This document comprises a prospectus relating to TalkTalk and the TalkTalk Shares, prepared in accordance with the Prospectus Rules and approved by the FSA under the FSMA. This document has been filed with the FSA and made available to the public in accordance with the Prospectus Rules. This document has been prepared in connection with the demerger of the TalkTalk Business from the New Group and, unless otherwise stated, on the assumption that the Scheme and the Demerger will become effective as proposed. TalkTalk, the TalkTalk Directors and the Proposed Director, whose names appear on page 193 of this document, accept responsibility for the information contained in this document. To the best of the knowledge of TalkTalk, the TalkTalk Directors and the Proposed Director, (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information. Neither the TalkTalk Shares nor any other securities in TalkTalk have been marketed to, nor are available for purchase, in whole or in part, by the public in the or elsewhere in connection with the Proposals or TalkTalk Admission. This document does not constitute nor form part of any offer or invitation to purchase, subscribe for, sell or issue, or any solicitation of any offer to purchase, subscribe for, sell or issue, TalkTalk Shares or any other securities of TalkTalk. You should read the whole of this document and the information incorporated by reference carefully. In particular, you should take account of the section entitled Risk Factors on pages 13 to 20 of this document for a discussion of the risks which might affect the value of your shares in TalkTalk. TalkTalk Telecom Group PLC (Incorporated in England and Wales under the Companies Act 2006 with registered number 07105891) Introduction to the Official List and admission to trading on the Stock Exchange of up to 925,000,000 TalkTalk Shares

Application will be made to the FSA for all of the TalkTalk Shares to be admitted to the Official List and to the for all of the TalkTalk Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities. If the Proposals proceed as currently envisaged, it is expected that TalkTalk Admission will become effective and that dealings in the TalkTalk Shares will commence on 29 March 2010. If the Demerger does not become effective by the Demerger Long Stop Date, neither TalkTalk Admission nor New Carphone Warehouse Admission will take place as envisaged in the Proposals. In such circumstances, New Carphone Warehouse intends to publish a further prospectus in its capacity as the holding company of the entire Carphone Warehouse Group (including the TalkTalk Business). New Carphone Warehouse would also intend to apply to the FSA for the New Carphone Warehouse Ordinary Shares (together with the New Carphone Warehouse Cancellation Shares which would be reclassified as New Carphone Warehouse Ordinary Shares with effect from such subsequent admission) to be admitted to Official List with a primary listing and to the London Stock Exchange for them to be admitted to trading on the London Stock Exchange’s main market for listed securities. This process would take a number of weeks to complete and the New Carphone Warehouse Ordinary Shares would remain unlisted during this period. There is also no guarantee that the application for a primary listing would be successful. The TalkTalk Shares have not been, and will not be, registered under the Securities Act or with any securities regulatory authority of any state or any other jurisdiction of the United States or under the applicable securities laws of any jurisdiction outside the United Kingdom and may not be offered, sold or otherwise transferred, directly or indirectly, in or into any jurisdiction or for the account or benefit of citizens or residents of any such jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such jurisdiction. Investors outside the United Kingdom are required by TalkTalk to inform themselves about and observe any restrictions on the offer, sale or transfer of TalkTalk Shares. Credit Suisse, which is authorised and regulated in the United Kingdom by the FSA, is acting as financial adviser and joint sponsor to Carphone Warehouse, as joint financial adviser and broker to the listing of New Carphone Warehouse and as joint financial adviser, broker and sponsor to the listing of TalkTalk and for no one else in connection with the Proposals and will not be responsible to anyone other than Carphone Warehouse, New Carphone Warehouse or TalkTalk for providing the protections afforded to clients of Credit Suisse nor for providing advice in relation to the Proposals or any other matter or arrangement referred to in this document. This statement does not seek to limit or exclude responsibilities or liabilities which may arise under the FSMA or the regulatory regime established thereunder. UBS Investment Bank, is acting as joint financial adviser and broker to the listing of New Carphone Warehouse, as joint sponsor to Carphone Warehouse and as joint financial adviser, broker and sponsor to the listing of TalkTalk and for no-one else in connection with the Proposals and will not be responsible to any person other than Carphone Warehouse, New Carphone Warehouse or TalkTalk for providing the protections afforded to clients of UBS Investment Bank nor for providing advice in relation to the Proposals or any other matter or arrangement referred to in this document. This statement does not seek to limit or exclude responsibilities or liabilities which may arise under the FSMA or the regulatory regime established thereunder. Apart from the responsibilities and liabilities, if any, which may be imposed on the Joint Sponsors (including those acting as sponsor as the case may be) by the FSMA or the regulatory regime established thereunder or under the regulatory regime of any jurisdiction where exclusion of liability under the relevant regulatory regime would be illegal, void or unenforceable, neither of the Joint Sponsors accepts any responsibility whatsoever for the contents of this document or for any other statement made or purported to be made by it, or on its behalf, in connection with TalkTalk, the TalkTalk Shares, the Proposals, TalkTalk Admission or any other matter or arrangement referred to in this document. Each of the Joint Sponsors accordingly disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of such document or any such statement. Investors should rely only on the information contained in this document. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representations must not be relied on as having been so authorised by Carphone Warehouse, TalkTalk, the TalkTalk Directors or the Joint Sponsors. In particular, the contents of the Carphone Warehouse Group or the TalkTalk Group’s websites do not form part of this document and investors should not rely on them. Without prejudice to any legal or regulatory obligation on TalkTalk to publish a supplementary prospectus pursuant to section 87G of the FSMA and Rule 3.4 of the Prospectus Rules, neither the delivery of this document, nor the Demerger becoming effective, nor TalkTalk Admission, shall, under any circumstances, create any implication that there has been no change in the affairs of the TalkTalk Group since the date of this document or that the information in it is correct as of any time subsequent to the date of this document. The distribution of this document and any accompanying documents and the allotment and issue of TalkTalk Shares in jurisdictions other than the United Kingdom may be restricted by law. Therefore persons outside the United Kingdom into whose possession this document and any accompanying documents come should inform themselves about and observe any such restrictions. No action has been taken by TalkTalk to obtain any approval, authorisation or exemption to permit the allotment or issue of TalkTalk Shares or the possession or distribution of this document (or any other publicity material relating to the TalkTalk Shares) in any jurisdiction, other than in the United Kingdom. Overseas shareholders may be affected by the laws of other jurisdictions in relation to the distribution of this document or the Proposals. Persons into whose possession this document comes should inform themselves about and observe any applicable restrictions and legal, exchange control or regulatory requirements in relation to the distribution of this document and the Proposals. Any failure to comply with such restrictions or requirements may constitute a violation of the securities laws of any such jurisdiction. The contents of this document should not be construed as legal, business or tax advice. Each investor should consult his, her or its own legal adviser, financial adviser or tax adviser for legal, financial or tax advice.

NOTICE TO INVESTORS IN THE UNITED STATES The TalkTalk Shares are being issued pursuant to the Proposals. Financial information included in this document has been prepared in accordance with IFRS accounting standards that may not be comparable to the financial statements of US companies. US generally accepted accounting principles differ in certain significant respects from IFRS. The financial statements relating to the TalkTalk Group in respect of the financial years ending 31 March 2009, 29 March 2008 and 31 March 2007 and for the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008 and the financial statements relating to UK and its subsidiaries in respect of the financial years ending 31 December 2008, 31 December 2007 and 31 December 2006 and for the six months ended 30 June 2009 and 30 June 2008 have not been audited in accordance with auditing standards generally accepted in the United States or the auditing standards of the Public Company Accounting Oversight Board (United States). Securities may not be offered or sold in the United States unless they are registered under the Securities Act or are exempt from such registration requirements. The TalkTalk Shares have not been, and will not be, registered under the Securities Act. The TalkTalk Shares will be issued in reliance on the exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) thereof. THE TALKTALK SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY IN THE UNITED STATES, NOR HAVE SUCH AUTHORITIES PASSED JUDGMENT UPON OR ENDORSED THE MERITS OF TALKTALK SHARES OR THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES.

ENFORCEMENT OF JUDGMENTS TalkTalk is a public limited company incorporated under the laws of England and Wales. All members of the TalkTalk Board are citizens or residents of countries other than the United States and a substantial portion of the assets of such persons and a substantial portion of the assets of TalkTalk and the TalkTalk Group are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon TalkTalk or such persons or to enforce outside the United States judgments obtained against TalkTalk or such persons in United States courts, including, without limitation, judgments based upon the civil liability provisions of the United States federal securities laws or the laws of any state or territory within the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. Investors may also have difficulties enforcing, in original actions brought in courts in jurisdictions outside the United States, liabilities under US securities laws.

DEFINED TERMS Certain terms used in this document are defined in the “Definitions” section of this document or the “Glossary” section of this document.

2 TABLE OF CONTENTS

Summary ...... 4 Risk factors ...... 13 Forward looking statements ...... 21 Expected timetable of principal events ...... 22 TalkTalk Directors, company secretary, registered office and advisers ...... 24 Part — Information on the Proposals ...... 25 Part II — Information on the TalkTalk Group ...... 26 Part III — Operating and financial review of the TalkTalk Group ...... 37 Part IV — Capitalisation and indebtedness ...... 55 Part V — Historical consolidated financial information relating to the TalkTalk Group ...... 56 Part VI — Profit forecast ...... 184 Part VII — Unaudited pro forma financial information ...... 187 Part VIII — United Kingdom taxation considerations ...... 190 Part IX — Directors, responsible persons, corporate governance and employees ...... 193 Part X — Additional information ...... 207 Part XI — Definitions ...... 245 Part XII — Glossary ...... 255

3 SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ AS AN INTRODUCTION TO THIS DOCUMENT. ANY DECISION TO INVEST IN TALKTALK SHARES SHOULD BE BASED ON CONSIDERATION OF THIS DOCUMENT AND THE INFORMATION INCORPORATED BY REFERENCE AS A WHOLE. Where a claim relating to information contained in this document is brought before a court, a plaintiff investor might, under the national legislation of the EEA States, have to bear the costs of translating this document before legal proceedings are initiated. Civil liability attaches to those persons who are responsible for this summary, including any translation of this summary, but only if this summary is misleading, inaccurate or inconsistent when read together with the other parts of this document.

1. Introduction The TalkTalk Group, which was created within Carphone Warehouse in 2002, is one of the leading fixed line voice and businesses in the UK. With over 4.1 million broadband customers and 1.1 million voice-only and narrowband customers, the TalkTalk Group markets to residential customers under the “TalkTalk” and “AOL” brands and to business customers principally under the “Opal” brand. By operating its own all-IP next generation network with the UK’s largest unbundled local loop footprint by number of unbundled exchanges, the TalkTalk Group is able to optimise operating efficiency and enjoy economies of scale, thereby having a sustainable platform to offer market-leading, value-for-money tariffs to its customers.

2. Directors and officers The TalkTalk Directors and officers are: ...... Chairman Roger Taylor ...... Non-executive deputy chairman ...... Proposed chief executive officer Amy Stirling ...... Chief financial officer David Goldie ...... Group commercial director John Gildersleeve...... Non-executive director John Allwood ...... Non-executive director Jessica Burley ...... Non-executive director Brent Hoberman ...... Non-executive director Tim Morris ...... Company secretary

3. The Proposals 3.1 The Scheme and the Reorganisation The Proposals will create two new holding companies, TalkTalk (which, following the Proposals, will be the holding company for the TalkTalk Business) and New Carphone Warehouse (which, following the Proposals, will be the holding company for the New Carphone Warehouse Business). If the Scheme becomes effective and the Carphone Warehouse Reduction is approved by the Court, New Carphone Warehouse will become the new holding company of Carphone Warehouse for the period between the Scheme Effective Date and the Demerger Effective Time. In order to facilitate the Demerger, the Carphone Warehouse Group will, after the Scheme Effective Date and prior to the Demerger Effective Time, undergo the Reorganisation. The Reorganisation will involve, among other things, the transfer of Carphone Warehouse’s holdings in Europe and Virgin Mobile France to New Carphone Warehouse and a series of further steps to consolidate the ownership of certain assets and obligations which relate to the TalkTalk Business within the TalkTalk Group (of which Carphone Warehouse will form part) following the Demerger.

3.2 The Demerger Under the terms of the Demerger Agreement and the Tax Sharing and Indemnification Agreement, TalkTalk and New Carphone Warehouse will indemnify each other against certain liabilities arising from their respective businesses and from the Demerger. There are also provisions to ensure that any assets which are

4 beneficially owned by any member of the TalkTalk Group but remain legally owned by any member of the New Carphone Warehouse Group following the Demerger are transferred, or procured to be transferred, to the relevant member of the TalkTalk Group for a consideration to be agreed between the parties (save to the extent that the value of such assets has been accounted for in calculating the value of the TalkTalk Group) and vice versa in respect of any assets which are beneficially owned by any member of the New Carphone Warehouse Group but remain legally owned by any member of the TalkTalk Group.

3.3 The TalkTalk Capital Reduction Shortly after the Scheme Effective Date and following the Reorganisation, it is proposed to seek the approval of the Court to the TalkTalk Capital Reduction, involving the reduction of the share premium account of TalkTalk in order to create distributable reserves. The TalkTalk Capital Reduction is expected to be approved by the Court on 29 March 2010 and the TalkTalk Court Order is expected to be delivered to the Registrar of Companies on 29 March 2010.

3.4 Financial effects of the Demerger The illustrative unaudited consolidated net assets of the TalkTalk Group as at 30 September 2009 on a pro forma basis and adjusted to reflect the Demerger as if Completion had occurred at that date, would have been £470 million. The pro forma financial effects of the demerger include the payment of cash dividends of £204 million to the New Carphone Warehouse Group, £104 million of which is used by the New Carphone Warehouse Group to settle loans from the TalkTalk Group, and estimated Demerger transaction related costs of £15 million. The TalkTalk Group had net debt of £361 million at 30 September 2009. Following the dividends, intercompany settlement and Demerger transaction related costs noted above, the TalkTalk Group’s pro forma net debt at the same date is £476 million. This pro forma net debt does not include the special interim dividend of 3.2 pence per Carphone Warehouse Share in respect of the financial year ending 31 March 2010. In addition, the pro forma net debt noted above has not been adjusted for the operating performance of the TalkTalk Group and Carphone Warehouse PLC related costs in the period since 30 September 2009, nor has it been adjusted for the acquisitions of France and UK Telco and the interim dividend of 1.45 pence per Carphone Warehouse Share paid in January 2010. Following Completion, the TalkTalk Group will have a revolving credit facility of £550 million and a term loan of £100 million, both of which mature in March 2013.

4. TalkTalk Admission Application will be made to the FSA for the TalkTalk Shares to be admitted to the Official List and to the London Stock Exchange for the TalkTalk Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities. If the Scheme and the Demerger proceed as currently envisaged, it is expected that TalkTalk Admission will become effective and that dealings in the TalkTalk Shares will commence on 29 March 2010. Application will be made pursuant to Chapter 6 of the Listing Rules, which sets out the requirements for primary listings (to be renamed premium listings with effect from 6 April 2010) on the Official List.

5. Major shareholders Following TalkTalk Admission, Charles Dunstone will be interested in 32.40 per cent.; 16.98 per cent.; Fidelity International Limited 5.04 per cent.; Jupiter Asset Management Limited 3.23 per cent.; and Government of Singapore Investment Corporation Pte Limited 3.01 per cent. of the issued TalkTalk Shares.

6. Current trading and prospects of TalkTalk For the quarter ended 31 December 2009, the TalkTalk Group’s revenue of £446 million (2009: £347 million) was 29 per cent. higher than the same period the previous year, reflecting the impact of the Tiscali UK acquisition in July 2009 as well as the underlying performance of the TalkTalk broadband business. Business revenue in the quarter grew to £81 million (2009: £72 million).

5 The TalkTalk Directors remain confident in the TalkTalk Group’s ability to execute well, to integrate Tiscali UK, to grow its broadband customer base and to continue to generate significant and growing operating free cash flow.

7. Summary financial information The financial information below has been extracted without material adjustment from the financial information set out in Part V of this document. Following Completion, the TalkTalk Group will comprise the TalkTalk Business, Carphone Warehouse (to be renamed TalkTalk Telecom Holdings Limited pursuant to the Proposals) and various other non-trading and holding companies. The financial information has been prepared with the objective of presenting the results, net assets and operating free cash flows of the TalkTalk Group in the form that will arise on completion of the Proposals, as if it had been a standalone business throughout the financial periods covered. Full details of the basis of preparation of the financial information are provided in Part Vof this document. The TalkTalk Group had a financial period ended March while Tiscali UK had a financial period ended December.

7.1 The TalkTalk Group — summary income statement Six months 26 weeks ended ended Year ended 30 September 27 September 31 March 29 March 31 March 2009 2008 2009 2008 2007 £m £m £m £m £m Headline results* Revenue ...... 789 697 1,385 1,424 1,116 EBITDA pre SAC and marketing ..... 172 140 298 271 166 SAC and marketing ...... (69) (72) (126) (164) (144) EBITDA ...... 103 68 172 107 22 Depreciation and amortisation ...... (34) (27) (56) (46) (30) EBIT ...... 69 41 116 61 (8) Net interest expense ...... (1) (6) (1) (41) (7) Profit before taxation ...... 68 35 115 20 (15) Taxation ...... (21) (10) (20) (8) 3 Profit (loss) after taxation...... 47 25 95 12 (12) Statutory results Headline profit (loss) after taxation ..... 47 25 95 12 (12) Exceptional items (post-taxation) ...... (4) (13) (80) (10) — Amortisation of acquisition intangibles and goodwill expense (post-taxation) . . (30) (25) (52) (53) (39) Statutory profit (loss) after taxation ... 13 (13) (37) (51) (51)

* Headline results differ from those previously disclosed by Carphone Warehouse for the UK fixed line division as a result of the inclusion of central PLC costs and the restatement for the change in Carphone Warehouse’s accounting policy for subscriber acquisition costs as detailed in Part III of this document. The results of Tiscali UK have been included with effect from 1 July 2009.

6 7.2 The TalkTalk Group — operating free cash flow

Six months 26 weeks ended ended Year ended 30 September 27 September 31 March 29 March 31 March 2009 2008 2009 2008 2007 £m £m £m £m £m Headline EBITDA ...... 103 68 172 107 22 Working capital ...... 8 (27) (32) 16 — Capital expenditure...... (41) (51) (106) (172) (114) Operating free cash flow...... 70 (10) 34 (49) (92)

7.3 The TalkTalk Group — summary balance sheet* 30 September 27 September 31 March 29 March 31 March 2009 2008 2009 2008 2007 £m £m £m £m £m Non-current assets Goodwill ...... 461 301 304 299 295 Other intangible assets ...... 359 306 290 329 378 Property, plant and equipment ...... 241 216 219 198 108 Loans to related parties ...... 104 289 397 13 — Non-current asset investments ...... 1 — 1 1 — Deferred tax assets ...... 149 73 108 88 76 1,315 1,185 1,319 928 857 Current assets Stock ...... 3 1 1 2 1 Trade and other receivables ...... 199 242 139 201 221 Cash and cash equivalents ...... 16 91 6 3 24 218 334 146 206 246 Total assets ...... 1,533 1,519 1,465 1,134 1,103 Current liabilities Trade and other payables ...... (396) (372) (264) (401) (332) Corporation tax liabilities...... (32) (15) (33) (15) (14) Loans and other borrowings ...... (2) — (33) (25) (22) Provisions...... (35) (9) (8) (10) (18) (465) (396) (338) (451) (386) Non-current liabilities Trade and other payables ...... (4) — — (1) (72) Loans and other borrowings ...... (375) (377) (425) (894) (708) Loans from related parties ...... — — — — (82) (379) (377) (425) (895) (862) Total liabilities ...... (844) (773) (763) (1,346) (1,248) Net assets (liabilities) ...... 689 746 702 (212) (145) Equity Invested capital ...... 689 746 702 (212) (145) Funds (deficit) attributable to equity shareholders...... 689 746 702 (212) (145)

* The TalkTalk Group balance sheet reflects movements in equity which are not reflected in its income statement, as detailed in note 1 of Section B of Part Vof this document. As detailed in Part VII of this document, prior to Completion it is expected that on a pro forma basis dividends of £204 million will be paid to the New Carphone Warehouse Group and Demerger and associated cost of £15 million will be incurred, resulting in pro forma net assets at 30 September 2009 of £470 million.

7 7.4 Tiscali UK — summary income statement Six months ended Year ended 30 June 30 June 31 December 31 December 31 December 2009 2008 2008 2007 2006 £m £m £m £m £m Headline results Revenue ...... 231 279 538 414 303 EBITDA pre SAC and marketing ...... 24 38 63 48 30 SAC and marketing ...... (9) (46) (78) (46) (54) EBITDA ...... 15 (8) (15) 2 (24) Depreciation and amortisation ...... (17) (17) (40) (30) (13) EBIT ...... (2) (25) (55) (28) (37) Net interest expense ...... 12 (20) (102) (18) (3) Profit (loss) before taxation ...... 10 (45) (157) (46) (40) Taxation ...... (4) (4) (8) (5) (1) Profit (loss) after taxation ...... 6 (49) (165) (51) (41) Statutory results Headline profit after taxation ...... 6 (49) (165) (51) (41) Exceptional items (post-taxation) ...... — (4) (12) (12) (11) Amortisation of acquisition intangibles and goodwill impairment (post-taxation) .... (43) (12) (44) (5) (1) Statutory loss after taxation...... (37) (65) (221) (68) (53)

7.5 Tiscali UK — operating free cash flow

Six months ended Year ended 30 June 30 June 31 December 31 December 31 December 2009 2008 2008 2007 2006 £m £m £m £m £m Headline EBITDA ...... 15 (8) (15) 2 (24) Working capital...... (57) 32 67 (29) 27 Capital expenditure ...... (5) (25) (32) (35) (41) Operating free cash flow ...... (47) (1) 20 (62) (38)

8 7.6 Tiscali UK — summary balance sheet 30 June 30 June 31 December 31 December 31 December 2009 2008 2008 2007 2006 £m £m£m £m £m Non-current assets Goodwill ...... 129 184 164 184 80 Other intangible assets ...... 83 115 99 135 56 Property, plant and equipment ...... 64 84 72 76 65 Deposits ...... 6 10 6 7 6 282 393 341 402 207 Current assets Stock ...... — 7 4 7 1 Trade and other receivables...... 57 125 74 103 55 Cash and cash equivalents...... 2 21 15 24 1 59 153 93 134 57 Total assets ...... 341 546 434 536 264 Current liabilities Trade and other payables ...... (119) (219) (197) (167) (121) Loans and other borrowings ...... (343) (255) (315) (232) (40) Provisions ...... (6) (8) (9) (9) (15) (468) (482) (521) (408) (176) Non-current liabilities Trade and other payables ...... (71) (66) (68) (64) (59) Loans and other borrowings ...... (5) (8) (11) (9) (8) (76) (74) (79) (73) (67) Total liabilities ...... (544) (556) (600) (481) (243) Net (liabilities) assets ...... (203) (10) (166) 55 21 Equity Invested capital ...... (203) (10) (166) 55 21 (Deficit) funds attributable to equity shareholders ...... (203) (10) (166) 55 21

9 8. Strategy The TalkTalk Group’s strategy is to be the provider of choice in the UK for phone and broadband services by offering customers the best value, underpinned by the TalkTalk Group’s proprietary next generation network. The key points of this strategy are: • maintaining and growing its broadband market share and voice customer base; • increasing ARPU through continued product innovation and penetration of value added services; • consolidating brands and increasing brand awareness; • increasing efficiency as customers are migrated onto a single integrated network and consolidated billing and CRM platforms; • growing data services and revenues from its business-to-business operation; • expanding the network where economically viable and enhancing the customer network experience; and • generating strong operating free cash flow.

9. Key strengths The TalkTalk Board believes that the key strengths of the TalkTalk Group include its: • significant scale as a leading UK broadband provider with 23 per cent. of the UK broadband market and services provided to over 5 million UK customers; • simple and flexible product offerings and positive end-to-end customer experience; • award winning, value for money residential tariffs; • opportunity to improve efficiency and profitability from further network, billing and systems integration and realisation of acquisition synergies; • flexible billing and other business support systems which enable the development and launch of new products to residential and business customers; • strong presence in the business-to-business market, providing an extensive range of voice, broadband and data products; • own fully unbundled all-IP NGN, the largest in the UK; • strong operating free cash flow generation; and • experienced management team.

10. Dividend policy The TalkTalk Board intends TalkTalk to pursue a progressive dividend policy that reflects the long-term development and underlying earnings of the TalkTalk Business. Given that TalkTalk is a new company incorporated for the purposes of the Proposals, it will not pay a final dividend in respect of the financial period ending 31 March 2010. Therefore in substitution, Carphone Warehouse will pay a special interim dividend of 3.2 pence per Carphone Warehouse Share in respect of the financial year ending 31 March 2010. In respect of the financial year ending 31 March 2011, TalkTalk intends to declare an interim dividend in November 2010 followed by a final dividend in June 2011. It is further intended that the aggregate amount of dividends to be paid by TalkTalk for the financial year ending 31 March 2011 will be at least equivalent to the aggregate amount of dividends paid to Carphone Warehouse Shareholders for the financial year ending 31 March 2010, including the Carphone Warehouse Special Interim Dividend.

11. The TalkTalk Group’s key competitors Key competitors of the TalkTalk Group’s residential business are: • BT (marketed through BT Retail), which is the incumbent telecommunications provider in the UK; • Sky, which offers fixed residential broadband as part of a suite of services with the provision of digital TV at its core; and

10 • , which is the UK’s major cable operator and offers fixed and mobile voice services, fixed and mobile broadband services and pay-TV services. Key competitors of the TalkTalk Group’s SME voice and data business are BT, Cable & Wireless plc, ntl: Telewest business and systems integrators.

12. Risk factors A number of factors affect the operating results, financial condition and prospects of the TalkTalk Group. The material risks of which the TalkTalk Directors are aware are as follows:

12.1 Risks relating to the Proposals • Certain conditions precedent must be satisfied before the Proposals can complete. • There will be a period of time when no Carphone Warehouse Shares, nor New Carphone Warehouse Shares, nor TalkTalk Shares are traded or listed. • If New Carphone Warehouse Admission and TalkTalk Admission do not occur, Carphone Warehouse Shareholders will receive unlisted Shares. • The Demerger may fail to realise anticipated benefits.

12.2 Risks relating to the TalkTalk Group and the TalkTalk Business • The TalkTalk Group is at risk from significant and rapid change in the legal systems, regulatory controls and custom and practices in the countries in which it or its suppliers operate. • The TalkTalk Group is at risk from disruption of key systems and assets on which it depends. • Increased competition in the UK ISP market may materially and adversely impact the TalkTalk Group’s performance and financial condition. • Consumer demand for the TalkTalk Group’s products and consumers’ ability to pay for such products may be affected by factors including the general state of the economy and changes to consumer behaviour. • The TalkTalk Group depends upon the availability and cost of certain wholesale services and other products and services that expose it to price, quality and supply variations. • Access to a new fibre network proposed by BT to deliver higher speed broadband to customers may not be available on viable terms. • The nature of fixed line broadband provision means that the TalkTalk Group is reliant on specific network infrastructure and access to local exchanges that are owned and controlled by BT. • The TalkTalk Group depends on key software applications and hardware for the provision of services and billing of customers. • The TalkTalk Group is at risk from IT systems related project risk. • The TalkTalk Group is exposed to significant and rapid change in telecommunications products. • The TalkTalk Group’s performance is dependent on the proper functioning of key operational matters such as its LLU network infrastructure, systems, technology, funding and support services. • The TalkTalk Group depends on the continued contribution of its executive officers and employees, both individually and as a group. • The TalkTalk Group depends on customer service and service delivery for the integrity of its brand and its reputation in the market. • Failure to provide adequate service levels to customers or to manage back office processes could result in an increase in the churn of customers to other providers. • The TalkTalk Group has a number of outsourcing arrangements and is at risk of third parties not delivering on their contractual agreements. • The TalkTalk Group’s plans for growing customer numbers and consolidation in markets means that further acquisition activity may continue which may bring inherent risks.

11 • The TalkTalk Group is subject to the risks inherent in the migration and integration of all acquired customer bases and the TalkTalk Group may be unable to realise anticipated synergies. • The TalkTalk Group is exposed to market risks such as interest rate rises, fluctuations in foreign currency and default by counterparties.

12.3 Risks relating to TalkTalk Shares • The price of TalkTalk Shares may be volatile and may be affected by a number of factors, some of which are beyond TalkTalk’s control, which could cause the value of an investment in TalkTalk Shares to decline. • Sale of TalkTalk Shares by substantial TalkTalk Shareholders could depress the price of TalkTalk Shares. • Future equity issues by TalkTalk could have an adverse effect on the market price of the TalkTalk Shares and dilute ownership. • The dividend policy of TalkTalk is dependent on the financial condition of the TalkTalk Group and the ability of TalkTalk’s subsidiaries to pay dividends. • Any change in current tax law or practice could adversely affect holders of TalkTalk Shares. • Holders of TalkTalk Shares in the United States and other overseas jurisdictions may not be able to participate in future equity offerings of TalkTalk. • The ability of TalkTalk Shareholders to bring legal action on behalf of themselves or TalkTalk may be materially affected by English law.

12 RISK FACTORS Investing in and holding TalkTalk Shares involves financial risk. Investors in TalkTalk Shares should carefully review the information contained in this document and should pay particular attention to the following risks associated with an investment in TalkTalk and the TalkTalk Shares which should be considered together with all other information contained in this document. If one or more of the following risks were to arise, the TalkTalk Group’s businesses, results of operations, financial condition and/or prospects and/or TalkTalk’s share price could be materially and adversely affected to the detriment of TalkTalk and the TalkTalk Shareholders, and investors could lose all of their investment. The risks set out below may not be exhaustive and do not necessarily comprise all of the risks associated with an investment in TalkTalk and the TalkTalk Shares. Additional risks and uncertainties not currently or at present known to TalkTalk or which TalkTalk currently deems immaterial may arise or become material in the future and may have a material adverse effect on TalkTalk. During the period between the Scheme Effective Date and the Demerger Effective Time (which is expected to be a period of fewer than five days), the TalkTalk Business will be part of the New Carphone Warehouse Group. A description of certain risks relating to the New Carphone Warehouse Business is incorporated into this document by reference to the section entitled Risk Factors on pages 12 to 21 (inclusive) of the New Carphone Warehouse Prospectus and the related definitions contained in Part XI of the New Carphone Warehouse Prospectus. You should consult a legal adviser, an independent financial adviser duly authorised under the FSMA or a tax adviser for legal, financial or tax advice.

PART A: RISKS RELATING TO THE PROPOSALS 1. The Proposals may not complete Certain conditions precedent must be satisfied before the Proposals can complete Completion of the Proposals is subject to the satisfaction (or waiver) of a number of conditions precedent contained in the Demerger Agreement (including the approval of the Proposals by the Carphone Warehouse Shareholders at the General Meeting) and successful completion of each of the individual steps of the Proposals. If the Carphone Warehouse Shareholders do not approve the Proposals at the General Meeting, or the Court fails to sanction the Scheme or confirm the Carphone Warehouse Capital Reduction, or the Court fails to sanction the New Carphone Warehouse Demerger Reduction, the Demerger will not complete. If the Scheme becomes effective but Completion does not take place, New Carphone Warehouse will remain the holding company of the TalkTalk Business and the New Carphone Warehouse Business. If that happens, Carphone Warehouse Shareholders will hold unlisted New Carphone Warehouse Ordinary Shares and unlisted New Carphone Warehouse Cancellation Shares (which will be reclassified as New Carphone Warehouse Ordinary Shares). As a consequence, it will be more difficult to realise an investment in New Carphone Warehouse Ordinary Shares because they will not yet have been admitted to trading on the London Stock Exchange’s main market for listed securities or to listing on the Official List and therefore any disposals will have to be made “off market”. It will also not be possible to trade in New Carphone Warehouse Cancellation Shares because the rights attaching to such shares do not permit their transfer. If New Carphone Warehouse Ordinary Shares are not admitted to listing on the Official List, New Carphone Warehouse will not be subject to the UKLA Rules and the regulatory regime established thereunder or to monitoring by the UKLA. In such circumstances, the New Carphone Warehouse Board would intend to make an application to the FSA for a primary listing of all of the New Carphone Warehouse Ordinary Shares, a process which would require the publication of a prospectus by New Carphone Warehouse as the holding company of the entire Carphone Warehouse Group (including the TalkTalk Business). This would take a number of weeks to complete and the New Carphone Warehouse Ordinary Shares would remain unlisted during this period. There is also no guarantee that the application for a primary listing would be successful.

2. No trading or listing There will be a period of time when no Carphone Warehouse Shares, nor New Carphone Warehouse Ordinary Shares, nor TalkTalk Shares are traded or listed As part of the Proposals, there will be a period of time between the Scheme Effective Date and the date of New Carphone Warehouse Admission and TalkTalk Admission when no Carphone Warehouse Shares, nor New Carphone Warehouse Ordinary Shares, nor TalkTalk Shares are admitted to trading on the London Stock Exchange’s main market for listed securities or to listing on the Official List which is currently expected to be a period of fewer than five days although it could be extended for considerably longer if the Court does not sanction the New Carphone Warehouse Demerger Reduction, if the Demerger Agreement is

13 terminated in accordance with its terms or if either of the applications to the UKLA for admission to listing on the Official List or to the London Stock Exchange for admission to trading on the London Stock Exchange’s main market for listed securities is not successful. During this time it will be more difficult to realise an investment in New Carphone Warehouse Ordinary Shares or TalkTalk Shares because the New Carphone Warehouse Ordinary Shares and the TalkTalk Shares will not yet have been admitted to trading on the London Stock Exchange’s main market for listed securities or to listing on the Official List and therefore any disposals will have to be made “off market”. It will also not be possible to trade in Carphone Warehouse Shares following the cancellation of trading in Carphone Warehouse Shares on the London Stock Exchange’s main market for listed securities and the removal of the listing of the Carphone Warehouse Shares from the Official List (for which applications will be made), in each case, by no later than 8.00 a.m. on the Scheme Effective Date. If no Carphone Warehouse Shares, New Carphone Warehouse Shares or TalkTalk Shares are admitted to listing on the Official List, none of Carphone Warehouse, New Carphone Warehouse or TalkTalk (as the case may be) will be subject to the UKLA Rules and the regulatory regime established thereunder or to monitoring by the UKLA.

3. No admission If New Carphone Warehouse Admission and TalkTalk Admission do not occur, Carphone Warehouse Shareholders will receive unlisted shares Neither the Scheme nor the Demerger is conditional upon New Carphone Warehouse Admission and TalkTalk Admission. Although applications will be made for New Carphone Warehouse Admission and TalkTalk Admission, it is possible that if the Court does not sanction the New Carphone Warehouse Demerger Reduction or if the Demerger Agreement is terminated in accordance with its terms, the Scheme will become effective but that New Carphone Warehouse Admission and TalkTalk Admission do not occur. If either of the applications to the UKLA for admission of the New Carphone Warehouse Ordinary Shares and the TalkTalk Shares to listing on the Official List or to the London Stock Exchange for admission to trading on the London Stock Exchange’s main market for listed securities is not successful, it is also possible that both the Scheme and the Demerger become effective but that New Carphone Warehouse Admission and/or TalkTalk Admission do not occur. In such circumstances, Carphone Warehouse Shareholders will hold unlisted New Carphone Warehouse Ordinary Shares and unlisted New Carphone Warehouse Cancellation Shares (which will be reclassified as New Carphone Warehouse Ordinary Shares) if the Scheme becomes effective but the Demerger does not complete; or unlisted New Carphone Warehouse Ordinary Shares and unlisted TalkTalk Shares if the Demerger completes. If no Carphone Warehouse Shares, New Carphone Warehouse Shares or TalkTalk Shares are admitted to listing on the Official List, none of Carphone Warehouse, New Carphone Warehouse or TalkTalk (as the case may be) will be subject to the UKLA Rules and the regulatory regime established thereunder or to monitoring by the UKLA.

4. Anticipated benefits of the Demerger The Demerger may fail to realise anticipated benefits There can be no guarantee that the TalkTalk Group will realise any or all of the anticipated benefits of the Demerger, either in a timely manner or at all. If that happens, and the TalkTalk Group incurs significant costs, this could have a material adverse impact on the results of the TalkTalk Group. If the Demerger does not complete, the TalkTalk Business may be unable to realise the returns to Carphone Warehouse Shareholders from the TalkTalk Business that the TalkTalk Board believes will result from the Demerger.

5. Separation Agreements Any liabilities of the TalkTalk Group in respect of matters arising before Completion that, pursuant to the terms of the Demerger Agreement and/or the Tax Sharing and Indemnification Agreement, do not become the responsibility of the other parties to those agreements after Completion, would remain liabilities of the TalkTalk Group even though the TalkTalk Group may not have made provision for such liabilities.

PART B: RISKS RELATING TO THE TALKTALK GROUP AND THE TALKTALK BUSINESS 1. External risks The TalkTalk Group and the TalkTalk Business are subject to a number of external risks. The TalkTalk Group defines external risks as those that stem from factors that are mainly outside its control. These risks often arise from the nature of the TalkTalk Business and the industry in which it operates.

14 1.1 Legal, regulatory, political and societal risks The TalkTalk Group is at risk from significant and rapid change in the legal systems, regulatory controls and custom and practices in the countries in which it or its suppliers operate These changes affect a wide range of areas including: wholesale supply pricing; infrastructure investment; customer provision and end use of the TalkTalk Group’s services and/or products by customers; customer services carried out via third party call centres; the TalkTalk Group’s property rights; employment practices, including trade unions; data protection; environment; health and safety issues; and accounting, taxation and stock exchange regulation. Accordingly, changes to, or violation of, these systems, controls or practices could increase the TalkTalk Group’s administrative or regulatory compliance costs, restrict its operations, require other sanctions and have material and adverse impacts on the reputation, performance and financial condition of the TalkTalk Group. There can be no assurance that the TalkTalk Group will be able to comply with any new regulations or law to which it might become subject. Political developments and changes within and outside the UK in society, including increased scrutiny of the TalkTalk Group or its industry or its suppliers in the countries in which they operate, for example within and outside the UK by lobby groups or the media, may result in or increase the rate of material legal and regulatory change and changes to customs and practices that could have a material adverse effect on the TalkTalk Group. Where relevant, the TalkTalk Group’s businesses anticipate being compliant with the procedures and processes proposed by the payment card industry within the required time period agreed with the acquiring banks although there is an inherent risk that full compliance may not be achieved on time. This could have a material adverse influence on the performance and financial condition of the TalkTalk Group. The TalkTalk Group’s main businesses are principally regulated and supervised by . Regulatory change is an ongoing process in the communications sector at both the UK and EU level. Regulatory changes relating to the TalkTalk Group’s activities and those of its competitors, such as changes relating to third party access to networks, the costs of interconnection with other networks or the prices of competing products and services, could adversely affect the TalkTalk Business. In addition, the TalkTalk Business and the industry in which it operates are subject to investigation by regulators which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. Any such action could harm the reputation of the TalkTalk Group and result in increased cost to the TalkTalk Business. The TalkTalk Group may also be subject to laws and regulations designed to address concerns about perceived illegal use of the internet by customers. This could include the introduction of obligations on ISPs to monitor or restrict certain traffic that could increase the TalkTalk Group’s costs, adversely affecting the TalkTalk Group’s performance. The TalkTalk Group may decide to appeal and/or challenge any changes to laws or regulations that may be material to its businesses and this may increase costs or distract management’s time from day to day business matters.

1.2 Business continuity and incident management The TalkTalk Group is at risk from disruption of key systems and assets on which it depends The functioning of the TalkTalk Group’s network systems could be disrupted for reasons either within or beyond the TalkTalk Group’s control, including but not limited to: accidental damage; disruption to the supply of utilities or services; safety issues; systems failure; workforce actions; terrorism; or environmental contamination. While the TalkTalk Group has an incident management system in place, there is a risk that these plans may prove inadequate and that any disruption may materially and adversely affect the TalkTalk Group’s ability to make services available to customers and therefore materially and adversely affect its reputation, performance or financial condition.

1.3 Competition and ISP consolidation Increased competition in the UK ISP market may materially and adversely impact the TalkTalk Group’s performance and financial condition The telecommunications industry is highly competitive. The TalkTalk Group competes with other multi- national corporations which have significant financial resources. The TalkTalk Group may be unable to

15 compete effectively if its competitors’ resources are applied to: change areas of focus; reduce prices; increase capital investments and marketing; or develop and launch new products. The risks highlighted above may increase if the trend of consolidation of ISPs and mobile telephony operators in the market place continues. The TalkTalk Group’s business-to-business operations also face a wide range of competitors, including BT and C&W and a number of system integrators. The nature of this competition varies depending on service offerings and the size of marketable area. Some competitors are able to include broadband in a “bundle”, along with the provision of premium television channels and/or mobile telephony, and that may appear a more attractive alternative for customers than the TalkTalk Group’s products. Competitors may also use broadband as a loss leader to increase market share. Other competitors may develop new competing products which the TalkTalk Group is unable to provide. A further competition risk is that a number of the operators in the mobile broadband market have considerable resources for marketing and the ability to bundle mobile broadband with other mobile products. Each of the risks outlined in this section may result in increased pricing pressure from competitors and adversely impact the TalkTalk Group’s sales and margins.

1.4 The consumer environment and fixed line voice demand Consumer demand for the TalkTalk Group’s products and consumers’ ability to pay for such products may be affected by factors including the general state of the economy and changes to consumer behaviour The TalkTalk Group has focused on understanding consumer preferences and in its ability to respond to consumer needs through innovation and value based delivery. However, it may be unable to respond successfully or at a reasonable cost to rapid changes in consumer demand or consumer behaviour. The general state of the economy may mean that the level of bad debts and deferred payments increases which may cause customer churn to be greater than expected. This could adversely affect the financial performance of the TalkTalk Group. Levels of fixed line voice usage have been in decline. If such trends accelerate as a result of changes in consumer behaviour or customer preference for mobile voice rather than fixed line voice, then the performance of the TalkTalk Group could be adversely affected.

