the news since
the beginning of August this year have done nothing to reduce that awareness,
and not just in the UK. Home affairs issues are at the top of the political
agenda. Serco has proven experience in homeland security, migration control,
offender management and law enforcement, the only company equipped to compete
in each of this market's sub-sectors. We expect more market growth in the UK
(already approaching £3bn per annum) and overseas, particularly in the US.

The UK market for private provision of publicly funded health services is
expanding. Political need to secure better health outcomes from finite
resources drives a search for alternative means of provision. UK spending on
health has risen to over £90bn, of which £10bn is addressable by Serco, thanks
to our rapidly expanding presence in primary care and occupational health and
established offering in hospital support services. The second highest expansion
in Government spending after health is education, where our schools' ICT and
children's services capabilities give us an addressable market of £4bn in the
UK alone.

Serco has two distinct offerings for the UK local government market. Local
environmental services present an addressable market of £3bn. IT-related
outsourcing by local and central government was around £4.3bn in 2005 and
independent commentators predict substantial growth in this area. The first
opportunities for shared services provision are now reaching the market, in
local and central government, helping to meet Government efficiency targets,
including those set by the Gershon review.

In transport markets, previous Government focus on new infrastructure has
shifted to more efficient deployment of existing rail and roads. In the UK, the
Government has passed much responsibility for transport planning to regional
bodies, encouraging joined-up thinking across modes - light and heavy rail,
buses and roads, including road charging.

Traffic management, at national and city level, is a growth market in the UK
and overseas, particularly in the US and Asia. Overall, we estimate the
addressable market at £4bn.

Defence budgets in the US and the UK are being stretched by international
commitments. Private sector provision of back office support frees uniformed
troops for frontline service, and can deliver significant cost efficiencies and

UK MoD service sector procurement stands at over £5bn per annum and is expected
to increase by up to £1bn per year until 2010. In July 2006, the McKane report
recommended the merger of the Defence Logistics Agency and Defence Procurement
Agency, which will mean that one agency will procure hardware and its
maintenance. This will provide more opportunities for Serco, working with
manufacturers, for whole life maintenance contracts.

The US is the world's biggest market for contracted public services. Federal
defence spending is $400bn, of which the services market is worth $50bn. Whilst
pressures on defence spending have led to short-term delays in the contracting
of some support services, there remain significant opportunities in this vast

In Australia, more defence support services are being opened up to the market,
as are prison management and a range of transport opportunities. Serco's
UK-developed experience in defence and civil resilience opens Middle East
markets to us, particularly in the UAE and Oman.

In Germany, the Government is encouraging greater penetration of the private
sector into public service provision. Over €4bn worth of public private
partnership infrastructure projects are in planning or construction. A recent
OECD study considered the German market to be open and fair, but over-burdened
by bureaucracy. Further private sector involvement in prison management is

In the UK, a significant new market involves the decommissioning and
rehabilitation of nuclear sites. The Nuclear Decommissioning Authority has
estimated the cost of its programme at around £70bn in total, equating to an
addressable market of more than £2bn per annum. Our nuclear and change
management expertise means we are strongly positioned to compete in this market
and we are in the final stages of forming a consortium bringing together
partners with proven track records of service delivery, nuclear site management
and clean-up capability.

Thanks to increased UK Government and business investment in the sciences,
knowledge transfer is a significant growth market whereby businesses and
individuals are helped to identify and exploit scientific developments,
technical innovation and sources of advice. Serco has considerable experience
in this area.


The skills, enthusiasm and dedication of our people are essential for
delivering the service quality our customers demand and bringing service to
life. We strive to maintain a culture in which employees can excel, harnessing
the power of individuals and providing support when they need it.

Developing Serco's leadership is vital to ensuring ongoing success. In January,
we introduced a business managers' programme, with nearly 360 people
participating to enhance their management skills. Serco's groundbreaking
programme with the Institute of Directors (IoD) continues to underpin the
strategic role of contract and divisional board membership. To date, more than
100 employees have achieved the IoD Serco certificate, with nearly 70 awarded
diplomas or chartered director status.

One of our people-development programmes is Skills for You, which is geared to
the UK Government's Skills for Life strategy for boosting adults' basic skills.
Nearly 2,000 of our employees have been assessed, with more than 350 in
training. We are delighted that for the second year running, Skills for You has
received a Business in the Community Big Tick award for business excellence.