1.5 Dependence on suppliers The TalkTalk Group depends upon the availability and cost of certain wholesale services and other products and services that expose it to price, quality and supply variations Key wholesale services on which the TalkTalk Group depends include use of local BT exchanges, BT network infrastructure, line installations and engineering, supply of routers, energy and power, and hardware and other equipment, some of which are available only from one or a limited number of suppliers. Although the TalkTalk Group actively takes measures to protect against changes in the price, quality and/or continuous supply without interruption of such services, there is no guarantee that such actions will be effective. The legacy ownership of line and exchange assets in BT and the regulated nature of the telecommunications market means any such price changes or any conditions of use are risk factors for the TalkTalk Group. It is also unclear whether or not there will be sufficient backhaul services available from third parties to support increases in demand from customers for the TalkTalk Group’s services significantly above future expectations. A failure to recover higher costs or shortfalls or interruptions or unavailability of services as a result could materially and adversely impact the TalkTalk Group’s performance.

1.6 Developments in infrastructure Access to the new fibre network proposed by BT to deliver higher speed broadband to customers may not be available on viable terms Uncertainty surrounding the building of and/or access to fibre networks, implemented by BT and others including the funding and price of using such a network, are risk factors for the TalkTalk Group. If access to the proposed fibre network is not available at a viable price, or with appropriate features, the TalkTalk Group

16 may elect to make capital investment in developing its own fibre network which could significantly impact the TalkTalk Group’s financial performance. Any proposed levy on line rental or fixed line packages for financing fibre infrastructure may affect the TalkTalk Group’s margin more than other operators in the market. Any of the above may result in increasing costs and/or increased pricing pressure from competitors and may adversely impact the TalkTalk Group’s sales, its ability to retain customers and therefore adversely affect the TalkTalk Group’s performance.

1.7 Wholesale services The nature of fixed line broadband provision means that the TalkTalk Group is reliant on specific network infrastructure and access to local exchanges that are owned and controlled by BT Certain costs charged to the TalkTalk Group are set by BT and are regulated by Ofcom. The TalkTalk Group is active in taking measures to ensure the pricing of products and calls is set at a fair level and that the regulation and control of the network infrastructure is fair. Any failure to achieve this could increase the TalkTalk Group’s costs and/or affect the TalkTalk Group’s margins and therefore adversely affect the TalkTalk Group’s performance.

2. Internal risks Internal risks are those arising from factors primarily within the control of the TalkTalk Group and the TalkTalk Business, including those that result from the corporate structures of the TalkTalk Group and the TalkTalk Business and the way the TalkTalk Group carries on its business.

2.1 IT The TalkTalk Group depends on key software applications and hardware supplied by third parties for the provision of services and billing of customers Any disruption caused by failings in key software applications, of underlying equipment or of communication networks could delay or otherwise impact the TalkTalk Group’s ability to bill customers and collect payment, to take and fulfil orders, to provide customer support or otherwise impact on the TalkTalk Group’s day to day decision making and therefore could have a material adverse effect on business continuity and the TalkTalk Group’s performance. The TalkTalk Group screens and monitors its systems for new viruses and bugs and has protection systems in place. There is a risk that indirect or targeted action by a third party may affect the TalkTalk Group’s ability to operate internal systems or make products available to customers. Any such interruption of services could be costly and impact the TalkTalk Group’s reputation and performance.

2.2 Systems development The TalkTalk Group is at risk from IT systems related project risk The TalkTalk Group is undertaking IT upgrades, systems infrastructure development and data migration projects that involve project risk. Any failure to deliver such projects on a timely basis may increase the costs of the TalkTalk Group, affect the quality of services delivered to customers and adversely impact the reputation and financial condition of the TalkTalk Group.

2.3 Product development The TalkTalk Group is exposed to significant and rapid change in telecommunications products Competition in the telecommunications market and the ability to deliver broadband services depends on keeping pace with rapidly changing technology. Any failure of the TalkTalk Group to ensure that its products remain competitive in the marketplace may have a material impact on the TalkTalk Group’s financial performance. Security concerns regarding the use of wi-fi broadband may result in the TalkTalk Group investing in additional security applications and upgrading equipment and/or connectivity. Any associated cost may not be able to be passed on to the customer and may have a material adverse impact on the TalkTalk Group’s financial performance.

17 2.4 Operational interdependence

The TalkTalk Group’s performance is dependent on the proper functioning of key operational matters such as its LLU network infrastructure, systems, technology, funding and support services

Any underperformance or failure to control the TalkTalk Group’s operations properly in one particular area could therefore impact the TalkTalk Group’s businesses in a number of other areas and materially and adversely impact the performance or financial condition of other business units or the TalkTalk Group as a whole.

2.5 Employees

The TalkTalk Group depends on the continued contribution of its executive officers and employees, both individually and as a group

There can be no guarantee that the TalkTalk Group will be able to attract, develop and retain individuals at an appropriate cost and ensure that the capabilities of the TalkTalk Group’s employees meet its business needs. Any failure to do so may impact the TalkTalk Group’s performance.

There is a risk that certain senior personnel critical to the running of the TalkTalk Group could leave the TalkTalk Group. This could have a negative impact on the TalkTalk Group’s ability to maintain relationships with customers, employees, suppliers and others with whom it has business dealings, with negative consequences for its continued performance and growth.

2.6 Brand and reputation

The TalkTalk Group depends on customer service and service delivery for the integrity of its brand and its reputation in the market

The TalkTalk Group continues to build brand identity through marketing across different media. Any under- performance by the TalkTalk Group effectively to deliver broadband services to customers, to provision new customers (including new line provisions) within timeframes or to deliver adequate customer services could impact the reputation of the TalkTalk Group’s brands and the financial position of the TalkTalk Group.

2.7 Customer service

Failure to provide adequate service levels to customers or to manage back office processes could result in an increase in the churn of customers to other providers

While the TalkTalk Group is investing significantly in its customer management and billing systems and to streamline its customer service and back office systems, failure to improve such services could result in an increase in the churn of customers to other providers which would have an adverse effect on the financial position of the TalkTalk Group.

2.8 Outsourcing

The TalkTalk Group has a number of outsourcing arrangements and is at risk of third parties not delivering on their contractual agreements

The TalkTalk Group is increasing its use of outsourcing arrangements with third parties, notably in IT, customer service and human resources operations. While the TalkTalk Group has benefited from the expertise of these third parties, the TalkTalk Group is also at risk from failures by these third parties to deliver on their contractual commitments which may materially and adversely impact on the TalkTalk Group’s reputation and performance and increase the TalkTalk Group’s costs.

3. Execution risks

Execution risks arise from the implementation of the TalkTalk Group’s strategy and its change and restructuring programmes which aim to enhance long-term shareholder value.

18 3.1 Acquisitions and disposals The TalkTalk Group’s plans for growing customer numbers and consolidating in markets means that further acquisition activity may continue which may bring inherent risks There are inherent risks in the acquisition and disposal of businesses and brands that may have an adverse impact on the TalkTalk Business or the TalkTalk Group’s financial results. From time to time, the TalkTalk Group makes acquisitions and disposals of businesses and brands. While these are carefully planned, the rationale for them may be based on incorrect assumptions or conclusions and they may not realise the expected benefits or there may be other unanticipated or unintended effects. Additionally, while the TalkTalk Group seeks protection, for example through warranties and indemnities in the case of acquisitions, significant liabilities may not be identified in due diligence or may come to light after the expiry of warranty or indemnity periods. These factors may have a material adverse impact on the performance or financial condition of the TalkTalk Group.

3.2 Migration and integration strategy The TalkTalk Group is subject to the risks inherent in the migration and integration of all acquired customer bases and the TalkTalk Group may be unable to realise anticipated synergies While the TalkTalk Group has experience of migrating and integrating acquired customer bases and has undertaken careful planning, there can be no guarantee that the TalkTalk Group will realise any of the anticipated benefits of integrating and migrating all acquired customer bases into the TalkTalk Group including onto the same billing and other operating systems. There is also an inherent risk that transitional services provided to the TalkTalk Group by third parties in respect of certain acquired customer bases may not be delivered to the level of performance required by the TalkTalk Group prior to the migration and integration of such customers into the TalkTalk Group. This may have an adverse impact on the TalkTalk Business and the TalkTalk Group’s financial results.

4. Financial risks The TalkTalk Group is exposed to market risks such as interest rate rises, fluctuations in foreign currency and default by counterparties The main financial risks facing the business are fluctuations in foreign currency (particularly the US Dollar and the Euro), interest rate risk and default by counterparties. Any of these financial risks may have a material adverse impact on the performance and financial condition of the TalkTalk Group.

PART C: RISKS RELATING TO TALKTALK SHARES 1. TalkTalk Share price could be volatile The price of TalkTalk Shares may be volatile and may be affected by a number of factors, some of which are beyond TalkTalk’s control, which could cause the value of an investment in TalkTalk Shares to decline The price of the TalkTalk Shares following TalkTalk Admission could be subject to significant fluctuations because of the volatility of the stock market in general and a variety of other factors, some of which are beyond TalkTalk’s control, including the other risks relating to an investment in TalkTalk as described in this section.

2. Major shareholders Sale of TalkTalk Shares by substantial TalkTalk Shareholders could depress the price of TalkTalk Shares As at the date of this document, Charles Dunstone is interested in 32.40 per cent.; David Ross is interested in 16.98 per cent.; Fidelity International Limited is interested in 5.04 per cent.; and Jupiter Asset Management Limited is interested in 3.23 per cent.; and Government of Singapore Investment Corporation Pte Limited is interested in 3.01 per cent. of the issued Carphone Warehouse Shares and, following TalkTalk Admission, 32.40 per cent.; 16.98 per cent.; 5.04 per cent.; 3.23 per cent.; and 3.01 per cent. of the issued TalkTalk Shares respectively. Subsequent sales by any of them (or any other substantial TalkTalk Shareholders) of a substantial number of TalkTalk Shares may significantly reduce the price of TalkTalk Shares. Also, any perceived view that any such TalkTalk Shareholder might sell substantial numbers of TalkTalk Shares could depress the price of TalkTalk Shares for an unknown period of time.

19 3. Dilution of equity Future equity issues by TalkTalk could have an adverse effect on the market price of the TalkTalk Shares and dilute ownership Future equity issues by TalkTalk could have an adverse effect on the market price of the TalkTalk Shares and may also reduce the percentage ownership and voting interests of the TalkTalk Shareholders. Moreover, TalkTalk may issue new shares that have rights, preferences or privileges senior to those of the TalkTalk Shares.

4. Dividends The dividend policy of TalkTalk is dependent on the financial condition of the TalkTalk Group and the ability of TalkTalk’s subsidiaries to pay dividends TalkTalk will only be able to pay dividends to holders of TalkTalk Shares to the extent that it has profits available for this purpose and TalkTalk may decide to use all or part of such profits for another purpose, for example, to invest in and further develop the TalkTalk Business. There is no guarantee that TalkTalk will be able to sustain its dividend policy in the future. TalkTalk will act as a holding company for the TalkTalk Group’s various operating subsidiaries and will not have any significant operations of its own. As a holding company, TalkTalk will therefore be reliant on its subsidiaries as its principal source of cash to meet its obligations and pay dividends.

5. Tax risk Any change in current tax law or practice could adversely affect holders of TalkTalk Shares Statements in this document concerning the taxation of holders of TalkTalk Shares are based on current UK tax law and published HMRC practice as at the date of this document, either of which is subject to change, possibly with retrospective effect. The taxation of an investment in TalkTalk Shares depends on the individual circumstances of TalkTalk Shareholders and the summary of the UK taxation treatment of an investment in TalkTalk Shares set out in Part VIII of this document is intended as a general guide only. It does not address the specific tax position of every investor and only deals with rules of UK taxation of general application. Therefore, any investors who are in any doubt as to their tax position regarding the TalkTalk Shares and any investors subject to tax in a jurisdiction other than the UK should consult their own independent tax advisers.

6. Risk for overseas shareholders Holders of TalkTalk Shares in the United States and other overseas jurisdictions may not be able to participate in future equity offerings of TalkTalk The Act provides for pre-emption rights to be granted to existing TalkTalk Shareholders, unless such rights are disapplied by shareholder resolution. However, US shareholders may not be entitled to exercise these rights unless the rights, and the TalkTalk Shares issued pursuant to such rights, are registered under the Securities Act or an exemption from the registration requirements of the Securities Act is available. TalkTalk has no current intention to seek such registration and would evaluate, at the time of any rights issue, whether the offer would qualify for an exemption, as well as the indirect benefits to TalkTalk of enabling US shareholders to exercise rights and any other factors it considers to be appropriate at the time, prior to making a decision on whether to utilise an exemption, if available, from the registration requirements of the Securities Act. Similar issues may arise in relation to other overseas jurisdictions.

7. English law governance The ability of TalkTalk Shareholders to bring legal action on behalf of themselves or TalkTalk may be materially affected by English law TalkTalk is a public limited company incorporated under the laws of England and Wales. The rights of TalkTalk Shareholders are governed by the TalkTalk Articles. These rights differ from the typical rights of shareholders in other jurisdictions. In particular, English law currently limits the circumstances under which shareholders of English companies may bring actions on behalf of a company. In addition, English law does not afford appraisal rights to dissenting shareholders in the form typically available to shareholders in a US corporation.

20 FORWARD LOOKING STATEMENTS Certain statements contained in this document, including those in the Parts headed “Summary”, “Risk Factors”, “Information on TalkTalk” and “Operating and Financial Review of TalkTalk”, constitute “forward looking statements”. In some cases, these forward looking statements can be identified by the use of forward looking terminology, including the terms “believes”, “estimates”, “plans”, “prepares”, “anticipates”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology. Investors should specifically consider the factors identified in this document, which could cause actual results to differ before making an investment decision. Such forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of TalkTalk and/or the TalkTalk Group, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such forward looking statements are based on numerous assumptions regarding the TalkTalk Group’s present and future business strategies and the environment in which TalkTalk and/or the TalkTalk Group will operate in the future. Such risks, uncertainties and other factors are set out more fully in the section of this document headed “Risk Factors”. These forward looking statements speak only as at the date of this document. Except as required by the FSA, the London Stock Exchange or applicable law (including as may be required by the UKLA Rules), TalkTalk expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document to reflect any change in TalkTalk’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The statements above relating to forward looking statements should not be construed as a qualification on the opinion of TalkTalk as to working capital set out in paragraph 10 of Part X of this document. TalkTalk will comply with its obligation to publish supplementary prospectuses containing further updated information required by law or by any regulatory authority but assumes no further obligation to publish additional information.

21 EXPECTED TIMETABLE OF PRINCIPAL EVENTS Event Time and/or date Latest time for receipt of blue Forms of Proxy/electronic Forms of Proxy/CREST Proxy Instructions for the Court Meeting...... 10.00 a.m. on 22 February 2010(1) Latest time for receipt of white Forms of Proxy/ electronic Forms of Proxy/CREST Proxy Instructions for the General Meeting...... 10.15 a.m. on 22 February 2010(1) Voting Record Time...... 6.00 p.m. on 22 February 2010(2) Court Meeting...... 10.00 a.m. on 24 February 2010 General Meeting...... 10.15 a.m. on 24 February 2010(3) Ex-dividend date for the Carphone Warehouse Special Interim Dividend...... 3March 2010 Record date for the Carphone Warehouse Special Interim Dividend...... 5March 2010 Payment date for the Carphone Warehouse Special Interim Dividend...... 22March 2010 Scheme Court Hearing to sanction the Scheme and grant Scheme Court Order...... 22 March 2010 Share Scheme Deadline...... 12.00 p.m. on 22 March 2010 Filing of Scheme Court Order...... 22March 2010 Last day of dealings in, and for registration of transfers of, and disablement in CREST of, Carphone Warehouse Shares...... Up until 4.30 p.m. on 23 March 2010 Scheme Record Time...... 6.00 p.m. on 23 March 2010 Suspension of listing of, and dealings in, Carphone Warehouse Shares...... 7.30a.m. on 24 March 2010 Carphone Warehouse Reduction Court Hearing to confirm the Carphone Warehouse Capital Reduction...... 24March 2010 Filing of Carphone Warehouse Reduction Court Order...... 25 March 2010 Scheme Effective Date: New Carphone Warehouse becomes the holding company of Carphone Warehouse...... 25 March 2010 Delisting of Carphone Warehouse Shares...... Bynolater than 8.00 a.m. on 25 March 2010 New Carphone Warehouse Reduction Record Time...... 6.00 p.m. on 25 March 2010 New Carphone Warehouse Court Hearing to confirm the New Carphone Warehouse Demerger Reduction...... 26March 2010 Filing of New Carphone Warehouse Court Order...... 26 March 2010 Demerger Effective Time: New Carphone Warehouse Demerger Reduction becomes effective...... At or around 4.30 p.m. on 26 March 2010 TalkTalk Admission, crediting of TalkTalk Shares to CREST accounts and the commencement of dealings in TalkTalk Shares on the London Stock Exchange’s main market for listed securities...... 8.00 a.m. on 29 March 2010 New Carphone Warehouse Admission, crediting of New Carphone Warehouse Ordinary Shares to CREST accounts and the commencement of dealings in New Carphone Warehouse Ordinary Shares on the London Stock Exchange’s main market for listed securities...... 8.00 a.m. on 29 March 2010 TalkTalk Court Hearing to confirm the TalkTalk Capital Reduction...... 29March 2010

22 Filing of TalkTalk Court Order...... 29 March 2010 Despatch of share certificates in respect of New Carphone Warehouse Ordinary Shares due under the Scheme and in respect of TalkTalk Shares...... 12April 2010 Unless otherwise stated, all references to times in this document are to London times.

The Court Meeting and the General Meeting will each be held at the offices of Osborne Clarke, One London Wall, London EC2Y 5EB.

Notes: 1. If the blue Form of Proxy for the Court Meeting is not returned by the above time, it may be handed to Equiniti, on behalf of the chairman of the Court Meeting, at the Court Meeting before the taking of the poll. However, the white Form of Proxy for the General Meeting must be returned by no later than 10.15 a.m. on 22 February 2010 to be valid. 2. If either the Court Meeting or the General Meeting is adjourned, the Voting Record Time for the adjourned meeting will be 6.00 p.m. on the date two days before the date set for the adjourned meeting. 3. To commence at 10.15 a.m. or, if later, immediately after the conclusion or adjournment of the Court Meeting. 4. Conditional dealings in New Carphone Warehouse Ordinary Shares and TalkTalk Shares will take place off-market and will be possible prior to New Carphone Warehouse Admission and TalkTalk Admission respectively. If the Demerger does not occur, these conditional dealings will be of no effect and any such dealings will be at the sole risk of the parties concerned. 5. These times and dates are indicative only and will depend, among other things, on the date upon which the Court sanctions the Scheme and confirms the Carphone Warehouse Capital Reduction and the date on which the Court confirms the New Carphone Warehouse Demerger Reduction. If any of the expected dates change, Carphone Warehouse will give adequate notice of the change by issuing an announcement through a Regulatory Information Service.

23 TALKTALK DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS

TALKTALK DIRECTORS Charles Dunstone Roger Taylor Amy Stirling David Goldie John Gildersleeve John Allwood Jessica Burley Brent Hoberman

PROPOSED DIRECTOR Dido Harding

COMPANY SECRETARY REGISTERED OFFICE Tim Morris 11 Evesham Street London W11 4AR

JOINT SPONSOR AND BROKER TO THE JOINT SPONSOR AND BROKER TO THE LISTING OF TALKTALK LISTING OF TALKTALK Credit Suisse Securities (Europe) Limited UBS Investment Bank One Cabot Square 1 Finsbury Avenue London E14 4QJ London EC2M 2PP

LEGAL ADVISERS TO TALKTALK AS TO LEGAL ADVISERS TO THE JOINT SPONSORS ENGLISH LAW TO THE LISTING OF TALKTALK AS TO ENGLISH LAW Osborne Clarke One London Wall Ashurst LLP London EC2Y 5EB Broadwalk House 5 Appold Street London EC2A 2HA

REPORTING ACCOUNTANTS REGISTRARS Deloitte LLP Equiniti Limited 2 New Street Square Aspect House London EC4A 3BZ Spencer Road Lancing West Sussex BN99 6DA

24 PART I

INFORMATION ON THE PROPOSALS

Information about the Proposals is incorporated into this document by reference to Parts I and II on pages 12 to 52 (inclusive) of the Scheme Document and the related definitions contained in Part XII of the Scheme Document.

25 PART II

INFORMATION ON THE TALKTALK GROUP

During the period between the Scheme Effective Date and the Demerger Effective Time (which is expected to be a period of fewer than five days), the TalkTalk Business will be part of the New Carphone Warehouse Group. Information about New Carphone Warehouse and the New Carphone Warehouse Business is incorporated into this document by reference to Part II, on pages 28 to 47 (inclusive) of the New Carphone Warehouse Prospectus and the related definitions contained in Part XI of the New Carphone Warehouse Prospectus. With effect from the Demerger Effective Time, the TalkTalk Business will cease to be part of the New Carphone Warehouse Group. The financial information in this Part II is (unless otherwise indicated) extracted without material adjustment from the financial statements of the TalkTalk Group set out in Part V of this document. Investors should read all of this document (and the information incorporated by reference into it) and not just rely on key or summarised information in this Part II. This Part II contains forward looking statements that involve risks and uncertainties. The TalkTalk Group’s actual results could differ materially from those anticipated in these forward looking statements as a result of such risks and uncertainties. Investors should read the section of this document headed “Forward Looking Statements” on page 21 and the section of this document headed “Risk Factors” on pages 13 to 20 (inclusive) for a discussion of the risks and uncertainties related to these statements.

1. Introduction to the TalkTalk Group The TalkTalk Group is one of the leading fixed line voice and broadband telecommunications businesses in the UK. With over 4.1 million broadband customers and 1.1 million voice-only and narrowband customers, the TalkTalk Group markets to residential customers under the “TalkTalk” and “AOL” brands and to business customers principally under the “Opal” brand. By operating its own all-IP (“Internet Protocol”) next generation network (“NGN”) with the UK’s largest unbundled local loop footprint by number of unbundled exchanges, the TalkTalk Group is able to optimise operating efficiency and enjoy economies of scale, thereby having a sustainable platform to offer market- leading, value-for-money tariffs to its customers. The TalkTalk Board believes that the key strengths of the TalkTalk Group include its: • significant scale as a leading UK broadband provider with 23 per cent. of the UK broadband market and telecommunication services provided to over 5 million UK customers; • simple and flexible product offerings and a positive end-to-end customer experience; • award winning, value-for-money residential tariffs; • opportunity to improve efficiency and profitability from further network, billing and systems integration and realisation of acquisition synergies; • flexible billing and other business support systems which enable the development and launch of new products to residential and business customers; • strong presence in the business-to-business market, providing an extensive range of voice, broadband and data products; • own fully unbundled all-IP NGN, the largest in the UK; • strong operating free cash flow generation; and • experienced management team. The TalkTalk Group’s strategy is to be the provider of choice in the UK for phone and broadband services by offering customers the best value, underpinned by the TalkTalk Group’s proprietary NGN. The key points of this strategy are: • maintaining and growing its broadband market share and voice customer base; • increasing average revenue per user (“ARPU”) through continued product innovation and penetration of value added services;

26 • consolidating brands and increasing brand awareness; • increasing efficiency as customers are migrated onto a single integrated network and consolidated billing and CRM platforms; • growing data services and revenues from its business-to-business operations; • expanding the network where economically viable and enhancing the customer network experience; and • generating strong operating free cash flow.

2. History of the TalkTalk Group The TalkTalk Group was created within Carphone Warehouse, with the key events in its history being as follows: 1989 Charles Dunstone founds Carphone Warehouse November 2002 Carphone Warehouse acquires Opal Telecom, a fixed line carrier specialising in carrier pre-select (“CPS”) and other services for small and medium sized enterprises (“SME”) February 2003 Taking advantage of the newly regulated expansion of CPS to residential households, the TalkTalk Group launches its own residential fixed line voice service September 2005 The TalkTalk Business launches broadband to residential customers December 2005 Onetel and Tele2 UK are acquired, increasing the TalkTalk Group’s customer base to 2.4 million residential customers. A subsidiary of Onetel called Rednet also expands Opal’s expertise in delivering managed corporate data networks February 2006 The TalkTalk Business starts to invest in its own unbundled IP network following changes in regulation April 2006 The TalkTalk Business launches “Free Broadband” available to nearly 70 per cent. of the UK population September 2006 Opal acquires Alto Hiway, further strengthening its expertise in providing managed corporate data networks September 2006 The TalkTalk Business begins migrating customers to its own unbundled network to enable it to reduce supplier costs December 2006 AOL’s UK business is acquired, increasing the TalkTalk Business’s residential broadband customer base to 2.2 million December 2008 Opal launches business grade asymmetric digital subscriber line (“ADSL”) broadband services running over the NGN July 2009 Tiscali’s UK operations acquired, increasing the TalkTalk Business’s customer base to over 4.1 million broadband customers and 1.1 million voice-only and narrowband customers November 2009 Opal launches wide area Ethernet services, running over the next generation network

3. The TalkTalk Group’s operations The TalkTalk Group offers a UK fixed line telecommunications service to over 4.1 million broadband customers and 1.1 million voice-only and narrowband customers. Its revenues for the year to 31 March 2009 were £1,385 million. The TalkTalk Group has three constituent parts: residential; business; and networks. The TalkTalk Group has created the most extensive unbundled local loop all-IP network in the UK. In return, this supports a low-cost, operating model and drives strong profitability on value-based competitive tariffs. 72 per cent. of the TalkTalk Group’s broadband customers, across all of its businesses, are on its unbundled network.

27 TalkTalk Group customer base and the proportion of its customers on the unbundled network

(Customers, 000s) (Proportion of customers on unbundled network, per cent.)

4,500 100% 4,000 90% 3,500 80% 78% 78% 79% 72% 70% 3,000 70% 73% 72% 67% 60% 2,500 61% 55% 50% 2,000 40% 1,500 40% 30% 1,000 20% 500 10% - 0% Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Broadband Non Broadband Unbundled per cent.

Source: The TalkTalk Group. The decline in the proportion of customers on the unbundled network from 79 per cent. to 72 per cent. in September 2009 is as a result of the TalkTalk Group including Tiscali UK customers. At the time of acquisition in July 2009, Tiscali UK had 51 per cent. of its customers on an unbundled network compared to 79 per cent. for TalkTalk and AOL branded customers.

3.1 The TalkTalk Group’s residential operations Following the launch of the TalkTalk Group’s residential business across the UK in February 2003, it has, through a combination of organic growth and acquisitions, built a significant residential customer base. “TalkTalk” is the principal brand which has become the major engine for growth, while “AOL” continues to be used, primarily for customer retention purposes.

(a) Residential products and services The TalkTalk Group’s residential products and services principally comprise the following: • voice telephony, composed of line rental, calls and added value services, such as voicemail; • broadband internet access, including related services, such as email and value added services such as storage; and • dial-up internet access known as “narrowband”. Broadband, voice and line rental are taken as one package by a majority of the TalkTalk Group’s customers. A smaller group of customers take just broadband, voice or narrowband services. The various types of tariffs and packages offering these services change from time to time and different tariffs apply to the different brands used by the TalkTalk Group. For instance, new customers are offered the TalkTalk branded “Essentials” package, comprising voice, broadband and line rental, and are also able to acquire “Boosts”, such as higher download speeds, greater download limits, security controls and a range of calling features, for an additional monthly charge with no contractual commitment beyond 30 days. With regards to additional products and services, residential customers are provided with access to a number of internet portals to provide email and also information and entertainment services. The TalkTalk Group is able to generate incremental revenue through the sale of advertising and search engines through customers using these portals. A number of other fixed line products and services are made available to customers, including broadband accessories, a conference call directory, a 118111 directory enquiry service, an online backup facility and identity security products. A free technical advice and support service is also provided to phone and broadband customers, accessible via either email or from a telephone line provided by the TalkTalk Group. The TalkTalk Group now also operates a pay-TV service, acquired as part of Tiscali’s UK operations, and is reviewing further strategic opportunities for this service and has now become a member of the Canvas Project.

28 (b) Distribution, sales and marketing Residential customers are acquired through a combination of channels with the majority of sales being delivered via direct routes to market such as online and inbound telesales, supported by direct response marketing spend. The TalkTalk Group continues to use indirect channels, such as retail, field marketing agencies and outbound telesales, for incremental volume opportunities and to attract customers in discrete segments not easily reached via direct sales methods.

(c) Customer services and operations The TalkTalk Group’s residential business provides customer service and technical support through both in-house and outsourced operations based in the UK and Ireland, India, South Africa, Philippines and Lithuania.

3.2 The TalkTalk Group’s business operations The TalkTalk Group provides voice, data services, telephony systems and mobile services to business customers in the UK, principally under the “Opal” brand. Opal is well established in the SME market, with the TalkTalk Directors estimating that it has a greater than 10 per cent. market share. Opal has three segments of sales channel and customer base: • Opal Connect — this is a direct-to-market division with in excess of 160,000 small business customers served. The principal brand is Opal but legacy Tiscali UK brands such as , Freedom to Surf and Nildram are also utilised for customer retention reasons. Customers purchase telephone lines, calls, mobile handsets and services and/or business-grade broadband internet access. Products are generic and not bespoke. Sales are generally achieved through third party sales agencies and through telemarketing; • Opal Consult — this is a direct-to-market division, addressing the medium sized enterprise market. Customers are engaged and supported by an experienced team of sales people and product support specialists. The range of products is diverse and frequently bespoke. The range includes telephone calls and lines, inbound contact centre automated solutions, telephone systems, wide area data network design and supply, mobile reselling and business-grade broadband internet access; and • Opal Partner — Opal provides white label, wholesale products to a network of more than 500 business- to-business partners. The products sold are mainly telephone calls and lines, business-grade broadband and inbound contact centre automated solutions. Opal has also recently launched wholesale Ethernet services to its resellers.

3.3 The TalkTalk Group’s network The TalkTalk Group runs two interconnected networks: a traditional legacy voice network (using time division multiplexing (“TDM”) switching) and a NGN (using IP switching). It is necessary to maintain the TDM network in order to interconnect with BT’s public switched telephone network (“PSTN”) as BT has not deployed its own NGN on a national basis. The NGN is the strategic network which underpins the TalkTalk Group’s voice and broadband services. A NGN offers a series of advantages over TDM. In particular: • a NGN is a single network using IP with centrally managed quality of service control over the prioritisation of data packets on the network. This means it can carry both voice services and a wide variety of data services, including video. It is more cost efficient to operate a single, multi-service network than to run specific networks for specific applications, as is the case for legacy carriers; • the conveyance layer, which manages the transportation of voice and data in the network, is separate from the control and application layers of the network. This makes it easier to develop and introduce new products and services than is the case in legacy networks where these three functions are tightly integrated; and • IP networks are cheaper to deploy and to scale than traditional telephone networks which means that capital expenditure is reduced. There are three principal elements to the TalkTalk Group’s NGN: the core network, which allows the conveyance of aggregated data flows across the network and provides access to other networks; backhaul,

29 which connects the core network to the access layer at the exchange; and the access layer, which connects the consumer and the exchange. The core network requires very high capacity national circuits and the TalkTalk Group purchase fibre optic capability from third party fibre owners on a long term lease basis. The amount of capacity that is available on leased fibre optic circuits is determined by the line terminating equipment installed. The TalkTalk Group has purchased its own line terminating equipment in the form of dense wave division multiplexing (“DWDM”) equipment. The DWDM equipment enables the TalkTalk Group to expand core network capacity through upgrading this equipment as technology advances thus reducing the need to take on additional fibre lease costs. The backhaul requires high capacity between the core network and BT’s exchanges and is leased from a range of network operators including BT. There is a competitive wholesale market and large capacity backhaul is available at a very economic cost. The majority of the TalkTalk Group’s investment to date has been in building access points to the consumer using local loop unbundling (“LLU”).

Local Loop Unbundling LLU can be undertaken on either a fully unbundled (MPF) or a partially unbundled (SMPF) basis. In both cases, the network operator installs its own equipment into a BT exchange, using a regulated service from BT (known as “co-mingling”). BT provides space and power in the exchange on regulated terms. After this, BT continues to own the physical copper line from the exchange to the customer’s premises but provides exclusive rights of use to the voice and data (broadband) services on that line to the network operator. LLU rollout is undertaken on an exchange by exchange basis. BT provides ADSL technology for broadband. Under MPF, the network operator takes over both the voice and broadband data services of the customer’s telephone. Under SMPF, the network operator takes over only the broadband data services on a line, allowing BT to wholesale the voice component on that line separately to the same SMPF operator or to an alternative communications provider. The TalkTalk Group has extensive experience in the delivery of voice services and so has chosen to pursue an MPF strategy for its TalkTalk and Opal branded customers. The regulated price of MPF for the network operator is lower than the combination of SMPF and BT’s wholesale line rental. AOL and Tiscali UK, however, chose to launch with an SMPF network strategy. Following the acquisition of these companies, the TalkTalk Group continues to operate SMPF equipment on its NGN to service AOL and Tiscali UK customers. The TalkTalk Group operates the largest MPF exchange footprint in the UK with population coverage of 81 per cent. and over 79 per cent. of TalkTalk Group broadband customers (excluding Tiscali UK broadband customers) have been unbundled. 51 per cent. of Tiscali UK’s customers were unbundled and there is significant scope for the TalkTalk Group to improve on this and increase the average across the TalkTalk Group of 72 per cent. unbundled customers as at 30 September 2009.

4. Strategy The TalkTalk Group’s strategy is to be the provider of choice in the UK for phone and broadband services by offering customers the best value, underpinned by the TalkTalk Group’s proprietary NGN. The key points of this strategy are:

4.1 Maintaining and growing its broadband market share and voice customer base Market scale and efficient network build are essential to delivering a low cost base and the TalkTalk Group is now a major player in the UK residential broadband market. Since it entered the residential market in 2003, the TalkTalk Group has consistently grown market share, driven by organic growth and acquisitions. The UK residential fixed broadband market has significantly consolidated and the TalkTalk Group expects that there will be limited opportunities to grow market share by acquisition. As a result, the TalkTalk Group will continue to focus on organic growth and will place greater focus on customer lifetime value, customer retention, up-sell conversion and increasing ARPU.

30 4.2 Increasing ARPU through continued product innovation and penetration of value added services

The TalkTalk Group intends to explore opportunities within the mobile virtual network operator (“MVNO”) and digital-TV marketplaces. It will launch a MVNO proposition in 2010 and is exploring various options to most effectively provide relevant and interesting content for its digital-TV proposition.

The TalkTalk Group also plans to enhance ARPU with the up-selling of innovative new products which aim to improve the customer experience, including increasing download speeds and improving parental controls.

4.3 Consolidating brands and increasing brand awareness

The TalkTalk Group has built a residential customer base which now markets to residential customers under the TalkTalk and AOL brands. The TalkTalk brand is the engine for future growth and this focus will benefit its overall awareness in the market. The TalkTalk brand is widely understood to be a customer focused brand, associated with great customer value.

4.4 Increasing efficiency as customers are migrated onto a single integrated network and consolidated billing and CRM platforms

The TalkTalk Group aims to realise substantial synergies from the integration of its various network, billing and other back office operations. In particular, these synergies will come from customer migration onto its own network, the integration of its core network, a single backhaul infrastructure and strategic billing and CRM platforms. It is expected that over 80 per cent. of the TalkTalk Group’s customers will be on a single, unbundled network and all of them on strategic billing and CRM platforms by March 2011.

4.5 Growing data services and revenues from its business-to-business operations

Opal’s strategy is to increase its market share of business data services. The principal focus is on business- grade ADSL broadband and wide area Ethernet connectivity. Both products are built on the NGN and Opal is committed to offering the best value in the business marketplace. With the increase in scale and growth in market share arising from the Tiscali UK acquisition and the NGN network to leverage, Opal is well equipped to gain market share in the fragmented UK market place.

4.6 Expanding the network where economically viable and enhancing the customer network experience

The TalkTalk Group will continue to unbundle new exchanges where it believes it is economically viable. The decision to unbundle an exchange takes into account the size of the population being served by an exchange and, therefore, the immediate benefit of migrating the TalkTalk Group’s existing customers from that exchange to a lower cost platform and the potential for the acquisition of new customers. As the TalkTalk Group expands its exchange footprint, it is often the first network operator to unbundle in an exchange, providing it with a competitive advantage in that location. The TalkTalk Group intends to roll out another approximately 300 unbundled exchanges, bringing the total to approximately 2,000 unbundled exchanges. The benefit of unbundled exchange rollout will increase over time as customer bandwidth requirements increase. Broadband provisioned via a wholesale service from BT incurs bandwidth charges at a fixed unit cost per Mbps. As the TalkTalk Group continues to experience a reduction in its cost per Mbps and as customer bandwidth usage continues to rise, this will reinforce the case for further exchange rollout and its competitive positioning in the market.

5. Key strengths

5.1 The TalkTalk Group’s fully unbundled all-IP NGN, the largest in the UK

As at 30 September 2009, the TalkTalk Group had the highest number of unbundled customers in the UK and covered 81 per cent. of the UK population via 1,714 unbundled exchanges. Having the largest unbundled network in the UK is valuable because it significantly reduces wholesale costs payable to network suppliers, allowing the TalkTalk Group to offer value-led tariffs to its customers whilst also providing greater control over quality of service across the network.

31 5.2 Award winning, value for money residential tariffs, simple and flexible product offerings and a positive end-to-end customer experience The TalkTalk Group is a leader in the residential broadband market for value-led quality propositions, focusing on simple, transparent tariffs where customers have the flexibility to choose from an extensive range of products. The TalkTalk Group markets a clear product suite, combining voice, line rental and broadband.

5.3 A strong presence in the business-to-business market, providing an extensive range of voice, broadband and data products The TalkTalk Group’s business operations had annual revenues of £296 million for the year to 31 March 2009 and the TalkTalk Directors estimate that it has in excess of 10 per cent. of SME customers in the fragmented UK market and also a very strong position in the wholesale market. Following the acquisition of Tiscali UK, the TalkTalk Group’s business operations has increased its business customer base and now has further opportunities to cross sell products and achieve ongoing cost savings and synergies from increased scale.

5.4 Significant scale as a leading UK broadband provider with 23 per cent. of the UK broadband market and telecommunication services provided to over 5 million UK customers The TalkTalk Group’s market scale and efficient unbundled IP network enables it to deliver a low cost base. A material proportion of its network capital and operating costs are stepped in nature and do not vary directly with customer numbers in the short term. These expenditures are supporting a large and growing customer base, resulting in increasingly efficient costs per unit. The TalkTalk Group also benefits from its scale across customer service costs, marketing spend and other overheads.

5.5 Flexible billing, and other business support systems which enable the development and launch of new products to residential and business customers The TalkTalk Group has invested in a suite of billing, customer relationship management (“CRM”) and other customer support systems, such as web self care, to optimise customer service quality and efficiency and to facilitate the future development of the business. These highly scalable systems are configurable which means that the product proposition can be flexible and that the TalkTalk Group can meet the changing needs of the market and the opportunities that arise.

5.6 An experienced management team The executive directors of the TalkTalk Board and senior management of TalkTalk have an average of over 10 years’ experience in the telecommunications industry.

5.7 Strong operating free cash flow generation The TalkTalk Group has invested in growing its customer base and migrating customers to its own broadband network infrastructure. A significant proportion of this investment is complete. These factors, coupled with continuing effective cash management, have enabled the business to become cash generative in the financial year to 31 March 2009. The TalkTalk Board intends TalkTalk to pursue a progressive dividend policy that reflects the long-term development and underlying earnings of the TalkTalk Business. In respect of the financial year ending 31 March 2011, TalkTalk intends to declare an interim dividend in November 2010 followed by a final dividend in June 2011. It is further intended that the aggregate amount of dividends to be paid by TalkTalk for the financial year ending 31 March 2011 will be at least equivalent to the aggregate amount of dividends paid to Carphone Warehouse Shareholders for the financial year ending 31 March 2010 including the Carphone Warehouse Special Interim Dividend.

5.8 An opportunity to improve efficiency and profitability from further network, billing and systems integration and realisation of acquisition synergies The TalkTalk Group has significant scope to increase its proportion of unbundled customers, and therefore cost efficiency, by migrating Tiscali UK customers to its own network. At the time of its acquisition in July 2009, around 51 per cent. of Tiscali UK’s customer base was unbundled, compared to 79 per cent. of the TalkTalk Group’s customer base prior to the acquisition of Tiscali UK. Expected acquisition synergies arise from: network integration and simplification; billing integration; site realisation; and backhaul consolidation.

32 6. Market and competitive landscape The UK broadband market is estimated to have 67 per cent. household penetration, which is forecast to grow to 72 per cent. by 2012. Consolidation has occurred over the past few years and competition is significant across the TalkTalk Group’s main business areas. The TalkTalk Group and the three other largest broadband operators, namely BT (marketed through BT Retail), Virgin Media and Sky, together held an aggregate market share of 85 per cent. as at 30 September 2009. The UK market for fixed line voice is currently in decline in terms of number of lines and minutes of use per customer.

6.1 UK broadband and fixed line voice markets (a) UK broadband market The UK is a substantial national market in Europe for fixed line broadband, with 18 million customers as at 30 September 2009. The graph below illustrates the growth in UK broadband connections and penetration over recent years. This trend is forecast to continue, although at a slower rate of growth, as the market approaches maturity. The UK Government is encouraging further broadband penetration. In June 2009, the final version of the Carter Report on Digital Britain was released, proposing, amongst other recommendations, that every UK citizen should have access to broadband services of at least 2Mbps/s by 2012, and that this coverage should be provided by a range of operators, both fixed and mobile. This may drive penetration to deeper levels, increasing the addressable market for broadband providers including the TalkTalk Group.

UK market broadband connections and penetration

25 72% 80% 69% 71% 67% 62% 70% 20 54% 60% 43% 15 50%

29% 40% 10 30%

20% 5 13.8 16.2 17.6 18.4 19.0 19.5 Household penetration Broadband lines (million) 7.2 10.9 10%

0 0% Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Broadband lines (million) Household penetration

Source: Ofcom Telecommunications Market Data (2006-2009), thereafter Ovum forecasts 2009 and Office of National Statistics (b) UK fixed line voice market The UK market for fixed line voice has been in slight decline in terms of the number of lines. The graph below illustrates the historical trend and this trend is expected to continue into the future.

UK market for fixed line connections

25 23.8 23.7 23.6 23.4 23.5

20

15

9.7 10.2 10.1 10.2 9.7 10

5 Telephone lines (million)

0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

Residential lines SME lines

Source: Ofcom Telecommunications Market Data (2006-2009)

33 6.2 The TalkTalk Group’s key competitors Key competitors of the TalkTalk Group’s residential business are: • BT (marketed through BT Retail), which is the incumbent telecommunications provider in the UK; • Sky, which offers fixed residential broadband as part of a suite of services with the provision of digital TV at its core; and • Virgin Media, which is the UK’s major cable operator and offers fixed and mobile voice services, fixed and mobile broadband services and pay-TV services. Key competitors of the TalkTalk Group’s SME voice and data business are BT, C&W, ntl: Telewest business and systems integrators.

6.3 Broadband internet The TalkTalk Group’s largest competitor is BTwhich provides retail broadband internet access services over its own network. BT also supplies a wholesale service to broadband providers. Virgin Media and Sky offer fixed line residential broadband as part of a suite of product offerings in which TV plays a major part. Virgin Media is also leveraging its ability to provide faster broadband speeds over its cable technology. Other companies offering fixed line broadband include the UK mobile operators as part of a range of products which lead with mobile voice.

6.4 Fixed line voice The TalkTalk Group competes primarily with BT in providing fixed line telephone services to residential customers in the UK. BT occupies an established market position as the former government-owned incumbent. The TalkTalk Group also competes with other telecommunications companies that provide fixed line telephone services, either directly through LLU or indirectly, including Sky, Orange, and Virgin Media. The TalkTalk Group also competes with mobile telephone networks that may threaten the competitive position of its networks by providing a substitute to fixed line telephone services. Mobile telephone services also contribute to the competitive price pressure in fixed line telephone services. There is also competition from companies offering voice over internet protocol (“VoIP”) services using the customer’s existing broadband connection. These include services offered by independent providers, such as Vonage and Skype, as well as those affiliated with established competitors such as BT and Orange. These services generally offer free calls between users of the same service in exchange for monthly subscriptions but charge for calls made to normal phone numbers, either on a flat monthly rate for unlimited calls (typically restricted to geographic areas) or on a pence per minute rate.

6.5 Business-to-business The UK market for business-to-business telecommunications is fragmented with a large number of players. The past few years have seen some consolidation in the industry, but there remains an opportunity for further consolidation. The TalkTalk Directors estimate that the TalkTalk Group, operating through the Opal brand, has over a 10 per cent. market share of the SME segment. The market comprises traditional network operators such as BT, C&W and ntl: Telewest business, virtual network operators and systems integrators like KCOM. While BT represents the main competitive threat nationally due to its network reach and product portfolio, the acquisition of THUS Group plc by C&W in 2008 has further strengthened C&W’s position in the market. Other providers compete within specific product and geographic segments. Competition in the UK business telecommunications market continues to be based on value-for-money, the key components of which are quality, reliability and price. In the future, further competition from mobile operators is expected, as they explore strategies to enter the fixed line market with convergence of propositions to target customers.

6.6 New technology In addition to the increasing competition and pricing pressure in the broadband market arising as LLU players look to gain the customer scale to make a return on their investment, there is the longer term threat of

34 new technology. For instance, 3G mobile technology, new fibre networks and other wireless technologies such as wi-fi and mobile broadband may subject the TalkTalk Group to increased competition over time. The majority of the TalkTalk Group’s residential customers have download speeds capped at up to eight Mbps with an option to increase to up to 24Mbps. BT is currently planning to invest in fibre roll out to 10 million UK households and businesses by 2012 which will enable broadband speeds of over 40Mbps. The TalkTalk Group is participating in the trial of BT’s fibre products and anticipates being provided with wholesale access. However, it is currently uncertain as to the type of wholesale product that the TalkTalk Group and other ISP’s will be provided and the level of customer demand for such services.

7. Regulatory environment This section summarises the principal laws and regulations under which the TalkTalk Group operates its own unbundled fixed line telecommunications network and provides services to its customers. The Communications Act is the principal piece of legislation. Subsequent reviews of the European directives behind the creation of the Communications Act have produced new draft directives which will need to be implemented in the UK by June 2011.

7.1 Ofcom The Communications Act established Ofcom as the single regulatory authority for the UK communications sector. The TalkTalk Group is not required to hold individual telecommunication licences in order to carry on its businesses. Instead, Ofcom impose a set of “General Conditions of Entitlement” which regulate the operation of the TalkTalk Group’s network and its provision of services to customers. For instance it must: • negotiate interconnection arrangements with other network providers; • ensure that any end-user can access the emergency services and that accurate customer location data is made available to the emergency services; • offer and support inbound and outbound number portability where the TalkTalk Group acquires a customer from or customers switch to another network provider; • conduct sales and marketing activities in accordance with good practice; • comply with a number of obligations in respect of broadband migrations; and • publish up to date price and tariff information. Ofcom is empowered to impose fines or other sanctions on the TalkTalk Group, including a suspension or revocation of its right to operate its network or provide services, should it fail to comply with any such conditions.

7.2 Relationships with other network providers The successful operation of the TalkTalk Group’s network and services relies on BT and other suppliers offering it wholesale access and interconnection products on terms and conditions, including price, that are mostly regulated by Ofcom. The TalkTalk Group is also subject to similar regulated prices that determine the termination rates it is able to charge other operators for geographic calls terminated on its network. According to the requirements of the Communications Act, some of these regulations are liable to review by Ofcom from time to time and any final decisions in the future may have a positive or negative impact on the TalkTalk Group and its customers. If there are grounds to do so, the TalkTalk Group may choose to appeal any Ofcom determination. The TalkTalk Group has decided to appeal Ofcom’s decision in May 2009 and October 2009 to change the prices BT charges the TalkTalk Group for certain LLU and wholesale line rental products and a final decision is expected from the Competition Appeal Tribunal during the second half of 2010. BT has also provided a set of undertakings to Ofcom which have the intention of ensuring that third parties, such as the TalkTalk Group, are not disadvantaged in their access to those assets in which BT enjoys monopoly ownership or significant market power. The undertakings gave rise to the setting up of a separate and semi-independent division within BT called Openreach. This division of BT provides the TalkTalk Group and other network operators with access to certain wholesale services, some of which have to be provided on an “equivalence of input” basis so that the terms available to the TalkTalk Group are equivalent to those enjoyed by other parts of BT. The TalkTalk Group is also currently awaiting the final report from

35 Ofcom’s consultation on a variation of these undertakings in respect of access to “fibre to the premises” wholesale products which may or may not be beneficial to the TalkTalk Group.

7.3 Potential new regulations In June 2009, the UK Government published its Digital Britain Report containing proposals about customer access to broadband services. These include a “Universal Service Commitment” to provide a minimum of 2Mbps broadband speeds based on £200 million of public spending, a 50 pence per month phone tax to help create a £1 billion fund for investment in new fibre networks for rural areas and certain obligations on ISPs, such as the TalkTalk Group, to help reduce illegal file sharing. It is currently unclear whether or not any of these proposals will become law and have any effect on the TalkTalk Group. Ofcom’s review of the UK pay-TV market has concluded that proposals are needed in respect of obligations being placed on Sky to offer wholesale access to specific premium sport and movie channels. A final decision is expected in early 2010 and, in the interim, the TalkTalk Group continues to review potential opportunities in this sector.

8. Intellectual Property of the TalkTalk Group The principal intellectual property on which the TalkTalk Group depends are the brands “TalkTalk”, “AOL”, “Tiscali” and “Opal” and certain patents used by its pay-TV business.

36 PART III

OPERATING AND FINANCIAL REVIEW OF THE TALKTALK GROUP

The operating and financial review should be read in conjunction with the TalkTalk Group’s audited historical consolidated financial information for the three years ended 31 March 2009, 29 March 2008 and 31 March 2007 and for the six months ended 30 September 2009, the TalkTalk Group’s unaudited financial information for the 26 weeks ended 27 September 2008 and Tiscali UK’s audited consolidated financial information for the three years ended 31 December 2008, 31 December 2007 and 31 December 2006 and for the six months ended 30 June 2009 and the unaudited financial information for the six months ended 30 June 2008 all of which is contained in Part Vof this document. Unless otherwise indicated, the selected financial information included in this Part III has been extracted without material adjustment from the TalkTalk Group’s and Tiscali UK’s historical consolidated financial information contained in Part V of this document.

1. Overview The TalkTalk Group is one of the leading fixed line voice and broadband telecommunications businesses in the UK, serving both residential and business-to-business customers. Further information on the business of the TalkTalk Group and a description of the TalkTalk Group’s strategy is set out in Part II of this document.

2. Current trading and prospects For the quarter ended 31 December 2009, the TalkTalk Group’s revenue of £446 million (2009: £347 million) was 29 per cent. higher than the same period the previous year, reflecting the impact of the Tiscali UK acquisition in July 2009 as well as the underlying performance of the TalkTalk broadband business. Business revenue in the quarter grew to £81 million (2009: £72 million). The TalkTalk Group ended the quarter with a total of 4.15 million broadband customers and now expects the total broadband base at the end of March 2010 to be towards the top of the 4.1 million to 4.2 million range previously guided by Carphone Warehouse. The TalkTalk Group’s net broadband customer additions in the quarter were 36,000, driven partly by the successful marketing campaign around the X-Factor. TalkTalk- branded customer growth more than offset the reduction in the Tiscali UK customer base, which was in line with expectations. Broadband ARPU was £23.8, slightly ahead of the same quarter the previous year (2009: £23.1). The non-broadband customer base was 1.10 million (2009:1.22 million) and non-broadband ARPU remained broadly flat at £20.1 (2009: £20.2). Non-broadband customer numbers and revenue continued to reduce in line with expectations. The integration of the Tiscali UK business remains well on track, with the customer proposition now re- branded to TalkTalk. The TalkTalk Directors remain confident in the TalkTalk Group’s ability to execute well, to integrate Tiscali UK, to grow its broadband customer base and to continue to generate significant and growing operating free cash flow.

3. Principal factors affecting the TalkTalk Group’s results of operations The TalkTalk Group has grown its fixed line voice and broadband business organically and through acquisitions. Certain other key factors, in addition to general economic and market conditions and government policy, legislation or regulation, have had, and are likely to continue to have, a material effect on TalkTalk Group’s results. Investors should also read the section entitled Risk Factors set out in pages 13 to 20 of this document for a discussion of the risks and uncertainties which the TalkTalk Group faces and also Part II of this document.

3.1 Demerger preparation The TalkTalk Group will have an efficient balance sheet as set out in paragraph 3.4 of the Summary of this document whilst retaining sufficient flexibility to invest in growth and efficiency initiatives. In the future, the TalkTalk Group will incur costs related to its public company status such as, the TalkTalk Board, shareholder services and the costs of TalkTalk Admission. The results presented include an element of central costs previously included within the Carphone Warehouse Group’s accounts for Carphone Warehouse PLC costs. Those costs were £8 million, £8 million and £7 million for the years ended 31 March

37 2009, 29 March 2008 and 31 March 2007 respectively. These costs are not necessarily representative of a standalone public limited company.

3.2 Consumer spending The TalkTalk Group’s results are affected by the level of consumer spending in the UK. Consumer spending can be volatile due to factors such as: changes in interest rates and utility costs; consumer confidence; and risk appetite (in particular, attitudes to borrowing which in turn are sensitive to the rate of growth in the housing market). A weakening in consumer demand was experienced in the financial year ended 31 March 2009 and in the six months ended 30 September 2009 as a result of the global financial crisis.

3.3 Acquisitions, agreements and disposals As part of the Carphone Warehouse Group, the TalkTalk Group has acquired several businesses over the period under review. In December 2006, the TalkTalk Group acquired the AOL UK internet access business. In July 2009, the TalkTalk Group acquired the Tiscali UK broadband business. The AOL acquisition increased the TalkTalk Group’s share of the UK broadband market from 5 per cent. to 16 per cent. and the Tiscali UK acquisition took UK market share to 23 per cent. The business-to-business operation, Opal, has grown its revenue base over the period through a combination of organic growth and by a series of small acquisitions.

3.4 Competitive environment and growth in the broadband market The UK residential broadband market is relatively consolidated, with four major operators, BT, the TalkTalk Group, Virgin Media and Sky, holding an aggregate market share of 85 per cent. as at 30 September 2009. UK broadband penetration is estimated to be 67 per cent. of households and is forecast to grow to 72 per cent. by 2012. As a result, the TalkTalk Group will continue to focus on organic growth and will place greater focus on customer lifetime value, customer retention, up-sell conversion and increasing ARPU. The competitive environment for business-to-business has remained consistent and stable throughout the period under review.

3.5 Customer behaviour, usage and content Over the period under review, customers have increased the amount of time they spend online and increased the amount of content they download, driven by rich media applications such as BBC i-Player. Peak traffic throughput per month averaged over all customers on the TalkTalk Group broadband LLU network grew from 25 kilobits to 35 kilobits between September 2008 and March 2009. This growth in peak traffic has increased network costs for the TalkTalk Group over the period under review although the increase in network costs was proportionately lower than the increase in usage. The TalkTalk Group’s network has been developed in anticipation of increases in usage over the next three years which will allow it to support a positive customer experience, at minimal additional cost.

3.6 Cost trends Over the period under review, the TalkTalk Group has built its own networks and, consequently, migrated its customers from the BT wholesale line rental and IP stream products onto its own network. Investment in the network has had a significant and positive impact in reducing the TalkTalk Group’s cost per customer over the period. The proportion of customers on the TalkTalk Group network (excluding Tiscali UK) had grown to 79 per cent. at 30 September 2009. The Tiscali UK business had also invested in its own network but to a lesser extent than the TalkTalk Group. The proportion of customers on the Tiscali UK network prior to integration with the TalkTalk Group was 51 per cent. The TalkTalk Group purchases a number of key services from BT Wholesale: Wholesale Line Rental; LLU (which includes fully unbundled lines (MPF) and shared unbundled lines (SMPF)) and Ethernet services. All these services are regulated by Ofcom and are charged at a fixed annual fee. Ofcom frequently reviews certain aspects of the regulatory regime and is able to adjust the level and structure of these charges. The integration of Tiscali UK is expected to create synergies in the future. Migrating Tiscali UK customers onto the TalkTalk Group’s own network, network integration and rationalisation and billing integration will create these synergies. Network integration enables efficiencies associated with backhaul, the core network

38 and individual exchanges to be realised. There is also focus on rationalising the number of billing, provisioning and CRM platforms used by the TalkTalk Group. The profile of subscriber acquisition costs and marketing expenses over the period has been determined by the volume of gross acquisitions and the extent of strategic marketing campaigns.

3.7 Foreign exchange The TalkTalk Group sources some of its supplies internationally. On its international supplies, it is exposed to foreign exchange risk, primarily with respect to the US Dollar and the Euro. The TalkTalk Group regularly reviews its hedging policy for foreign currency denominated transactions.

3.8 Inflation Inflation generally affects the TalkTalk Group by increasing wage costs, rental costs, rates and the costs of other goods and services that TalkTalk Group purchases that are not for resale.

3.9 Taxation The TalkTalk Group has significant brought-forward tax losses and significant unclaimed capital allowances. Use of these losses and unclaimed allowances is dependent upon the structure of the TalkTalk Group and future trading.

4. Basis of preparation of financial information and explanation of line items For the periods up to 30 September 2009, the TalkTalk Group was not constituted as a separate group of companies under Carphone Warehouse. However, the combined financial information has been prepared as though the TalkTalk Group had existed as a standalone group throughout the period. While the TalkTalk Board believes that the financial information set out in the combined financial information is an appropriate presentation, this financial information is not necessarily indicative of the financial results that might have occurred had the TalkTalk Group been an independently financed and managed public entity during the periods presented or of the TalkTalk Group’s financial results that may occur in any future period.

4.1 Financial information The TalkTalk Group’s financial information presents results for the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008 and for the financial years ended 31 March 2009, 29 March 2008 and 31 March 2007 (excluding the Tiscali UK business for the period up to 30 June 2009 when it was not owned by the TalkTalk Group). Tiscali UK’s financial information presents results for the years ended 31 December 2008, 31 December 2007 and 31 December 2006 and for the six months ended 30 June 2009 and 30 June 2008. Following Completion, the TalkTalk Group will comprise the TalkTalk Business, Carphone Warehouse (to be renamed TalkTalk Telecom Holdings Limited pursuant to the Proposals) and various other non-trading and holding companies. The financial information has been prepared with the objective of presenting the results, net assets and cash flows of the TalkTalk Group in the form that will arise on Completion, as if it had been a standalone business throughout the financial periods covered. The construction of the financial information has required the allocation of various costs that were shared across the Carphone Warehouse Group. While such costs have been allocated on a basis intended to reflect their nature, the financial information does not necessarily reflect the results that the TalkTalk Group might have had if it had been a separate, standalone group during this time. Full details of the basis of preparation of the financial information are provided in Part Vof this document. The principal entities included within the financial information are shown in note 14 to the financial information set out in Section A of Part V of this document.

4.2 Accounting policies and other principles applicable to the financial information The principal accounting policies and other principles applied in the preparation of the financial information are set out in note 1 to the financial information set out in Section B of Part V of this document for the financial years ended 31 March 2009, 29 March 2008 and 31 March 2007. These policies have been consistently applied to all periods presented. The financial information has been prepared on the basis of IFRS adopted for use in the European Union. These standards include subsequent amendments and related

39 interpretations issued and adopted by the International Accounting Standards Board that have been endorsed by the European Commission.

4.3 Explanation of line items for the TalkTalk Group and Tiscali UK (a) Revenue Revenue is stated net of VATand other sales-related taxes. The TalkTalk Group’s revenues primarily arise from the provision of fixed line telecommunications services to consumer and business users. Changes in the TalkTalk Group’s revenue from period to period are generally affected by the following factors: • the price at which the TalkTalk Group sells its services; • broadband and non-broadband customer numbers; • competition from the TalkTalk Group’s competitors which may impact the number of TalkTalk Group customers or its pricing policy; • changes in the ARPU of TalkTalk Group customers; and • changes in the mix and breadth of products between higher and lower revenue products.

(b) EBITDA pre SAC and marketing EBITDA pre subscriber acquisition costs and marketing expenses consists of revenue less operating costs. Operating costs include costs of sales that are variable to customer usage, costs incurred in providing customer services, the costs of operating the network and IT systems and administrative costs including payroll for employees, head office departments and operations. EBITDA pre SAC and marketing can vary from period to period as a result of: • broadband and non-broadband customer numbers, and the volume of new customers; • the number of customers on the LLU network; • changes in network operating costs and regulatory pricing; • increases in customer usage; • the level of payroll and benefit increases given to employees; and • the terms and conditions of key outsource suppliers.

(c) Subscriber acquisition costs and marketing Subscriber acquisition costs and marketing expenses consist primarily of the costs to acquire and set up new customers and include: • sales commissions to third party sales agents; • fees paid to BT for connection of customers onto the LLU network; • other customer incentives, such as free laptop promotions; and • marketing spend including TV, radio, newspaper, online and associated production costs. Changes in the TalkTalk Group’s selling costs from period to period are affected primarily by the following factors: • the market rate for new customer acquisitions charged by third party customer acquisition partners; • the volume of acquisition of new customers; • the cost of hardware and incentives offered to customers; and • the cost of advertising across various media platforms.

(d) Depreciation and amortisation Depreciation and amortisation costs consist of the following: • depreciation charges related to property, plant and equipment; and • amortisation charges on software.

40 Changes in the TalkTalk Group’s depreciation and amortisation charges from period to period are affected primarily by the level of capital expenditure.

(e) Net interest expense Net interest expense includes interest payable on loans and other facilities and the amortisation of arrangement fees on such facilities after taking into account interest income.

(f) Taxation Taxation represents the corporation tax charge or credit for the period.

(g) Exceptional items Exceptional items are items that are both material and one-off in nature, and are presented separately to avoid distortion of underlying performance.

(h) Amortisation of acquisition intangibles Amortisation of acquisition intangibles represents amortisation charges in respect of intangible assets arising on acquisition of businesses, for example customer bases, brands and other intellectual property.

5. Results of operations — The TalkTalk Group Set out below is a review of the TalkTalk Group’s results for the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008 and the years ending 31 March 2009, 29 March 2008 and 31 March 2007.

5.1 Comparison of the six months ended 30 September 2009 to 26 weeks ended 27 September 2008 Six months 26 weeks ended ended 30 September 27 September 2009 2008 £m £m Headline results Revenue...... 789 697 EBITDA pre SAC and marketing...... 172 140 SAC and marketing ...... (69) (72) EBITDA ...... 103 68 Depreciation and amortisation ...... (34) (27) EBIT...... 69 41 Net interest expense ...... (1) (6) Profit before taxation ...... 68 35 Taxation ...... (21) (10) Profit after taxation ...... 47 25 Statutory results Headline profit after taxation ...... 47 25 Exceptional items...... (4) (18) Taxation on exceptional items...... — 5 Amortisation of acquisition intangibles ...... (41) (35) Taxation on amortisation of acquisition intangibles ...... 11 10 Statutory profit (loss) after taxation...... 13 (13)

The above results are net of £4 million (2008: £5 million) of central costs that are excluded from the presentation of the TalkTalk Group’s results as disclosed in Carphone Warehouse’s interim statements issued on 27 September 2009.

(a) Overview The TalkTalk Group generated revenues of £789 million and EBIT of £69 million, compared to revenues of £697 million and EBIT of £41 million in the previous year, resulting in an increase in EBIT margin from 6 per cent. to 9 per cent. This improvement reflects the acquisition of Tiscali UK whose results have been included with effect from 1 July 2009, the continued increase in the

41 proportion of customers on our own network year-on-year, and the business reorganisation undertaken in 2009.

(b) Revenue

Six months 26 weeks ended ended 30 September 27 September 2009 2008 £m £m Broadband and non-broadband* ...... 631 549 Business-to-business ...... 158 148 Total ...... 789 697

* Comprises residential customers and small business customers with similar profiles.

Total broadband and non-broadband revenues including Tiscali UK were up 15 per cent. to £631 million (2008: £549 million). Revenues excluding Tiscali UK were £534 million, down 3 per cent. primarily due to the expected continued decline in the non-broadband customer base, partially offset by the growing broadband base.

Business revenues increased by 7 per cent. to £158 million (2008: £148 million). Underlying revenue, excluding Tiscali UK, increased by £2 million.

(c) EBITDA pre SAC and marketing

EBITDA pre SAC and marketing grew 23 per cent. year-on-year to £172 million (2008: £140 million). This improvement predominantly reflects contribution from Tiscali UK, growth in the TalkTalk customer base, the increasing mix of these customers on the LLU network, and the impact of the reorganisation programme completed in 2008.

(d) SAC and marketing

Subscriber acquisition costs and marketing expenses reduced 4 per cent. to £69 million (2008: £72 million). Whilst customer additions have increased year-on-year, average cost per addition has decreased.

(e) Depreciation and amortisation

Depreciation and amortisation charges including Tiscali UK were up 26 per cent. to £34 million (2008: £27 million). Underlying charges excluding Tiscali UK were up 19 per cent. to £32 million, driven by capital expenditure in the prior year.

(f) Net interest expense

Net interest expense has fallen 83 per cent. to £1 million (2008: £6 million). This reflects a sharp reduction in year-on-year interest costs as a result of repayment of a large proportion of borrowings funded by the sale of a 50 per cent. interest in Best Buy Europe in July 2008.

(g) Taxation

Taxation increased to £21 million (2008: £10 million) as a result of the increased profitability of the TalkTalk Group.

(h) Statutory profit (loss) after taxation

A statutory profit of £13 million was generated in the six month period to 30 September 2009 in comparison to a statutory loss of £13 million in the six month period to 30 September 2008, driven by the improvement in Headline EBIT and decreased reorganisation costs. Acquisition intangible amortisation charges increased as a result of the assets recognised on the acquisition of Tiscali UK.

42 5.2 Comparison of the year ended 31 March 2009 to the year ended 29 March 2008 Year ended 31 March 29 March 2009 2008 £m £m Headline results Revenue...... 1,385 1,424 EBITDA pre SAC and marketing...... 298 271 SAC and marketing ...... (126) (164) EBITDA ...... 172 107 Depreciation and amortisation ...... (56) (46) EBIT...... 116 61 Net interest expense ...... (1) (41) Profit before taxation ...... 115 20 Taxation ...... (20) (8) Profit after taxation ...... 95 12 Statutory results Headline profit after taxation ...... 95 12 Exceptional items...... (111) (15) Taxation on exceptional items...... 31 5 Amortisation of acquisition intangibles ...... (71) (75) Taxation on amortisation of acquisition intangibles ...... 19 22 Statutory loss after taxation ...... (37) (51)

The EBIT shown above does not correspond to that disclosed in Carphone Warehouse’s financial statements issued on 5 June 2009 for the UK fixed line division due to the inclusion of PLC costs of £8 million (2008: £8 million).

(a) Overview The TalkTalk Group generated revenues of £1,385 million and EBIT of £116 million, compared to revenues of £1,424 million and EBIT of £61 million last year, resulting in an increase in EBIT margin from 4 per cent. to 8 per cent. This improvement reflects the continued increase in the proportion of customers on the TalkTalk Group’s own network year-on-year and the successful integration of AOL.

(b) Revenue Year ended 31 March 29 March 2009 2008 £m £m Broadband and non-broadband* ...... 1,089 1,112 Business-to-business ...... 296 312 Total ...... 1,385 1,424

* Comprises residential customers and small business customers with similar profiles. Total broadband and non-broadband revenues were down marginally, falling 2 per cent. to £1,089 million (2008: £1,112 million), primarily due to the expected continued decline in the non-broadband customer base, partially offset by the growing broadband base. Business-to-business revenues declined by 5 per cent. to £296 million (2008: £312 million). Opal continued to improve its revenue mix, with an ongoing trend towards higher value services offsetting falling premium rate traffic.

(c) EBITDA pre SAC and marketing EBITDA pre SAC and marketing grew 10 per cent. year-on-year to £298 million (2008: £271 million). This improvement predominantly reflects growth in the TalkTalk customer base, the increasing mix of these customers on the LLU network, and the impact of the integration of AOL.

43 (d) SAC and marketing Subscriber acquisition and marketing costs reduced 23 per cent. to £126 million (2008: £164 million), primarily driven by a decrease in the level of customer acquisition.

(e) Depreciation and amortisation

Depreciation and amortisation charges increased 22 per cent. to £56 million (2008: £46 million), driven by capital expenditure on the network in the prior year and the deployment of TalkTalk Group’s new billing and customer management system during the year.

(f) Net interest expense Net interest expense has fallen 98 per cent. to £1 million (2008: £41 million). This reflects a sharp reduction in year-on-year interest costs as a result of repayment of a large proportion of borrowings funded by the sale of a 50 per cent. interest in Best Buy Europe in July 2008.

(g) Taxation Taxation increased to £20 million (2008: £8 million) as a result of the increased profitability of the TalkTalk Group.

(h) Statutory loss after taxation Statutory loss after taxation reduced by £14 million in the year. The £83 million improvement in Headline profit after taxation was offset by an increase in exceptional charges, net of taxation, of £70 million in comparison to the prior period, relating to the completion of the AOL integration and the TalkTalk Group reorganisation and a foreign exchange loss, net of taxation, of £61 million incurred by Carphone Warehouse on Swiss Franc borrowings.

5.3 Comparison of the year ended 29 March 2008 to year ended 31 March 2007 Year ended 29 March 31 March 2008 2007 £m £m Headline results Revenue...... 1,424 1,116 EBITDA pre SAC and marketing...... 271 166 SAC and marketing ...... (164) (144) EBITDA ...... 107 22 Depreciation and amortisation ...... (46) (30) EBIT...... 61 (8) Net interest expense ...... (41) (7) Profit (loss) before taxation ...... 20 (15) Taxation ...... (8) 3 Profit (loss) after taxation ...... 12 (12) Statutory results Headline profit (loss) after taxation ...... 12 (12) Exceptional items...... (15) — Taxation on exceptional items...... 5 — Amortisation of acquisition intangibles ...... (75) (55) Taxation on amortisation of acquisition intangibles ...... 22 16 Statutory loss after taxation ...... (51) (51)

The EBIT shown above does not correspond to that disclosed in Carphone Warehouse’s financial statements issued on 12 June 2008 for the UK fixed line division due to the inclusion of PLC costs of £8 million (2007: £7 million), the restatement for central costs of £3 million, and the restatement for the impact of the change in accounting policy for subscriber acquisition costs of £53 million (2007: £21 million).

(a) Overview The TalkTalk Group generated revenues of £1,424 million and EBIT of £61 million, compared to revenues of £1,116 million and a negative EBIT of £8 million in the previous year, resulting in an increase in EBIT margin from (1) per cent. to 4 per cent. This result reflects the full year ownership of AOL and the continued increase in the proportion of customers on the TalkTalk Group’s own network.

44 (b) Revenue

Year ended 29 March 31 March 2008 2007 £m £m Broadband and non-broadband* ...... 1,112 796 Business-to-business ...... 312 320 Total ...... 1,424 1,116

* Comprises residential customers and small business customers with similar profiles.

Total broadband and non-broadband revenues increased 40 per cent. to £1,112 million (2007: £796 million), driven primarily by the full year of ownership of AOL and the continued growth in the broadband base.

Business-to-business revenues declined by 3 per cent. to £312 million (2007: £320 million), within the revenue mix there was a significant shift towards higher margin business streams, delivering an overall improvement to the quality of the business.

(c) EBITDA pre SAC and marketing

EBITDA pre SAC and marketing grew 63 per cent. year-on-year to £271 million (2007: £166 million). This improvement predominantly reflects the ownership of AOL for the full year and the increased proportion of customers on the LLU network.

(d) SAC and marketing

Subscriber acquisition costs and marketing expenses increased 14 per cent. to £164 million (2007: £144 million), driven by increased customer acquisition during the year.

(e) Depreciation and amortisation

Depreciation and amortisation charges increased 53 per cent. to £46 million (2007: £30 million), driven by capital expenditure on the network in the prior year.

(f) Net interest expense

Net interest expense grew to £41 million (2007: £7 million) due to the increased borrowings required to fund the acquisition of AOL.

(g) Taxation

Taxation increased by £11 million to £8 million (2007: £3 million credit) as a result of the move of TalkTalk Group into profit.

(h) Statutory loss after taxation

Statutory loss after taxation remained flat year on year at £51 million. The improvement in headline profit after taxation of £24 million was offset by reorganisation costs incurred during the year of £10 million, net of taxation, arising from the integration of AOL and an increase in amortisation charges on acquired intangible assets of £14 million, net of taxation, from the acquisition of AOL.

6. Results of operations — Tiscali UK

Set out below is a discussion of Tiscali UK’s results for the six months ended 30 June 2009 and 30 June 2008 and the years ending 31 December 2008, 31 December 2007 and 31 December 2006. Tiscali UK was acquired by the TalkTalk Group on 3 July 2009 (although the Tiscali UK business has been consolidated since 1 July 2009).

45 6.1 Comparison of the six months ended 30 June 2009 to the six months ended 30 June 2008 Six months ended 30 June 30 June 2009 2008 £m £m Headline results Revenue...... 231 279 EBITDA pre SAC and marketing...... 24 38 SAC and marketing ...... (9) (46) EBITDA ...... 15 (8) Depreciation and amortisation ...... (17) (17) EBIT...... (2) (25) Net interest income (expense) ...... 12 (20) Profit (loss) before taxation ...... 10 (45) Taxation ...... (4) (4) Profit (loss) after taxation ...... 6 (49) Statutory results Headline profit (loss) after taxation ...... 6 (49) Exceptional items...... — (4) Amortisation of acquisition intangibles and goodwill impairment ...... (47) (16) Taxation on amortisation of acquisition intangibles ...... 4 4 Statutory loss after taxation ...... (37) (65)

(a) Overview Tiscali UK generated revenues of £231 million and a negative EBIT of £2 million, compared to revenues of £279 million and a negative EBIT of £25 million in the prior year, resulting in an improvement in the negative EBIT margin from (9) per cent. to (1) per cent.

(b) Revenue Revenues decreased 17 per cent. to £231 million (2008: £279 million) due to a reduction in the broadband base as the business reduced acquisition activity. In addition, business-to-business revenues declined as corporate customers became more cautious in dealing with Tiscali UK given the lack of clarity over its future ownership.

(c) EBITDA pre SAC and marketing EBITDA pre SAC and marketing declined 37 per cent. year-on-year to £24 million (2008: £38 million). This decline predominately reflects the decreasing revenues generated by the business as above. Underlying operating expenses decreased as the programme to integrate Pipex completed at the end of 2008.

(d) SAC and marketing Subscriber acquisition and marketing costs decreased 80 per cent. to £9 million (2008: £46 million), driven by a significant reduction in customer acquisition during the period.

(e) Depreciation and amortisation Depreciation and operating intangible amortisation were in line with the prior period.

(f) Net interest income (expense) Net interest income grew to £12 million (2008: expense £20 million) due to favourable movements in the euro exchange rate as the borrowings were denominated in Euros, the movement on which is reflected in net interest income (expense).

(g) Taxation Taxation charge was in line with the prior period, reflecting the continued unwind in the deferred taxation asset.

46 (h) Statutory loss after taxation Statutory loss after taxation reduced £28 million to £37 million (2008: £65 million), primarily driven by the improvement in Headline profit after taxation and the increase in amortisation of acquisition intangibles and goodwill expense as a result of the impairment of the goodwill arising on the acquisition of Pipex and the Pipex brand. Exceptional costs incurred in the prior year related to the integration of the Pipex business.

6.2 Comparison of the year ended 31 December 2008 to the year ended 31 December 2007

Year ended 31 December 31 December 2008 2007 £m £m Headline results Revenue...... 538 414 EBITDA pre SAC and marketing...... 63 48 SAC and marketing ...... (78) (46) EBITDA ...... (15) 2 Depreciation and amortisation ...... (40) (30) EBIT...... (55) (28) Net interest expense ...... (102) (18) Loss before taxation ...... (157) (46) Taxation ...... (8) (5) Loss after taxation ...... (165) (51) Statutory results Headline loss after taxation ...... (165) (51) Exceptional items...... (12) (12) Amortisation of acquisition intangibles and goodwill impairment ...... (52) (10) Taxation on amortisation of acquisition intangibles ...... 8 5 Statutory loss after taxation ...... (221) (68)

(a) Overview Tiscali UK generated revenues of £538 million and a negative EBIT of £55 million, compared to revenues of £414 million and a negative EBIT of £28 million in the prior year, resulting in a worsening in the EBIT margin from (7) per cent. to (10) per cent.

(b) Revenue Revenues increased 30 per cent. to £538 million (2007: £414 million), primarily driven by the full year ownership of the Pipex business acquired in 2007.

(c) EBITDA pre SAC and marketing EBITDA pre SAC and marketing increased 31 per cent. year-on-year to £63 million (2007: £48 million), primarily driven by the full year ownership of the Pipex business acquired in 2007 and the continued roll-out of the LLU network.

(d) SAC and marketing Subscriber acquisition and marketing costs increased 70 per cent. to £78 million (2007: £46 million) as the business sought to maintain the enlarged broadband base as a result of the Pipex acquisition.

(e) Depreciation and amortisation Depreciation and amortisation increased 33 per cent. to £40 million (2007: £30 million) primarily driven by the expansion of the LLU network in the prior year and the full year ownership of the Pipex business.

47 (f) Net interest expense Net interest expense increased to £102 million (2007: £18 million) primarily driven by the increased level of borrowings as a result of the acquisition of Pipex in 2007, and an unfavourable movement in the Euro exchange rate, in which the borrowings were denominated.

(g) Taxation Taxation increased to £8 million (2007: £5 million) due to the unwind of a deferred taxation asset that is unwinding in concert with the deferred taxation liabilities that have been recognised in relation to intangible assets arising from the acquisitions of Pipex and VNL.

(h) Statutory loss after taxation Statutory loss after taxation increased £153 million to £221 million (2007: £68 million), primarily driven by the increase in Headline loss after taxation and the increase in amortisation of acquisition intangibles and goodwill expense as a result of the full year of ownership of Pipex, and the impairment of goodwill arising on the acquisition of VNL.

6.3 Comparison of the year ended 31 December 2007 to the year ended 31 December 2006 Year ended 31 December 31 December 2007 2006 £m £m Headline results Revenue...... 414 303 EBITDA pre SAC and marketing...... 48 30 SAC and marketing ...... (46) (54) EBITDA ...... 2 (24) Depreciation and amortisation ...... (30) (13) EBIT...... (28) (37) Net interest expense ...... (18) (3) Loss before taxation ...... (46) (40) Taxation ...... (5) (1) Loss after taxation ...... (51) (41) Statutory results Headline loss after taxation ...... (51) (41) Exceptional items...... (12) (11) Amortisation of acquisition intangibles and goodwill impairment ...... (10) (2) Taxation on amortisation of acquisition intangibles ...... 5 1 Statutory loss after taxation ...... (68) (53)

(a) Overview Tiscali UK generated revenues of £414 million and a negative EBIT of £28 million, compared to revenues of £303 million and a negative EBIT of £37 million in the prior year, resulting in an improvement in the EBIT margin from (12) per cent. to (7) per cent.

(b) Revenue Revenues increased 37 per cent. to £414 million (2006: £303 million), primarily driven by the full year ownership of the VNL business acquired in 2006 and the acquisition of the Pipex business in September 2007.

(c) EBITDA pre SAC and marketing EBITDA pre SAC and marketing increased year-on-year to £48 million (2006: £30 million), primarily driven by the full year ownership of the VNL business and the acquisition of Pipex, alongside continued improvements in network efficiency as a result of the expansion of the LLU network.

48 (d) SAC and marketing Subscriber acquisition and marketing costs decreased 15 per cent. to £46 million (2006: £54 million) as the business focused on integrating the recently acquired businesses.

(e) Depreciation and amortisation Depreciation and operating intangible amortisation increased to £30 million (2006: £13 million) primarily driven by the expansion of the LLU network in the prior and current years, alongside assets acquired with the VNL and Pipex businesses.

(f) Net interest expense Net interest expense increased to £18 million (2006: £3 million) primarily driven by the borrowings incurred to acquire the Pipex business in 2007.

(g) Taxation Taxation increased to £5 million (2006: £1 million) due to the unwinding of a deferred taxation asset that is unwinding in concert with the deferred taxation liabilities that have been recognised in relation to intangible assets arising from the acquisitions of Pipex and VNL.

(h) Statutory loss after taxation Statutory loss after taxation increased £15 million to £68 million (2006: £53 million), primarily driven by the increase in Headline loss after taxation and the increase in amortisation of acquisition intangible assets arising on the acquisition of VNL in 2006 and Pipex in September 2007.

7. Liquidity and capital resources — The TalkTalk Group 7.1 Comparison of the six months ended 30 September 2009 to the 26 weeks ended 27 September 2008 Six months 26 weeks ended ended 30 September 27 September 2009 2008 £m £m Headline EBITDA ...... 103 68 Working capital ...... 8 (27) Capital expenditure ...... (41) (51) Operating free cash flow ...... 70 (10) Exceptionals (cash element) ...... (6) (13) Acquisitions (net) ...... (235) (72) Taxation and interest ...... (2) (6) Dividends and shares ...... (27) (79) Demerger and related party movements...... 290 808 Cash flow for the period...... 90 628 Opening net debt ...... (452) (916) Exchange rate movements ...... 1 2 Closing net debt ...... (361) (286)

The TalkTalk Group generated operating free cash flow of £70 million (2008: outflow of £10 million). This improvement reflects the strong EBITDA growth described above in paragraph 5.1, lower capital expenditure and an improvement in working capital year-on-year. The working capital outflow in the prior period was caused by timing issues due to a change to calendar month ends for reporting purposes, and consequently was not repeated in the current period. TalkTalk Group’s capital expenditure in the period was £41 million, representing a reduction of 20 per cent. year-on-year (2008: £51 million). Exceptional costs of £6 million have arisen from the TalkTalk Group’s integration programme, principally comprising redundancy and consultancy costs. In the prior year, exceptional costs of £13 million were incurred completing the integration of the AOL business acquired in December 2006.

49 The acquisition costs incurred in the year was for the purchase of Tiscali’s UK operations. In the prior year, the principal acquisition cost was the final deferred consideration payment of £70 million for the AOL acquisition. Tax and interest reflects a sharp reduction in year-on-year interest costs as a result of repayment of a large proportion of borrowings funded by the sale of a 50 per cent. interest in Best Buy Europe in July 2008, and continuing minimal taxation payments, reflecting the substantial tax losses available to TalkTalk Group. Dividends and shares relate to dividends paid by Carphone Warehouse during both periods and the acquisition of shares by the Carphone Warehouse Employee Benefit Trust. Demerger and related party movements have arisen as a result of the restructuring of Carphone Warehouse as explained in the basis of preparation in note 4 of Section B of Part Vof this document, and loans to or from related parties, and do not relate to the underlying operations of the business.