In a separate release today, the Board has announced that Executive Chairman
Kevin Beeston will move to Non-Executive Chairman from 1 September 2007.

With Serco performing strongly and well-positioned for future growth, and
having built a highly-capable management team at all levels, Kevin has decided
to diversify his business interests.

Kevin joined Serco in 1985, was appointed Finance Director in 1996, Chief
Executive in 1999 and Executive Chairman in 2002.

As Non-Executive Chairman he will continue to chair the Board and oversee the
Company's development on behalf of shareholders. The Board is delighted that
his long association with the Company will continue.

Leonard V. Broese van Groenou joined the Board as a Non-Executive Director in
April. Leonard is a member of the Remuneration, Audit, Nominations and Training
and Development committees. He succeeded Ralph Hodge, who retired from the
Board after six years with Serco. We would like to thank Ralph for his immense
contribution during his time with the Group.


The trends which have driven strong growth in our markets in recent years
continue. Governments around the world need to deliver improved services at
lower cost, and are increasing the range of services for which they are turning
to the private sector for support. At the same time, we continue to add to our
capabilities and develop ways of harnessing the breadth of skills we have
within the Group. This allows us to address new markets and provide solutions
to the increasingly complex challenges our customers face.

Around the world, we have identified a pipeline of opportunities in excess of £
22bn. Coupled with the high visibility of our revenues in the next few years,
we remain confident of delivering double-digit growth for the foreseeable
future. At the same time, our continued focus on efficiency, selective bidding
and management of our contract portfolio, will allow us to generate improved
margins in 2006 and beyond.

Finance Review

1. Financial performance

Serco grew strongly in the first half of 2006. Growth was principally organic
and we also benefited from full six-month contributions from ITNET (now Serco
Solutions) and RCI (now part of Serco Inc), which were acquired in February
2005 and March 2005 respectively.

Figure 1 shows the income statement. This includes the results of joint
ventures, which are proportionately consolidated.

Figure 1: Income statement

Six months to 30 June                       2006       2005  Increase 
                                              £m         £m           
Revenue                                  1,236.2    1,074.9   15.0%   
Gross profit                               178.4      153.5   16.2%   
Administrative expenses before           (116.6)    (101.6)   14.8%   
Investment revenue and finance costs       (9.3)      (8.2)           
Profit before tax and intangible            52.5       43.7   20.1%   
Intangible amortisation                    (7.7)      (6.4)           
Profit before tax                           44.8       37.3   20.1%   
Tax                                       (13.0)     (11.4)           
Profit for the period                       31.8       25.9   22.8%   
Minority interest                          (0.5)      (0.5)           
Retained earnings                           31.3       25.4   23.2%   
Effective tax rate                         29.0%      30.5%           
Earnings per share before intangible       8.06p      6.78p   18.9%   
Earnings per share after intangible        6.69p      5.61p   19.3%   
Dividend per share                         1.05p      0.91p   15.4%   

2.1 Revenue

Revenue grew by 15.0% to £1,236.2m. Excluding revenue from Serco Solutions and
RCI, revenue growth was 10.0%.

Joint venture revenue increased by 21.0% to £308.0m, primarily reflecting
continued growth in our contract to operate the Atomic Weapons Establishment.

During the first half, Serco Solutions contributed revenue of £107.0m (2005: £
83.9m). RCI contributed revenue of £95.1m (2005: £50.5m).

2.2 Gross margin

Gross margin - the average contract margin across our portfolio - was 14.4% in
the first half of 2006, compared with 14.3% in the same period last year.

2.3 Investment revenue and finance costs

Investment revenue and finance costs totalled a net cost of £9.3m (2005: £
8.2m). The increase was due to the inclusion for the full six months of the
debt used to finance acquisitions in 2005, partially offset by a reduction in
our underlying net debt and a lower net finance cost on the assets and
liabilities of our defined benefit pension schemes.

2.4 Profit before tax and intangible amortisation (PBTA)

PBTA increased by 20.1% to £52.5m (2005: £43.7m), representing a net margin of
4.2% (2005: 4.1%).

Serco Solutions contributed PBTA of £8.5m (2005: £6.1m), representing a PBTA
margin of 7.9% (2005: 7.3%), while RCI added £6.1m to PBTA (2005: £3.2m), a
PBTA margin of 6.4% (2005: 6.3%).