7.2 Comparison of the year ended 31 March 2009 to the year ended 29 March 2008 Year ended 31 March 29 March 2009 2008 £m £m Headline EBITDA ...... 172 107 Working capital ...... (32) 16 Capital expenditure ...... (106) (172) Operating free cash flow ...... 34 (49) Exceptionals (cash element) ...... (20) (15) Acquisitions (net) ...... (72) (68) Taxation and interest ...... (1) (41) Dividends and shares ...... (89) (17) Other ...... (1) — Demerger and related party movements...... 747 136 Cash flow for the period...... 598 (54) Opening net debt ...... (916) (706) Exchange rate movements ...... (134) (156) Closing net debt ...... (452) (916)

The TalkTalk Group generated operating free cash flow of £34 million (2008: outflow of £49 million). Strong EBITDA growth was partially offset by an outflow on working capital, which was caused by timing issues due to a change to calendar month ends for reporting purposes; there was no deterioration in underlying working capital. Capital expenditure reduced from £172 million to £106 million, reflecting high levels of network investment in the prior year. The major elements of the capital expenditure on the network in the year ended March 2009 were the additional exchanges unbundled, increased capacity in existing exchanges, and the continuation of the TalkTalk Group’s project to increase backhaul capacity within the network. By the end of the year the new CRM and billing platform had been substantially completed. Exceptional costs of £20 million have arisen from the completion of the integration of AOL acquired in December 2006 and the comprehensive reorganisation programme in the second half of the year. The principal acquisition costs in both periods were the deferred consideration payments for AOL. Tax and interest reflects a sharp reduction in year-on-year interest costs as a result of repayment of a large proportion of borrowings funded by the sale of a 50 per cent. interest in Best Buy Europe in July 2008 and continuing minimal taxation payments, reflecting the substantial tax losses available to TalkTalk Group. Dividends and shares relate to dividends paid by Carphone Warehouse during both periods and the acquisition of shares by the Carphone Warehouse Employee Benefit Trust. No new shares were issued in the period ended 31 March 2009. Demerger related movements have arisen as a result of the restructuring of Carphone Warehouse as explained in the basis of preparation in note 4 of Section B of Part Vof this document, and loans to or from related parties, and do not relate to the underlying operations of the business.

50 7.3 Comparison of the year ended 29 March 2008 to the year ended 31 March 2007 Year ended 29 March 31 March 2008 2007 £m £m Headline EBITDA ...... 107 22 Working capital ...... 16 — Capital expenditure ...... (172) (114) Operating free cash flow ...... (49) (92) Exceptionals (cash element) ...... (15) — Acquisitions (net) ...... (68) (248) Taxation and interest ...... (41) (6) Dividends and shares ...... (17) (15) Demerger and related party movements...... 136 4 Cash flow for the period...... (54) (357) Opening net debt ...... (706) (360) Exchange rate movements ...... (156) 11 Closing net debt ...... (916) (706)

The TalkTalk Group absorbed operating free cash flow of £49 million (2007: outflow of £92 million). The year-on-year improvement represents the strong EBITDA growth described above in paragraph 5.3 and an improvement in working capital year-on-year, but was offset by a significant increase in capital expenditure. The working capital inflow in the current period was caused by timing issues, with the cut off on 29 March 2008 causing some supplier payments being made in the following period. Capital expenditure increased from £114 million to £172 million, reflecting high levels of network investment in the year due to the LLU roll out. Exceptional costs of £15 million were incurred in the year ended 29 March 2008 as a result of the integration of the AOL UK business. The principal acquisition costs in both periods related to the acquisition of the AOL UK business. Tax and interest reflects a sharp increase in year-on-year interest costs and continuing minimal taxation payments, reflecting the substantial tax losses available to TalkTalk Group. Dividends and shares relate to dividends paid and shares issued by Carphone Warehouse in both periods and the acquisition of shares by the Carphone Warehouse Employee Benefit Trust. Demerger related movements have arisen as a result of the restructuring of Carphone Warehouse, as explained in the basis of preparation in note 4 of Section B of Part Vof this document, and loans to or from related parties, and do not relate to the underlying operations of the business.

8. Liquidity and capital resources — Tiscali UK 8.1 Comparison of the six months ended 30 June 2009 to the six months ended 30 June 2008 Six months ended 30 June 30 June 2009 2008 £m £m Headline EBITDA ...... 15 (8) Working capital ...... (57) 32 Capital expenditure ...... (5) (25) Operating free cash flow ...... (47) (1) Exceptionals (cash element) ...... — (4) Taxation and interest ...... (18) (17) Cash flow for the period...... (65) (22) Opening net debt ...... (311) (217) Exchange rate movements ...... 30 (3) Closing net debt ...... (346) (242)

51 Tiscali UK generated negative operating free cash flow of £47 million (2008: outflow of £1 million). This deterioration in free cash flow despite the strong EBITDA growth and lower capital expenditure, was driven by a significant deterioration in working capital as payments deferred from prior periods were settled. Tiscali UK’s capital expenditure in the period was £5 million, representing a reduction of 80 per cent. year-on-year (2008: £25 million), as the business decreased expenditure during the sale process. Exceptional costs of £4 million arose in the prior period as a result of the integration of the Pipex business. Taxation and interest were consistent year-on-year, as interest on borrowings remained level and continuing minimal taxation payments, reflecting the substantial tax losses available to Tiscali UK.

8.2 Comparison of the year ended 31 December 2008 to the year ended 31 December 2007 Year ended 31 December 31 December 2008 2007 £m £m Headline EBITDA ...... (15) 2 Working capital ...... 67 (29) Capital expenditure ...... (32) (35) Operating free cash flow ...... 20 (62) Exceptionals (cash element) ...... (12) (12) Acquisitions (net) ...... — (189) Taxation and interest ...... (34) (5) Dividends and shares ...... — 102 Cash flow for the period...... (26) (166) Opening net debt ...... (217) (47) Exchange rate movements ...... (68) (4) Closing net debt ...... (311) (217)

Tiscali UK generated operating free cash flow of £20 million (2007: outflow of £62 million). This inflow reflects improved working capital as a result of deferring payments to later periods, partially offset by deteriorating Headline EBITDA and broadly consistent capital expenditure. Tiscali UK’s capital expenditure in the period was £32 million, representing a reduction of nine per cent. year-on-year (2007: £35 million), as the business continued the expansion of the LLU network. Exceptional costs of £12 million (2007: £12 million) arose in the period as a result of the integration of the Pipex business. Exceptional costs in prior periods related to the integration of both the Pipex and VNL businesses. There were no acquisitions during the year ended 31 December 2008 (2007: £189 million). During the year ended 31 December 2008 there were no issue of shares or payments of dividends. Taxation and interest represents a sharp increase year-on-year in interest costs as a result of the full year impact of the borrowings incurred to acquire Pipex, unfavourable exchange rate movements in borrowings denominated in Euros, and continued minimal taxation payments, reflecting the substantial tax losses available to Tiscali UK.

52 8.3 Comparison of the year ended 31 December 2007 to the year ended 31 December 2006

Year ended 31 December 31 December 2007 2006 £m £m Headline EBITDA ...... 2 (24) Working capital ...... (29) 27 Capital expenditure ...... (35) (41) Operating free cash flow ...... (62) (38) Exceptionals (cash element) ...... (12) (11) Acquisitions (net) ...... (189) (1) Taxation and interest ...... (5) (2) Dividends and shares ...... 102 — Cash flow for the period...... (166) (52) Opening net debt ...... (47) 6 Exchange rate movements ...... (4) (1) Closing net debt ...... (217) (47)

Tiscali UK generated negative operating free cash flow of £62 million (2006: outflow of £38 million). This deterioration in free cash flow despite the strong EBITDA growth and lower capital expenditure, was driven by a significant deterioration in working capital as payments deferred from prior periods were settled. Tiscali UK’s capital expenditure in the period was £35 million, representing a reduction of 15 per cent. year-on-year (2006: £41 million), as the business continued the expansion of the LLU network, at a reduced pace. Exceptional costs of £12 million (2006: £11 million) arose in the period as a result of the integration of the Pipex and VNL businesses. In the prior period exceptional costs represented the integration of the VNL business. The acquisition costs in the year ended 31 December 2007 related to the acquisition of Pipex. Taxation and interest increased year-on-year as a result of borrowings incurred to acquire Pipex, and continued minimal taxation payments, reflecting the substantial tax losses available to Tiscali UK. Dividends and shares in the year ended 31 December 2007 represents newly subscribed share capital created to fund the acquisition of VNL.

9. Treasury

Prior to the Demerger, the TalkTalk Group’s treasury requirements were serviced centrally by Carphone Warehouse. The TalkTalk Group operated in accordance with the TalkTalk Group treasury policy and procedures which were periodically reviewed by Carphone Warehouse and were subject to regular internal audit reviews. Following the Demerger, the treasury function will be operated by the TalkTalk Group.

10. Dividend policy

The TalkTalk Board intends TalkTalk to pursue a progressive dividend policy that reflects the long-term development and underlying earnings of the TalkTalk Business. Given that TalkTalk is a new company incorporated for the purposes of the Proposals, it will not pay a final dividend in respect of the financial period ending 31 March 2010. Therefore in substitution, Carphone Warehouse will pay a special interim dividend of 3.2 pence per Carphone Warehouse Share in respect of the financial year ending 31 March 2010 as set out in the Scheme Document. In respect of the financial year ending 31 March 2011, TalkTalk intends to declare an interim dividend in November 2010 followed by a final dividend in June 2011. It is further intended that the aggregate amount of dividends to be paid by TalkTalk for the financial year ending 31 March 2011 will be at least equivalent to the aggregate amount of dividends paid to Carphone Warehouse Shareholders for the financial year ending 31 March 2010, including the Carphone Warehouse Special Interim Dividend.

53 11. Funding arrangements The facilities available to Carphone Warehouse are described in Part Vof this document. From Completion, these facilities will be replaced by a £550 million revolving credit facility (syndicated amongst the TalkTalk Group’s core bank group) and a £100 million bilateral term loan. Both facilities mature in March 2013 and the terms of both facilities are similar. The interest rate payable in respect of drawings under these facilities is at a margin over LIBOR. The actual margin applicable to any drawing depends on the ratio of debt to EBITDA. A non-utilisation fee is payable in respect of amounts available but undrawn under the £550 million facility. The Demerger has triggered a requirement to re-negotiate the terms of the funding facilities and these negotiations are complete but subject to the Demerger becoming effective. As a result, the cost of funding for the demerged TalkTalk Group will increase when compared to the cost incurred when the TalkTalk Group was part of the Carphone Warehouse Group. Overdraft facilities are in use to provide working capital flexibility and bear interest rates as appropriate. Surplus cash, which is minimised through efficient cash management, is invested across a wide range of financial institutions to minimise counterparty exposure. Funding of the TalkTalk Group’s subsidiaries is arranged centrally at arm’s length rates of interest. Further information on the TalkTalk Group’s historical funding arrangements and management of foreign exchange, interest, credit and liquidity risk is provided in Part V of this document.

12. Borrowings The TalkTalk Group had net debt of £507 million at 31 December 2009, comprising drawings of £375 million under a term loan facility, £179 million of drawings under a revolving credit facility, both of which are described in Part V of this document, and net cash of £47 million. Since this date TalkTalk’s borrowings have reduced significantly.

13. Critical accounting estimates and assumptions Critical accounting estimates and assumptions are defined in note 1 of Section A of Part Vof this document.

14. Contracted obligations and commitments The TalkTalk Group’s contracted capital commitments as at 31 December 2009 were £35 million. There has been no material change in the commitments under operating leases since that reported as at 30 September 2009 and set out in note 23 of Section A of Part V of this document.

54 PART IV

CAPITALISATION AND INDEBTEDNESS The following table shows the total debt and net financial indebtedness of the TalkTalk Group as at 31 December 2009. £m Current loans and other borrowings Bank overdrafts ...... — — Non-current loans and other borrowings Bank loans ...... (554) (554) Total debt (554) Liquidity Cash and cash equivalents ...... 47 47 Current loans and other borrowings Bank overdrafts ...... — — Non-current loans and other borrowings Bank loans ...... (554) (554) Net financial indebtedness (507) Loans to related parties ...... 262 Net financial indebtedness including funding to related parties ...... (245)

1. This information is unaudited. 2. The TalkTalk Group has not in the past formed a separate legal group and therefore it is not meaningful to show share capital or any analysis of reserves. 3. All loans and other borrowings are unsecured and are not guaranteed. 4. Net financial indebtedness has increased since 30 September 2009 due to additional short term funding being provided to the New Carphone Warehouse Group for working capital purposes during its peak trading period.

55 PART V

HISTORICAL CONSOLIDATED FINANCIAL INFORMATION RELATING TO THE TALKTALK GROUP

Basis of financial information Following Completion, the TalkTalk Group will comprise the TalkTalk Business. The financial information has been prepared on a going concern basis with the objective of presenting the results, net assets and cash flows of the TalkTalk Group in the form that will arise on Completion, as if it had been a standalone business throughout the financial periods covered. Full details of the basis of preparation of the financial information are provided in note 1 to the financial information for the TalkTalk Group for the financial years ended 31 March 2009, 29 March 2008 and 31 March 2007. Sections A and B of this Part V set out the audited consolidated financial information of the TalkTalk Group (excluding Tiscali UK for the period up to 30 June 2009 when it was not owned by the TalkTalk Group) for the financial years ended 31 March 2009, 29 March 2008 and 31 March 2007, the six months ended 30 September 2009 and the unaudited financial information for the 26 weeks ended 27 September 2008. The financial information contained in Sections A and B of this Part V does not constitute statutory accounts within the meaning of section 434 of the Act. Sections D and E of this Part V set out the audited consolidated financial information of Tiscali UK for the financial years ended 31 December 2008, 31 December 2007 and 31 December 2006, the six months ended 30 June 2009 and the unaudited financial information for the six months ended 30 June 2008. The financial information contained in Sections D and E of this Part V does not constitute statutory accounts within the meaning of Section 434 of the Act.

56 SECTION A: HISTORICAL CONSOLIDATED FINANCIAL INFORMATION FOR THE TALKTALK GROUP FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2009 AND THE 26 WEEKS ENDED 27 SEPTEMBER 2008 Consolidated income statement For the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008

Before After Before After amortisation Amortisation of amortisation amortisation Amortisation of amortisation of acquisition acquisition of acquisition of acquisition acquisition of acquisition intangibles and intangibles and intangibles and intangibles and intangibles and intangibles and exceptional exceptional exceptional exceptional exceptional exceptional items items items items items items Notes 2009 2009 2009 2008 2008 2008 £m £m £m £m £m £m Revenue ...... 2 789 — 789 697 — 697 Cost of sales ...... (396) — (396) (366) — (366) Gross profit ...... 393 — 393 331 — 331 Operating expenses excluding depreciation and amortisation ...... 3,4 (290) (4) (294) (263) (13) (276) EBITDA ...... 2 103 (4) 99 68 (13) 55 Depreciation...... 2 (23) — (23) (20) — (20) Amortisation ...... 2 (11) (41) (52) (7) (35) (42) Profit (loss) before interest and taxation ...... 3 69 (45) 24 41 (48) (7) Interest expense ...... 4,7 (5) — (5) (14) (5) (19) Interest income...... 7 4 — 4 8 — 8 Profit (loss) before taxation ...... 68 (45) 23 35 (53) (18) Taxation...... 8,10 (21) 11 (10) (10) 15 5 Net profit (loss) for the period ...... 47 (34) 13 25 (38) (13) Earnings per share Basic ...... 11 5.2p 1.4p 2.8p (1.5)p Diluted ...... 11 5.1p 1.4p 2.7p (1.5)p

A reconciliation of Headline results to statutory results is provided in note 10 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

57 Consolidated statement of comprehensive income For the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008

Notes 2009 2008 £m £m Net profit (loss) for the period ...... 13 (13) Currency translation and cash flow hedges ...... 1 9 Taxation on items recognised directly in reserves...... 8 2 (12) Total recognised income and expense for the period ...... 16 (16)

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

58 Consolidated statement of changes in equity For the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008

Notes 2009 2008 £m £m At the beginning of the period ...... 702 (212) Total recognised income and expense for the period ...... 16 (16) Net purchase of own shares ...... — (53) Net cost of share-based payments ...... 6 1 2 Equity dividends...... 9 (27) (26) Movements in demerger reserve ...... (3) 1,051 At the end of the period ...... 689 746

The accompanying notes are an integral part of this consolidated statement of changes in equity.

59 Consolidated balance sheet As at 30 September 2009 and 27 September 2008

Notes 2009 2008 £m £m Non-current assets Goodwill ...... 12 461 301 Other intangible assets ...... 12 359 306 Property, plant and equipment ...... 13 241 216 Loans to related parties...... 16 104 289 Non-current asset investments ...... 14 1 — Deferred tax assets ...... 8 149 73 1,315 1,185 Current assets Stock ...... 15 3 1 Trade and other receivables...... 16 199 242 Cash and cash equivalents...... 18 16 91 218 334 Total assets ...... 1,533 1,519 Current liabilities Trade and other payables ...... 17 (396) (372) Corporation tax liabilities ...... (32) (15) Loans and other borrowings ...... 18 (2) — Provisions ...... 20 (35) (9) (465) (396) Non-current liabilities Trade and other payables ...... 17 (4) — Loans and other borrowings ...... 18 (375) (377) (379) (377) Total liabilities ...... (844) (773) Net assets ...... 689 746 Equity Invested capital ...... 21 689 746 Funds attributable to equity shareholders ...... 689 746

The accompanying notes are an integral part of this consolidated balance sheet.

60 Consolidated cash flow statement For the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008

Notes 2009 2008 £m £m Operating activities Profit (loss) before interest and taxation ...... 24 (7) Adjustments for non-cash items: Share-based payments ...... 1 2 Depreciation ...... 23 20 Amortisation...... 52 42 Operating cash flows before movements in working capital ...... 100 57 Increase in trade and other receivables ...... (7) (33) (Increase) decrease in stock ...... (2) 1 Increase in trade and other payables ...... 17 1 (Decrease) increase in provisions ...... (3) 2 Cash flows from operating activities...... 105 28 Taxation paid ...... (1) — Net cash generated from operating activities ...... 104 28 Investing activities Interest received ...... 4 8 Acquisition of subsidiaries, net of cash acquired ...... 14 (235) (72) Acquisition of intangible assets ...... (17) (13) Acquisition of property, plant and equipment...... (24) (38) Cash flows from investing activities ...... (272) (115) Financing activities Net purchase of own shares ...... — (53) Decrease in borrowings...... 22 (49) (534) Interest paid ...... (5) (14) Cash flows relating to movements in demerger reserves ...... (3) 1,084 Net decrease (increase) in loans to related parties ...... 22 293 (276) Dividends paid ...... 9 (27) (26) Cash flows from financing activities ...... 209 181 Net increase in cash and cash equivalents 41 94 Cash and cash equivalents at the start of the period ...... (27) (3) Cash and cash equivalents at the end of the period ...... 14 91 Cash and cash equivalents for the purposes of this statement comprise: Cash and cash equivalents...... 22 16 91 Bank overdrafts ...... 22 (2) — 14 91

The accompanying notes are an integral part of this consolidated cash flow statement.

61 Notes to the financial information for the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008

1. Accounting policies and basis of preparation The financial information for the six months ended 30 September 2009 and 26 weeks ended 27 September 2008 has been prepared using the basis of preparation, accounting policies and methods of computation set out in Section B of Part Von pages 92 to 126 of this document. Where note 1 (t) of section B of Part Vof this document states that a standard or interpretation will be adopted by the TalkTalk Group in the year ending 31 March 2010, such standards and interpretations have duly been adopted in the period ended 30 September 2009. The financial information for 26 weeks ended 27 September 2008 has not been subject to audit or review by TalkTalk Group’s auditors.

2. Segmental reporting The TalkTalk Group’s segments are analysed as follows: Operations PLC costs Total £m £m £m 2009 Revenue ...... 789 — 789 Headline EBITDA ...... 107 (4) 103 Depreciation ...... (23) — (23) Amortisation of operating intangibles ...... (11) — (11) Headline EBIT ...... 73 (4) 69 Amortisation of acquisition intangibles ...... (41) — (41) Exceptional items (see note 4) ...... (4) — (4) Statutory EBIT (segment results) ...... 28 (4) 24 2008 Revenue ...... 697 — 697 Headline EBITDA ...... 73 (5) 68 Depreciation ...... (20) — (20) Amortisation of operating intangibles ...... (7) — (7) Headline EBIT ...... 46 (5) 41 Amortisation of acquisition intangibles ...... (35) — (35) Exceptional items (see note 4) ...... (13) — (13) Statutory EBIT (segment results) ...... (2) (5) (7)

PLC costs represent central Carphone Warehouse costs that are not attributable to the Operations. Assets, liabilities and infrastructure of the TalkTalk Group are generally shared, hence segmental assets, liabilities and capital expenditure cannot practically be allocated across Operations and PLC costs. Segmental revenue and total assets are analysed by geographical location as follows: 2009 2008 £m £m Revenue United Kingdom ...... 780 687 Other ...... 9 10 789 697

2009 2008 £m £m Total assets United Kingdom ...... 1,531 1,517 Other ...... 2 2 1,533 1,519

Revenue and total assets are allocated based on where customers and assets are located.

62 3. Profit (loss) before interest and taxation Profit (loss) before interest and taxation is stated after charging: 2009 2008 £m £m Depreciation of property, plant and equipment ...... 23 20 Amortisation of acquisition intangibles ...... 41 35 Amortisation of other intangible fixed assets ...... 11 7 Impairment of trade receivables ...... 9 9 Share-based payments (see note 6) ...... 1 2 Other employee costs, excluding share-based payments ...... 64 68 Other stock costs ...... 12 7 Rentals under operating leases — property ...... 2 1 Rentals under operating leases — non-property ...... 18 12 Operating expenses are analysed as follows: 2009 2008 £m £m Operating expenses excluding depreciation and amortisation ...... 294 276 Depreciation ...... 23 20 Amortisation ...... 52 42 Total operating expenses ...... 369 338

4. Exceptional items The following items have been disclosed separately in the period given their size and one-off nature: Pre-tax Taxation Post-tax Note Income statement presentation loss credit loss £m £m £m 2009 TalkTalk Group integration ...... (a) Operating expenses (4) — (4) 2008 AOL integration.... (b) Operating expenses and taxation (13) 3 (10) Foreign exchange losses ...... (c) Interest expense and taxation (5) 2 (3)

(a) TalkTalk Group integration On 3 July 2009, the TalkTalk Group acquired the UK operations of Tiscali S.p.A., the internet service provider (Tiscali UK’s results have been consolidated since 1 July 2009). The restructuring of the Tiscali UK business and integration with the rest of the TalkTalk Group, most of which will occur during 2010, is expected to yield significant synergies, both through the elimination of duplicated costs and through network and operational efficiencies. Reorganisation costs of £4 million were incurred in the period ended 30 September 2009, principally comprising redundancy and consulting costs.

(b) AOL integration The TalkTalk Group acquired AOL’s UK internet access business in December 2006. Since this time the TalkTalk Group has worked on the reorganisation of the business through a programme to transfer network operations, hosting, billing and customer management away from a transitional platform provided by AOL Time Warner onto the TalkTalk Group’s own systems and infrastructure. The transition was completed during the year ended 31 March 2009 at a cost of £16 million, against which a tax credit of £4 million was recognised. Costs of £13 million were incurred in the period ended 27 September 2008, against which a tax credit of £3 million was recognised.

(c) Foreign exchange losses An exceptional foreign exchange loss of £5 million arose in the 26 weeks ended 27 September 2008 following a change in the functional currency of the Carphone Warehouse Group’s brand company, which

63 forms part of the TalkTalk Group, from Swiss Francs to UK Sterling. The Best Buy Europe Joint Venture Transaction necessitated a change in the operations of the brand company, which in turn made UK Sterling the appropriate functional currency. As a result of the change, movements on the brand company’s Swiss Franc borrowings, which would previously have been recognised through equity, were thereafter reflected in the income statement. A tax credit of £2 million was recognised in respect of this loss.

5. Employee costs

Compensation earned by key management, comprising the TalkTalk Group executive committee and an allocation of Carphone Warehouse directors, was as follows:

2009 2008 £m £m Salaries and fees ...... 1.4 1.3 Performance bonuses ...... 2.0 1.6 Benefits ...... 0.1 — Share-based payments ...... 0.2 0.3 3.7 3.2

Amounts of £0.5 million were paid to HMRC during the year ended 31 March 2008 on behalf of a number of key management; these amounts were outstanding at 30 September 2009. Interest is charged on the loans at a market rate and loans are repayable in the year ending 31 March 2011.

Loans of £3.8 million were made to certain employees in the period ended 30 September 2009, to enable them to acquire A ordinary shares in TTGL, pursuant to the TTG VES. These loans were outstanding at 30 September 2009. Interest is charged on the loans at a market rate and loans are ordinarily repayable when the shares vest.

6. Share-based payments

Carphone Warehouse has historically issued share options to certain employees of the Carphone Warehouse Group. As explained in Part X of this document, options and awards granted under the Carphone Warehouse Discretionary Share Schemes will generally be exchanged for replacement options and awards over TalkTalk Shares and New Carphone Warehouse Ordinary Shares, so that an option-holder in Carphone Warehouse would become an option-holder in both TalkTalk and New Carphone Warehouse. Since generally all Carphone Warehouse options are therefore relevant to the TalkTalk Group, for simplicity of presentation the analysis in this financial information reflects all options for the Carphone Warehouse share schemes.

Carphone Warehouse had the following schemes during the period:

(a) Performance Plan

Carphone Warehouse has a Performance Plan which uses share options to provide long-term incentives to senior management of the Carphone Warehouse Group. Awards made under the Performance Plan in the years ended 29 March 2008 and 31 March 2007 are subject to Total Shareholder Return (“TSR”) performance targets and are measured over an initial performance period to 4 June 2010 and a subsequent performance period to 4 June 2011.

Awards made in earlier years were subject to a mixture of Carphone Warehouse’s Headline EPS and TSR performance targets measured over a three or four year performance period. The performance period for all such awards has been completed and where targets have been met the relevant share options have vested.

The following table summarises the number and weighted average exercise prices (“WAEP”) of share options for the scheme. The WAEP used throughout this analysis is that of the share options as exercised and takes no account of adjustments to the exercise price of unexercised share options that may take place

64 following the Demerger. The WAEP is therefore not necessarily representative of the WAEP that might apply on an ongoing basis. 2009 2009 2008 2008 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the period ...... 22 — 43 — Forfeited during the period ...... (1) — (14) — Exercised during the period ...... (1) — (3) — Outstanding at the end of the period ...... 20—26— Exercisable at the end of the period ...... 11—16—

The options outstanding at 30 September 2009 had a weighted average remaining contractual life of 6.8 years (2008: 7.7 years). The options exercised during the six months ended 30 September 2009 were exercised at a weighted average market price of £1.68 (2008: £1.98).

(b) ESOS Carphone Warehouse has an ESOS under which share options were issued at market value. All ESOS options have already vested. The following table summarises the number and WAEP of share options for the scheme: 2009 2008 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the period ...... 8 1.04 9 1.02 Exercised during the period ...... (1) 0.93 — 0.89 Outstanding at the end of the period ...... 7 1.08 9 1.02 Exercisable at the end of the period ...... 7 1.08 9 1.02

The options outstanding at 30 September 2009 had a weighted average remaining contractual life of 1.9 years (2008: 3.1 years). The options exercised during the year were exercised at a weighted average market price of £1.68 (2008: £2.72). The summary above includes 5 million (2008: 5 million) options that were granted before 7 November 2002. In accordance with IFRS 2 ‘Share-based Payment’, no cost has been recognised in respect of these options.

(c) Retail Share Option Scheme Prior to the Best Buy Europe Joint Venture Transaction, Carphone Warehouse operated a Retail Share Option Scheme, which provided market priced share options to senior employees in the UK retail and distribution business. Following the Best Buy Europe Joint Venture Transaction, all unvested options were allowed by the Carphone Warehouse Remuneration Committee to vest early and the scheme was terminated. The expiry dates of these options were changed to the later of three years from the last date of exercise, where an option-holder had previously exercised under the scheme, and 31 December 2008. The following table summarises the number and WAEP of share options for the scheme: 2009 2008 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the period ...... 2 2.73 6 2.90 Forfeited during the period ...... — — (1) 3.08 Exercised during the period ...... — 1.48 — 1.72 Outstanding at the end of the period ...... 2 2.75 5 2.91 Exercisable at the end of the period ...... 2 2.75 2 1.61

The options outstanding at 30 September 2009 had a weighted average remaining contractual life of 4.1 years (2008: 2.3 years). The options exercised during the year were exercised at a weighted average market price of £ 1.73 (2008: £ 2.41).

65 (d) Share gift In December 2008, 3.6 million shares were gifted by Carphone Warehouse’s Employee Benefit Trust to certain senior employees of the Carphone Warehouse Group. The shares are restricted until 30 June 2010, and will be forfeited if various internal performance conditions, principally in relation to earnings and cash generation, are not met.

(e) Other employee share option schemes Carphone Warehouse has a SAYE Scheme which permits the grant to employees of options linked to a bank save-as-you-earn contract for a term of three or five years with contributions from employees of between £5 and £250 per month. Options may be exercised at the end of the three or five year period at a subscription price not less than 80 per cent. of the middle market quotation on the date of grant. In addition, options were granted to UK employees at the time of Carphone Warehouse’s admission to the London Stock Exchange. Market priced options were also granted during the year ended 31 March 2009 by Carphone Warehouse to certain Carphone Warehouse Group employees. These awards are subject to internal performance conditions, principally in relation to earnings and cash generation, over a period to June 2010. The following table summarises the number and WAEP of share options for the scheme:

2009 2008 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the period...... 9 1.08 8 2.00 Forfeited during the period ...... (1) 0.88 (1) 2.52 Exercised during the period ...... — — (2) 1.26 Outstanding at the end of the period ...... 8 1.09 5 2.18 Exercisable at the end of the period ...... 1 1.53 1 1.12

The options outstanding at 30 September 2009 had a weighted average remaining contractual life of 8.1 years (2008: 2.0 years). The options exercised during the six months ended 30 September 2009 were exercised at a weighted average market price of £1.66 (2008: £1.92). The summary above includes 1 million (2008: 1 million) options that were granted before 7 November 2002. In accordance with IFRS 2, no cost has been recognised in respect of these options.

(f) Fair value models Nil cost options with internal performance targets were valued using the market price of a share at the date of grant, discounted for expected future dividends to the date of exercise. The fair values of other options with internal performance targets have been estimated at the date of grant using a Binomial model. The inputs into the Binomial model were as follows:

2009 2008 Expected volatility (%)...... 35.0 29.2 Risk free rate (%) ...... 3.1 5.8 Dividend yield (%)...... 2.0 2.0 Expected volatility has been arrived at by using the historical volatility of the Carphone Warehouse Group’s share price, and the volatility of the share price of similar companies, whose shares have been listed for longer than those of the Carphone Warehouse Group, over a period comparable with the expected lives of the options. The assumptions made in relation to the timing of exercises were based on historical exercise patterns for each option scheme. The fair values of options with external performance targets were estimated at the date of grant using a Monte Carlo model. The model combines the market price of a share at the date of grant with the probability of meeting performance criteria, based on the historical performance of the Carphone Warehouse Group’s shares. The historical performance period reflects a volatility of 27.4 per cent. A dividend yield of 2.0 per cent. was assumed in the model.

66 (g) Charge to income statement

The TalkTalk Group recognised a charge of £1 million in the period ended 30 September 2009 (2008: £2 million) in respect of equity settled share-based payments.

7. Interest expense and income (finance costs)

Interest expense is analysed as follows:

2009 2008 £m £m Interest on bank loans and overdrafts ...... 5 14 Foreign exchange losses (see note 4) ...... — 5 519

Interest income is analysed as follows:

2009 2008 £m £m Interest on cash and cash equivalents ...... 3 — Interest on loans to related parties...... 1 8 48

8. Taxation

The tax charge (credit) comprises:

2009 2008 £m £m Deferred tax: Origination and reversal of timing differences ...... 8 (5) Adjustments in respect of prior periods ...... 2 — Total tax charge (credit) ...... 10 (5)

The tax charge on Headline earnings for the six months ended 30 September 2009 is £21 million (2008: £10 million) representing an effective tax rate on pre-tax profits or losses of 31 per cent. (2008: 29 per cent.). The tax charge on statutory earnings for the period is £10 million (2008: credit £5 million).

The principal differences between the tax charge (credit) shown above and the amount calculated by applying the standard rate of UK corporation tax of 28 per cent. (2008: 28 per cent.) to profit (loss) before taxation are as follows:

2009 2008 £m £m Profit (loss) before taxation ...... 23 (18) Profit (loss) before taxation at 28% (2008: 30%) ...... 6 (5) Items attracting no tax relief or liability ...... 2 — Adjustments in respect of prior periods ...... 2 — Total tax charge (credit) ...... 10 (5)

Tax on items recognised directly in reserves is as follows:

2009 2008 £m £m Deferred tax credit (debit) on share-based payments ...... 2 (12) 2 (12)

67 The deferred tax assets recognised by the TalkTalk Group and movements thereon during the period are as follows: Timing differences on Share-based capitalised Other timing payments costs Tax losses differences Total £m £m £m £m £m 2009 Opening balance...... 2 29 74 3 108 Charge to the income statement ...... — — (10) — (10) Credit to reserves ...... 2 — — — 2 Acquisition of subsidiaries ...... — 38 37 (26) 49 Closing balance...... 4 67 101 (23) 149 2008 Opening balance...... 23 4 56 5 88 Credit to the income statement ...... — — 5 — 5 Charge to reserves ...... (12) — — — (12) Movements through demerger reserves . . (3) 1 (2) (4) (8) Closing balance...... 8 5 59 1 73

Other deferred tax timing differences arising on the acquisition of subsidiaries of £26 million reflect deferred tax on acquisition intangibles recognised on the acquisition of Tiscali UK. No deferred tax assets and liabilities have been offset in either period, except where there is a legal right to do so in the relevant jurisdictions. At 30 September 2009, the TalkTalk Group had unused tax losses of £1,001 million (2008: £288 million) available for offset against future taxable profits. A deferred tax asset of £101 million (2008: £59 million) has been recognised in respect of £359 million (2008: £193 million) of such losses, based on expectations of recovery in the foreseeable future. No deferred tax asset has been recognised in respect of the remaining £642 million (2008: £95 million) as there is insufficient evidence that there will be suitable taxable profits against which these losses can be recovered. All losses may be carried forward indefinitely. Following a change in UK tax legislation during the period which resulted in dividends from overseas subsidiaries not being subject to corporation taxation, the TalkTalk Group no longer had unrecognised deferred tax liabilities (2008: £20 million) in respect of temporary differences associated with undistributed earnings of subsidiaries. Prior to this change in legislation no liabilities had been recognised in respect of these differences because the TalkTalk Group was in a position to control the timing of their reversal.

9. Equity dividends The following dividends were paid by Carphone Warehouse to Carphone Warehouse Shareholders: 2009 2008 £m £m Final dividend for the year ended 29 March 2008 of 3.00p per ordinary share ...... — 26 Final dividend for the year ended 31 March 2009 of 3.00p per ordinary share ...... 27 — 27 26

68 The following interim dividends for 31 March 2010 had not been paid at 30 September 2009 and as such are not recognised in this financial information.

2009 2008 £m £m Interim dividend for the year ending 31 March 2010 of 1.45p per ordinary share ...... 13 Special interim dividend for the year ending 31 March 2010 of 3.2p per ordinary share ...... 29 42

The New Carphone Warehouse Employee Benefit Trust has waived its rights to receive dividends and this is reflected in the analysis above.

10. Reconciliation of Headline results to statutory results

Profit (loss) before Profit (loss) Net profit interest and before (loss) for EBITDA taxation taxation the period £m £m £m £m 2009 Headline results ...... 103 69 68 47 Exceptional items (see note 4) ...... (4) (4) (4) (4) Amortisation of acquisition intangibles (see note 12) ...... — (41) (41) (41) Taxation on amortisation of acquisition intangibles. . . — — — 11 Statutory results ...... 99 24 23 13 2008 Headline results ...... 68 41 35 25 Exceptional items (see note 4) ...... (13) (13) (18) (18) Amortisation of acquisition intangibles (see note 12) ...... — (35) (35) (35) Taxation on exceptional items (see note 4) ...... — — — 5 Taxation on amortisation of acquisition intangibles. . . — — — 10 Statutory results ...... 55 (7) (18) (13)

Headline information is provided because the TalkTalk Directors consider that it provides assistance in understanding underlying performance.

11. Earnings per share

2009 2008 Headline earnings (£ million) (see note 10) ...... 47 25 Statutory earnings (£ million)...... 13 (13) Weighted average number of shares (millions): Average shares in issue ...... 914 914 Less average holding by Carphone Warehouse Employee Benefit Trust ...... (17) (21) For basic earnings per share ...... 897 893 Dilutive effect of share options ...... 18 24 For diluted earnings per share ...... 915 917

The weighted average number of shares for Carphone Warehouse has been applied for illustrative purposes in calculating earnings per share. This is not necessarily representative of the weighted average number of shares that will apply for TalkTalk following the Demerger. The number of shares that could be issued but that are not considered to be dilutive at 30 September 2009 was 19 million (2008: 21 million).

69 2009 2008 Basic pence per share Headline ...... 5.2 2.8 Statutory ...... 1.4 (1.5) 2009 2008 Diluted pence per share Headline ...... 5.1 2.7 Statutory ...... 1.4 (1.5) Headline earnings per share is provided because the TalkTalk Directors consider that it provides assistance in understanding underlying performance.

12. Goodwill and other intangible assets (a) Goodwill 2009 2008 £m £m Opening cost and net book value ...... 304 299 Acquisition of subsidiaries (see note 14) ...... 157 2 Closing cost and net book value ...... 461 301

The cash flows of the TalkTalk Group are not separable into individual cash generating units as its cash flows are derived from shared assets and infrastructure. The TalkTalk Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the cash generating units are determined from value in use calculations. The TalkTalk Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three years and extrapolates cash flows in perpetuity based on a country-specific growth rate for the UK, where all goodwill is located, of 1.8 per cent. (2008: 1.8 per cent.). The average pre- tax rate used to discount the forecast cash flows is 9.7 per cent. (2008: 9.7 per cent.). The key assumptions for the value in use calculations are those in relation to the discount rates, growth rates and expected changes to selling prices and direct costs during the period, all of which are based on historical patterns and expectations of future market developments. Management estimates discount rates using pre- tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units. Due to the substantial headroom indicated by the TalkTalk Group’s cash flow forecasts, the TalkTalk Directors do not consider it likely that key assumptions may change to such an extent that it would lead to a significant impairment loss.

70 (b) Other intangible assets Other intangible assets are analysed as follows: Operating Acquisition Total other intangibles intangibles intangibles £m £m £m 2009 Opening balance ...... 114 176 290 Acquisition of subsidiaries ...... 9 95 104 Additions ...... 17 — 17 Amortisation ...... (11) (41) (52) Closing balance ...... 129 230 359 Cost (gross carrying amount) ...... 165 418 583 Accumulated amortisation ...... (36) (188) (224) Net carrying amount ...... 129 230 359 2008 Opening balance ...... 85 244 329 Additions ...... 19 — 19 Amortisation ...... (7) (35) (42) Closing balance ...... 97 209 306

Cost (gross carrying amount) ...... 109 327 436 Accumulated amortisation ...... (12) (118) (130) Net carrying amount ...... 97 209 306

Prior to the Best Buy Europe Joint Venture Transaction, some of the Carphone Warehouse Group’s IT functions were centralised in a single business. The costs of this business, including depreciation, amortisation and other operating expenses and capital expenditure, were allocated between the TalkTalk Group and the Best Buy Europe Group based on the nature of these costs. The IT business formed part of the Best Buy Europe Group and the associated assets are therefore reflected in the balance sheet of the Best Buy Europe Group. As a result, some depreciation and amortisation is reflected in the income statement and capital expenditure is reflected in the cashflow statement of the TalkTalk Group up to 30 June 2008 without a corresponding movement in the balance sheet. Acquisition intangibles are removed from cost in the analysis above once fully amortised.

71 Acquisition intangibles are analysed as follows: Customer revenue Customer share bases agreements Other Total £m £m £m £m 2009 Opening balance ...... 164 9 3 176 Acquisition of subsidiaries...... 90 — 5 95 Amortisation ...... (33) (6) (2) (41) Closing balance ...... 221 3 6 230

Cost (gross carrying amount) ...... 372 34 12 418 Accumulated amortisation ...... (151) (31) (6) (188) Net carrying amount ...... 221 3 6 230 2008 Opening balance ...... 217 21 6 244 Amortisation ...... (27) (6) (2) (35) Closing balance ...... 190 15 4 209

Cost (gross carrying amount) ...... 280 35 12 327 Accumulated amortisation ...... (90) (20) (8) (118) Net carrying amount ...... 190 15 4 209

Customer bases relate primarily to AOL’s UK internet access business which was acquired in December 2006 and Tiscali UK which was acquired on 3 July 2009 (although the Tiscali UK business has been consolidated since 1 July 2009). The valuation of customer bases is derived from the discounted future cash flows expected from them, after a deduction for contributory assets. Customer revenue share agreements again arose on the acquisition of AOL’s UK internet access business, and represent rights, subject to performance criteria, to a share of transactional revenues generated by AOL access customers and TalkTalk customers on AOL sites. The valuation of these rights was again derived from the discounted future cash flows expected from the agreement, after a deduction for contributory assets. Other acquisition intangibles primarily represent a licence to continue to use the AOL and Tiscali brands for a limited time period, valued using the relief from royalty method.

72 13. Property, plant and equipment Network equipment Short and leasehold computer Fixtures and costs hardware fittings Total £m £m £m £m 2009 Opening balance ...... 3 215 1 219 Additions ...... 3 20 1 24 Acquisitions of subsidiaries ...... 3 18 — 21 Depreciation ...... (1) (22) — (23) Closing balance ...... 8 231 2 241

Cost (gross carrying amount) ...... 9 310 2 321 Accumulated depreciation ...... (1) (79) — (80) Net carrying amount ...... 8 231 2 241 2008 Opening balance ...... 3 194 1 198 Additions ...... — 38 — 38 Depreciation ...... — (20) — (20) Closing balance ...... 3 212 1 216

Cost (gross carrying amount) ...... 3 288 1 292 Accumulated depreciation ...... — (76) — (76) Net carrying amount ...... 3 212 1 216

Prior to the Best Buy Europe Joint Venture Transaction, some of the Carphone Warehouse Group’s IT functions were centralised in a single business. The costs of this business, including depreciation, amortisation and other operating expenses, and capital expenditure were allocated between the TalkTalk Group and the Best Buy Europe Group based on the nature of these costs. The IT business formed part of the Best Buy Europe Group and the associated assets are therefore reflected in the balance sheet of the Best Buy Europe Group. As a result, some depreciation and amortisation is reflected in the income statement and capital expenditure is reflected in the cashflow statement of the TalkTalk Group up to 30 June 2008 without a corresponding movement in the balance sheet.

14. Non-current asset investments 2009 2008 £m £m Opening balance ...... 1 1 Changes in fair value ...... — (1) Closing balance ...... 1—

Non-current asset investments at 30 September 2009 relate to a 15 per cent. interest in Shared Band Limited, a telecommunications technology provider.

73 (a) Principal TalkTalk Group investments The TalkTalk Group has investments in the following subsidiary undertakings, which principally affected the profits or losses or net assets of the TalkTalk Group. To avoid a statement of excessive length, details of investments which are not significant have been omitted. All holdings are in equity share capital and give the TalkTalk Group an effective holding of 100 per cent. on consolidation. Country of incorporation Name or registration Nature of business TalkTalk Group Limited ...... England and Wales Holding company The Carphone Warehouse Group PLC ...... England and Wales Holding company CPW Broadband Services (UK) Limited ...... England and Wales Telecommunications Onetel Telecommunications Limited ...... England and Wales Telecommunications Opal Telecom Limited ...... England and Wales Telecommunications TalkTalk Telecom Limited ...... England and Wales Telecommunications TalkTalk Direct Limited ...... England and Wales Telecommunications TalkTalk UK Communication Services Limited ...... England and Wales Telecommunications GIS Telecoms Limited ...... England and Wales Telecommunications CPW Network Services Limited ...... England and Wales Telecommunications Tiscali UK Limited ...... England and Wales Telecommunications

(b) Acquisitions

(i) Tiscali UK On 3 July 2009, the TalkTalk Group acquired the entire issued share capital of Tiscali UK for a gross cash consideration of £238 million, which is subject to working capital and customer number adjustments. Tiscali UK has been consolidated from 1 July 2009.

74 The following table sets out the book values of the identifiable assets and liabilities acquired and their provisional fair value to the TalkTalk Group: Accounting Fair value to Acquisition-related policy Fair value the TalkTalk Book Value adjustments(a) alignments(b) adjustments Group £m £m £m £m £m Non-current assets Goodwill ...... 129 (129) — — — Acquisition intangibles ...... 54 (54) — 95 95 Other intangible assets ...... 29 (29) — 9 9 Property, plant and equipment...... 64 — — (43) 21 Deposits ...... 6 — (6) — — Deferred taxation assets ..... — — — 49 49 Current assets Trade and other receivables. . . 57 — 6 (3) 60 Cash and cash equivalents.... 2 1 — — 3 Total assets ...... 341 (211) — 107 237 Current liabilities Trade and other payables .... (119) — — (3) (122) Loans and other borrowings . . (343) 343 — — — Provisions ...... (6) — — (23) (29) Non-current liabilities Trade and other payables .... (71) 71 — — — Loans and other borrowings . . (5) — — — (5) Total liabilities ...... (544) 414 — (26) (156) Total assets and liabilities ... (203) 203 — 81 81 Goodwill ...... 157 Satisfied by cash...... 238 Net cash outflows in respect of the acquisition comprised: £m Gross cash consideration (including fees) ...... 238 Cash acquired ...... (3) 235

(a) Acquisition-related adjustments to intangible assets which are replaced as part of the acquisition accounting process and financing-related adjustments arising on the transaction. (b) Accounting policy alignments represent reclassification of deposits. Fair value adjustments relate principally to: • the recognition of the following acquisition intangibles: • customer bases, comprising broadband, internet protocol television, voice and narrowband customers, valued at £90 million. The valuation is derived from the discounted future cash flows expected to be generated by the customer bases, after a deduction for contributory assets; and • a licence to continue to use the Tiscali brand in perpetuity, valued at £5 million using the relief from royalty method, which reflects the discounted future cash flows saved from not incurring royalty payments; • the write-down of property, plant and equipment and internally developed and purchased software to its market value; • the recognition of deferred tax, principally in respect of capital allowances, intangible assets and tax losses; and • the recognition of unrecorded liabilities and provisions for onerous contracts. The goodwill arising on the acquisition of Tiscali UK reflects buyer-specific synergies and the elimination from the market of a competitor to the TalkTalk Group.

75 The TalkTalk Group’s results for the period reflect revenue from Tiscali UK of £105 million and a profit before taxation of £1 million. Pro-forma revenue and profit before taxation for the TalkTalk Group assuming Tiscali UK had been acquired on 31 March 2009, are £894 million and £14 million.

(ii) Other acquisitions

A final deferred consideration payment of £70 million in relation to AOL’s internet access business was made during the period ended 27 September 2008. Additionally TalkTalk Group acquired a number of other businesses during the year for net consideration of £2 million, which resulted in goodwill of £2 million.

15. Stock

2009 2008 £m £m Finished goods and goods for resale ...... 3 1 31

The difference between the balance sheet value of stock and its replacement cost is not material.

16. Trade and other receivables

Trade and other receivables comprise:

2009 2008 £m £m Current — trade and other receivables Trade receivables — gross ...... 196 225 Less provision for impairment ...... (39) (17) Trade receivables — net ...... 157 208 Other receivables ...... 11 28 Prepayments and accrued income ...... 31 6 199 242

2009 2008 £m £m Non-current — loans to related parties Loans to the New Carphone Warehouse Group ...... 104 289 104 289

Loans to the New Carphone Warehouse Group during the period were provided on an uncommitted basis and were repayable , but have been presented as non-current for consistency with the New Carphone Warehouse Group, which has presented the loans as non-current to reflect the ongoing arrangements for the funding of its joint ventures and associates.

Loans to the New Carphone Warehouse Group are denominated in UK Sterling and Euros. Loans denominated in Euros are hedged using borrowings or foreign exchange swaps as described in Notes 18 and 19.

The average credit period taken on trade receivables, calculated by reference to the amount owed at the period end as a proportion of total revenue in the period, adjusted to take account of the timing of acquisitions, was 34 days (2008: 50 days).

The TalkTalk Group’s trade receivables are denominated in the following currencies:

2009 2008 £m £m UK Sterling ...... 187 220 Other ...... 9 5 196 225

76 The ageing of gross trade receivables is as follows:

2009 2008 £m £m Notyetdue...... 103 178 0 to 2 months...... 48 20 2 to 4 months...... 12 8 Over 4 months ...... 33 19 196 225

The ageing of the provision for impairment of trade receivables is as follows:

2009 2008 £m £m Notyetdue...... (2) (2) 0 to 2 months...... (4) (3) 2 to 4 months...... (4) (3) Over 4 months ...... (29) (9) (39) (17)

Movements in the provisions for impairment of trade receivables are as follows:

2009 2008 £m £m Opening balance ...... (19) (14) Charge to the income statement ...... (9) (9) Receivables written off as irrecoverable ...... 23 6 Acquisition of subsidiaries ...... (34) — Closing balance ...... (39) (17)

Trade receivables of £56 million (2008: £32 million) were past due but not impaired. These balances primarily relate to residential and corporate fixed line customers. The TalkTalk Group has made provision based on historic rates of recoverability and all unprovided amounts are considered to be recoverable. The ageing analysis of these trade receivables is as follows:

2009 2008 £m £m 0 to 2 months...... 44 10 2 to 4 months...... 8 5 Over 4 months ...... 4 17 56 32

17. Trade and other payables

2009 2008 £m £m Current Trade payables ...... 146 126 Other taxes and social security costs ...... 24 47 Other payables ...... 20 17 Accruals and deferred income...... 206 182 396 372

2009 2008 £m £m Non-current Other payables ...... 4 — 4—

77 The average credit period taken on trade payables, calculated by reference to the amounts owed at the period end as a proportion of the amounts invoiced by suppliers in the period, adjusted to take account of the timing of acquisitions, was 28 days (2008: 29 days). The TalkTalk Directors consider that the carrying amount of trade and other payables approximates to their fair value.

18. Cash and cash equivalents, loans and other borrowings Cash and cash equivalents are as follows:

2009 2008 £m £m Cash at bank and in hand ...... 16 91 16 91

The effective interest rate on bank deposits and money market funds was 0.4 per cent. (2008: 4.6 per cent.). Loans and other borrowings comprise:

2009 2008 £m £m Current Bank overdrafts ...... 2 — 2—

Maturity 2009 2008 £m £m Non-current £375 million term loan ...... 2012 375 377 £550 million revolving credit facility ...... 2013 — — 375 377

Details of the current and non-current borrowing facilities of the TalkTalk Group for the period are set out below.

Bank overdrafts: Overdraft facilities are held at a variety of UK banks to assist in short-term cash management. These facilities bear interest based on a margin over base rate or relevant overnight interest rate.

£550 million revolving credit facility (“RCF”): The TalkTalk Group has a committed RCF of £550 million, which matures in March 2013. The interest rate payable in respect of drawings under this facility is at a margin over LIBOR for the relevant currency and for the appropriate period. The actual margin applicable to any drawing depends on the ratio of debt to EBITDA calculated in respect of the most recent accounting period. A non-utilisation fee is payable in respect of amounts available but undrawn under this facility. Covenants are included in this facility that limit the ratio of debt to EBITDA, interest cover and fixed charges (interest and operating lease expenditure) cover.

£375 million term loan: The TalkTalk Group also has a term loan facility of £375 million, which matures in October 2012. The terms of this facility are similar to the TalkTalk Group’s RCF, with an identical covenant package. This facility was fully drawn in UK Sterling at 30 September 2009 and was fully drawn in Swiss Francs at 27 September 2008. The facility allows the amount borrowed to exceed £375 million by 5 per cent., when this is the result of currency fluctuation on amounts already borrowed. The average maturity of all non-current borrowings is 3.0 years (2008: 4.0 years) and the weighted average interest cost was 1.3 per cent. (2008: 3.6 per cent.).

78 Borrowing facilities:

The TalkTalk Group had undrawn committed borrowing facilities at the end of the period, in respect of which all conditions precedent had been met, as follows:

2009 2008 £m £m Maturing in 2013 ...... 550 550 550 550

Debt maturity profile:

The maturity of the TalkTalk Group’s borrowings is as follows:

2009 2008 £m £m Less than 1 year...... 2 — 3 to 4 years ...... 375 — 4 to 5 years ...... — 377 Total ...... 377 377

Currency profile of borrowings:

The currency profile of the TalkTalk Group’s borrowings is as follows:

2009 2008 £m £m UK Sterling ...... 377 — Swiss Francs ...... — 377 Total ...... 377 377

At 27 September 2008, the £375 million term loan was drawn in Swiss Francs, and was used to hedge the assets of the Carphone Warehouse Group’s brand company, the functional currency of which at the start of that period was Swiss Francs. As detailed below, the functional currency of the brand company was subsequently changed to UK Sterling.

The book value and fair value of the TalkTalk Group’s loans and other borrowings are as follows:

Book and fair value 2009 2008 £m £m Bank overdrafts ...... 2 — Committed bank loans ...... 375 377 Total ...... 377 377

Securities and guarantees:

None of the borrowings are secured over TalkTalk Group assets. Although some guarantees are given by TalkTalk Group companies, these guarantees are to cover commercial obligations and, as such, create no additional credit risk.

Functional currency:

At 30 September 2009, all of the TalkTalk Group’s subsidiaries prepared accounts in either UK Sterling or Euro, further to the change in the functional currency of the Carphone Warehouse Group’s brand company detailed notes 4 and 19 and the disposal of the TalkTalk Group’s South African subsidiary during the year ended 31 March 2009.

79 19. Financial risk management and derivative financial instruments The book value and fair value of the TalkTalk Group’s financial assets, liabilities and derivative financial instruments, excluding the TalkTalk Group’s loans and other borrowings shown above, are as follows: Book and fair value 2009 2008 £m £m Cash and cash equivalents ...... 16 91 Trade and other receivables ...... 199 242 Loans to related parties ...... 104 289 Non-current asset investments...... 1 — Trade and other payables ...... (400) (372)

(a) Forward currency contracts The TalkTalk Group uses forward currency contracts to hedge balance sheet assets and liabilities and also for short-term liquidity management. The TalkTalk Group currently holds no currency option contracts. The TalkTalk Group also uses forward currency contracts to hedge transactional exposures. These contracts are mainly denominated in Euros, South African Rand and US Dollars, and cover costs of sales and operating expenses. At 30 September 2009, the total notional principal amount of outstanding currency contracts was £111 million (2008: £206 million), part of which is offset by loans to related parties.

(b) Embedded derivatives No contracts with embedded derivatives have been identified and accordingly no such derivatives have been accounted for separately.

(c) Financial instruments The TalkTalk Group’s activities expose it to a variety of financial risks including market risk (such as currency risk and interest rate risk), credit risk and liquidity risk. The Carphone Warehouse Group Treasury function, which operates under approved treasury policies, uses certain financial instruments to mitigate potential adverse effects on the TalkTalk Group’s financial performance from these risks. These financial instruments primarily consist of bank loans and deposits, spot and forward foreign exchange contracts, and foreign exchange swaps. Other products, such as interest rate swaps and currency options, can also be used depending on the risks to be covered. The TalkTalk Group does not trade or speculate in any financial instruments.

(d) Foreign exchange risk The TalkTalk Group is exposed to limited cross-border transactional commitments and, where significant, these are hedged at inception using forward currency contracts. These exposures arise mainly through costs of sales and operating expenses. The TalkTalk Group’s foreign exchange position is calculated daily and any positions are closed out immediately unless the exposure is immaterial. In some circumstances, the TalkTalk Group also hedges future currency commitments, which are accounted for as cash flow hedges. The TalkTalk Group policy permits the use of long-term derivative treasury products (such as cross-currency swaps) for the management of currency risk although none are currently held. Translational currency risk (for example, investments in overseas assets or loans to subsidiaries and related parties) is ordinarily hedged using foreign exchange swaps or currency borrowings. The translation risk on converting overseas currency profit is not hedged and such profits are converted into UK Sterling at average exchange rates throughout the year. Funding to the TalkTalk Group subsidiaries and to related parties is ordinarily denominated in the functional currency of each subsidiary. As detailed in note 4, the functional currency of CPW Brands Limited changed during the period ended 27 September 2008 from Swiss Francs to UK Sterling. As a result, foreign exchange movements arose in CPW Brands Limited on its Swiss Franc borrowings, prior to their redenomination to UK Sterling. These movements are reflected in the profit and loss account of CPW Brands Limited. Prior to the Best Buy Europe Joint Venture Transaction the TalkTalk Group held various currency borrowings used by the Carphone Warehouse Group for the purpose of hedging the funding overseas operations. Following the Best Buy Europe Joint Venture Transaction and the change of functional currency

80 of CPW Brands Limited, borrowings were largely denominated in UK Sterling. Remaining Euro liabilities primarily hedge loans to the New Carphone Warehouse Group in respect of Virgin Mobile France. Currency loans and deposits and foreign exchange contracts are sensitive to movements in foreign exchange rates; this sensitivity can be analysed in comparison to period-end rates (adjusted for funding to related parties and assuming all other variables remain constant) as follows: 2009 2008 £m £m 10 per cent. movement in the UK Sterling/Euro exchange rate Income statement movement...... — — Other equity movement ...... — 1 2009 2008 £m £m 10 per cent. movement in the UK Sterling/Swiss Franc exchange rate Income statement movement...... — 44 Other equity movement ...... — — Changes in the value of currency loans and foreign exchange contracts would not be expected to have an impact in the income statement, as they match currency assets, the value of which would rise or fall correspondingly, with net investment hedges assumed to remain fully effective. The impact on equity of revaluations would be partially offset on consolidation by the revaluation of any net assets that are hedged by these borrowings and derivatives. The effect of foreign exchange derivatives on borrowings at the period end was as follows: Swiss UK Sterling Euro Franc Total £m £m £m £m 2009 Borrowings before derivatives ...... 377 — — 377 Derivatives ...... (54) 54 — — Total ...... 323 54 — 377

Swiss UK Sterling Euro Franc Total £m £m £m £m 2008 Borrowings before derivatives ...... — — 377 377 Derivatives ...... (114) 52 62 — Total ...... (114) 52 439 377

(e) Interest rate risk The TalkTalk Group’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at floating rates of interest and thus expose the TalkTalk Group to cash flow interest rate risk. These floating rates are linked to LIBOR and other interest rate bases as appropriate to the instrument and currency. Future cash flows arising from these financial instruments depend on interest periods agreed at the time of rollover. The TalkTalk Group policy permits the use of long-term interest rate derivatives in managing the risks associated with movements in interest rates although the TalkTalk Group holds none of these products at present. Since all cash, cash equivalents and borrowings are at floating rates of interest, no further disclosure on the effect of interest rate derivative products has been provided. Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates and such movements have been analysed in the chart below by calculating the effect on the income statement and equity of 1 per cent. movements in the interest rate for the currencies in which most TalkTalk Group cash and borrowings are denominated. Funding to related parties has been offset against gross borrowings in calculating these sensitivities. This annualised analysis has been prepared on the assumption that the period-end positions prevail throughout the year, and therefore may not be representative of fluctuations in levels of borrowings.

81 2009 2008 £m £m 1 per cent. movement in the UK Sterling interest rate Income statement movement...... 2 4 Other equity movement ...... — — 2009 2008 £m £m 1 per cent. movement in the Swiss Franc interest rate Income statement movement...... — 4 Other equity movement ...... — —

(f) Liquidity risk The TalkTalk Group manages its exposure to liquidity risk by regularly reviewing the long- and short-term cash flow projections for the business against facilities and other resources available to it. Headroom is assessed based on historical experience as well as by assessing current business risks, including foreign exchange movements. Existing facilities do not expire for more than three years; it is Carphone Warehouse Group policy to refinance debt maturities significantly ahead of maturity dates. The table below analyses the TalkTalk Group’s financial liabilities into relevant maturity groupings. The amounts disclosed in the table are the contractual undiscounted cash flows assuming period-end interest rates remain constant and that borrowings are paid in full in the year of maturity. Less than 1to2 2to3 3to4 4to5 1 year years years years years Total £m £m £m £m £m £m 2009 Borrowings ...... (4) (4) (4) (375) — (387) Derivative financial instruments — payable ...... (111) ————(111) Derivative financial instruments — receivable ...... 111 ————111 Trade and other payables ...... (396) (4) — — — (400) 2008 Borrowings ...... (13) (13) (13) (13) (377) (429) Derivative financial instruments — payable ...... (206) ————(206) Derivative financial instruments — receivable ...... 206 ————206 Trade and other payables ...... (372) ————(372)

(g) Credit risk The TalkTalk Group’s exposure to credit risk is regularly monitored and the Carphone Warehouse Group’s policy updated as appropriate. Debt, investments, foreign exchange and derivative transactions are all spread amongst a number of banks all of which have short- or long-term credit ratings appropriate to the TalkTalk Group’s policies and exposures. Trade receivables primarily comprise balances due from residential and corporate fixed line customers, and provision is made for any receivables that are considered to be irrecoverable.

82 20. Provisions Reorganisation Other Total £m £m £m 2009 Opening balance ...... 6 2 8 Acquisition of subsidiaries...... — 29 29 Utilised in the period...... (1) (1) (2) Closing balance ...... 53035 2008 Opening balance ...... 4 6 10 Utilised in the period...... — (1) (1) Closing balance ...... 459

Provisions are categorised as follows:

(a) Reorganisation Reorganisation provisions at the start of the period relate principally to reorganisation programmes initiated in relation to business acquisitions or disposals. Increases in the provision in the period ended 30 September 2009 relate to the reorganisation programmes announced in the year ended 31 March 2009. Costs have only been charged to provisions where such programmes have not been completed by the balance sheet date. Reorganisation provisions are typically expected to be utilised over the 12 to 24 months following announcement of the reorganisation.

(b) Other Other provisions relate principally to the anticipated costs of unresolved tax issues and legal disputes, and costs associated with onerous contracts. Provisions recognised during the period ended 30 September 2009 relate to the acquisition of Tiscali UK as described in note 14.

21. Invested capital 2009 2008 £m £m Opening balance ...... 702 (212) Net profit (loss) for the period ...... 13 (13) Currency translation and cash flow hedges ...... 1 9 Tax on items recognised directly in reserves (see note 8) ...... 2 (12) Net purchase of own shares (see below) ...... — (53) Net cost of share-based payments (see note 6)...... 1 2 Equity dividends (see note 9) ...... (27) (26) Movements in demerger reserves ...... (3) 1,051 Closing balance ...... 689 746

Net purchase of own shares The Carphone Warehouse Employee Benefit Trust held 17 million shares at 30 September 2009 (2008: 26 million) in the Carphone Warehouse for the benefit of the Carphone Warehouse Group’s employees. The Carphone Warehouse Employee Benefit Trust has waived its rights to receive dividends and none of its shares have been allocated to specific schemes. At the period end the shares had a market value of £33 million (2008: £45 million).

83 22. Analysis of changes in net debt Exchange Opening Cash flow movements Closing £m £m £m £m 2009 Cash and cash equivalents ...... 6 10 — 16 Bank overdrafts...... (33) 31 — (2) (27) 41 — 14 Non-current loans and other borrowings...... (425) 49 1 (375) (425) 49 1 (375) Total net debt ...... (452) 90 1 (361) Loans to related parties ...... 397 (293) — 104 Total net debt including loans to related parties ... (55) (203) 1 (257) 2008 Cash and cash equivalents ...... 3 88 — 91 Bank overdrafts...... (6) 6 — — (3) 94 — 91 Current loans and other borrowings ...... (19) 19 — — Non-current loans and other borrowings...... (894) 515 2 (377) (913) 534 2 (377) Total net debt ...... (916) 628 2 (286) Loans to related parties ...... 13 276 — 289 Total net debt including loans to related parties ... (903) 904 2 3

23. Commitments under operating leases The TalkTalk Group leases network infrastructure and offices under non-cancellable operating leases. The leases have varying terms, purchase options, escalation clauses and renewal rights. The TalkTalk Group had outstanding commitments for future minimum due as follows: 2009 2008 £m £m Within one year ...... 35 11 In two to five years ...... 58 17 After five years ...... 41 22 134 50

24. Capital commitments 2009 2008 £m £m Expenditure contracted, but not provided for in the financial information ..... 616

25. Pension arrangements The TalkTalk Group provides various defined contribution pension schemes for the benefit of a significant number of its employees, the cost of which for the period ended 30 September 2009 was £1 million (2008: £1 million).

84 26. Related party transactions During the period, the TalkTalk Group had the following disclosable transactions (see also note 16): Other New Best Buy Carphone Europe Warehouse Group Group £m £m 2009 Revenue for services provided ...... 5 — Expenses for services received ...... (14) (1) Net interest income ...... — 3 Loans owed to the TalkTalk Group ...... — 104 Other amounts owed to the TalkTalk Group ...... 4 — Amounts owed by the TalkTalk Group ...... (20) — Other New Best Buy Carphone Europe Warehouse Group Group £m £m 2008 Revenue for services provided ...... 5 — Expenses for services received ...... (36) (1) Net interest income ...... — 8 Loans owed to the TalkTalk Group ...... — 289 Other amounts owed to the TalkTalk Group ...... 39 — Amounts owed by the TalkTalk Group ...... (29) — Revenue for services provided during the period principally relates to telecommunications services. Expenses for services received relate primarily to IT services and commissions on product sales. All products and services were provided at market rates. In December 2008, 2.0 million shares in Carphone Warehouse were gifted by the Carphone Warehouse Employee Benefit Trust to certain senior employees of New Carphone Warehouse and the Best Buy Europe Group. The shares are restricted until 30 June 2010 and will be forfeited if various internal performance conditions are not met.

85 SECTION B: HISTORICAL CONSOLIDATED FINANCIAL INFORMATION FOR THE TALKTALK GROUP FOR THE FINANCIAL YEARS ENDED 31 MARCH 2009, 29 MARCH 2008 AND 31 MARCH 2007 Consolidated income statement For the years ended 31 March 2009 and 29 March 2008 Before After Before After amortisation of Amortisation of amortisation of amortisation of Amortisation of amortisation of acquisition acquisition acquisition acquisition acquisition acquisition intangibles and intangibles and intangibles and intangibles and intangibles and intangibles and exceptional exceptional exceptional exceptional exceptional exceptional items items items items items items Notes 2009 2009 2009 2008 2008 2008 £m £m £m £m £m £m Revenue ...... 2 1,385 — 1,385 1,424 — 1,424 Cost of sales ...... (658) — (658) (792) — (792) Gross profit ...... 727 — 727 632 — 632 Operating expenses excluding depreciation andamortisation.... 3,4 (555) (26) (581) (525) (15) (540) EBITDA ...... 2 172 (26) 146 107 (15) 92 Depreciation...... 2 (40) — (40) (33) — (33) Amortisation ...... 2,3 (16) (71) (87) (13) (75) (88) Profit (loss) before interest and taxation ...... 3 116 (97) 19 61 (90) (29) Interest expense ...... 4,7 (30) (85) (115) (51) — (51) Interest income...... 7 29 — 29 10 — 10 Profit (loss) before taxation ...... 115 (182) (67) 20 (90) (70) Taxation...... 8,10 (20) 50 30 (8) 27 19 Net profit (loss) for the year ...... 95 (132) (37) 12 (63) (51) Earnings per share Basic ...... 11 10.7p (4.1)p 1.3p (5.7)p Diluted ...... 11 10.4p (4.1)p 1.3p (5.7)p A reconciliation of Headline results to statutory results is provided in note 10 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

86 Consolidated income statement For the years ended 29 March 2008 and 31 March 2007

Before After amortisation of Amortisation of amortisation of acquisition acquisition acquisition Before After intangibles and intangibles and intangibles and amortisation of Amortisation of amortisation of exceptional exceptional exceptional acquisition acquisition acquisition items items items intangibles intangibles intangibles Notes 2008 2008 2008 2007 2007 2007 £m £m £m £m £m £m Revenue ...... 2 1,424 — 1,424 1,116 — 1,116 Cost of sales ...... (792) — (792) (778) — (778) Gross profit ...... 632 — 632 338 — 338 Operating expenses excluding depreciation and amortisation ...... 3,4 (525) (15) (540) (316) — (316) EBITDA ...... 2 107 (15) 92 22 — 22 Depreciation...... 2 (33) — (33) (22) — (22) Amortisation ...... 2,3 (13) (75) (88) (8) (55) (63) Profit (loss) before interest and taxation ...... 3 61 (90) (29) (8) (55) (63) Interest expense ...... 7 (51) — (51) (32) — (32) Interest income...... 7 10 — 10 25 — 25 Profit (loss) before taxation ...... 20 (90) (70) (15) (55) (70) Taxation...... 8,10 (8) 27 19 3 16 19 Net profit (loss) for the year ...... 12 (63) (51) (12) (39) (51) Earnings per share Basic ...... 11 1.3p (5.7)p (1.4)p (5.8)p Diluted ...... 11 1.3p (5.7)p (1.3)p (5.8)p

A reconciliation of Headline results to statutory results is provided in note 10 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

87 Consolidated statement of comprehensive income For the years ended 31 March 2009, 29 March 2008 and 31 March 2007

Notes 2009 2008 2007 £m £m £m Net loss for the year...... (37) (51) (51) Currency translation and cash flow hedges ...... 1 (71) 3 Taxation on items recognised directly in reserves ...... 8 (16) 7 3 Total recognised income and expense for the year ...... (52) (115) (45)

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

88 Consolidated statement of changes in equity For the years ended 31 March 2009, 29 March 2008 and 31 March 2007

Notes 2009 2008 2007 £m £m £m At the beginning of the year ...... (212) (145) 63 Total recognised income and expense for the year ...... (52) (115) (45) Issue of share capital ...... — 49 8 Net (purchase) sale of own shares...... (51) (35) 1 Net cost of share-based payments ...... 6 3 3 3 Equity dividends ...... 9 (38) (31) (24) Movements in demerger reserves ...... 1,052 62 (151) At the end of the year ...... 702 (212) (145)

The accompanying notes are an integral part of this consolidated statement of changes in equity.

89 Consolidated balance sheet As at 31 March 2009, 29 March 2008 and 31 March 2007

Notes 2009 2008 2007 £m £m £m Non-current assets Goodwill ...... 12 304 299 295 Other intangible assets ...... 12 290 329 378 Property, plant and equipment ...... 13 219 198 108 Loans to related parties ...... 16 397 13 — Non-current asset investments...... 14 1 1 — Deferred tax assets ...... 8 108 88 76 1,319 928 857 Current assets Stock...... 15 1 2 1 Trade and other receivables ...... 16 139 201 221 Cash and cash equivalents ...... 18 6 3 24 146 206 246 Total assets ...... 1,465 1,134 1,103 Current liabilities Trade and other payables ...... 17 (264) (401) (332) Corporation tax liabilities ...... (33) (15) (14) Loans and other borrowings ...... 18 (33) (25) (22) Provisions ...... 20 (8) (10) (18) (338) (451) (386) Non-current liabilities Trade and other payables ...... 17 — (1) (72) Loans and other borrowings ...... 18 (425) (894) (708) Loans from related parties ...... 18 — — (82) (425) (895) (862) Total liabilities ...... (763) (1,346) (1,248) Net assets (liabilities) ...... 702 (212) (145) Equity Invested capital ...... 21 702 (212) (145) Funds (deficit) attributable to equity shareholders ...... 702 (212) (145)

The accompanying notes are an integral part of this consolidated balance sheet.

90 Consolidated cash flow statement For the years ended 31 March 2009, 29 March 2008 and 31 March 2007

Notes 2009 2008 2007 £m £m £m Operating activities Profit (loss) before interest and taxation ...... 19 (29) (63) Adjustments for non-cash items: Share-based payments ...... 3 3 3 Depreciation...... 40 33 22 Amortisation ...... 87 88 63 Loss on disposal of property, plant and equipment ...... — 1 — Operating cash flows before movements in working capital . . 149 96 25 Decrease (increase) in trade and other receivables ...... 5 16 (19) Increase in stock ...... — (1) — (Decrease) increase in trade and other payables...... (45) 1 41 Increase (decrease) in provisions ...... 11 (4) (25) Cash flows from operating activities ...... 120 108 22 Investing activities Interest received...... 29 10 26 Disposal of subsidiaries, net of cash disposed ...... 4 — — Acquisition of subsidiaries, net of cash acquired ...... 14 (76) (68) (248) Acquisition of intangible assets ...... (47) (54) (44) Acquisition of property, plant and equipment ...... (58) (118) (70) Acquisition of non-current asset investments ...... (1) — — Cash flows from investing activities ...... (149) (230) (336) Financing activities Proceeds from the issue of share capital ...... — 49 8 Net (purchase) sale of own shares...... (51) (35) 1 (Decrease) increase in borrowings ...... 22 (621) 38 374 Interest paid...... (30) (51) (32) Cash flows relating to movements in demerger reserves .... 1,130 231 (234) Net (increase) decrease in loans to related parties ...... 22 (384) (95) 238 Dividends paid...... 9 (38) (31) (24) Cash flows from financing activities...... 6 106 331 Net (decrease) increase in cash and cash equivalents ..... (23) (16) 17 Cash and cash equivalents at the start of the year ...... (3) 13 (4) Effect of exchange rate fluctuations ...... (1) — — Cash and cash equivalents at the end of the year ...... (27) (3) 13 Cash and cash equivalents for the purposes of this statement comprise: Cash and cash equivalents ...... 22 6 3 24 Bank overdrafts ...... 22 (33) (6) (11) (27) (3) 13

The accompanying notes are an integral part of this consolidated cash flow statement.

91 Notes to the financial information for the years ended 31 March 2009, 29 March 2008 and 31 March 2007

1. Accounting policies

(a) Basis of preparation This non-statutory financial information has been prepared in accordance with IFRS and IFRIC interpretations as endorsed by the European Union at 31 March 2009. The consolidated financial information has been prepared on a going concern basis and on the historical cost basis, except for the revaluation of certain financial instruments and investments. The principal accounting policies adopted are set out below.

Presentation of the TalkTalk Group — general: Following the completion of the Proposals, the TalkTalk Group will comprise the TalkTalk Business, the Carphone Warehouse (to be renamed TalkTalk Telecom Holdings Limited pursuant to the Proposals) and various other non-trading and holding companies. The consolidated financial information has been prepared with the objective of presenting the results, net assets and cash flows of the TalkTalk Group in the form that will arise on completion of the Proposals, as if it had been a standalone business during the year from 30 March 2008 to 31 March 2009, the 52 weeks ended 29 March 2008 and the 52 weeks ended 31 March 2007 (“the Reporting Period”). The consolidated financial information has been prepared by aggregating the financial accounts of the companies and assets that will comprise the TalkTalk Group following the Proposals. Any assets and liabilities held within the consolidation of the Carphone Warehouse Group that relate to the TalkTalk Group have been reflected in the consolidated financial information, as though they had always formed part of the TalkTalk Group. The principles of IAS 27 ‘Consolidated and Separate Financial Statements’, SIC 12 ‘Consolidation — Special Purpose Entities’ and SIR 2000 ‘Investment Reporting Standards applicable to Public Reporting Engagements on Historical Financial Information’ have been applied in determining the companies and assets to be combined and the principles to be followed. Certain operating expenses arose in companies that will form part of the TalkTalk Group on completion of the Proposals that relate to the New Carphone Warehouse Business. Included within such costs are certain operating expenses that were borne by Carphone Warehouse, which will form part of the TalkTalk Group, during the Reporting Period. A proportion of these costs have been allocated to the New Carphone Warehouse Group using a basis of allocation consistent with the nature of the cost. In particular, the costs of the Carphone Warehouse Board and key management have been allocated between TalkTalk Group and the New Carphone Warehouse Group to reflect as far as possible the split of management responsibilities following the completion of the Proposals. These allocations do not necessarily reflect the results that the TalkTalk Group might have incurred if it had been a separate, standalone group during this time. As any such cost allocations did not result in cash payments, they are offset by an entry in equity, described as “movements in demerger reserves”, and are reflected in the cash flow statement within “cash flows relating to movements in demerger reserves”. During the Reporting Period, various services were provided to the TalkTalk Group by other companies within the Carphone Warehouse Group, and vice versa. These charges might have been different had the TalkTalk Group existed on a standalone basis during the Reporting Period and therefore the consolidated financial information for the Reporting Period does not necessarily reflect the results, net assets and cash flows that the TalkTalk Group might have had if it had been a separate, standalone group during this time. Details of transactions with other companies within the Carphone Warehouse Group are set out in note 26. Additionally, as the TalkTalk Group was not a standalone business during the Reporting Period, certain cash flows that relate to the New Carphone Warehouse Business arose in companies that will form part of the TalkTalk Group following completion of the Proposals. These cash flows are offset by an entry in equity, as “movements in demerger reserves”, and are reflected in the cash flow statement within “cash flows relating to movements in demerger reserves”. Dividends to or from other entities in the Carphone Warehouse Group have been eliminated with the corresponding entry recorded in equity. Such dividends would not have been applicable had the operations

92 been independent during the Reporting Period and are not representative of the future position of the TalkTalk Group. Such payments are recorded in “cash flows relating to movements in demerger reserves”.

As the TalkTalk Group did not exist as a separate legal group during the Reporting Period, it is not meaningful to show share capital or an analysis of separate equity accounts. Instead, movements in the cumulative investment in the TalkTalk Group are presented as “invested capital”.

Presentation of the TalkTalk Group — financing arrangements:

During the Reporting Period, Carphone Warehouse provided funding to various companies within the Carphone Warehouse Group. The financial information reflects the historical loans and deposits within the TalkTalk Group, adjusted where necessary for transactions required to form the TalkTalk Group. Generally, such loans or deposits were provided on a repayable on demand basis. They have been presented as non- current in the financial information to reflect that such prepayment has not been required during the reporting period. Adjustment has also been made to present the funding of New Carphone Warehouse’s joint ventures as though it had been made via New Carphone Warehouse, to reflect the ongoing structure of their funding, although the funding was in fact provided directly by Carphone Warehouse which will form part of the TalkTalk Group.

Presentation of the TalkTalk Group — other:

Throughout the Reporting Period, some IT functions were provided to various businesses within the Carphone Warehouse Group by a central IT company. This company formed part of the Best Buy Europe Group following the Best Buy Europe Joint Venture Transaction. Prior to this, the costs of the IT company, including depreciation, amortisation, other operating expenses and capital expenditure, were allocated to each part of the Carphone Warehouse Group based on the services provided. The allocation was applied in the financial statements up until the date of the Best Buy Europe Joint Venture Transaction, from which time it was replaced by a different charge-out structure. To the extent that the allocation before the Best Buy Europe Joint Venture Transaction did not equal the cash consideration paid for these services, the difference has been recorded in equity.

Carphone Warehouse has issued equity settled share-based payments to certain employees of its subsidiaries and of the Best Buy Europe Group. The share option expense arising in relation to these employees has been allocated between TalkTalk Group, New Carphone Warehouse and the Best Buy Europe based on the businesses that benefited from the incentives.

Taxation has been allocated in the income statements of the New Carphone Warehouse Group, the TalkTalk Group and the Best Buy Europe Group to reflect as far as possible the underlying tax position in each business. Any group relief provided between companies in the Carphone Warehouse Group is therefore treated as having been charged, even if such charges were not made. As the TalkTalk Group did not exist in the Reporting Period on a separate, standalone basis, the taxation reflected in the financial information is not necessarily representative of the position if it had been, or of the position in the future.

EPS information has been provided based on the share capital of Carphone Warehouse in each year and the share holdings of the Carphone Warehouse Employee Benefit Trust, as TalkTalk did not exist during the years presented. Diluted EPS has been calculated using the Carphone Warehouse dilution adjustments.

(b) Basis of consolidation

Until the year ended 31 March 2009, the TalkTalk Group reported using a weekly financial (“retail”) calendar, under which the financial information was drawn up to the closest Saturday to 31 March. The TalkTalk Group then elected to move to a fixed period end of 31 March, which is better suited to the operating cycles of the TalkTalk Group’s operations. The results for the periods ended 29 March 2008 and 31 March 2007 (each described as “the year”), reflect the retail calendar.

The results of subsidiaries acquired or sold during the year are included from or to the date on which control or significant influence passed. Intercompany transactions and balances between subsidiaries are eliminated on consolidation.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the TalkTalk Group.

93 (c) Foreign currency translation and transactions Material transactions in foreign currencies are hedged using forward purchases or sales of the relevant currencies and are recognised in the financial statements at the exchange rates thus obtained. Unhedged transactions are recorded at the exchange rate on the date of the transaction. Material monetary assets and liabilities denominated in foreign currencies are hedged, mainly using forward foreign exchange contracts to create matching liabilities and assets, and are retranslated at each balance sheet date. Hedge accounting as defined by IAS 39 ‘Financial Instruments: Recognition and Measurement’ has been applied in the Reporting Period by marking to market the relevant financial instruments at the balance sheet date and recognising the gain or loss in equity in respect of cash flow hedges, and through the income statement in respect of fair value hedges. Financial instruments are also used for the purposes of net investment hedging. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges in that the gain or loss on the effective portion of the hedges is recognised in equity, while any gains or losses on any ineffective portion is recognised immediately in the income statement. The results of overseas operations are translated at the average foreign exchange rates for the year, and their balance sheets are translated at the rates prevailing at the balance sheet date. Goodwill is held in the currency of the operations to which it relates. Exchange differences arising on the translation of opening net assets, goodwill and results of overseas operations are recognised in equity. All other exchange differences are included in the income statement. The principal exchange rates against UK Sterling used in this financial information are as follows: Average Closing Mar-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-07 Mar-08 Sep-08 Mar-09 Sep-09 Euro ...... 1.47 1.41 1.27 1.21 1.14 1.47 1.26 1.26 1.08 1.09 South African Rand ...... 13.37 14.35 14.87 14.89 12.67 14.22 16.08 14.94 13.63 12.12 Swiss Franc ...... 2.34 2.32 2.04 1.89 1.73 2.39 1.99 2.01 1.63 1.66 United States Dollar ...... 1.90 2.01 1.93 1.73 1.60 1.96 1.99 1.84 1.43 1.60 Where a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the operation.

(d) Revenue Turnover is stated net of VAT and other sales related taxes, and comprises revenue generated from the provision of fixed line telecommunications services. All such revenue is recognised as the services are provided.

(e) Share-based payments Carphone Warehouse has issued equity settled share-based payments to certain employees of the TalkTalk Group. Equity settled share-based payments are measured at fair value at the date of grant, and expensed over the vesting period, based on an estimate of the number of shares that will eventually vest. Fair value is measured by use of a Binomial model for share-based payments with internal performance criteria (such as Earnings Per Share targets) and a Monte Carlo model for those with external performance criteria (such as Total Shareholder Return targets). For schemes with internal performance criteria, the number of options expected to vest is recalculated at each balance sheet date, based on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement, with a corresponding entry in reserves. For schemes with external performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement, with a corresponding entry in reserves. If a share-based payment scheme is cancelled, any remaining part of the fair value of the scheme is expensed through the income statement. If a share-based payment scheme is forfeited, no further expense is recognised and any charges previously recognised through the income statement are reversed.

94 (f) Pensions Contributions to defined contribution schemes are charged to the income statement as they become payable in accordance with the rules of the schemes.