Excluding the profits generated by Serco Solutions and RCI and their associated
funding costs, growth in PBTA was 16.8%.

2.5 Intangible amortisation

The charge for intangible amortisation in the period was £7.7m (2005: £6.4m).
The increase resulted primarily from a full six months of the amortisation of
intangible assets arising on the acquisition of ITNET and RCI.

2.6 Profit before tax

Profit before tax increased by 20.1% to £44.8m (2005: £37.3m).

2.7 Tax

The tax charge of £13.0m (2005: £11.4m) represents an effective rate of 29.0%,
compared with 30.5% in 2005. The reduction in the effective rate primarily
resulted from a change in the geographical mix of profits.

2.8 Earnings per share (EPS)

EPS before intangible amortisation grew by 18.9% to 8.06p. After intangible
amortisation, EPS increased by 19.3% to 6.69p.

EPS is calculated on an average share base of 467.8m during the period (2005:
452.7m). The increase mainly resulted from a full six months effect of shares
issued during the first half of 2005, in part consideration for the acquisition
of ITNET, acquired on 3 February 2005.

3. Dividends

Serco's policy is to increase the total dividend per share each year broadly in
line with the organic increase in earnings. The interim dividend of 1.05p per
share represents a 15.4% increase on 2005. The dividend will be paid on 18
October 2006 to shareholders on the register at the close of business on 8
September 2006.

4. Cash flow

The Group generated a free cash inflow of £25.8m, an increase of 33.0% compared
with the first half of 2005.

Figure 2 analyses the cash flow. As in previous periods, we have designed the
analysis to show the true cash performance of the Group - the cash flows
generated by subsidiaries plus the dividends received from joint ventures. It
therefore differs from the consolidated cash flow on page 23, which
proportionately consolidates the cash flows of joint ventures. The adjustment
line in Figure 2 reconciles the movement in Group cash to the consolidated cash

Figure 2: Cash flow

Six months to 30 June                               2006        2005
                                                      £m          £m
Operating profit excluding joint ventures           34.2        29.4
Non cash items                                      22.3        22.9
Group EBITDA                                        56.5        52.3
Working capital movement                          (11.2)      (15.5)
Group operating cash flow                           45.3        36.8
Interest                                           (8.7)       (7.7)
Tax                                                (2.4)       (3.2)
Expenditure on tangible and intangible assets     (21.9)      (12.1)
Dividends from joint ventures                       13.5         7.7
Other items                                            -       (2.1)
Group free cash flow                                25.8        19.4
Acquisitions                                           -     (282.5)
Other financing                                   (23.0)       254.4
Dividends paid                                     (9.6)       (8.3)
Group non recourse debt financed assets            (3.0)       (9.2)
Group net decrease in cash and cash                (9.8)      (26.2)
Adjustment to include joint venture cash             7.1        29.3
Net (decrease)/increase in cash and cash           (2.7)         3.1

Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures)
before interest, tax, depreciation and intangible amortisation.

4.1 Group operating cash flow

The Group operating cash inflow was £45.3m (2005: £36.8m), an increase of
23.1%. This represents a conversion of Group EBITDA into cash of 80% (2005:
70%). The Group's cash conversion is particularly notable given the level of
organic growth, which typically results in a working capital outflow equivalent
to one month's incremental revenue.

4.2 Tax

In the first half of the year tax paid was £2.4m (2005: £3.2m) excluding joint
ventures. This compares with a tax charge in the income statement, excluding
joint ventures, of £7.0m (2005: £7.8m). The difference between the income
statement tax charge and cash tax in the first half of 2006 primarily reflects
a continued residual level of accelerated capital allowances and other timing

We expect the cash tax paid to trend towards the charge in the income statement
as the level of timing differences reduces over time.

4.3 Expenditure on tangible and intangible assets

Expenditure on tangible and intangible assets in the period was £21.9m (2005: £
12.1m). This represents 2.4% of revenue excluding joint ventures (2005: 1.5%).
The increase resulted from expenditure on designing and building our new SAP
accounting system and shared service centre. The total cost of this programme
is estimated at £35m, of which £7m was incurred in the second half of 2005 and
£10m in the first half of 2006.