(g) Dividends Dividend income is recognised when payment has been received. Final dividend distributions are recognised as a liability in the financial information in the year in which they are approved by the relevant shareholders. Interim dividends are recognised in the year in which they are paid.

(h) Leases Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives and rent-free periods are amortised through the income statement over the period of the lease. Gains or losses from sale and leaseback transactions are deferred over the life of the new lease to the extent that the rentals are considered to be above or below market rentals. The remaining gain or loss is recognised within operating expenses in the year in which the sale is completed.

(i) Taxation Current tax, including United Kingdom corporation tax and overseas tax, is provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided in full on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, and the carry-forward of unused tax losses and credits. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is provided on the unremitted earnings of overseas subsidiaries where incremental tax is expected to arise on their remittance except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Current and deferred tax is recognised in the income statement except where it relates to an item recognised directly in reserves, in which case it is recognised directly in reserves. Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions.

(j) Intangible assets Goodwill: Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is recognised initially as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. At the acquisition date, goodwill is allocated to each of the cash-generating units expected to benefit from the combination and held in the currency of the operations to which the goodwill relates. Goodwill is reviewed at least annually for impairment, or more frequently where there is an indication that goodwill may be impaired. Impairment is determined by assessing the future cash flows of the cash generating units to which the goodwill relates. Where the future cash flows are less than the carrying value of goodwill, an impairment charge is recognised in the income statement. On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or loss on disposal.

95 Operating intangibles: Operating intangibles include internal infrastructure and design costs incurred in the development of software for internal use. Internally generated software is recognised as an intangible asset only if it can be separately identified, it is probable that the asset will generate future economic benefits, and the development cost can be measured reliably. Where these conditions are not met, development expenditure is recognised as an expense in the year in which it is incurred. Operating intangibles are amortised on a straight-line basis over their estimated useful economic lives of up to 8 years.

Acquisition intangibles: Acquired intangible assets such as customer bases, customer revenue share agreements, brands and other intangible assets acquired through a business combination are capitalised separately from goodwill and amortised over their expected useful lives of up to 6 years on a straight-line basis. The value attributed to such assets is based on the future economic benefit that is expected to be derived from them, calculated as the present value of future cash flows after a deduction for contributory assets.

(k) Property, plant and equipment Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life from the date it is brought into use, as follows: Short leasehold costs ...... 10%orthelease term if less than 10 years Network equipment and computer hardware ...... 12.5-50% per annum Fixtures and fittings ...... 20-25% per annum

(l) Recoverable amount of non-current assets At each reporting date, the TalkTalk Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the TalkTalk Group makes a formal estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down through an accelerated amortisation charge to its recoverable amount. The recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets.

(m) Investments Investments, other than subsidiaries, are initially recognised at cost, being the fair value of the consideration given plus any transaction costs associated with the acquisition. Investments are categorised as available-for-sale and are then recorded at fair value. Changes in fair value, together with any related taxation, are taken directly to equity, and recycled to the income statement when the investment is sold or determined to be impaired.

(n) Stock Stock is stated at the lower of cost and net realisable value. Cost, net of discounts and volume bonuses from product suppliers, includes all direct costs incurred in bringing stock to its present location and condition and represents finished goods and goods for resale. Net realisable value is based on estimated selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow-moving or defective items where appropriate.

(o) Cash and cash equivalents Cash and cash equivalents represent cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash.

(p) Loans and other borrowings Loans and other borrowings represent committed and uncommitted bank loans, bank overdrafts, and loans from related parties.

96 Bank fees and legal costs associated with the securing of external financing are capitalised and amortised over the term of the relevant facility. All other borrowing costs are recognised in the income statement in the period in which they are incurred.

(q) Provisions Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted where the time value of money is considered to be material. Provisions are categorised as follows:

Reorganisation: Reorganisation provisions relate principally to redundancy costs and are only recognised where plans are demonstrably committed and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are not recognised in respect of future operating losses.

Other: Other provisions relate to dilapidations and similar property costs, and all other provisions, principally being the anticipated costs of unresolved tax issues and legal disputes, and costs associated with onerous contracts. All such provisions are assessed by reference to the best available information at the balance sheet date.

(r) Headline results Headline results are stated before the amortisation of acquisition intangibles. Headline results also exclude any exceptional items that are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance.

(s) Use of critical accounting estimates and assumptions Estimates and assumptions used in the preparation of the financial information are continually reviewed and revised as necessary. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have a material impact. The principal balances in the financial information where changes in estimates and assumptions may have a material impact are as follows:

Recoverable amount of non-current assets: All non-current assets, including goodwill and other intangible assets, are reviewed for potential impairment using estimates of the future economic benefits attributable to them. In the case of customer bases, such estimates involve assumptions in relation to future customer margins and average customer lives. Any estimates of future economic benefits made in relation to non-current assets may differ from the benefits that ultimately arise, and materially affect the recoverable value of the asset.

Trade and other receivables: Provisions for irrecoverable receivables are based on extensive historical evidence, and the best available information in relation to specific issues, but are unavoidably dependent on future events.

Current taxation: The complex nature of tax legislation in the tax jurisdictions in which the TalkTalk Group operates necessitates the use of many estimates and assumptions, where the outcome may differ from that assumed.

Deferred taxation: The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the relevant jurisdictions in the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain.

97 Provisions: The TalkTalk Group’s reorganisation and other provisions are based on the best information available to management at the balance sheet date. However, the future costs assumed are inevitably only estimates, which may differ from those ultimately incurred.

(t) Recent accounting developments The following standards or interpretations became effective during the year ending 31 March 2010 and have been applied in this financial information: • IFRS 8 ‘Operating Segments’ updated segmental reporting requirements; • IAS 1 (Amendment) ‘Presentation of Financial Statements’ has changed the presentation of the statement of changes in equity and introduced a statement of comprehensive income. The following interpretation was adopted for the year ended 31 March 2009. • IFRIC 11 ‘IFRS 2 — Group and Treasury Share Transactions’ states that when an entity buys its own instruments to settle a share-based payment obligation it should be accounted for as an equity-settled award. The following standards, amendments and interpretations (none of which is expected to have a material impact on the TalkTalk Group’s results or financial statements except where noted) have been adopted by the European Union but have not been applied by the TalkTalk Group: • IFRS 1 (Amendment) ‘First-time Adoption of International Financial Reporting Standards’ and IAS 27 (Amendment) ‘Consolidated and separate financial statements’ on the ‘Cost of an investment in a subsidiary, jointly controlled entity or associate’. The TalkTalk Group will adopt the amendments for the period ending 31 March 2011; • IFRS 2 (Amendment) ‘Share-based Payment’ clarifies the treatment of certain conditions when accounting or share-based payments. The TalkTalk Group will adopt the amendments for the year ending 31 March 2010; • IAS 23 (Amendment) ‘Borrowing Costs’ requires the capitalisation of borrowing costs directly attributable to a qualifying asset as part of the cost of that asset. The TalkTalk Group will adopt the amendments for the year ending 31 March 2010; • IAS 32 (Amendment) ‘Financial Instruments: Presentation’ and IAS 1 (Amendment) ‘Presentation of financial statements’ on ‘Puttable financial instruments and obligations arising on liquidation’. The TalkTalk Group will adopt the amendments for the year ending 31 March 2010; • IAS 39 (Amendment) ‘Financial Instruments: Recognition and Measurement’, and IFRS 7 (Amendment) ‘Financial Instruments: Disclosures’, on the ‘Reclassification of financial assets’ allows the reclassification of certain financial assets previously classified as ’held-for-trading’ or ‘available- for-sale’ to another category under limited circumstances. The TalkTalk Group will adopt the amendment for the year ending 31 March 2010; • IFRIC 12 ‘Service Concession Arrangements’ applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services and will have no impact on the TalkTalk Group; • IFRIC 13 ‘Customer Loyalty Programmes’ requires that where goods or services are sold with a customer loyalty incentive, the consideration receivable from the customer should be allocated between the components of the arrangement in proportion to their fair values. The TalkTalk Group will adopt the amendments for the year ending 31 March 2010; • IFRIC 14 ‘IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ will have no impact on the TalkTalk Group as it does not operate any defined benefit pension schemes. The TalkTalk Group will adopt the interpretation for the year ending 31 March 2010; and • ‘Improvements to IFRSs 2008’ amends existing standards resulting in changes to presentation, recognition and measurement plus terminology and editorial changes. The TalkTalk Group will adopt the amendment for the year ending 31 March 2010.

98 Standards, amendments and interpretations which have not yet been approved by the European Union and as such cannot be early adopted by the TalkTalk Group are as follows: • IFRS 1 (Revised) ‘First-time Adoption of International Financial Reporting Standards’ effective for the year ending 31 March 2011; • IFRS 3 (Revised) ‘Business Combinations’ effective for the year ending 31 March 2011; • IFRS 7 (Amendment) ‘Financial Instruments: Disclosures’ effective for the year ending 31 March 2010; • IAS 27 (Revised), ‘Consolidated and Separate Financial Statements’ effective for the year ending 31 March 2011; • IAS 39 (Amendment) ‘Financial Instruments: Recognition and Measurement’ on ‘Eligible hedged items’ effective for the year ending 31 March 2011; • IFRIC 9 (Amendment) ‘Reassessment of Embedded Derivatives’ and IAS 39, ‘Financial Instruments: Recognition and Measurement’ on ‘embedded derivatives’ effective for the year ending 31 March 2010; • IFRIC 15 ‘Agreements for Construction of Real Estate’ effective for the year ending 31 March 2010; • IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ effective for the year ending 31 March 2010; • IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ effective for the year ending March 2011; • IFRIC 18 ‘Transfer of Assets from Customers’ effective for the year ending March 2011; and • ‘Improvements to IFRSs 2009’ effective for the year ending 31 March 2010.

2. Segmental reporting Continuing operations are analysed as follows: Operations PLC costs Total £m £m £m 2009 Revenue ...... 1,385 — 1,385 Headline EBITDA ...... 180 (8) 172 Depreciation ...... (40) — (40) Amortisation of operating intangibles ...... (16) — (16) Headline EBIT ...... 124 (8) 116 Amortisation of acquisition intangibles ...... (71) — (71) Exceptional items (see note 4) ...... (26) — (26) Statutory EBIT (segment results) ...... 27 (8) 19 2008 Revenue ...... 1,424 — 1,424 Headline EBITDA ...... 115 (8) 107 Depreciation ...... (33) — (33) Amortisation of operating intangibles ...... (13) — (13) Headline EBIT ...... 69 (8) 61 Amortisation of acquisition intangibles ...... (75) — (75) Exceptional items (see note 4) ...... (15) — (15) Statutory EBIT (segment results) ...... (21) (8) (29) 2007 Revenue ...... 1,116 — 1,116 Headline EBITDA ...... 29 (7) 22 Depreciation ...... (22) — (22) Amortisation of operating intangibles ...... (8) — (8) Headline EBIT ...... (1) (7) (8) Amortisation of acquisition intangibles ...... (55) — (55) Statutory EBIT (segment results) ...... (56) (7) (63)

PLC costs represent central Carphone Warehouse costs that are not attributable to the operations.

99 Assets, liabilities and infrastructure of the TalkTalk Group are generally shared, hence segmental assets, liabilities and capital expenditure cannot practically be allocated across Operations and PLC costs. Segmental revenue and total assets are analysed by geographical location as follows: 2009 2008 2007 £m £m £m Revenue United Kingdom ...... 1,365 1,399 1,082 Other ...... 20 25 34 1,385 1,424 1,116

2009 2008 2007 £m £m £m Total assets United Kingdom ...... 1,463 1,132 1,101 Other ...... 2 2 2 1,465 1,134 1,103

Revenue and total assets are allocated based on where customers and assets are located. 3. Profit (loss) before interest and taxation Profit (loss) before interest and taxation is stated after charging: 2009 2008 2007 £m £m £m Depreciation of property, plant and equipment ...... 40 33 22 Amortisation of acquisition intangibles ...... 71 75 55 Amortisation of other intangible fixed assets...... 16 13 8 Impairment of trade receivables ...... 16 15 17 Share-based payments (see note 6) ...... 3 3 3 Other employee costs, excluding share-based payments...... 116 129 98 Stock costs ...... 14 14 14 Rentals under operating leases — property ...... 4 4 4 Rentals under operating leases — non-property ...... 29 29 23 Operating expenses are analysed as follows: 2009 2008 2007 £m £m £m Operating expenses excluding depreciation and amortisation ..... 581 540 316 Depreciation ...... 40 33 22 Amortisation ...... 87 88 63 Total operating expenses ...... 708 661 401

4. Exceptional items The following items have been disclosed separately given their size and one-off nature: Pre-tax Taxation Post-tax Note Income statement presentation loss credit loss £m £m £m 2009 AOL integration ...... (a) Operating expenses and taxation (16) 4 (12) Reorganisation programme ...... (b) Operating expenses and taxation (10) 3 (7) Foreign exchange losses . . . (c) Interest expense and taxation (85) 24 (61) 2008 AOL integration ...... (a) Operating expenses and taxation (15) 5 (10) (a) AOL integration The TalkTalk Group acquired AOL’s UK internet access business in December 2006. From this time the TalkTalk Group commenced the reorganisation of the business through a programme to transfer network operations, hosting, billing and customer management away from a transitional platform provided by AOL

100 Time Warner onto the TalkTalk Group’s own systems and infrastructure. The transition was completed during the year ended 31 March 2009. Costs of £16 million (2008: £15 million) were incurred on the programme, against which a tax credit of £4 million (2008: £5 million) has been recognised.

(b) Reorganisation programme The TalkTalk Group undertook a comprehensive reorganisation of its structure and operations during the year ended 31 March 2009, resulting in redundancy and other restructuring costs of £10 million. These costs are expected to attract tax relief at 28 per cent. and a tax credit of £3 million has been recognised against them.

(c) Foreign exchange losses An exceptional foreign exchange loss of £85 million arose in the year ended 31 March 2009 following a change in the functional currency of the Carphone Warehouse Group’s brand company (which forms part of TalkTalk Group) from Swiss Francs to UK Sterling. As a result of the change, movements on the brand company’s Swiss Franc borrowings, which would previously have been recognised through reserves, were thereafter reflected in the income statement. These borrowings were converted into UK Sterling before 31 March 2009. A tax credit of £24 million has been recognised in respect of this loss.

5. Employee costs Compensation earned by key management, comprising the TalkTalk Group executive board and an allocation of Carphone Warehouse directors, was as follows: 2009 2008 2007 £m £m £m Salaries and fees ...... 2.8 2.0 1.8 Performance bonuses ...... 1.9 1.6 1.4 Benefits...... 0.1 0.1 0.1 Pension costs...... 0.1 0.2 0.1 Share-based payments ...... 0.6 1.1 0.9 5.5 5.0 4.3

Amounts of £0.5 million were paid to HMRC during the year ended 31 March 2009 on behalf of a number of Key Management; these amounts were outstanding at 31 March 2009. Interest is charged on these loans at a market rate, and the loans are repayable in the year ending 31 March 2011. There were no loans outstanding from TalkTalk Group executives at 29 March 2008 or 31 March 2007.

6. Share-based payments Carphone Warehouse has historically issued share options to certain employees of the Carphone Warehouse Group. As explained in Part X of this document, options and awards granted under the Carphone Warehouse Discretionary Share Schemes will generally be exchanged for replacement options and awards over TalkTalk Shares and New Carphone Warehouse Ordinary Shares, so that an option-holder in Carphone Warehouse would become an option-holder in both TalkTalk and New Carphone Warehouse. Since generally all Carphone Warehouse options are therefore relevant to the TalkTalk Group, for simplicity of presentation the analysis in this financial information reflects all options for the Carphone Warehouse share schemes. Carphone Warehouse had the following schemes during the period:

(a) Performance Plan Carphone Warehouse has a Performance Plan which uses share options to provide long-term incentives to senior management of the Carphone Warehouse Group. Awards made under the Performance Plan in the years ended 29 March 2008 and 31 March 2007 are subject to Total Shareholder Return (“TSR”) performance targets and are to be measured over an initial performance period to 4 June 2010 and a subsequent performance period to 4 June 2011. Awards made in earlier years were subject to a mixture of the Carphone Warehouse Group’s Headline EPS and TSR performance targets measured over a three or four year performance period. The performance period for all such awards has been completed and where targets have been met the relevant share options have vested.

101 The following table summarises the number and weighted average exercise prices (“WAEP”) of share options for the scheme. The WAEP used throughout this analysis is that of the share options as exercised and takes no account of adjustments to the exercise price of unexercised share options that may take place following the Demerger. The WAEP is therefore not necessarily representative of the WAEP that might apply on an ongoing basis. 2009 2008 2007 Number WAEP Number WAEP Number WAEP million £ million £ million £ Outstanding at the beginning of the year ...... 43 — 52 — 29 — Granted during the year .... — — 2 — 25 — Forfeited during the year . . . (15) — (6) — (2) — Exercised during the year . . . (6) — (5) — — — Outstanding at the end of the year ...... 22 — 43 — 52 — Exercisable at the end of the year ...... 13 — 6 — — —

The options outstanding at 31 March 2009 had a weighted average remaining contractual life of 7.3 years (2008: 8.3 years; 2007: 9.0 years). The options exercised during the year to 31 March 2009 were exercised at a weighted average market price of £1.54 (2008: £3.51; 2007: no options were exercised). (b) ESOS Carphone Warehouse had an ESOS under which share options were issued at market value in previous years. All ESOS options have already vested. The following table summarises the number and WAEP of share options for the scheme: 2009 2008 2007 Number WAEP Number WAEP Number WAEP million £ million £ million £ Outstanding at the beginning of the year ...... 9 1.02 21 1.11 32 1.05 Exercised during the year . . . (1) 0.89 (12) 1.17 (11) 0.93 Outstanding at the end of the year ...... 8 1.04 9 1.02 21 1.11 Exercisable at the end of the year ...... 8 1.04 9 1.02 21 1.11

The options outstanding at 31 March 2009 had a weighted average remaining contractual life of 2.5 years (2008: 3.6 years; 2007: 4.5 years). The options exercised during the year ended 31 March 2009 were exercised at a weighted average market price of £1.64 (2008: £3.31; 2007: £3.09). The summary above includes 5 million (2008: 5 million; 2007: 14 million) options that were granted before 7 November 2002. In accordance with IFRS 2 ‘Share-based Payment’, no cost has been recognised in respect of these options. (c) Retail Share Option Scheme Prior to the Best Buy Europe Joint Venture Transaction, Carphone Warehouse operated a Retail Share Option Scheme, which provided market priced share options to senior employees in the UK retail and distribution business. Following the Best Buy Europe Joint Venture Transaction, all unvested options were allowed by the Carphone Warehouse Remuneration Committee to vest early and the scheme was terminated. The expiry dates of these options were changed to the later of three years from the last date of exercise, where an option-holder had previously exercised under the scheme, and 31 December 2008.

102 The following table summarises the number and WAEP of share options for the scheme: 2009 2008 2007 Number WAEP Number WAEP Number WAEP million £ million £ million £ Outstanding at the beginning of the year ...... 6 2.90 4 1.82 7 1.67 Granted during the year .... — — 3 3.56 — 3.10 Forfeited during the year . . . (4) 3.03 — 2.14 (1) 1.66 Exercised during the year . . . — 1.72 (1) 1.53 (2) 1.45 Outstanding at the end of the year ...... 2 2.73 6 2.90 4 1.82 Exercisable at the end of the year ...... 2 2.73 2 1.61 2 1.44

The options outstanding at 31 March 2009 had a weighted average remaining contractual life of 4.5 years (2008: 8.5 years; 2007: 7.7 years). The options exercised during the year were exercised at a weighted average market price of £2.41 (2008: £3.07; 2007: £3.14).

(d) Share gift In December 2008, 3.6 million shares were gifted by Carphone Warehouse’s Employee Benefit Trust to certain Carphone Warehouse Group employees. The shares are restricted until 30 June 2010, and will be forfeited if various internal performance conditions, principally in relation to earnings and cash generation, are not met.

(e) Other employee share option schemes Carphone Warehouse has a SAYE Scheme which permits the grant to employees of options linked to a bank save-as-you-earn contract for a term of three or five years with contributions from employees of between £5 and £250 per month. Options may be exercised at the end of the three or five year period at a subscription price not less than 80 per cent. of the middle market quotation on the date of grant. In addition, options were granted to UK employees at the time of Carphone Warehouse’s admission to the London Stock Exchange. Market priced options were also granted during the year ended 31 March 2009 to certain Carphone Warehouse Group employees. These awards are subject to internal performance conditions, principally in relation to earnings and cash generation, over a period to June 2010. The following table summarises the number and WAEP of share options for the scheme: 2009 2008 2007 Number WAEP Number WAEP Number WAEP million £ million £ million £ Outstanding at the beginning of the year ...... 8 2.00 9 1.60 9 1.09 Granted during the year .... 7 0.88 3 2.59 3 2.66 Forfeited during the year . . . (4) 2.38 (2) 2.26 (1) 1.76 Exercised during the year . . . (2) 1.24 (2) 1.07 (2) 0.78 Outstanding at the end of the year ...... 9 1.08 8 2.00 9 1.60 Exercisable at the end of the year ...... 1 0.92 1 0.88 1 0.87

The options outstanding at 31 March 2009 had a weighted average remaining contractual life of 8.2 years (2008: 2.1 years; 2007: 2.2 years). The options exercised during the year were exercised at a weighted average market price of £1.87 (2008: £3.33; 2007: £2.81). The summary above includes 1 million (2008: 1 million; 2007: 1 million) options that were granted before 7 November 2002. In accordance with IFRS 2, no cost has been recognised in respect of these options.

103 (f) Fair value models Nil cost options with internal performance targets were valued using the market price of a share at the date of grant, discounted for expected future dividends to the date of exercise. The fair values of other options with internal performance targets have been estimated at the date of grant using a Binomial model. The inputs into the Binomial model were as follows: 2009 2008 2007 Expected volatility (%) ...... 35.0 29.2 28.6 Risk free rate (%) ...... 3.1 5.8 5.3 Dividend yield (%) ...... 2.0 2.0 2.0 Expected volatility was arrived at by using the historical volatility of the Carphone Warehouse share price, and the volatility of the share price of similar companies, whose shares have been listed for longer than those of Carphone Warehouse, over a period comparable with the expected lives of the options. The assumptions made in relation to the timing of exercises were based on historical exercise patterns for each option scheme. The fair values of options with external performance targets were estimated at the date of grant using a Monte Carlo model. The model combines the market price of a share at the date of grant with the probability of meeting performance criteria, based on the historical performance of Carphone Warehouse Shares. The historical performance period reflects a volatility of 27.4 per cent. A dividend yield of 2.0 per cent. was assumed in the model. (g) Charge to income statement During the year the TalkTalk Group recognised a charge of £3 million (2008: £3 million; 2007: £3 million) in respect of equity settled share-based payments. 7. Interest expense and income (finance costs) Interest expense is analysed as follows: 2009 2008 2007 £m £m £m Interest on bank loans and overdrafts ...... 29 49 30 Amortisation of facility fees and similar charges...... 1 2 1 Foreign exchange losses (see note 4) ...... 85 — — Other interest expense ...... — — 1 115 51 32

Interest income is analysed as follows: 2009 2008 2007 £m £m £m Interest on cash and cash equivalents ...... 7 1 — Interest on loans to related parties ...... 16 9 25 Other interest receivable ...... 6 — — 29 10 25

104 8. Taxation The tax credit comprises: 2009 2008 2007 £m £m £m Current tax: UK corporation tax ...... 8 2 3 Overseas tax ...... 1 1 — 933 Adjustments in respect of prior years: UK corporation tax ...... 3 — — Total current tax ...... 12 3 3 Deferred tax: Origination and reversal of timing differences...... (23) (22) (23) Adjustments in respect of prior years ...... (19) — 1 Total deferred tax ...... (42) (22) (22) Total tax credit ...... (30) (19) (19)

The tax charge relating to Headline earnings (see note 10) for the year ended 31 March 2009 is £20 million (2008: £8 million; 2007: credit of £3 million) representing an effective tax rate on pre-tax profits or losses of 17 per cent. (2008: 40 per cent.; 2007: 20 per cent.). The tax credit relating to statutory earnings for the period is £30 million (2008: £19 million; 2007: £19 million). The principal differences between the tax credit shown above and the amount calculated by applying the standard rate of UK corporation tax of 28 per cent. (2008: 30 per cent.; 2007: 30 per cent.) to loss before taxation are as follows: 2009 2008 2007 £m £m £m Loss before taxation ...... (67) (70) (70) Loss before taxation at 28% (2008: 30%; 2007: 30%)...... (19) (21) (21) Items attracting no tax relief or liability ...... 5 (2) 2 Benefit of tax losses brought forward ...... — — (1) Adjustments in respect of prior years ...... (16) — 1 Impact of change in UK tax rate (see below) ...... — 4 — Total tax credit ...... (30) (19) (19)

Tax on items recognised directly in reserves is as follows: 2009 2008 2007 £m £m £m Current tax credit on share-based payments ...... — (9) (8) Deferred tax debit on share-based payments ...... 16 3 4 Deferred tax credit on available-for-sale investments...... — (1) 1 16 (7) (3)

105 The deferred tax assets recognised by the TalkTalk Group and movements thereon during the Reporting Period are as follows: Timing Share-based differences on Other timing payments capitalised costs Tax losses differences Total £m £m £m £m £m 2009 Opening balance ...... 23 4 56 5 88 (Charge) credit to the income statement ...... (2) 24 18 2 42 Charge to reserves ...... (16) — — — (16) Adjustments through demerger reserve . . (3) 1 — (4) (6) Closing balance ...... 2 29 74 3 108 2008 Opening balance ...... 27 13 20 16 76 (Charge) credit to the income statement ...... (1) (9) 47 (15) 22 Charge to reserves ...... (3) — — 1 (2) Adjustments through demerger reserve . . — — (11) 3 (8) Closing balance ...... 23 4 56 5 88 2007 Opening balance ...... 27 9 4 2 42 Credit to the income statement ...... 4 1 13 4 22 Charge to reserves ...... (4) — — (1) (5) Acquisition of subsidiaries ...... — 3 1 11 15 Adjustments through demerger reserve . . — — 2 — 2 Closing balance ...... 27 13 20 16 76

No deferred tax assets and liabilities have been offset in the Reporting Period, except where there is a legal right to do so in the relevant jurisdictions. From 1 April 2008, the UK statutory rate of corporation tax reduced from 30 per cent. to 28 per cent. The impact of this change on the value of deferred tax assets was recognised at 29 March 2008. At 31 March 2009 the TalkTalk Group had unused tax losses of £307 million (2008: £278 million; 2007: £168 million) available for offset against future taxable profits. A deferred tax asset of £74 million (2008: £56 million; 2007: £20 million) has been recognised in respect of £263 million (2008: £183 million; 2007: £71 million) of such losses, based on expectations of recovery in the foreseeable future. No deferred tax asset has been recognised in respect of the remaining £44 million (2008: £95 million; 2007: £97 million) as there is insufficient evidence that there will be suitable taxable profits against which these losses can be recovered. All losses may be carried forward indefinitely. At 31 March 2009 the TalkTalk Group has unrecognised deferred tax liabilities of £20 million (2008: £20 million; 2007: £19 million) in respect of temporary differences associated with the undistributed earnings of subsidiaries of £78 million (2008: £69 million; 2007: £69 million). No liability has been recognised in respect of these differences because the TalkTalk Group is in a position to control the timing of their reversal and it is probable that they will not reverse in the foreseeable future.

106 9. Equity dividends The following dividends were paid by Carphone Warehouse to Carphone Warehouse Shareholders: 2009 2008 2007 £m £m £m Final dividend for the year ended 1 April 2006 of 1.75p per ordinary share ...... — — 15 Interim dividend for the year ended 31 March 2007 of 1.00p per ordinary share ...... — — 9 Final dividend for the year ended 31 March 2007 of 2.25p per ordinary share ...... — 20 — Interim dividend for the year ended 29 March 2008 of 1.25p per ordinary share ...... — 11 — Final dividend for the year ended 29 March 2008 of 3.00p per ordinary share ...... 26 — — Interim dividend for the year ended 31 March 2009 of 1.35p per ordinary share ...... 12 — — 38 31 24 The final dividend for 31 March 2009 was not approved by Carphone Warehouse Shareholders at 31 March 2009 and as such is not included as a liability in this financial information: Final dividend for the year ended 31 March 2009 of 3.00p per ordinary share ...... 27

The Carphone Warehouse Employee Benefit Trust has waived its right to receive dividends and this is reflected in the analysis above.

10. Reconciliation of Headline results to statutory results Profit (loss) before interest Profit (loss) Net profit (loss) EBITDA and taxation before taxation for the year £m £m £m £m 2009 Headline results ...... 172 116 115 95 Exceptional items (see note 4) ...... (26) (26) (111) (111) Amortisation of acquisition intangibles (see note 12) ...... — (71) (71) (71) Taxation on exceptional items (see note 4) ...... — — — 31 Taxation on amortisation of acquisition intangibles ...... — — — 19 Statutory results ...... 146 19 (67) (37) 2008 Headline results ...... 107 61 20 12 Exceptional items (see note 4) ...... (15) (15) (15) (15) Amortisation of acquisition intangibles (see note 12) ...... — (75) (75) (75) Taxation on exceptional items (see note 4) ...... — — — 5 Taxation on amortisation of acquisition intangibles ...... — — — 22 Statutory results ...... 92 (29) (70) (51) 2007 Headline results ...... 22 (8) (15) (12) Amortisation of acquisition intangibles (see note 12) ...... — (55) (55) (55) Taxation on amortisation of acquisition intangibles ...... — — — 16 Statutory results ...... 22 (63) (70) (51)

107 Headline information is provided because the TalkTalk Directors consider that it provides assistance in understanding underlying performance.

11. Earnings per share 2009 2008 2007 Headline earnings (£ million) (see note 10) ...... 95 12 (12) Statutory earnings (£ million) ...... (37) (51) (51)

Weighted average number of shares (millions): Average shares in issue ...... 914 906 892 Less average holding by Carphone Warehouse Employee Benefit Trust ...... (22) (6) (12) For basic earnings per share ...... 892 900 880 Dilutive effect of share options ...... 20 40 49 For diluted earnings per share ...... 912 940 929

The weighted average number of shares for Carphone Warehouse has been applied for illustrative purposes in calculating earnings per share. This is not necessarily representative of the weighted average number of shares that will apply for TalkTalk following the Demerger. The number of shares that could be issued but that are not considered to be dilutive at 31 March 2009 was 21 million (2008: 26 million; 2007: 37 million). 2009 2008 2007 Basic pence per share Headline ...... 10.7 1.3 (1.4) Statutory ...... (4.1) (5.7) (5.8) 2009 2008 2007 Diluted pence per share Headline ...... 10.4 1.3 (1.3) Statutory ...... (4.1) (5.7) (5.8) Headline earnings per share is provided because the TalkTalk Directors consider that it provides assistance in understanding underlying performance.

12. Goodwill and other intangible assets

(a) Goodwill 2009 2008 2007 £m £m £m Opening net book value ...... 299 295 222 Acquisition of subsidiaries (see note 14)...... 5 — 76 Adjustments to contingent consideration ...... — 4 (1) Adjustments to fair value ...... — — (2) Closing net book value...... 304 299 295

The cash flows of the TalkTalk Group are not separable into individual cash generating units as its cash flows are derived from shared assets and infrastructure. The TalkTalk Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the cash generating units is determined from value in use calculations. The TalkTalk Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three years and extrapolates cash flows in perpetuity based on a country-specific growth rate for the UK, where all goodwill is located, of 1.8 per cent. (2008: 1.8 per cent.; 2007: 2.5 per cent.) . The average pre-tax rate used to discount the forecast cash flows is 9.7 per cent. (2008: 10.0 per cent.; 2007: 10.0 per cent.). The key assumptions for the value in use calculations are those in relation to the discount rates, growth rates and expected changes to selling prices and direct costs during the period, all of which are based on historical patterns and expectations of future market developments. Management estimates discount rates using pre-

108 tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating units. Due to the substantial headroom indicated by the TalkTalk Group’s cash flow forecasts, the TalkTalk Directors do not consider it likely that key assumptions may change to such an extent that it would lead to a significant impairment loss.

(b) Other intangible assets Other intangible assets are analysed as follows: Operating Acquisition Total other intangibles intangibles intangibles £m £m £m 2009 Opening balance ...... 85 244 329 Additions ...... 45 — 45 Acquisition of subsidiaries ...... — 3 3 Amortisation ...... (16) (71) (87) Closing balance ...... 114 176 290

Cost (gross carrying amount) ...... 139 325 464 Accumulated amortisation ...... (25) (149) (174) Net carrying amount ...... 114 176 290 2008 Opening balance ...... 61 317 378 Acquisition of subsidiaries ...... — 2 2 Additions ...... 32 — 32 Amortisation ...... (8) (75) (83) Closing balance ...... 85 244 329

Cost (gross carrying amount) ...... 94 363 457 Accumulated amortisation ...... (9) (119) (128) Net carrying amount ...... 85 244 329 2007 Opening balance ...... 13 55 68 Acquisition of subsidiaries ...... 10 335 345 Additions ...... 41 — 41 Adjustment to deferred consideration ...... — (18) (18) Amortisation ...... (3) (55) (58) Closing balance ...... 61 317 378

Cost (gross carrying amount) ...... 66 400 466 Accumulated amortisation ...... (5) (83) (88) Net carrying amount ...... 61 317 378

Prior to the Best Buy Europe Joint Venture Transaction, some of the Carphone Warehouse Group’s IT functions were centralised in a single business. The costs of this business, including depreciation, amortisation and other operating expenses and capital expenditure, were allocated between the TalkTalk Group and the Best Buy Europe Group based on the nature of these costs. The IT business formed part of the Best Buy Europe Group and the associated assets are therefore reflected in the balance sheet of the Best Buy Europe Group. As a result, some depreciation and amortisation is reflected in the income statement and capital expenditure is reflected in the cash flow statement of the TalkTalk Group up to 30 June 2008 without a corresponding movement in the balance sheet. At 29 March 2008, operating intangibles included assets with a cost of £58 million on which amortisation had not yet been charged as the assets had not yet been brought into use (2007: £30 million). At 31 March 2009, there were no such assets. Acquisition intangibles are removed from cost in the analysis above once fully amortised.

109 Acquisition intangibles are analysed as follows: Customer revenue Customer share bases agreements Other Total £m £m £m £m 2009 Opening balance ...... 217 21 6 244 Acquisition of subsidiaries...... 3 — — 3 Amortisation ...... (56) (12) (3) (71) Closing balance ...... 164 9 3 176

Cost (gross carrying amount) ...... 283 35 7 325 Accumulated amortisation ...... (119) (26) (4) (149) Net carrying amount ...... 164 9 3 176 2008 Opening balance ...... 273 32 12 317 Acquisition of subsidiaries...... 2 — — 2 Amortisation ...... (58) (11) (6) (75) Closing balance ...... 217 21 6 244

Cost (gross carrying amount) ...... 314 35 14 363 Accumulated amortisation ...... (97) (14) (8) (119) Net carrying amount ...... 217 21 6 244 2007 Opening balance ...... 21 — 34 55 Acquisition of subsidiaries...... 286 35 14 335 Adjustments to deferred consideration ...... — — (18) (18) Amortisation ...... (34) (3) (18) (55) Closing balance ...... 273 32 12 317

Cost (gross carrying amount) ...... 332 35 33 400 Accumulated amortisation ...... (59) (3) (21) (83) Net carrying amount ...... 273 32 12 317

Customer bases relate primarily to AOL’s UK internet access business which was acquired in December 2006. The valuation of customer bases is derived from the discounted future cash flows expected from them, after a deduction for contributory assets. Customer revenue share agreements again arose on the acquisition of AOL’s UK internet access business, and represent rights, subject to performance criteria, to a share of transactional revenues generated by AOL access customers and TalkTalk customers on AOL sites. The valuation of these rights was again derived from the discounted future cash flows expected from the agreement, after a deduction for contributory assets. Other acquisition intangibles primarily represent a licence to continue to use the AOL brand for a limited time period, valued using the relief from royalty method.

110 13. Property, plant and equipment Network equipment Short leasehold and computer Fixtures and costs hardware fittings Total £m £m £m £m 2009 Opening balance ...... 3 194 1 198 Additions ...... — 61 1 62 Disposals ...... — (1) — (1) Depreciation ...... — (39) (1) (40) Closing balance ...... 32151219

Cost (gross carrying amount) ...... 3 310 1 314 Accumulated depreciation ...... — (95) — (95) Net carrying amount ...... 32151219 2008 Opening balance ...... 1 103 4 108 Additions ...... 2 117 — 119 Disposals ...... — — (3) (3) Depreciation ...... — (26) — (26) Closing balance ...... 3 194 1 198

Cost (gross carrying amount) ...... 3 250 1 254 Accumulated depreciation ...... — (56) — (56) Net carrying amount ...... 3 194 1 198 2007 Opening balance ...... 1 43 2 46 Additions ...... — 71 2 73 Disposals ...... — (2) — (2) Acquisition of subsidiaries...... — 8 — 8 Depreciation ...... — (17) — (17) Closing balance ...... 1 103 4 108

Cost (gross carrying amount) ...... 1 133 4 138 Accumulated depreciation ...... — (30) — (30) Net carrying amount ...... 1 103 4 108

Prior to the Best Buy Europe Joint Venture Transaction, some of the Carphone Warehouse Group’s IT functions were centralised in a single business. The costs of this business, including depreciation, amortisation and other operating expenses and capital expenditure, were allocated between the TalkTalk Group and the Best Buy Europe Group based on the nature of these costs. The IT business formed part of the Best Buy Europe Group and the associated assets are therefore reflected in the balance sheet of the Best Buy Europe Group. As a result, some depreciation and amortisation is reflected in the income statement and capital expenditure is reflected in the cash flow statement of the TalkTalk Group up to 30 June 2008 without a corresponding movement in the balance sheet.

14. Non-current asset investments 2009 2008 2007 £m £m £m Opening balance ...... 1 — — Additions ...... 1 1 — Changes in fair value ...... (1) — — Closing balance ...... 11—

Non-current asset investments at 31 March 2009 and additions in the year then ended relate to a 15 per cent. stake in Shared Band Limited, a telecommunications technology provider.

111 (a) Principal TalkTalk Group investments The TalkTalk Group has investments in the following subsidiary undertakings, which principally affected the profits or losses or net assets of the TalkTalk Group. To avoid a statement of excessive length, details of investments which are not significant have been omitted. All holdings are in equity share capital and give the TalkTalk Group an effective holding of 100 per cent. on consolidation. Name Country of incorporation or registration Nature of business TalkTalk Group Limited...... England and Wales Holding company The Carphone Warehouse Group PLC ...... England and Wales Holding company CPW Broadband Services (UK) Limited...... England and Wales Telecommunications Onetel Telecommunications Limited...... England and Wales Telecommunications Opal Telecom Limited ...... England and Wales Telecommunications TalkTalk Telecom Limited ...... England and Wales Telecommunications TalkTalk Direct Limited ...... England and Wales Telecommunications TalkTalk UK Communication Services Limited ...... England and Wales Telecommunications GIS Telecoms Limited ...... England and Wales Telecommunications CPW Network Services Limited...... England and Wales Telecommunications (b) Acquisitions (i) AOL UK On 29 December 2006, the TalkTalk Group acquired the trade and assets of the internet access business of AOL (UK) Limited, 100 per cent. of the issued share capital of AOL Services (UK) Limited, registered in England and Wales, 100 per cent. of the issued share capital of AOL Europe Operations Limited, registered in Ireland, and 100 per cent. of the issued share capital of AOL Services Sarl, registered in Luxembourg, for a total consideration of £383 million. The final deferred consideration payment of £70 million in relation to AOL’s UK internet access business was made during the year ended 31 March 2009. The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the TalkTalk Group: Accounting Fair value to policy Fair value the TalkTalk Book value alignments adjustments Group £m £m £m £m Non-current asset Acquisition intangibles ...... — — 324 324 Other intangible assets ...... 13 — (3) 10 Property, plant and equipment...... 40 — (32) 8 Deferred tax (liabilities) assets ...... (1) — 16 15 Current assets Trade and other receivables ...... 20 (1) — 19 Total assets ...... 72 (1) 305 376 Current liabilities Trade and other payables ...... (49) (2) 2 (49) Provisions ...... — — (8) (8) Total liabilities ...... (49) (2) (6) (57) Total assets and liabilities ...... 23 (3) 299 319 Goodwill ...... 64 383 Satisfied by Cash paid in the year ended 31 March 2007 . . 252 Deferred consideration paid in the years ended 29 March 2008 and 31 March 2009 ...... 131 383

112 Fair value adjustments relate principally to: • the recognition of the following acquisition intangibles: • customer bases comprising broadband, narrowband and voice customers of £279 million. The valuation is derived from the discounted future cash flows expected to be generated by the customer bases, after a deduction for contributory assets; • rights, subject to future performance criteria, to a share of transactional revenues generated by AOL access and TalkTalk customers on AOL sites. These rights are valued at £35 million, based on discounted expected future cash flows, after a deduction for contributory assets; and • a licence to continue to use the AOL brand for a limited period, valued at £10 million using the relief from royalty method, which reflects the discounted future cash flows saved from not incurring royalty payments; • the write-down of property, plant and equipment and software development to its market value; • the recognition of deferred tax, principally in respect of accelerated capital allowances and intangible assets; and • the recognition of unrecorded liabilities and provision of onerous contract. The goodwill arising on the acquisition of AOL is attributable primarily to the removal of a significant competitor to TalkTalk in the residential broadband market and the anticipated future operating synergies arising from the combination. The TalkTalk Group’s results for the year ended 31 March 2007 reflect revenue from AOL of £107 million and a loss before taxation of £4 million.

(ii) Alto Hiway On 30 September 2006, the TalkTalk Group acquired 100 per cent. of the issued share capital of Hicom Internet Limited and its wholly owned subsidiary, Alto Hiway Limited (together Alto Hiway), both companies being registered in England and Wales, for an upfront gross cash consideration of £5 million and deferred consideration of £2 million which is contingent on future performance and payable over 3 years. Alto Hiway is a business internet service provider.

113 The following table sets out the book values of the identifiable assets and liabilities acquired and their fair value to the TalkTalk Group: Fair value to Fair value the TalkTalk Book value adjustments Group £m £m £m Non-current asset Acquisition intangibles ...... — 3 3 Current assets Trade and other receivables ...... 2 — 2 Cash and cash equivalents ...... 1 — 1 Total assets ...... 336 Current liabilities Trade and other payables ...... (4) — (4) Non-current liabilities Deferred tax liabilities ...... — (1) (1) Total liabilities ...... (4) (1) (5) Total assets and liabilities ...... (1) 2 1 Goodwill ...... 6 7 Satisfied by Cash paid in the year ended 31 March 2007 ...... 5 Deferred consideration paid in the year ended 29 March 2008 ...... 2 7

£m Net cash outflows in respect of the acquisition in the year ended 31 March 2007 comprised: Gross cash consideration ...... 5 Cash acquired ...... (1) 4

Fair value adjustments relate principally to the recognition of acquisition intangibles, being a customer base with a value of £3 million, and the recognition of deferred tax thereon. The TalkTalk Group’s results for the year ended 31 March 2007 reflect revenue from Alto Hiway of £4 million and a loss before taxation of £1 million. The following table sets out the net cash outflow on acquisitions during each year: Gross cash Cash 2009 consideration acquired Total AOL deferred consideration ...... (70) — (70) Other acquisitions ...... (6) — (6) (76) — (76)

Gross cash Cash 2008 consideration acquired Total AOL deferred consideration ...... (61) — (61) Other deferred consideration ...... (4) — (4) Other acquisitions ...... (3) — (3) (68) — (68)

114 Gross cash Cash 2007 consideration acquired Total AOL acquisition ...... (252) — (252) Alto Hiway acquisition ...... (5) 1 (4) Onetel contingent consideration...... 18 — 18 Other acquisitions ...... (10) — (10) (249) 1 (248)

Cash outflows in the year ended 31 March 2009 represent a final deferred consideration payment of £70 million in relation to AOL UK and £6 million in relation to other acquisitions, which gave rise to goodwill of £5 million and acquisition intangibles of £3 million. Cash outflows in the year ended 29 March 2008 comprise deferred consideration of £61 million in relation to AOL UK, which gave rise to additional goodwill of £4 million, and £7 million in relation to other acquisitions, which gave rise to acquisition intangibles of £2 million. Cash outflows in the year ended 31 March 2007 represent consideration of £252 million on AOL UK, which gave rise to goodwill of £60 million and acquisition intangibles of £324 million; net consideration of £4 million in relation to Alto Hiway, which gave rise to goodwill of £6 million and acquisition intangibles of £3 million; the reimbursement of £18 million of contingent consideration arising on Onetel; and £10 million in relation to other acquisitions, which gave rise to goodwill of £10 million and acquisition intangibles of £8 million.

15. Stock

2009 2008 2007 £m £m £m Finished goods and goods for resale ...... 1 2 1 121

The difference between the balance sheet value of stock and its replacement cost is not material.

16. Trade and other receivables Trade and other receivables comprise:

2009 2008 2007 £m £m £m Current — trade and other receivables Trade receivables — gross ...... 141 180 205 Less provision for impairment ...... (19) (14) (16) Trade receivables — net ...... 122 166 189 Other receivables ...... 6 22 18 Prepayments and accrued income ...... 11 13 14 139 201 221

2009 2008 2007 £m £m £m Non-current — loans to related parties Loans to the New Carphone Warehouse Group ...... 397 13 — 397 13 —

Loans to the New Carphone Warehouse Group during the Reporting Period were provided on an uncommitted basis and were repayable on demand, but have been presented as non-current for consistency with the New Carphone Warehouse Group, which has presented the loans as non-current to reflect the ongoing arrangements for the funding of its joint ventures and associates. Loans to the New Carphone Warehouse Group are primarily denominated in UK Sterling and Euros. Euro loans are hedged using borrowings or foreign exchange swaps, as described in notes 18 and 19.

115 The average credit period taken on trade receivables, calculated by reference to the amount owed at the period end as a proportion of total revenue in the period, adjusted to take account of the timing of acquisitions, was 32 days (2008: 36 days; 2007: 50 days). Trade receivables are denominated in the following currencies: 2009 2008 2007 £m £m £m UK Sterling...... 139 178 202 Other ...... 2 2 3 141 180 205

The ageing of gross trade receivables is as follows: 2009 2008 2007 £m £m £m Notyetdue...... 86 141 165 0 to 2 months ...... 33 19 22 2 to 4 months ...... 9 11 12 Over 4 months...... 13 9 6 141 180 205

The ageing of provisions for impairment of trade receivables is as follows: 2009 2008 2007 £m £m £m Notyetdue...... (1) (1) (2) 0 to 2 months ...... (4) (3) (3) 2 to 4 months ...... (5) (6) (7) Over 4 months...... (9) (4) (4) (19) (14) (16)

Movements in provisions for impairment of trade receivables are as follows: 2009 2008 2007 £m £m £m Opening balance ...... (14) (16) (12) Charge to the income statement ...... (16) (15) (17) Receivables written off as irrecoverable ...... 11 17 15 Acquisition of business ...... — — (2) Closing balance ...... (19) (14) (16)

Trade receivables of £37 million (2008: £26 million; 2007: £26 million) were past due but not impaired. These balances primarily relate to residential and corporate fixed line customers. The TalkTalk Group has made provision based on historic rates of recoverability and all unprovided amounts are considered to be recoverable. The ageing analysis of these trade receivables is as follows: 2009 2008 2007 £m £m £m 0 to 2 months ...... 29 16 19 2 to 4 months ...... 4 5 5 Over 4 months...... 4 5 2 37 26 26

116 17. Trade and other payables 2009 2008 2007 £m £m £m Current Trade payables ...... 77 142 91 Other taxes and social security costs ...... 17 19 3 Other payables ...... 13 84 66 Accruals and deferred income ...... 157 153 172 Forward currency contracts (see note 19) ...... — 3 — 264 401 332

2009 2008 2007 £m £m £m Non-current Other payables ...... — 1 72 —172

The average credit period taken on trade payables, calculated by reference to the amounts owed at the period end as a proportion of the amounts invoiced by suppliers in the period, adjusted to take account of the timing of acquisitions, was 20 days (2008: 33 days; 2007: 26 days). The TalkTalk Directors consider that the carrying amount of trade and other payables approximates to their fair value.

18. Cash and cash equivalents, loans and other borrowings Cash and cash equivalents are as follows: 2009 2008 2007 £m £m £m Cash at bank and in hand...... 6 3 24 6324

The effective interest rate on bank deposits and money market funds was 3.5 per cent. (2008: 5.1 per cent.; 2007: 4.9 per cent.). Loans and other borrowings comprise: 2009 2008 2007 £m £m £m Current Bank overdrafts ...... 33 6 11 Other uncommitted bank loans ...... — 19 10 Loan notes ...... — — 1 33 25 22

Maturity 2009 2008 2007 £m £m £m Non-current £50m term loan...... Cancelled — 50 50 £225m term loan...... Cancelled — 228 224 £450 revolving credit facility ...... Cancelled — — 60 £375m term loan...... 2012 375 381 374 £550m revolving credit facility ...... 2013 50 235 — 425 894 708

Loans from related parties Loans from the New Carphone Warehouse Group . . . see below — — 82 ——82

117 The terms of loans from the New Carphone Warehouse Group are set out in note 16.

Details of the current and non-current borrowing facilities of the TalkTalk Group in the Reporting Period are set out below.

Bank overdrafts and other uncommitted bank loans:

Overdraft facilities are held at a variety of UK banks to assist in short-term cash management. These facilities bear interest based on a margin over base rate or relevant overnight rate.

£550 million revolving credit facility (“RCF”):

The TalkTalk Group has a committed RCF of £550 million, which matures in March 2013. The interest rate payable in respect of drawings under this facility is at a margin over LIBOR for the relevant currency and for the appropriate period. The actual margin applicable to any drawing depends on the ratio of debt to EBITDA calculated in respect of the most recent accounting period. A non-utilisation fee is payable in respect of amounts available but undrawn under this facility. Covenants are included in this facility that limit the ratio of debt to EBITDA, interest cover and fixed charges (interest and operating lease expenditure) cover.

£375 million term loan:

The TalkTalk Group also has a term loan facility of £375 million, which matures in October 2012. The terms of this facility are similar to the TalkTalk Group’s RCF, with an identical covenant package. This facility was fully drawn in UK Sterling at 31 March 2009, and was fully drawn in Swiss Francs at 29 March 2008.

The facility allows the amount borrowed to exceed £375 million by 5 per cent., when this is a result of currency fluctuation on amounts already borrowed.

The average maturity of all non-current borrowings is 3.5 years (2008: 4.0 years; 2007: 3.9 years) and the weighted average interest cost was 3.8 per cent. (2008: 4.5 per cent.; 2007: 4.3 per cent.).

Borrowing facilities:

The TalkTalk Group had undrawn committed borrowing facilities at the end of each year, in respect of which all conditions precedent had been met, as follows:

2009 2008 2007 £m £m £m Maturing in 2009...... — 200 390 Maturing in 2013...... 500 315 — 500 515 390

Debt maturity profile:

The maturity of the TalkTalk Group’s borrowings is as follows:

2009 2008 2007 £m £m £m Less than 1 year ...... 33 25 22 2 to 3 years ...... — 278 60 3 to 4 years ...... 425 381 274 4 to 5 years ...... — 235 374 Total...... 458 919 730

118 Currency profile of borrowings: The currency profile of the TalkTalk Group’s borrowings is as follows: 2009 2008 2007 £m £m £m UK Sterling...... 458 307 130 Euro ...... — 230 225 Swiss Franc...... — 381 374 Other ...... — 1 1 Total...... 458 919 730

Euro borrowings at 29 March 2008 and 31 March 2007 relate to funding to businesses within the Best Buy Europe Group, which was denominated in the same currency. Swiss Franc borrowings at the same dates related to the Carphone Warehouse Group’s brand company, which had a functional currency of Swiss Francs until the year ended 31 March 2009. The book value and fair value of the TalkTalk Group’s loans and other borrowings are as follows: Book and fair value 2009 2008 2007 £m £m £m Bank overdrafts and loan notes ...... 33 6 12 Other uncommitted bank loans ...... — 19 10 Committed bank loans ...... 425 894 708 Total...... 458 919 730

Securities and guarantees: None of the borrowings are secured over TalkTalk Group assets. Although some guarantees are given by TalkTalk Group companies, these guarantees are to cover commercial obligations and, as such, create no additional credit risk.

Functional currency: At the end of the year, all of the TalkTalk Group’s subsidiaries prepared accounts in either UK Sterling or Euro, further to the change in the functional currency of the Carphone Warehouse Group’s brand company detailed notes 4 and 19 and the disposal of the TalkTalk Group’s South African subsidiary during the year ended 31 March 2009.

19. Financial risk management and derivative financial instruments The book value and fair value of the TalkTalk Group’s financial assets, liabilities and derivative financial instruments, excluding the TalkTalk Group’s loans and other borrowings shown above, are as follows: Book and fair value 2009 2008 2007 £m £m £m Cash and cash equivalents ...... 6 3 24 Trade and other receivables ...... 139 201 221 Non-current asset investments ...... 1 1 — Forward currency contracts — fair value hedges ...... — (3) — Other trade and other payables ...... (264) (399) (404) Loans to (from) related parties ...... 397 13 (82)

(a) Forward currency contracts The TalkTalk Group uses forward currency contracts to hedge balance sheet assets and liabilities and also for short-term liquidity management. The TalkTalk Group currently holds no currency option contracts. The TalkTalk Group also uses forward currency contracts to hedge transactional exposures. These contracts are mainly denominated in Euros, South African Rand and US Dollars to cover costs of sales and operating expenses.

119 At 31 March 2009, the total notional principal amount of outstanding currency contracts was £344 million (2008: £302 million; 2007: £163 million), part of which is offset by loans to and currency contracts with related parties. An expense of £3 million was transferred to income in respect of forward currency contracts in the year ended 29 March 2008, which was offset by the foreign exchange movements of the financial instruments that they hedged.

(b) Embedded derivatives

No contracts with embedded derivatives have been identified and accordingly no such derivatives have been accounted for separately.

(c) Financial instruments

The TalkTalk Group’s activities expose it to a variety of financial risks including market risk (such as currency risk and interest rate risk), credit risk and liquidity risk. The Carphone Warehouse Group Treasury function, which operates under approved treasury policies, uses certain financial instruments to mitigate potential adverse effects on the TalkTalk Group’s financial performance from these risks. These financial instruments primarily consist of bank loans and deposits, spot and forward foreign exchange contracts, and foreign exchange swaps. Other products, such as interest rate swaps and currency options, can also be used depending on the risks to be covered. The TalkTalk Group does not trade or speculate in any financial instruments.

(d) Foreign exchange risk

The TalkTalk Group is exposed to limited cross-border transactional commitments and, where significant, these are hedged at inception using forward currency contracts. These exposures arise mainly through costs of sales and operating expenses. The TalkTalk Group’s foreign exchange position is calculated daily and any positions are closed out immediately unless the exposure is immaterial. In some circumstances, the TalkTalk Group also hedges future currency commitments, which are accounted for as cash flow hedges. TalkTalk Group policy permits the use of long-term derivative treasury products (such as cross-currency swaps) for the management of currency risk although none are currently held.

Translational currency risk (for example, investments in overseas assets or loans to subsidiaries and related parties) is ordinarily hedged using foreign exchange swaps or currency borrowings. The translation risk on converting overseas currency profit is not hedged and such profits are converted into UK Sterling at average exchange rates throughout the year.

Funding to TalkTalk Group subsidiaries and to related parties is ordinarily denominated in the functional currency of each subsidiary. As detailed in note 4, the functional currency of CPW Brands Limited changed during the year ended 31 March 2009 from Swiss Francs to UK Sterling. As a result, foreign exchange movements arose in CPW Brands Limited on its Swiss Franc borrowings, prior to their redenomination to UK Sterling. These movements are reflected in the profit and loss account of CPW Brands Limited.

Prior to the Best Buy Europe Joint Venture Transaction the TalkTalk Group held various currency borrowings used by the Carphone Warehouse Group for the purpose of hedging the funding overseas operations. Following the Best Buy Europe Joint Venture Transaction and the change of functional currency of CPW Brands Limited, borrowings were largely denominated in UK Sterling. Euro liabilities remaining at 31 March 2009 primarily hedge loans to the New Carphone Warehouse Group in respect of Virgin Mobile France.

Currency loans and deposits and foreign exchange contracts are sensitive to movements in foreign exchange rates; this sensitivity can be analysed in comparison to year-end rates (adjusted for funding to and currency contracts with related parties and assuming all other variables remain constant) as follows:

2009 2008 2007 £m £m £m 10 per cent. movement in the UK Sterling/Euro exchange rate Income statement movement ...... — — — Other equity movement ...... 1 — —

120 2009 2008 2007 £m £m £m 10 per cent. movement in the UK Sterling/Swiss Franc exchange rate Income statement movement ...... — — — Other equity movement ...... — 45 39 Changes in the value of currency loans and foreign exchange contracts would not be expected to have an impact in the income statement, as they match currency assets, the value of which would rise or fall correspondingly, with net investment hedges assumed to remain fully effective. The impact on equity of revaluations would be partially offset on consolidation by the revaluation of any net assets that are hedged by these borrowings and derivatives. The effect of foreign exchange derivatives on borrowings at the year end was as follows: Swiss UK Sterling Euro Franc Other Total £m £m £m £m £m 2009 Borrowings before derivatives ...... 458 — — — 458 Derivatives ...... (44) 45 — (1) — Total ...... 414 45 — (1) 458

Swiss UK Sterling Euro Franc Other Total £m £m £m £m £m 2008 Borrowings before derivatives ...... 307 230 381 1 919 Derivatives ...... (302) 203 66 33 — Total ...... 5 433 447 34 919

Swiss UK Sterling Euro Franc Other Total £m £m £m £m £m 2007 Borrowings before derivatives ...... 130 225 374 1 730 Derivatives ...... (163) 120 10 33 — Total ...... (33) 345 384 34 730

(e) Interest rate risk The TalkTalk Group’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at floating rates of interest and thus expose the TalkTalk Group to cash flow interest rate risk. These floating rates are linked to LIBOR and other interest rate bases as appropriate to the instrument and currency. Future cash flows arising from these financial instruments depend on interest periods agreed at the time of rollover. TalkTalk Group policy permits the use of long-term interest rate derivatives in managing the risks associated with movements in interest rates although the TalkTalk Group holds none of these products at present. Since all cash, cash equivalents and borrowings are at floating rates of interest, no further disclosure on the effect of interest rate derivative products has been provided. Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates and such movements have been analysed in the chart below by calculating the effect on the income statement and equity of 1 per cent. movements in the interest rate for the currencies in which most TalkTalk Group cash and borrowings are denominated. Funding to or from related parties has been offset against gross borrowings in calculating these sensitivities. This analysis has been prepared on the assumption that the year-end positions prevail throughout the year, and therefore may not be representative of fluctuations in levels of borrowings.

121 2009 2008 2007 £m £m £m 1 per cent. movement in the Swiss Franc interest rate Income statement movement ...... — 4 4 Other equity movement ...... — — —

2009 2008 2007 £m £m £m 1 per cent. movement in the UK Sterling interest rate Income statement movement ...... — — — Other equity movement ...... — — —

(f) Liquidity risk

The TalkTalk Group manages its exposure to liquidity risk by regularly reviewing the long- and short-term cash flow projections for the business against facilities and other resources available to it. Headroom is assessed based on historical experience as well as by assessing current business risks, including foreign exchange movements. Existing facilities do not expire for more than three years; it is TalkTalk Group policy to refinance debt maturities significantly ahead of maturity dates.

The table below analyses the TalkTalk Group’s financial liabilities into relevant maturity groupings. The amounts disclosed in the table are the contractual undiscounted cash flows assuming year end interest rates remain constant and that borrowings are paid in full in the year of maturity.

Less than 1to2 2to3 3to4 4to5More than 1 year years years years years 5 years Total £m £m £m £m £m £m £m 2009 Borrowings ...... (49) (13) (15) (442) — — (519) Derivative financial instruments — payable ...... (344) —————(344) Derivative financial instruments — receivable...... 344 —————344 Trade and other payables ...... (264) —————(264) 2008 Borrowings ...... (65) (41) (317) (27) (262) (388) (1,100) Derivative financial instruments — payable ...... 302 —————302 Derivative financial instruments — receivable...... (302) —————(302) Trade and other payables ...... (401) (1) ————(402) 2007 Borrowings ...... (62) (40) (94) (299) (13) (394) (902) Derivative financial instruments — payable ...... 163 —————163 Derivative financial instruments — receivable...... (163) —————(163) Loans from related parties ...... (82) —————(82) Trade and other payables ...... (332) (72) ————(404)

(g) Credit risk

The TalkTalk Group’s exposure to credit risk is regularly monitored and the TalkTalk Group’s policy updated as appropriate. Debt, investments, foreign exchange and derivative transactions are all spread amongst a number of banks all of which have short- or long-term credit ratings appropriate to the TalkTalk Group’s policies and exposures. Trade receivables primarily comprise balances due from residential and corporate fixed line customers, and provision is made for any receivables that are considered to be irrecoverable.

122 20. Provisions

Reorganisation Other Total £m £m £m 2009 Opening balance ...... 4 6 10 Charge to income statement ...... 4 — 4 Utilised in the year...... (2) (4) (6) Closing balance ...... 628 2008 Opening balance ...... 5 13 18 Utilised in the year...... (1) (7) (8) Closing balance ...... 4610 2007 Opening balance ...... 18 14 32 Acquisition of subsidiaries ...... — 8 8 Charge to income statement ...... 6 — 6 Released in the year ...... (6) — (6) Utilised in the year...... (13) (9) (22) Closing balance ...... 51318

Provisions are categorised as follows:

Reorganisation Reorganisation provisions at the start of the year ended 31 March 2007 relate principally to reorganisation programmes initiated in relation to business acquisitions or disposals. Increases in the provision at 31 March 2009 relate to the reorganisation programmes set out in note 4. Costs have only been charged to provisions where such programmes have not been completed by the balance sheet date. Reorganisation provisions are typically expected to be utilised over the 12 to 24 months following announcement of the reorganisation.

Other Other provisions relate principally to the anticipated costs of unresolved tax issues and legal disputes, and costs associated with onerous contracts.

21. Invested capital

2009 2008 2007 £m £m £m Opening balance ...... (212) (145) 63 Net loss for the year ...... (37) (51) (51) Currency translation and cash flow hedges ...... 1 (71) 3 Tax on items recognised directly in reserves (see note 8) ...... (16) 7 3 Issue of share capital ...... — 49 8 Net (purchase) sale of own shares (see below) ...... (51) (35) 1 Net cost of share-based payments (see note 6) ...... 3 3 3 Equity dividends (see note 9) ...... (38) (31) (24) Movements in demerger reserves ...... 1,052 62 (151) Closing balance ...... 702 (212) (145)

Net purchase of own shares The Carphone Warehouse Employee Benefit Trust which holds 22 million shares (2008: 7 million; 2007: 10 million) in the Carphone Warehouse for the benefit of the Carphone Warehouse Group’s employees. The Carphone Warehouse Employee Benefit Trust has waived its rights to receive dividends and none of its shares has been allocated to specific schemes. At 31 March 2009 the shares had a market value of £28 million (2008: £19 million; 2007: £27 million).

123 22. Analysis of changes in net debt Exchange Opening Cash flow movements Closing £m £m £m £m 2009 Cash and cash equivalents ...... 3 4 (1) 6 Bank overdrafts...... (6) (27) — (33) (3) (23) (1) (27) Current loans and other borrowings ...... (19) 19 — — Non-current loans and other borrowings...... (894) 602 (133) (425) (913) 621 (133) (425) Total net debt ...... (916) 598 (134) (452) Loans to related parties ...... 13 384 — 397 Total net debt including loans to related parties ... (903) 982 (134) (55) 2008 Cash and cash equivalents ...... 24 (21) — 3 Bank overdrafts...... (11) 5 — (6) 13 (16) — (3) Current loans and other borrowings ...... (11) (8) — (19) Non-current loans and other borrowings...... (708) (30) (156) (894) (719) (38) (156) (913) Total net debt ...... (706) (54) (156) (916) Loans (from) to related parties...... (82) 95 — 13 Total net debt including loans (from) to related parties ...... (788) 41 (156) (903) 2007 Cash and cash equivalents ...... 17 7 — 24 Bank overdrafts...... (21) 10 — (11) (4) 17 — 13 Current loans and other borrowings ...... (36) 25 — (11) Non-current loans and other borrowings...... (320) (399) 11 (708) (356) (374) 11 (719) Total net debt ...... (360) (357) 11 (706) Loans to (from) related parties...... 156 (238) — (82) Total net debt including loans to (from) related parties ...... (204) (595) 11 (788)

23. Commitments under operating leases The TalkTalk Group leases network infrastructure and offices under non-cancellable operating leases. The leases have varying terms, purchase options, escalation clauses and renewal rights. The TalkTalk Group had outstanding commitments for future minimum due as follows: 2009 2008 2007 £m £m £m Within one year ...... 13 15 18 In two to five years ...... 23 20 27 After five years ...... 28 19 11 64 54 56

124 24. Capital commitments 2009 2008 2007 £m £m £m Expenditure contracted, but not provided for in the financial statements ...... 8412

25. Pension arrangements The TalkTalk Group provides various defined contribution pension schemes for the benefit of a significant number of its employees, the cost of which for the year ended 31 March 2009 was £2 million (2008: £2 million; 2007: £1 million).

26. Related party transactions During the Reporting Period, the TalkTalk Group had the following disclosable transactions (see also notes 16 and 18): Other New Carphone Best Buy Warehouse Europe Group Group £m £m 2009 Revenue for services provided ...... 8 — Expenses for services received ...... (47) (1) Net interest income ...... — 16 Loans owed to the TalkTalk Group ...... — 397 Other amounts owed to the TalkTalk Group ...... 13 — Amounts owed by the TalkTalk Group ...... (24) — Other New Carphone Best Buy Warehouse Europe Group Group £m £m 2008 Revenue for services provided ...... 10 — Expenses for services received ...... (41) (1) Net interest income ...... — 9 Loans owed to the TalkTalk Group ...... — 13 Other amounts owed to the TalkTalk Group ...... 44 — Amounts owed by the TalkTalk Group ...... (31) — Other New Carphone Best Buy Warehouse Europe Group Group £m £m 2007 Revenue for services provided ...... 8 — Expenses for services received ...... (22) (1) Net interest income ...... — 25 Loans owed by the TalkTalk Group ...... — (82) Other amounts owed to the TalkTalk Group ...... 23 — Amounts owed by the TalkTalk Group ...... (10) — Revenue for services provided during the year principally relates to telecommunications services. Expenses for services received relate primarily to IT services and commissions on product sales. All products and services were provided at market rates. During the year ended 29 March 2008 consortium relief of £3 million was claimed on the losses of Virgin Mobile France, a joint venture of New Carphone Warehouse Group. No other claims were made during the Reporting Period.

125 In December 2008, 2.0 million shares in the Company were gifted by the Carphone Warehouse Group’s Employee Benefit Trust to certain employees of New Carphone Warehouse and the Best Buy Europe Group. The shares are restricted until 30 June 2010 and will be forfeited if various internal performance conditions are not met.

27. Post balance sheet events On 3 July 2009, the TalkTalk Group acquired Tiscali’s UK operations for a total cash consideration of £235 million, funded entirely from existing debt facilities. Tiscali UK has been consolidated since 1 July 2009.

126 SECTION C: REPORTING ACCOUNTANTS’ REPORT ON THE HISTORICAL CONSOLIDATED FINANCIAL INFORMATION SET OUT IN SECTIONS A AND B OF PART V OF THIS DOCUMENT

The Board of Directors on behalf of TalkTalk Telecom Group PLC 11 Evesham Street London W11 4AR Credit Suisse Securities (Europe) Limited One Cabot Square London E14 4QJ UBS Limited 1 Finsbury Avenue London EC2M 2PP

29 January 2010 Dear Sirs TalkTalk Telecom Group PLC (“TalkTalk”) We report on the financial information set out in Sections A and B of Part Vof the prospectus dated 29 January 2010 (the “Prospectus”) of TalkTalk and its remaining subsidiaries following the Demerger (as defined in the Prospectus) excluding Tiscali UK Limited and its subsidiaries up to 1 July 2009 (the “Demerged TalkTalk Group”). This financial information has been prepared for inclusion in the Prospectus on the basis of the accounting policies set out in Note 1 to the financial information. This report is required by Annex I item 20.1 of Commission Regulation (EC) No 809/2004 (the “Prospectus Directive Regulation”) and is given for the purpose of complying with that requirement and for no other purpose.

Responsibilities The Directors of TalkTalk are responsible for preparing the financial information on the basis of preparation set out in Note 1 to the financial information and in accordance with IFRS as adopted by the EU. It is our responsibility to form an opinion as to whether the financial information gives a true and fair view, for the purposes of the Prospectus, and to report our opinion to you. Save for any responsibility arising under Prospectus Rule 5.5.3R(2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus.

Basis of opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made

127 by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion In our opinion, the financial information gives, for the purposes of the Prospectus, a true and fair view of the state of affairs of the Demerged TalkTalk Group as at the dates stated and of its profits or losses, cash flows and changes in equity for the periods then ended in accordance with the basis of preparation set out in Note 1 to the financial information set out in Section B of Part V of the Prospectus and in accordance with IFRS as adopted by the EU. We express no opinion on the financial information for the 26 week period ended 27 September 2008 set out in the financial information which is marked unaudited.

Declaration For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 and Annex III item 1.2 of the Prospectus Directive Regulation.

Yours faithfully

Deloitte LLP Chartered Accountants Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTT and its member firms.

128 SECTION D: HISTORICAL CONSOLIDATED FINANCIAL INFORMATION FOR TISCALI UK FOR THE SIX MONTHS ENDED 30 JUNE 2009 AND 30 JUNE 2008. Consolidated income statement For the six months ended 30 June 2009 and 30 June 2008

Before After Before After amortisation Amortisation amortisation amortisation Amortisation amortisation of acquisition of acquisition of acquisition of acquisition of acquisition of acquisition intangibles, intangibles, intangibles, intangibles, intangibles, intangibles, goodwill goodwill goodwill goodwill goodwill goodwill impairment and impairment and impairment and impairment and impairment and impairment and exceptional exceptional exceptional exceptional exceptional exceptional items items items items items items Notes 2009 2009 2009 2008 2008 2008 £m £m £m £m £m £m Revenue ...... 2 231 — 231 279 — 279 Cost of sales ...... (139) — (139) (162) — (162) Gross profit ...... 92 — 92 117 — 117 Operating expenses excluding depreciation and amortisation ...... 3,4 (77) — (77) (125) (4) (129) EBITDA ...... 15 — 15 (8) (4) (12) Depreciation...... 3 (11) — (11) (12) — (12) Amortisation and goodwill impairment ...... 3 (6) (47) (53) (5) (16) (21) Loss before interest and taxation ..... (2) (47) (49) (25) (20) (45) Interest expense ..... 7 (18) — (18) (21) — (21) Interest income...... 7 30 — 30 1 — 1 Profit (loss) before taxation ...... 10 (47) (37) (45) (20) (65) Taxation...... 8 (4) 4 — (4) 4 — Net profit (loss) for the period ...... 6 (43) (37) (49) (16) (65)

A reconciliation of Headline results to statutory results is provided in note 9 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

129 Consolidated statement of comprehensive income For the six months ended 30 June 2009 and 30 June 2008

2009 2008 £m £m Net loss for the period...... (37) (65) Total recognised income and expense for the period ...... (37) (65)

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

130 Consolidated statement of changes in equity For the six months ended 30 June 2009 and 30 June 2008

2009 2008 £m £m At the beginning of the period ...... (166) 55 Total recognised income and expense for the period ...... (37) (65) At the end of the period ...... (203) (10)

The accompanying notes are an integral part of this consolidated statement of changes in equity.

131 Consolidated balance sheet As at 30 June 2009 and 30 June 2008

Notes 2009 2008 £m £m Non-current assets Goodwill ...... 10 129 184 Other intangible assets ...... 10 83 115 Property, plant and equipment ...... 11 64 84 Deposits ...... 6 10 282 393 Current assets Stock ...... 13 — 7 Trade and other receivables...... 14 57 125 Cash and cash equivalents...... 16 2 21 59 153 Total assets ...... 341 546 Current liabilities Trade and other payables ...... 15 (119) (219) Loans and other borrowings ...... 16 (343) (255) Provisions ...... 18 (6) (8) (468) (482) Non-current liabilities Trade and other payables ...... 15 (71) (66) Loans and other borrowings ...... 16 (5) (8) (76) (74) Total liabilities ...... (544) (556) Net liabilities ...... (203) (10) Equity Invested capital ...... 19 (203) (10) Deficit attributable to equity shareholders ...... (203) (10)

The accompanying notes are an integral part of this consolidated balance sheet.

132 Consolidated cash flow statements For the six months ended 30 June 2009 and 30 June 2008

Notes 2009 2008 £m £m Operating activities Loss before interest and taxation ...... (49) (45) Adjustments for non-cash items: Depreciation ...... 11 12 Amortisation and goodwill impairment ...... 53 21 Operating cash flows before movements in working capital ...... 15 (12) Decrease (increase) in trade and other receivables ...... 17 (21) Decrease in stock ...... 5 — (Decrease) increase in trade and other payables ...... (77) 55 (Decrease) in provisions ...... (2) (1) Net cash generated from operating activities ...... (42) 21 Investing activities Interest received ...... — 1 Acquisition of intangible assets ...... (2) (2) Acquisition of property, plant and equipment...... (3) (20) Acquisition of deposits ...... — (3) Cash flows from investing activities ...... (5) (24) Financing activities Increase in borrowings ...... 61 18 Interest paid ...... (18) (18) Repayment of capital element of finance leases ...... (9) — Cash flows from financing activities ...... 34 — Net decrease in cash and cash equivalents ...... (13) (3) Cash and cash equivalents at the start of the period ...... 15 24 Cash and cash equivalents at the end of the period ...... 16 221 Cash and cash equivalents for the purposes of this statement comprise: Cash and cash equivalents...... 2 21 221

The accompanying notes are an integral part of this consolidated cash flow statement.

133 Notes to the financial information for the six months ended 30 June 2009 and the six months ended 30 June 2008

1. Accounting policies (a) Basis of preparation Tiscali UK Limited is a company incorporated and domiciled in the United Kingdom and is a wholly owned subsidiary of TalkTalk Group Limited following its acquisition by Carphone Warehouse on 3 July 2009 (although the Tiscali UK business has been consolidated since 1 July 2009). The consolidated financial statements of Tiscali UK Limited and its subsidiaries have been prepared in accordance with IFRS. These financial statements have been prepared on a going concern basis. The TalkTalk Group has confirmed that it will retain business operations and provide the necessary finance to fund Tiscali UK operations for the foreseeable future. These financial statements have been prepared in accordance with IFRS as adopted for use in the European Union. These financial statements therefore comply with Article 4 of the European Union International Accounting Standard regulation. The following standards and interpretations have become effective during the period covered by these financial statements: • IFRS7 ‘Financial Instruments: Disclosures’, and the related amendment to IAS1 ‘Presentation of Financial Statements’ on capital disclosures. This introduces new disclosures relating to financial instruments but does not have any impact on their classification or valuation. • IFRIC8 ‘Scope of IFRS2’, provides guidance where the consideration received for the equity instruments issued is less that their fair value so as to assess whether they fall within the scope of IFRS2. This standard has not impacted Tiscali UK’s financial statements. • IFRIC9 ‘Reassessment of Embedded Derivatives’ provides further guidance on the assessment of embedded derivatives and is not relevant to Tiscali UK’s operations. • IFRIC10 ‘Interim Financial Reporting’ prohibits certain impairment losses recognised in an interim period to be reversed at a subsequent balance sheet date. This has not had any impact on Tiscali UK’s financial statements. • IFRS8 ‘Operating Segments’, updates segmental reporting requirements. The consolidated financial statements have been prepared on the historical cost basis. The consolidated financial statements are presented in UK Sterling and all values are rounded to the nearest million UK Sterling (£m) except when otherwise indicated. The principal activity of Tiscali UK is that of a telephone, internet and television services provider. Tiscali UK’s registered address is: 11 Evesham Street London W11 4AR Tiscali UK’s principal accounting policies are set out below:

(b) Basis of consolidation The consolidation includes Tiscali UK and the companies over which it has either directly or indirectly the power to govern the financial and operating policies so as to obtain economic benefits from their activities. The consolidated financial statements incorporate the results of Tiscali UK’s half year to 30 June 2009 and the prior half year’s unaudited comparative results. The results of subsidiaries acquired or sold during the respective periods are included from or to the date on which control passed. Intercompany transactions and balances between companies within Tiscali UK are eliminated on consolidation. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used in line with those used by Tiscali UK.

134 (c) Foreign currency translation Unhedged transactions are recorded at the exchange rate on the date of the transaction. The results of overseas operations are translated at the average foreign exchange rates for the period, and their balance sheets are translated at the rates prevailing at the balance sheet date. Exchange differences arising on the translation of opening net assets, goodwill and results of overseas operations are recognised in the translation reserve. All other exchange differences are included in the income statement. The principal exchange rates against UK Sterling used in these financial statements are as follows: Average Closing 2009 2008 2009 2008 Euro ...... 1.11 1.29 1.17 1.26 Where a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the operation.

(d) Revenue Revenue is stated net of VATand other sales related taxes and represents the amounts receivable for services and goods provided apportioned over the period to which they relate.

(e) Share based payments Tiscali UK issues cash settled share-based payments to certain employees. Cash settled share-based payments are measured at fair value at each balance sheet date, and expensed over the vesting period, based on Tiscali UK’s estimate of the number of shares that will eventually vest. For schemes with internal performance criteria, the number of options expected to vest is recalculated at each balance sheet date, based on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement. For schemes with external performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement. If a share-based payment scheme is cancelled, any remaining part of the fair value of the scheme is expensed through the income statement. If a share-based payment scheme is forfeited, no further expense is recognised and any charges previously recognised through the income statement are reversed.

(f) Pensions Contributions to defined contribution schemes are charged to the income statement when an employee has rendered services in accordance with the rules of the schemes.

(g) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives and rent-free periods are amortised through the income statement over the period of the lease. Leases in terms of which Tiscali UK assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset.

135 Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction in the liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance sheet liability.

(h) Taxation

Current tax, including UK corporation tax and overseas tax, is provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided in full on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, and the carry-forward of unused tax losses and credits. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is provided on the unremitted earnings of overseas subsidiaries, where incremental tax is expected to arise on their remittance except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Current and deferred tax is recognised in the income statement except where it relates to an item recognised directly in reserves, in which case it is recognised directly in reserves. Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions.

(i) Intangible assets Goodwill: Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is recognised initially as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. At the acquisition date, goodwill is allocated to each of the cash-generating units (“CGUs”) expected to benefit from the combination and held in the currency of the operations to which the goodwill relates. Goodwill is reviewed at least annually for impairment, or more frequently where there is an indication that goodwill may be impaired. Where the future cash flows are less than the carrying value of goodwill, an impairment charge is recognised in the income statement. On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or loss on disposal.

Operating intangibles: Operating intangibles includes internal infrastructure and design costs incurred in the development of software for internal use. Internally generated software is recognised as an intangible asset only if it can be separately identified, it is probable that the asset will generate future economic benefits, and the development cost can be measured reliably. Where these conditions are not met, development expenditure is recognised as an expense in the period in which it is incurred. Operating intangibles are amortised on a straight-line basis over their estimated useful economic lives of up to 8 years.

Acquisition intangibles: Acquired intangible assets such as customer bases, customer revenue share agreements, brands and other intangible assets acquired through a business combination are capitalised separately from goodwill and amortised over their expected useful lives of up to 6 years on a straight-line basis. The value attributed to such assets is based on the future economic benefit that is expected to be derived from them, calculated as the present value of future cash flows after a deduction for contributory assets.

136 (j) Property, plant and equipment

Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life from the date it is brought into use, as follows:

Short leasehold costs ...... — 10%orthelease term if less Network equipment and computer hardware . . . — 12.5%-50% per annum Fixtures and fittings...... — 20-25% per annum

(k) Recoverable amount of non-current assets

At each reporting date, Tiscali UK assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, Tiscali UK makes a formal estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets.

(l) Stock

Stock is stated at the lower of cost and net realisable value. The cost of stock is based on the first-in first-out principle and includes expenditure incurred in acquiring the stock, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realisable value is based on estimated selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow-moving or defective items where appropriate.

(m) Cash and cash equivalents

Cash and cash equivalents represent cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash.

(n) Deposits

Deposits represent amounts paid to landlords to secure sites, and are refundable on exit of those sites.

(o) Loans and other borrowings

Loans and other borrowings represent committed and uncommitted bank loans, and bank overdrafts and are measured initially at the fair value of consideration received.

After initial recognition, loans and other borrowings are subsequently measured at amortised cost using the effective interest rate method if the time value of money is significant. Gains and losses on the settlement or otherwise cancellation of liabilities are recognised in interest income and expenses respectively.

(p) Provisions

Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted where the time value of money is considered to be material.

Provisions are categorised as follows:

Reorganisation:

Reorganisation provisions relate principally to redundancy costs and are only recognised where plans are demonstrably committed and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are not recognised in respect of future operating losses.

137 Other: Other provisions constitute dilapidations and similar property costs, provisions for legal issues and provisions for film and television rights, the cost of which is based on television subscriber numbers. All such provisions are assessed by reference to the best available information at the balance sheet date.

(q) Headline results Headline results are stated before the amortisation of acquisition intangibles and goodwill impairment. Headline results also exclude any exceptional items that are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance.

(r) Use of critical accounting estimates and assumptions Estimates and assumptions used in the preparation of the financial statements are continually reviewed and revised as necessary. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have a material impact in the financial statements. The principal balances in the financial statements where changes in estimates and assumptions may have a material impact are as follows:

Recoverable amount of non-current assets: All non-current assets, including goodwill and other intangible assets, are reviewed for potential impairment using estimates of the future economic benefits attributable to them. In the case of customer bases, such estimates involve assumptions in relation to future customer margins and average customer lives. Any estimates of future economic benefits made in relation to non-current assets may differ from the benefits that ultimately arise, and materially affect the recoverable value of the asset.

Trade and other receivables: Provisions for irrecoverable receivables are based on extensive historical evidence, and the best available information in relation to specific issues, but are unavoidably dependent on future events.

Deferred taxation: The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the relevant jurisdictions in the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain.

Provisions: Tiscali UK’s reorganisation provisions are based on the best information available to management at the balance sheet date. However, the future costs assumed are inevitably only estimates, which may differ from those ultimately incurred.

(s) Recent accounting developments The IASB and IFRIC have issued the following standards and interpretations, and endorsed by the European Union, with an effective date after this financial information: IFRS 3 (Revised) ‘Business Combinations’ effective for annual periods beginning on or after 1 July 2009. IAS 27 (Revised) ‘Consolidated and separate financial statements’ effective for annual periods beginning on or after 1 July 2009. Standards, amendments and interpretations which have not yet been approved by the European Union and as such cannot be early adopted by Tiscali UK are as follows: IFRS 1 (Revised) ‘First-time Adoption of International Financial Reporting Standards’ and IFRS 1 (Amendment) ‘Additional exemptions for first-time adopters’ effective for the year ending 31 December 2009. IFRS 9 ‘Financial Instruments’ effective for the year ending 31 December 2013.