4.4 Dividends from joint ventures

Dividends received from joint ventures totalled £13.5m (2005: £7.7m),
equivalent to 93% (2005: 61%) of joint ventures' profit after tax. The high
level of conversion reflects dividend payments made by joint ventures from
reserves retained in previous years. We expect a conversion rate in the range
of 70% to 80% going forward.

4.5 Other financing

The movement in other financing principally reflects the repayment in January
2006 of £20m of the term loan taken out in 2005 to fund acquisitions.

4.6 Group non recourse debt financed assets

The £3.0m outflow (2005: £9.2m outflow) is the net of the movement on non
recourse loans and changes in other PFI balances. Over the life of each PFI
contract, we expect these movements to offset each other.

5. Net debt

Figure 3 analyses Serco's net debt.

Figure 3: Net debt

As at                                         30 June     31 December
                                                 2006            2005
                                                   £m              £m
Group - cash and cash equivalents               198.9           210.0
Group - recourse debt                         (417.9)         (453.1)
Group - obligations under finance              (18.0)          (20.9)
Group recourse net debt                       (237.0)         (264.0)
Joint venture recourse net cash                  26.9            18.0
Total recourse net debt                       (210.1)         (246.0)
Group non recourse debt                       (311.2)         (326.8)
Joint venture non recourse debt                     -          (22.4)
Total non recourse debt                       (311.2)         (349.2)
Total net debt                                (521.3)         (595.2)

Included within Group recourse net debt is £25.2m (31 December 2005: £22.6m) of
encumbered cash, comprising cash of PFI and other project companies securing
credit obligations and customer advance payments.

5.1 Group recourse net debt

Group recourse net debt reduced from £264.0m at 31 December 2005 to £237.0m at
30 June 2006. The reduction resulted from the Group's cash flow and the effect
of exchange movements on the Group's foreign currency denominated debt (which
reduced net debt by £8.5m).

5.2 Group non recourse debt

The Group's debt is non recourse if no Group company other than the relevant
borrower - typically a special purpose company for a PFI - has an obligation to
repay the debt under a guarantee or other arrangement. The debt is excluded
from all of our credit agreements and other covenant calculations, and
therefore has no impact on the Group's ability to borrow.

Group non recourse debt reduced by £15.6m to £311.2m during the first half.
This was the result of scheduled repayments of debt across our non recourse
debt funded projects.

5.3 Joint venture non recourse debt

The joint venture non recourse debt recorded in 2005 resulted from debt taken
on in the course of operating a contract where we have a right of full cost
reimbursement. A debtor equal to the value of this non recourse debt was
therefore included in Serco's accounts to reflect this. During the first half
of 2006, we have renegotiated certain terms of this loan. This allows us to
offset the debtor and non recourse debt in our accounts, thereby reflecting the
economic reality of the contract.

6. Pensions

At 30 June 2006, the net amount included in the balance sheet arising from our
defined benefit pension scheme obligations was £116.9m (31 December 2005: £
149.9m). Figure 4 provides further analysis.

Figure 4: Defined benefit pension schemes

As at                                   30 June 2006     31 December
Group schemes - non contract                 (155.8)         (200.4)
Contract specific schemes                                           
- reimbursable                                (77.1)          (84.9)
- not certain to be reimbursable              (24.0)          (21.3)
Net retirement benefit liabilities           (256.9)         (306.6)
Intangible assets arising from                  22.2            19.0
rights to operate franchises and                                    
Reimbursable rights debtor                      77.1            84.9
Deferred tax assets                             40.7            52.8
Net balance sheet position                   (116.9)         (149.9)

Serco has three main types of scheme which are accounted for as defined benefit
pension schemes. Each type has its own accounting treatment under IFRS. These

  * Schemes which do not relate to specific contracts or franchises (non
    contract specific) - principally the Group scheme. For these schemes, we
    charge the actuarial gain or loss for the period to the consolidated
    statement of recognised income and expense (the SORIE)
  * Schemes relating to specific contracts or franchises, where the deficit
    will pass back to the customer or to the next contractor at the end of the
    contract (not certain to be reimbursable). For these schemes, we charge the
    actuarial gain or loss on our share of the deficit for the period to the
    SORIE, recognise a recoverable intangible asset on the balance sheet and
    amortise the intangible asset to the income statement over the contract or
    franchise life, and
  * The AWE contract, where we have a right of full cost reimbursement and
    therefore include both the pension scheme deficit and offsetting debtor in
    the balance sheet (reimbursable).
The net balance sheet position of our defined benefit pension schemes at 30
June 2006 was a liability of £116.9m, a reduction of £33.0m from 31 December
2005. This movement is principally due to changes in bond rates. The
sensitivity of the liabilities of our pension schemes to movements in bond
rates and other actuarial assumptions can be found in our 2005 Annual Review
and Accounts.

We continue to review the funding and investment profile of our main Group
defined benefit pension scheme, which had a gross deficit of £119.4m at 30 June
2006. It is our intention to inject around £70m into the scheme over the course
of the next 12 months. We also intend to review employer and employee
contributions to the scheme, with a plan to pay off the remaining deficit over
ten years.

7. Provisions
At 30 June 2006, the Group held provisions amounting to £20.9m (31 December
2005: £26.4m). Provisions include amounts relating to long-term service awards,
terminal gratuities, property and restructuring. The decrease in provisions
includes a reduction as a result of the planned restructuring in Serco

8. Treasury

Serco's debt finance is provided by a £400m bank credit facility and two
private placements. We had borrowed £249.8m under the bank credit facility at
30 June 2006. Interest is charged at a rate of 50 basis points over LIBOR on
borrowings under the facility. The facility is unsecured and matures in 2009.
The first private placement, for £43.2m, matures in 2007 and the second, for £
117m, amortises from 2011 to 2015.

At 30 June 2006, Serco also had £311.2m of non recourse debt that is used to
fund PFI and similar activities. In all cases, no entity other than the
relevant borrower has an obligation, as a result of a guarantee or other
arrangement, to repay non recourse debt.

Independent review report to Serco Group plc


We have been instructed by the company to review the financial information for
the six months ended 30 June 2006 which comprise the consolidated income
statement, the consolidated statement of recognised income and expense, the
consolidated balance sheet, the consolidated cash flow statement and related
notes 1 to 7. We have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or
material inconsistencies with the financial information.

This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the company, for our review work, for this report, or for the conclusions
we have formed.

Directors' responsibilities

The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.

Review work performed

We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and
applying analytical procedures to the financial information and underlying
financial data and, based thereon, assessing whether the accounting policies
and presentation have been consistently applied unless otherwise disclosed. A
review excludes audit procedures such as tests of controls and verification of
assets, liabilities and transactions. It is substantially less in scope than an
audit performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.

Review conclusion

On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2006.

Deloitte & Touche LLP
Chartered Accountants
31 August 2006

Consolidated income statement                                                  
for the six months ended 30 June 2006                                          

                                          6 months to 6 months to       Year to
                                         30 June 2006     30 June   31 December
                                                             2005          2005
                                                   £m          £m            £m
Notes                                     (unaudited) (unaudited)     (audited)
Continuing operations                                                          
Revenue                                       1,236.2     1,074.9       2,260.3
Cost of sales                               (1,057.8)     (921.4)     (1,935.3)
Gross profit                                    178.4       153.5         325.0
Administrative expenses                       (116.6)     (101.6)       (214.3)
Other expenses - amortisation of                (7.7)       (6.4)        (13.6)
Total administrative expenses                 (124.3)     (108.0)       (227.9)
Operating profit                                 54.1        45.5          97.1
Investment revenue 2                             17.4        16.2          33.6
Finance costs 2                                (26.7)      (24.4)        (52.8)
Profit before tax                                44.8        37.3          77.9
Tax                                            (13.0)      (11.4)        (23.5)
Profit for the period                            31.8        25.9          54.4
Attributable to:                                                               
Equity holders of the parent                     31.3        25.4          53.4
Minority interest                                 0.5         0.5           1.0
Earnings per ordinary share (EPS)                                              
Basic EPS 3                                     6.69p       5.61p        11.66p
Diluted EPS 3                                   6.60p       5.51p        11.46p

Consolidated statement of recognised income and expense                        
for the six months ended 30 June 2006                                          

                                   6 months to   6 months to         Year to
                                       30 June       30 June     31 December 
                                          2006          2005            2005     
                                            £m            £m              £m
                             Notes (unaudited)   (unaudited)       (audited)
Net actuarial gain/(loss) on   6          83.3        (33.9)          (58.4)
defined benefit pension                                                     
Actuarial (loss)/gain on       6        (37.3)           4.0            35.6
reimbursable rights                                                         
Net exchange (loss)/gain on    6         (8.2)           2.8             6.9
translation of foreign                                                      
Fair value gain on cash flow   6           2.6           0.7             6.1
hedges during the period                                                    
Tax (charge)/credit on items   6        (12.2)          10.0             2.0
taken directly to equity                                                    
Net income/(expense)                      28.2        (16.4)           (7.8)
recognised directly in                                                      
Profit for the period                     31.8          25.9            54.4
Total recognised income and               60.0           9.5            46.6
expense for the period                                                      
Attributable to:                                                            
Equity holders of the parent              59.5           9.0            45.6
Minority interest                          0.5           0.5             1.0

Consolidated balance sheet                                                     
at 30 June 2006                                                                

                              At 30 June 2006   At 30 June 2005  At 31 December
                                           £m                £m              £m
                       Notes      (unaudited)       (unaudited)       (audited)
Non-current assets                                                             
Goodwill                                535.3             539.3           544.5
Other intangible                        122.2              95.2           107.8
Property, plant and                      95.2             104.1           103.0
Trade and other                         443.8             388.5           459.8
Deferred tax assets                      77.5              93.8            91.2
                                      1,274.0           1,220.9         1,306.3
Current assets                                                                 
Inventories                              44.8              33.6            36.4
Trade and other                         514.2             481.4           528.8
Cash and cash                           235.8             204.1           240.7
                                        794.8             719.1           805.9
Total assets                          2,068.8           1,940.0         2,112.2
Current liabilities                                                            
Trade and other                       (560.6)           (495.4)         (531.1)
Current tax                            (20.3)            (12.9)          (19.5)
Obligations under                       (8.3)             (8.3)           (8.2)
finance leases                                                                 
Loans                                  (44.8)            (50.1)          (64.8)
Financial instruments                   (3.0)             (4.2)           (4.9)
                                      (637.0)           (570.9)         (628.5)
Trade and other                         (7.4)             (1.8)           (5.0)
Obligations under                      (14.6)            (21.1)          (18.2)
finance leases                                                                 
Loans                                 (689.4)           (711.1)         (744.7)
Financial instruments                  (31.2)            (32.1)          (30.8)
Retirement benefit                    (256.9)           (291.5)         (306.6)
Provisions                             (20.9)            (26.4)          (26.3)
Deferred tax                           (91.3)            (64.0)          (92.1)
                                    (1,111.7)         (1,148.0)       (1,223.7)
Total liabilities                   (1,748.7)         (1,718.9)       (1,852.2)
Net assets                              320.1             221.1           260.0
Share capital            6                9.5               9.3             9.4
Share premium account    6              277.8             266.5           269.5
Capital redemption                        0.1               0.1             0.1
Retained earnings        6              154.5             118.7           132.8
Retirement benefit       6            (105.1)           (145.0)         (139.0)
obligations reserve                                                            
Share-based payment      6               19.7               8.9            16.6
Own shares reserve                     (16.4)            (16.4)          (16.4)
Hedging and              6             (21.4)            (23.2)          (15.1)
translation reserve                                                            
Equity attributable                     318.7             218.9           257.9
to equity holders of                                                           
the parent                                                                     
Minority interest                         1.4               2.2             2.1
Total equity                            320.1             221.1           260.0

Consolidated cash flow statement                                               
for the six months ended 30 June 2006                                          

                                          6 months to  6 months to      Year to
                                         30 June 2006 30 June 2005  31 December
                                                      Re-presented Re-presented
                                                                 *            *
                                                   £m           £m           £m
                                   Notes  (unaudited)  (unaudited)    (audited)
Net cash inflow from operating       4           73.2         67.5        140.8
Investing activities                                                           
Interest received                                18.2         15.4         32.8
Proceeds from disposal of                         1.7          0.4          0.4
property, plant and equipment                                                  
Purchase of property, plant and                (12.7)       (11.3)       (22.3)
Acquisition of subsidiaries, net                    -      (280.9)      (281.7)
of cash acquired                                                               
Purchase of other intangible                   (14.5)        (2.4)       (13.1)
Net cash outflow from investing                 (7.3)      (278.8)      (283.9)
Financing activities                                                           
Interest paid                                  (27.3)       (23.1)       (47.6)
Dividends paid                                  (9.6)        (8.3)       (12.5)
Dividends paid to minority                      (1.0)            -            -
Repayment of borrowings                        (22.2)            -        (5.8)
New loan advances                                   -        260.2        272.0
Capital element of finance lease                (4.5)        (3.4)        (8.4)
Proceeds from issue of share                      8.4          1.4          4.4
Movement in non recourse loans                 (12.4)       (12.4)       (21.5)
Net cash (outflow)/inflow from                 (68.6)        214.4        180.6
financing activities                                                           
Net (decrease)/increase in cash                 (2.7)          3.1         37.5
and cash equivalents                                                           
Cash and cash equivalents at                    240.7        200.5        200.5
beginning of period                                                            
Net exchange (loss)/gain                        (2.2)          0.5          2.7
Cash and cash equivalents at end                235.8        204.1        240.7
of period                                                                      

* interest paid is presented within financing activities (previously shown
within investing activities)

Notes to the financial statements

1. General information

The Interim Report is unaudited and does not constitute statutory accounts
within the meaning of s240 of the Companies Act 1985. The statutory accounts
for the year ended 31 December 2005 have been delivered to the Registrar of
Companies. The auditors' opinion on these accounts was unqualified and did not
contain a statement made under s237(2) or s237(3) of the Companies Act 1985.

The accounting policies used in the interim financial statements are consistent
with International Financial Reporting Standards (IFRS) and those followed in
the preparation of the Group's annual financial statements for the year ended
31 December 2005. The interim financial statements include the results of
subsidiaries and joint ventures. Joint ventures have been proportionately

Interest paid within the cash flow statement has been re-presented and is shown
within financing activities in accordance with latest guidance (interest paid
was previously shown within investing activities).

2. Investment revenue and finance costs

                                  6 months to  6 months to       Year to
                                 30 June 2006 30 June 2005   31 December
                                           £m           £m            £m
                                  (unaudited)  (unaudited)     (audited)
Interest receivable by PFI               13.9         13.3          26.7
Interest receivable on other              3.5          2.9           6.9
loans and deposits                                                      
Investment revenue                       17.4         16.2          33.6
Interest payable on non recourse       (12.0)       (11.2)        (19.9)
Interest payable on other loans        (13.4)       (10.7)        (27.8)
Fair value adjustment on fair           (0.1)            -           0.4
value hedges and non IAS 39                                             
designated hedges                                                       
Other - finance leases and net          (1.2)        (2.5)         (5.5)
interest on retirement benefit                                          
Finance costs                          (26.7)       (24.4)        (52.8)

3. Earnings per share

Basic and diluted earnings per ordinary share have been calculated in
accordance with

IAS 33 `Earnings Per Share'. Earnings per share (EPS) is shown both before and
after amortisation of intangible assets to assist in the understanding of the
impact of IAS 38 `Intangible Assets' on the Group accounts.

The calculation of the basic and diluted EPS is based on the following data:

Number of shares

                                    6 months to  6 months to        Year to
                                   30 June 2006 30 June 2005    31 December
                                       millions     millions       millions
                                    (unaudited)  (unaudited)      (audited)
Weighted average number of                467.8        452.7          458.1
ordinary shares for the purpose of                                         
basic EPS                                                                  
Effect of dilutive potential                6.4          8.3            8.0
ordinary shares: share options                                             
Weighted average number of                474.2        461.0          466.1
ordinary shares for the purpose of                                         
diluted EPS                                                                

Earnings                    6 months to             6 months to             Year to      
                           30 June 2006            30 June 2005        31 December 2005  
                         Earnings   Per share    Earnings   Per share  Earnings Per share
                                       amount                  amount              amount
                               £m       pence          £m       pence        £m     pence
                      (unaudited) (unaudited) (unaudited) (unaudited) (audited) (audited)
Earnings for the             31.3        6.69        25.4        5.61      53.4     11.66
purposes of basic EPS                                                                    
being net profit                                                                         
attributable to the                                                                      
equity holders of the                                                                    
Add back :                                                                               
Amortisation of               6.4        1.37         5.3        1.17      11.2      2.43
intangible assets,                                                                       
net of tax                                                                               
Basic earnings before        37.7        8.06        30.7        6.78      64.6     14.09
amortisation of                                                                          
intangible assets                                                                        
Earnings for the             31.3        6.69        25.4        5.61      53.4     11.66
purposes of diluted                                                                      
Effect of dilutive              -      (0.09)           -      (0.10)         -    (0.20)
potential ordinary                                                                       
Diluted EPS                  31.3        6.60        25.4        5.51      53.4     11.46

4. Reconciliation of operating profit to net cash inflow from operating

                                           6 months to 6 months to      Year to
                                               30 June     30 June  31 December
                                                  2006        2005         2005
                                                    £m          £m           £m
                                           (unaudited) (unaudited)    (audited)
Operating profit for the period                   54.1        45.5         97.1
Adjustments for:                                                               
Share-based payment                                2.5         2.7          5.7
Depreciation of property, plant and               15.3        15.2         30.3
Amortisation of intangible assets                  7.7         6.4         13.6
(Profit)/loss on disposal of property,           (0.3)         0.4          0.4
plant and equipment                                                            
Loss on disposal of intangible assets                -           -          0.1
Operating cash inflows before movements in        79.3        70.2        147.2
working capital                                                                
(Increase)/decrease in inventories               (8.9)         0.2        (1.9)
Increase in receivables                         (10.3)      (19.5)       (47.2)
Increase in payables                              18.2        20.0         44.6
Decrease in provisions                           (5.2)      (0.8)             -
Cash generated by operations before PFI           73.1        70.1        142.7
asset expenditure                                                              
Movement on PFI debtor                             9.4         4.7         15.3
Expenditure on PFI assets in the course of           -       (3.0)        (7.8)
Cash generated by operations after PFI            82.5        71.8        150.2
asset expenditure                                                              
Tax paid                                         (9.3)       (4.3)        (9.4)
Net cash inflow from operating activities         73.2        67.5        140.8

5. Analysis of net debt

                          At 30 June    At 30 June   At 31 December
                                2006          2005             2005
                                  £m            £m               £m
                         (unaudited)   (unaudited)        (audited)
Cash and cash                  235.8         204.1            240.7
Other loans                  (423.0)       (467.6)          (460.3)
Obligations under             (22.9)        (29.4)           (26.4)
finance leases                                                     
Recourse net debt            (210.1)       (292.9)          (246.0)
Non recourse loans           (266.5)       (246.1)          (278.2)
(related to PFI assets)                                            
Other non recourse loans      (44.7)        (47.5)           (71.0)
Total net debt               (521.3)       (586.5)          (595.2)

6. Reserves

                            Share   Share Retained  Retirement Share-based Hedging and
                          capital premium earnings     benefit     payment translation
                                  account          obligations     reserve     reserve
                               £m      £m       £m          £m          £m          £m
As at 31 December 2005        9.4   269.5    132.8     (139.0)        16.6      (15.1)
Shares issued                 0.1       -        -           -           -           -
Premium on shares issued        -     8.3        -           -           -           -
Profit for the period           -       -     31.3           -           -           -
attributable to equity                                                                
holders of the parent                                                                 
Dividends paid                  -       -    (9.6)           -           -           -
Net actuarial gain on           -       -        -        83.3           -           -
defined benefit pension                                                               
Actuarial loss on               -       -        -      (37.3)           -           -
reimbursable rights                                                                   
Expense in relation to          -       -        -           -         2.5           -
share-based payment                                                                   
Fair value gain on cash         -       -        -           -           -         2.6
flow hedges during the                                                                
Net exchange loss on            -       -        -           -           -       (8.2)
translation of foreign                                                                
Tax charge on cash flow         -       -        -           -           -       (0.7)
Tax (charge)/credit on          -       -        -      (12.1)         0.6           -
items taken directly to                                                               
As at 30 June 2006            9.5   277.8    154.5     (105.1)        19.7      (21.4)

7. Joint ventures

The Group's interests in joint ventures are reported in the consolidated
financial statements using the proportionate consolidation method.

The effect of the Group's joint ventures on the consolidated income statement
is as follows:

                              6 months to 6 months to       Year to
                                  30 June     30 June   31 December
                                     2006        2005          2005
                                       £m          £m            £m
                              (unaudited) (unaudited)     (audited)
Revenue                             308.0       254.5         536.1
Operating profit                     19.9        16.1          34.7
Profit before tax                    20.5        16.3          36.4
Tax                                 (6.0)       (3.6)        (10.4)
Profit for the period                14.5        12.7          26.0
Minority interest                   (0.3)       (0.4)         (0.5)
Share of post-tax results            14.2        12.3          25.5
from joint ventures