138 IAS 32 (Amendment) ‘Classification of Rights issues’ effective for the year ending 31 December 2011.

IAS 39 (Amendment) ‘Financial Instruments: Recognition and Measurement: Eligible hedged items’ and ‘Reclassification of financial assets: Effective date and transition’ effective for the year ending 31 December 2010.

IFRIC 9 (Amendment) ‘Reassessment of Embedded Derivatives’ and IAS 39, ‘Financial Instruments: Recognition and Measurement of embedded derivatives’ effective for the year ending 30 June 2010.

IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ effective for the year ending 30 June 2010.

IFRIC 18 ‘Transfer of Assets from Customers’ effective for the year ending 31 December 2010.

‘Improvements to IFRSs 2009’ effective for the year ending 31 March 2010.

2. Segmental reporting Tiscali UK operates in one operating segment, being the UK telecoms operations with all of its revenues derived from telephony, internet and television services.

3. Loss before interest and taxation

Loss before interest and taxation is stated after charging:

2009 2008 £m £m Depreciation of property, plant and equipment ...... 11 12 Amortisation of acquisition intangibles ...... 12 16 Amortisation of other intangible fixed assets ...... 6 5 Goodwill impairment (see note 10) ...... 35 — Impairment of trade receivables ...... 10 — Other employee costs, excluding share based payments ...... 16 17 Impairment of stock ...... 3 — Rentals under operating leases — property ...... 2 2 Rentals under operating leases — non-property ...... 6 6 Cash settled share-based payment charge ...... — 2

Operating expenses are analysed as follows:

2009 2008 £m £m Operating expenses excluding depreciation and amortisation ...... 77 129 Depreciation ...... 11 12 Amortisation and goodwill impairment ...... 53 21 Total operating expenses ...... 141 162

4. Exceptional items

The following items have been disclosed separately in the period given their size and one-off nature:

Income statement Pre-tax Post-tax Note presentation loss Taxation loss £m £m £m 2008 Pipex integration ...... a Operating expenses (4) — (4)

(a) Pipex integration

Tiscali UK acquired the Pipex UK internet access business in September 2007. Since that time Tiscali UK worked on the integration of Pipex into the Tiscali UK business, through a programme to transfer network operations, hosting, billing and customer management on to Tiscali UK’s systems. The transition was completed during the year ended 31 December 2008.

139 5. Employee costs Compensation earned by the key management comprising the Tiscali UK’s executive committee, was as follows: 2009 2008 £m £m Salaries and fees ...... 1 1 Performance bonus...... 1 1 Cash-settled share-based payments ...... — 2 24

6. Share-based payments On 19 January 2007, the Tiscali UK Share Option Plan was established. Subject to the rules of the Scheme eligible employees were granted options to acquire shares in the Company at a future date at a price set at the date of the grant. All options granted are cash settled. Options granted under the Tiscali UK Share Option Plan (including directors) were as follows: 2009 2008 Number Number Outstanding at the beginning of the period ...... 4,534 4,221 Outstanding at the end of the period ...... 4,534 4,221 Exercisable at the end of the period...... 4,534 4,221

No share options were forfeited or expired during the six months to 30 June 2009. The options outstanding at 30 June 2009 have an exercise price £4,521 (30 June 2008: £3,599) and a contractual life of three years. The maximum life of the options is ten years after the date of grant. During the period zero share options were exercised (31 December 2008: 329 at a share price of £8,120). The share option plan was settled on 3 July 2009 in cash as a result of the acquisition of Tiscali UK by TalkTalk Group Limited. The cash paid out per share of £4,521 was used as the basis of fair value of the share options in existence at 30 June 2009. The carrying amount of the liability relating to the cash-settled options at 30 June 2009 is £8 million plus an additional £1 million for National Insurance (30 June 2008: £9 million). Subsequent to the acquisition of Tiscali UK by TalkTalk Group Limited, £8 million was paid out to senior management.

7. Interest expense and income (finance costs) Interest expense is analysed as follows: 2009 2008 £m £m Interest on bank loans and overdrafts ...... 14 13 Amortisation of facility fees and similar charges ...... 1 1 Foreign exchange losses ...... — 3 Movement in discount on deferred consideration (note 15) ...... 2 2 Finance charges payable under finance lease and hire purchase contracts ..... 1 1 Other interest payable ...... — 1 18 21

Interest income is analysed as follows: 2009 2008 £m £m Interest on cash and cash equivalents ...... — 1 Foreign exchange gains ...... 30 — 30 1

Foreign exchange gains or losses were incurred on translation of Euro denominated loans.

140 8. Taxation The tax charge comprises: 2009 2008 £m £m UK corporation tax Total current tax...... — — Deferred tax: Origination and reversal of timing differences ...... — — Total deferred tax ...... — — Total tax credit ...... ——

The principal differences between the tax credit shown above and the amount calculated by applying the standard rate of UK corporation tax in the UK of 28 per cent. (2008: 29 per cent.) to the loss before taxation are as follows: 2009 2008 £m £m Loss before taxation ...... (37) (65) Loss before taxation at 28% (2008: 29%) ...... (10) (19) Items attracting no tax relief or liability ...... 18 6 Tax losses not recognised ...... — 13 Tax losses utilised previously not recognised ...... (8) — Total tax credit ...... ——

The deferred tax liabilities recognised by Tiscali UK and movements thereon during the year are as follows: Deferred taxation £m 2009 Deferred tax asset opening balance ...... 27 Debit to the income statement ...... (4) Deferred tax asset closing balance ...... 23 Deferred tax liability opening balance ...... (27) Credit to the income statement ...... 4 Deferred tax liability closing balance ...... (23) Closing balance ...... —

2008 Deferred tax asset opening balance ...... 35 Debit to the income statement ...... (4) Deferred tax asset closing balance ...... 31 Deferred tax liability opening balance ...... (35) Credit to the income statement ...... 4 Deferred tax liability closing balance ...... (31) Closing balance ...... —

Management considers to what extent it is probable that deferred tax assets will be realised. Deferred tax assets have been recognised to the extent that they are expected to be utilised. The deferred tax liability arises upon acquisition intangibles. From 1 April 2008, the UK statutory rate of corporation tax reduced from 30 per cent. to 28 per cent. The impact of this change on the value of deferred tax assets was recognised at 31 December 2008. At 30 June 2009 Tiscali UK had unrecognised deferred tax assets of £214 million (30 June 2008: £184 million). No tax asset has been recognised in respect of these as there is insufficient evidence that there will be sufficient taxable profits against which these losses can be recovered. All assets may be carried

141 forward indefinitely subject to certain restrictions on usage. A deferred tax asset of £23 million (June 2008: £31 million) has been recognised as management consider it probable that there will be sufficient taxable profits against which these assets can be recovered.

9. Reconciliation of Headline results to statutory results Loss Net loss before Loss from interest and before continuing EBITDA taxation taxation operations £m £m £m £m 2009 Headline results ...... 15 (2) 10 6 Amortisation of acquisition intangibles and impairment of goodwill (see note 10) ...... — (47) (47) (47) Taxation on amortisation of acquisition intangibles. . . — — — 4 Statutory results ...... 15 (49) (37) (37)

Loss Net loss before Loss from interest and before continuing EBITDA taxation taxation operations £m £m £m £m 2008 Headline results ...... (8) (25) (45) (49) Exceptional items (see note 4) ...... (4) (4) (4) (4) Amortisation of acquisition intangibles and impairment of goodwill (see note 10) ...... — (16) (16) (16) Taxation on amortisation of acquisition intangibles. . . — — — 4 Statutory results ...... (12) (45) (65) (65)

Headline information is provided because the Directors consider that it provides assistance in understanding underlying performance.

10. Goodwill and other intangible assets

(a) Goodwill

2009 2008 £m £m Opening net book value ...... 164 184 Goodwill impairment ...... (35) — Closing net book value ...... 129 184 Cost (gross carrying amount) ...... 184 184 Accumulated goodwill impairment ...... (55) — Net carrying amount ...... 129 184

Tiscali UK has only one cash generating unit being the UK telecoms operations. The cash flows of Tiscali UK are not separable into individual cash generating units as its cash flows are derived from shared assets and infrastructure.

Tiscali UK tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired.

The recoverable amount of the CGU is determined by the fair value less costs of sale of the business.

A goodwill impairment of £35 million was recognised at 30 June 2009 (2008: nil). The size of the impairment was based on a comparison of the consideration paid by TalkTalk Group in comparison to the net assets of Tiscali UK.

142 (b) Other intangible assets Other intangible fixed assets are analysed as follows: Operating Acquisition Total other intangibles intangibles intangibles £m £m £m 2009 Opening balance ...... 33 66 99 Additions ...... 2 — 2 Amortisation ...... (6) (12) (18) Closing balance ...... 29 54 83 Cost (gross carrying amount) ...... 65 110 175 Accumulated amortisation ...... (36) (56) (92) Net carrying amount ...... 29 54 83 2008 Opening balance ...... 37 98 135 Additions ...... 1 — 1 Amortisation ...... (5) (16) (21) Closing balance ...... 33 82 115 Cost (gross carrying amount) ...... 56 110 166 Accumulated amortisation ...... (23) (28) (51) Net carrying amount ...... 33 82 115

Acquisition intangibles are removed from cost once they are fully amortised. Acquisition intangibles are analysed as follows: Customer bases Brands Total £m £m £m 2009 Opening balance ...... 57 9 66 Amortisation ...... (10) (2) (12) Closing balance ...... 47 7 54 Cost (gross carrying amount) ...... 84 26 110 Accumulated amortisation ...... (37) (19) (56) Net carrying amount ...... 47 7 54 2008 Opening balance ...... 76 22 98 Amortisation ...... (10) (6) (16) Closing balance ...... 66 16 82 Cost (gross carrying amount) ...... 84 26 110 Accumulated amortisation ...... (18) (10) (28) Net carrying amount ...... 66 16 82

Customer bases relate primarily to the Pipex and VNL business, which were acquired in 2007 and 2006 respectively. The valuation of customer bases is derived from the discounted future cash flows expected from them, after a deduction for contributory assets. Brands relates to the brands acquired with the Pipex and VNL businesses and are valued using the relief from royalty method.

143 11. Property, plant and equipment

Network equipment Short and Fixtures leasehold computer and costs hardware fittings Total £m £m £m £m 2009 Opening balance ...... 3 64 5 72 Additions ...... — 3 — 3 Depreciation ...... — (10) (1) (11) Closing balance ...... 357464 Cost (gross carrying amount) ...... 8 130 22 160 Accumulated depreciation ...... (5) (73) (18) (96) Net carrying amount ...... 357464

2008 Opening balance ...... 3 68 5 76 Additions ...... — 19 1 20 Depreciation ...... — (11) (1) (12) Closing balance ...... 376584 Cost (gross carrying amount) ...... 7 127 19 153 Accumulated depreciation ...... (4) (51) (14) (69) Net carrying amount ...... 376584

The carrying value of plant and equipment held under finance lease was £15 million at 30 June 2009 (2008: £17 million).

12. Non-current asset investments

Principal Tiscali UK investments

Tiscali UK has investments in the following subsidiary undertakings, which principally affected the profits or losses or net assets of Tiscali UK. To avoid a statement of excessive length, details of investments which are not significant have been omitted. All holdings are in equity share capital and give Tiscali UK a holding of 100 per cent. on consolidation.

Country of incorporation or Name registration Nature of business Tiscali Network Distribution Limited ...... England and Wales Network marketing Pipex Internet Limited...... England and Wales Telecommunications Freedom to Surf Limited ...... England and Wales Non-trading Accent UK Limited...... England and Wales Non-trading Nildram Limited ...... England and Wales Non-trading Trinite Limited ...... England and Wales Non-trading Pipex Communications Services ...... England and Wales Non-trading Pipex Broadband Limited ...... England and Wales Non-trading Highway One Limited ...... England and Wales Non-trading Pipex Networks Limited ...... England and Wales Non-trading Pipex UK Limited ...... England and Wales Non-trading Homecall Payment Services Limited ...... England and Wales Non-trading Toucan Residential Limited ...... England and Wales Non-trading Switch2 Telecoms Limited ...... England and Wales Non-trading Toucan Residential Ireland Limited ...... Ireland Customer services

144 13. Stock

2009 2008 £m £m Finished goods and goods for resale ...... —7

The difference between the balance sheet value of stock and its replacement cost is not material.

14. Trade and other receivables Trade and other receivables comprise:

2009 2008 £m £m Trade and other receivables Trade receivables — gross ...... 72 81 Less provision for impairment ...... (35) (35) Trade receivables — net ...... 37 46 Other receivables ...... 3 25 Prepayments and accrued income ...... 17 54 57 125

The average credit period taken on trade receivables, calculated by reference to the amount owed at the period end as a proportion of total revenue in the period, adjusted to take account of the timing of acquisitions, was 57 days (2008: 53 days). Tiscali UK’s trade and other receivables are denominated in the following currencies:

2009 2008 £m £m UK Sterling ...... 57 125

The ageing of gross trade receivables is as follows:

2009 2008 £m £m Notyetdue...... 6 14 0 to 2 months ...... 30 33 2 to 4 months ...... 3 6 Over 4 months ...... 33 28 72 81

The ageing of Tiscali UK provisions for impairment of trade receivables is as follows:

2009 2008 £m £m Notyetdue...... — — 0 to 2 months...... — (1) 2 to 4 months...... (2) (6) Over 4 months ...... (33) (28) (35) (35)

Movements in Tiscali UK provisions for impairment of trade receivables are as follows:

2009 2008 £m £m Opening balance ...... (35) (42) Charge to the income statement...... (10) — Receivables written off as irrecoverable ...... 10 7 Closing balance ...... (35) (35)

145 Trade receivables of £31 million (2008: £32 million) were past due but not impaired. These balances primarily relate to residential and corporate fixed line customers. Tiscali UK has made provision based on historic rates of recoverability and all unprovided amounts are considered to be recoverable. The ageing analysis of these trade receivables is as follows: 2009 2008 £m £m 0 to 2 months ...... 30 32 2 to 4 months ...... 1 — Over 4 months ...... — — 31 32

15. Trade and other payables 2009 2008 £m £m Current Trade payables ...... 58 131 Other taxes and social security costs ...... 13 7 Other payables ...... 8 13 Accruals and deferred income...... 40 68 119 219

2009 2008 £m £m Non-Current Other payables ...... 71 66 71 66

The average credit period taken on trade payables, calculated by reference to the amounts owed at the period end as a proportion of the amounts invoiced by suppliers in the period, adjusted to take account of the timing of acquisitions, was 76 days (2008: 150 days). The Directors consider that the carrying amount of trade and other payables approximates to their fair value. Other payables represent the deferred purchase consideration on the purchase of VNL, of which £89,384,000 was due to be paid in instalments starting in 2011. The liability was discounted to fair value at acquisition and is being unwound at a rate of 7 per cent. per annum. The liability was settled on 3 July 2009 by a cash payment of £17million as part of the terms of the acquisition of Tiscali UK by TTGL. Trade payables includes amounts owed to related UK parties.

16. Cash and cash equivalents, loans and other borrowings Cash and cash equivalents were as follows: 2009 2008 £m £m Cash at bank and in hand ...... 221

The effective interest rate on bank deposits and money market funds was 3.5 per cent. (2008: 5.1 per cent.). Loans and other borrowings comprise: 2009 2008 £m £m Current Obligations under finance leases ...... 9 10 Loans ...... 334 245 343 255

146 2009 2008 £m £m Non-current Obligations under finance leases ...... 58

Loans comprise loans from Tiscali UK Holdings plc and Tiscali Italy S.r.l., related parties. The Tiscali UK Holdings plc loan is denominated in Euro and UK Sterling and the interest rate is calculated at EURIBOR +4.5 per cent. per annum (2007: EURIBOR +3.0 per cent., 2006: EURIBOR +3.0 per cent. per annum), is repayable on demand and recorded all as current loan. The Tiscali Italy S.r.l. loan is denominated in UK Sterling, is non-interest bearing, is repayable on demand and recorded all as current loan. The fair value of short-term maturity loans and short-term finance lease liabilities approximates to the carrying amount because of the short maturity of these instruments. On 3 July 2009, the ultimate parent company Tiscali UK Holdings Plc subscribed for one ordinary share with a par value of 10p at a value of £158 million in the Company. This was used to repay part of the loan outstanding to Tiscali S.p.A. and its subsidiaries. The remaining balance of the loan to Tiscali S.p.A. and its subsidiaries were repaid by the new parent company, TTGL. Undrawn committed facilities were nil at 30 June 2009 (30 June 2008: nil).

17. Financial risk management and derivative financial instruments The book value and fair value of Tiscali UK’s financial assets, liabilities and derivative financial instruments, excluding Tiscali UK’s loans and other borrowings shown above, are as follows: 2009 2008 £m £m Book and fair value Trade and other receivables ...... 57 125 Trade and other payables ...... (190) (285) Tiscali UK’s activities expose it to a variety of financial risks including market risk (such as foreign exchange risk and interest rate risk), credit risk and liquidity risk. Tiscali UK’s principal assets subject to credit risk are cash and debtors. Tiscali UK’s liquidity risk is primarily attributable to its trade debtors.

(a) Foreign exchange risk Tiscali UK is exposed to foreign exchange risk largely in relation to loan borrowings denominated in Euro. Foreign exchange risk is not mitigated by any hedging instruments. Translation risk on converting overseas currency profits or losses is also not hedged and such profits and losses are converted into UK Sterling at average exchange rates throughout the period, however the impact is not significant. Currency loans and a limited amount of trading activities are sensitive to movements in foreign exchange rates. This sensitivity can be analysed in comparison to period-end rates (assuming all other variables remain constant) as follows: 2009 2008 £m £m Movement in income statement 10 per cent. movements in the UK Sterling/Euro exchange rate ...... 25 21 A strengthening of UK Sterling results in a gain to the income statement. The impact of translating the net assets of foreign operations into UK Sterling is insignificant and excluded from the above sensitivity analysis. No foreign currency movements are recorded within reserves.

(b) Interest rate risk Tiscali UK’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at floating rates of interest and thus expose Tiscali UK to cash flow interest rate risk. These floating rates are linked to EURIBOR. The following table demonstrates the sensitivity for Tiscali UK to a reasonably possible change of 1 per cent. in the interest rates, with all other variables held constant, of Tiscali UK’s income statement (through the impact on floating rate borrowings). There is no impact on Tiscali UK’s

147 equity. This analysis has been prepared on the assumption that the period-end positions prevail throughout the period, and therefore may not be representative of fluctuations in levels of borrowings.

2009 2008 £m £m Movement in income statement 1 per cent. movement in the UK Sterling interest rate ...... 1 1 1 per cent. movement in the Euro interest rate ...... 2 2

An increase in interest rates will result in a loss to the income statement.

(c) Liquidity risk

Tiscali UK manages its exposure to liquidity risk by regularly reviewing long and short-term cashflow projections for the business against facilities and other resources available to it. The table below analyses Tiscali UK’s financial liabilities into relevant maturity. The amounts diclosed in the table are the contractual undiscounted cash flows.

Less than 1 1to2 2to3 year years years Total £m £m £m £m 2009 Borrowings ...... 334 — — 334 Finance leases...... 9 4 1 14 Trade and other payables...... 119 89 — 208

Less than 1 1to2 2to3 year years years Total £m £m £m £m 2008 Borrowings ...... 245 — — 245 Finance leases...... 10 6 2 18 Trade and other payables...... 219 89 — 308

Tiscali UK’s liquidity risk is primarily attributable to its trade debtors. Tiscali UK manages its exposure to liquidity risk by regularly reviewing the collection and aging profile of its trade debtors and long and short term cash flow projections.

Capital management

Capital constitutes Tiscali UK’s working capital (receivables and payables) and the equity and funding provided by its parent company.

The primary objective of Tiscali UK’s capital management is to ensure that it is in a position to meet its ongoing payment obligations at any time. Capital management is managed by the ultimate parent entity and capital funding is received through the form of intercompany borrowings. Tiscali UK therefore does not have any external borrowings.

(d) Credit risk

Tiscali UK’s principal assets subject to credit risk are cash and receivables. Tiscali UK has no significant concentration of credit risk with exposure spread over a large number of counterparties and customers. The credit quality of customers are established for all customers based on an internal rating criteria. Provision is made for any trade receivables that are considered to be irrecoverable. Tiscali UK does not use derivative financial instruments to mitigate credit risk.

148 18. Provisions Reorganisation Other Total £m £m £m 2009 Opening balance ...... 2 8 10 Charge to income statement ...... 1 3 4 Utilised in the period ...... (1) (7) (8) Closing balance ...... 246 2008 Opening balance ...... 8 1 9 Charge to income statement ...... 4 2 6 Utilised in the period ...... (7) — (7) Closing balance ...... 538

Provisions are categorised as follows:

(a) Reorganisation Reorganisation provisions relate to the integration of acquired businesses and are typically expected to be utilised over the twelve months following the announcement of the reorganisation.

(b) Other Other provisions constitute dilapidations and similar property costs, provisions for legal issues and provisions for film and television rights, the cost of which is based on television subscriber numbers. All such provisions are assessed by reference to the best available information at the balance sheet date.

19. Invested capital 2009 2008 £m £m Opening balance ...... (166) 55 Net loss for the period ...... (37) (65) Closing balance ...... (203) (10)

149 20. Analysis of changes in net debt Exchange Opening Cash flow movements Closing £m £m £m £m 2009 Cash and cash equivalents ...... 15 (13) 2 15 (13) 2 Current loans and other borrowings ...... (303) (61) 30 (334) Finance leases...... (23) 9 — (14) (326) (52) 30 (348) Total net debt ...... (311) (65) 30 (346) 2008 Cash and cash equivalents ...... 24 (3) — 21 24 (3) — 21 Current loans and other borrowings ...... (224) (18) (3) (245) Finance leases...... (17) (1) — (18) (241) (19) (3) (263) Total net debt ...... (217) (22) (3) (242)

21. Commitments under operating leases Tiscali UK leases network infrastructure and offices under non-cancellable operating leases. The leases have varying terms, purchase options, escalation clauses and renewal rights. Tiscali UK had outstanding commitments for future minimum due as follows: 2009 2008 £m £m Within one year ...... 8 7 In two to five years ...... 24 27 After five years ...... 10 14 42 48

22. Capital commitments 2009 2008 £m £m Expenditure contracted, but not provided for in the financial statements ...... —4

23. Pension arrangements Tiscali UK provides various defined contribution pension schemes for the benefit of a significant number of its employees, the cost of which for continuing operations for the period was £1 million (30 June 2008: £1 million).

24. Related party transactions During the period, Tiscali UK had the following disclosable transactions: Tiscali Tiscali Tiscali S.P.A. Holdings Plc Tinet BV Italy S.r.l. £m £m £m £m 2009 Revenue for services provided ...... 4 — — — Expenses for services received...... (3) — (1) (6) Net interest expense ...... — (14) — — Amounts owed by Tiscali UK — loan ...... — (334) — —

150 Tiscali Tiscali Tiscali S.P.A. Holdings Plc Tinet BV Italy S.r.l. £m £m £m £m 2008 Revenue for services provided ...... 5 — — 2 Expenses for services received...... (4) — (1) (11) Net interest expense ...... — (17) — — Amounts owed by Tiscali UK — loan ...... — (219) — (26) Amounts owed by Tiscali UK — trade payables ..... (2) — (1) — Revenue for services provided during the period principally related to telecommunications services. Expenses for services received relate primarily to IT services and commissions on product sales. All products and services were provided at market rates.

25. Contingent liabilities At 30 June 2009, certain companies within Tiscali UK had guaranteed the following facilities of Tiscali UK Holdings Plc, a related party, a A400 million of Senior Secured Exchange Notes; a A50,000,000 senior revolving credit facility agreement; and a A150 million facility agreement (repaid February 2008). This guarantee was secured by a fixed and floating charge over the assets of the respective companies. During the period six months ended 30 June 2009, the covenants related to the above facilities were not observed and a formal standstill agreement was reached by the key lenders suspending capital and interest payments. Upon acquisition of Tiscali UK by TTGL, Tiscali UK was released from the above guarantees.

26. Post balance sheet events On 3 July 2009 TTGL, a subsidiary of Carphone Warehouse completed the acquisition of Tiscali UK Limited (a subsidiary of Tiscali S.p.A.) and its subsidiaries as a going concern. Prior to completion, Tiscali Holdings Plc subscribed for one ordinary share with a par value of 10p at a value of £158 million in the Company. This was used to repay part of the loan outstanding to Tiscali S.p.A. and its subsidiaries. The remaining balance of the loan has been repaid by the new parent company, TTGL. Also prior to completion, TTGL paid £17million to the original shareholders of VNL in part-settlement of the deferred consideration (arisen on the acquisition of VNL by Tiscali UK during 2006). The remaining balance owing to the VNL shareholders was converted to one ordinary share in Tiscali UK prior to the acquisition.

27. Ultimate parent company For each of the respective periods the immediate parent company was Tiscali UK Holdings Plc (formerly Tiscali UK Holdings Limited), a company incorporated in the United Kingdom. Tiscali UK’s ultimate parent undertaking and controlling party was Tiscali S.p.A. which is incorporated in Italy. Tiscali S.p.A. was the parent company of both the smallest and largest groups which include the company and prepare consolidated accounts. From 3 July 2009 the ultimate parent company was Carphone Warehouse.

151 SECTION E: HISTORICAL CONSOLIDATED FINANCIAL INFORMATION FOR TISCALI UK FOR THE FINANCIAL YEARS ENDED 31 DECEMBER 2008, 31 DECEMBER 2007 AND 31 DECEMBER 2006 Consolidated income statement For the years ended 31 December 2008 and 31 December 2007 Before After Before After amortisation Amortisation of amortisation amortisation Amortisation of amortisation of acquisition acquisition of acquisition of acquisition acquisition of acquisition intangibles, intangibles, intangibles, intangibles, intangibles, intangibles, goodwill goodwill goodwill goodwill goodwill goodwill impairments impairments impairments impairments impairments impairments and and and and and and exceptional exceptional exceptional exceptional exceptional exceptional items items items items items items Notes 2008 2008 2008 2007 2007 2007 £m £m £m £m £m £m Revenue ...... 2 538 — 538 414 — 414 Cost of sales ...... (313) — (313) (246) — (246) Gross profit ...... 225 — 225 168 — 168 Operating expenses excluding depreciation and amortisation ...... 3,4 (240) (12) (252) (166) (12) (178) EBITDA ...... (15) (12) (27) 2 (12) (10) Depreciation...... 3 (28) — (28) (18) — (18) Amortisation and goodwill impairment ...... 3 (12) (52) (64) (12) (10) (22) Loss before interest and taxation ...... (55) (64) (119) (28) (22) (50) Interest expense ...... 7 (103) — (103) (19) — (19) Interest income...... 7 1 — 1 1 — 1 Loss before taxation .. (157) (64) (221) (46) (22) (68) Taxation...... 4,8 (8) 8 — (5) 5 — Net loss for the year .. (165) (56) (221) (51) (17) (68)

A reconciliation of Headline results to statutory results is provided in note 10 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

152 Consolidated income statement For the years ended 31 December 2007 and 31 December 2006 Before After Before After amortisation of Amortisation of amortisation of amortisation of Amortisation of amortisation acquisition acquisition acquisition acquisition acquisition of acquisition intangibles, intangibles, intangibles, intangibles, intangibles, intangibles, goodwill goodwill goodwill goodwill goodwill goodwill impairment impairment impairment impairment impairment impairment and and and and and and exceptional exceptional exceptional exceptional exceptional exceptional items items items items items items Notes 2007 2007 2007 2006 2006 2006 £m £m £m £m £m Revenue ...... 2 414 — 414 303 — 303 Cost of sales ...... (246) — (246) (186) — (186) Gross profit ...... 168 — 168 117 — 117 Operating expenses excluding depreciation and amortisation ...... 3,4 (166) (12) (178) (141) (11) (152) EBITDA ...... 2 (12) (10) (24) (11) (35) Depreciation...... 3 (18) — (18) (9) — (9) Amortisation ...... 3 (12) (10) (22) (4) (2) (6) Loss before interest and taxation ...... (28) (22) (50) (37) (13) (50) Interest expense ...... 7 (19) — (19) (3) — (3) Interest income...... 7 1 — 1 — — — Loss before taxation .. (46) (22) (68) (40) (13) (53) Taxation...... 4,8 (5) 5 — (1) 1 — Net loss for the year .. (51) (17) (68) (41) (12) (53)

A reconciliation of Headline results to statutory results is provided in note 10 to the financial information. The accompanying notes are an integral part of this consolidated income statement. All amounts relate to continuing operations.

153 Consolidated statement of comprehensive income For the years ended 31 December 2008, 31 December 2007 and 31 December 2006 2008 2007 2006 £m £m £m Net loss for the year ...... (221) (68) (53) Total recognised income and expense for the year ...... (221) (68) (53)

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

154 Consolidated statement of changes in equity For the years ended 31 December 2008, 31 December 2007 and 31 December 2006 Notes 2008 2007 2006 £m £m £m At the beginning of the year ...... 55 21 74 Total recognised income and expense for the year ...... (221) (68) (53) Issue of share capital ...... 20 — 102 — At the end of the year ...... (166) 55 21

The accompanying notes are an integral part of this consolidated statement of changes in equity.

155 Consolidated balance sheet As at 31 December 2008, 31 December 2007 and 31 December 2006 Notes 2008 2007 2006 £m £m £m Non-current assets Goodwill ...... 11 164 184 80 Other intangible assets ...... 11 99 135 56 Property, plant and equipment ...... 12 72 76 65 Deposits ...... 6 7 6 341 402 207 Current assets Stock...... 14 4 7 1 Trade and other receivables ...... 15 74 103 55 Cash and cash equivalents ...... 17 15 24 1 93 134 57 Total assets ...... 434 536 264 Current liabilities Trade and other payables ...... 16 (197) (167) (121) Loans and other borrowings ...... 17 (315) (232) (40) Provisions ...... 19 (9) (9) (15) (521) (408) (176) Non-current liabilities Trade and other payables ...... 16 (68) (64) (59) Loans and other borrowings ...... 17 (11) (9) (8) (79) (73) (67) Total liabilities ...... (600) (481) (243) Net (liabilities) assets ...... (166) 55 21 Equity Invested capital ...... 20 (166) 55 21 (Deficit) funds attributable to equity shareholders...... (166) 55 21

The accompanying notes are an integral part of this consolidated balance sheet.

156 Consolidated cash flow statement For the years ended 31 December 2008, 31 December 2007 and 31 December 2006 Notes 2008 2007 2006 £m £m £m Operating activities Loss before interest and taxation ...... (119) (50) (50) Adjustments for non-cash items: Depreciation...... 28 18 9 Amortisation and goodwill impairment ...... 64 22 6 Operating cash flows before movements in working capital . . (27) (10) (35) Decrease (increase) in trade and other receivables ...... 29 (17) 21 Decrease (increase) in stock ...... 3 (6) (1) Increase (decrease) in trade and other payables ...... 35 1 (8) (Decrease) increase in provisions ...... — (7) 15 Net cash generated from operating activities ...... 40 (39) (8) Investing activities Interest received...... 1 1 — Acquisition of subsidiaries, net of cash acquired ...... 13 — (189) (1) Acquisition of intangible assets ...... (9) (9) (5) Acquisition of property, plant and equipment ...... (24) (25) (34) Acquisition (disposal) of deposits ...... 1 (1) (2) Cash flows from investing activities ...... (31) (223) (42) Financing activities Proceeds from the issue of share capital ...... — 102 — Increase in borrowings ...... 21 11 185 35 Interest paid...... (35) (6) (2) Proceeds of capital element of finance leases ...... 6 4 10 Cash flows from financing activities...... (18) 285 43 Net (decrease) increase in cash and cash equivalents ..... (9) 23 (7) Cash and cash equivalents at the start of the year ...... 24 1 8 Effect of exchange rate fluctuations ...... — — — Cash and cash equivalents at the end of the year ...... 15 24 1 Cash and cash equivalents for the purposes of this statement comprise: Cash and cash equivalents ...... 15 24 1 15 24 1

The accompanying notes are an integral part of this consolidated cash flow statement.

157 Notes to the financial information for the years ended 31 December 2008, 31 December 2007 and 31 December 2006

1. Accounting policies

(a) Basis of preparation Tiscali UK Limited is a company incorporated and domiciled in the United Kingdom and is a wholly owned subsidiary of TalkTalk Group Limited following its acquisition by Carphone Warehouse on 3 July 2009 (although the Tiscali UK business has been consolidated since 1 July 2009). The consolidated financial statements of Tiscali UK Ltd and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These financial statements are the first consolidated financial statements prepared by Tiscali UK. Previously Tiscali UK formed part of its former parent company’s consolidated accounts and was not required to present consolidated financial statements in its own right. Tiscali UK has complied with IFRS1 ‘First-time Adoption of International Financial Reporting Standards’, as this is the first set of consolidated financial statements prepared under IFRS. Tiscali UK’s date of transition to IFRS is 1 January 2006. IFRS1 requires an entity to comply with each IFRS effective at the reporting date for its financial statements prepared under IFRS. As a general rule, IFRS1 requires such standards to be applied retrospectively. However, the standard allows several optional exemptions from full retrospective application. Tiscali UK has elected to take advantage of the following exemptions: • Tiscali UK has adopted IFRS 3 ‘Business Combinations’ to the extent that it applies to acquisitions post 1 January 2006. Acquisitions before that date are recorded under previous accounting rules as Tiscali UK has taken advantage of the exemption allowed in IFRS1 regarding business combinations recognised before the date of transition to IFRS. All goodwill and intangible assets will be tested for impairment, as required by IAS36 ’Impairment of assets’, goodwill on an annual basis and other intangible assets when there is an indicator of impairment. • Tiscali UK has elected to take advantage of the exemption allowed in IFRS1 regarding cumulative translation differences. Accordingly, the cumulative translation differences for all foreign operations are deemed to be nil at the date of transition to IFRS. The reconciliations required by IFRS are not applicable to Tiscali UK as consolidated results have not previously been prepared for Tiscali UK. Note 28 shows the balance sheet of Tiscali UK at 1 January 2006, being the first consolidated position prepared under IFRS. These financial statements have been prepared on a going concern basis. The TalkTalk Group has confirmed that it will retain business operations and provide the necessary finance to fund its operations for the foreseeable future. These financial statements have been prepared in accordance with IFRS as adopted for use in the European Union. These financial statements therefore comply with Article 4 of the European Union International Accounting Standard regulation. The following standards and interpretations have become effective during the period covered by these financial statements: • IFRS7 ‘Financial Instruments: Disclosures’, and the related amendment to IAS1 ‘Presentation of Financial Statements’ on capital disclosures. This introduces new disclosures relating to financial instruments but does not have any impact on their classification or valuation. • IFRIC8 ‘Scope of IFRS2’, provides guidance where the consideration received for the equity instruments issued is less that their fair value so as to assess whether they fall within the scope of IFRS2. This standard has not impacted Tiscali UK’s financial statements. • IFRIC9 ‘Reassessment of Embedded Derivatives’ provides further guidance on the assessment of embedded derivatives and is not relevant to Tiscali UK’s operations. • IFRIC10 ‘Interim Financial Reporting’ prohibits certain impairment losses recognised in an interim period to be reversed at a subsequent balance sheet date. This has not had any impact on Tiscali’s financial statements. • IFRS8 ‘Operating Segments’, updates segmental reporting requirements.

158 The consolidated financial statements have been prepared on the historical cost basis. The consolidated financial statements are presented in UK Sterling and all values are rounded to the nearest million UK Sterling (£m) except when otherwise indicated. The principal activity of Tiscali UK is that of a telephone, internet and television services provider. Tiscali UK’s registered address is: 11 Evesham Street London W11 4AR Tiscali UK’s principal accounting policies are set out below:

(b) Basis of consolidation The consolidation includes Tiscali UK and the companies over which it has either directly or indirectly the power to govern the financial and operating policies so as to obtain economic benefits from their activities. The consolidated financial statements incorporate the results for the three years ended 31 December 2008, 2007 and 2006. The results of subsidiaries acquired or sold during the respective periods are included from or to the date on which control passed. Intercompany transactions and balances between companies within Tiscali UK are eliminated on consolidation. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used in line with those used by Tiscali UK. (c) Foreign currency translation Unhedged transactions are recorded at the exchange rate on the date of the transaction. The results of overseas operations are translated at the average foreign exchange rates for the period, and their balance sheets are translated at the rates prevailing at the balance sheet date. Exchange differences arising on the translation of opening net assets, goodwill and results of overseas operations are recognised in the translation reserve. All other exchange differences are included in the income statement. The principal exchange rates against UK Sterling used in these financial statements are as follows:

Average Closing 2008 2007 2006 2008 2007 2006 Euro ...... 1.25 1.48 1.47 1.05 1.36 1.48 Where a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the operation. (d) Revenue Revenue is stated net of VATand other sales related taxes and represents the amounts receivable for services and goods provided apportioned over the period to which they relate. (e) Share-based payments Tiscali UK issues cash settled share-based payments to certain employees. Cash settled share-based payments are measured at fair value at each balance sheet date, and expensed over the vesting period, based on Tiscali UK’s estimate of the number of shares that will eventually vest. For schemes with internal performance criteria, the number of options expected to vest is recalculated at each balance sheet date, based on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement. For schemes with external performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement.

159 If a share-based payment scheme is cancelled, any remaining part of the fair value of the scheme is expensed through the income statement. If a share-based payment scheme is forfeited, no further expense is recognised and any charges previously recognised through the income statement are reversed.

(f) Pensions Contributions to defined contribution schemes are charged to the income statement when an employee has rendered services in accordance with the rules of the schemes.

(g) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives and rent-free periods are amortised through the income statement over the period of the lease. Gains or losses from sale and leaseback transactions are deferred over the life of the new lease to the extent that the rentals are considered to be above or below market rentals. The remaining gain or loss is recognised within operating expenses in the period in which the sale is completed. Leases in terms of which Tiscali UK assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leases assets is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction in the liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance sheet liability.

(h) Taxation Current tax, including UK corporation tax and overseas tax, is provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided in full on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, and the carry-forward of unused tax losses and credits. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is provided on the unremitted earnings of overseas subsidiaries where incremental tax is expected to arise on their remittance except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Current and deferred tax is recognised in the income statement except where it relates to an item recognised directly in reserves, in which case it is recognised directly in reserves. Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions.

(i) Intangible assets

Goodwill: Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is

160 recognised initially as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. At the acquisition date, goodwill is allocated to each of the cash-generating units (“CGUs”) expected to benefit from the combination and held in the currency of the operations to which the goodwill relates. Goodwill is reviewed at least annually for impairment, or more frequently where there is an indication that goodwill may be impaired. Where the future cash flows are less than the carrying value of goodwill, an impairment charge is recognised in the income statement.

On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or loss on disposal.

Operating intangibles:

Operating intangibles includes internal infrastructure and design costs incurred in the development of software for internal use. Internally generated software is recognised as an intangible asset only if it can be separately identified, it is probable that the asset will generate future economic benefits, and the development cost can be measured reliably. Where these conditions are not met, development expenditure is recognised as an expense in the period in which it is incurred. Operating intangibles are amortised on a straight-line basis over their estimated useful economic lives of up to 8 years.

Acquisition intangibles:

Acquired intangible assets such as customer bases, customer revenue share agreements, brands and other intangible assets acquired through a business combination are capitalised separately from goodwill and amortised over their expected useful lives of up to 6 years on a straight-line basis. The value attributed to such assets is based on the future economic benefit that is expected to be derived from them, calculated as the present value of future cash flows after a deduction for contributory assets.

(j) Property, plant and equipment

Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life from the date it is brought into use, as follows:

Short leasehold costs...... — 10%orthelease term if less Network equipment and computer hardware. . — 12.5%-50% per annum Fixtures and fittings ...... — 20-25% per annum

(k) Recoverable amount of non-current assets

At each reporting date, Tiscali UK assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, Tiscali UK makes a formal estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or cash generating units fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets.

(l) Stock

Stock is stated at the lower of cost and net realisable value. The cost of stock is based on the first-in first-out principle and includes expenditure incurred in acquiring the stock, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realisable value is based on estimated selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow-moving or defective items where appropriate.

(m) Cash and cash equivalents

Cash and cash equivalents represent cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash.

161 (n) Deposits Deposits represent amounts paid to landlords to secure sites, and are refundable on exit of those sites.

(o) Loans and other borrowings Loans and other borrowings represent committed and uncommitted bank loans, and bank overdrafts and are measured initially at the fair value of consideration received. After initial recognition, loans and other borrowings are subsequently measured at amortised cost using the effective interest rate method if the time value of money is significant. Gains and losses on the settlement or otherwise cancellation of liabilities are recognised in interest income and expenses respectively.

(p) Provisions Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted where the time value of money is considered to be material. Provisions are categorised as follows:

Reorganisation Reorganisation provisions relate principally to redundancy costs and are only recognised where plans are demonstrably committed and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are not recognised in respect of future operating losses.

Other Other provisions constitute dilapidations and similar property costs, provisions for legal issues and provisions for film and television rights, the cost of which is based on television subscriber numbers. All such provisions are assessed by reference to the best available information at the balance sheet date.

(q) Headline results Headline results are stated before the amortisation of acquisition intangibles and goodwill impairment. Headline results also exclude any exceptional items that are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance.

(r) Use of critical accounting estimates and assumptions Estimates and assumptions used in the preparation of the financial statements are continually reviewed and revised as necessary. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have a material impact in the financial statements. The principal balances in the financial statements where changes in estimates and assumptions may have a material impact are as follows:

Recoverable amount of non-current assets: All non-current assets, including goodwill and other intangible assets, are reviewed for potential impairment using estimates of the future economic benefits attributable to them. In the case of customer bases, such estimates involve assumptions in relation to future customer margins and average customer lives. Any estimates of future economic benefits made in relation to non-current assets may differ from the benefits that ultimately arise, and materially affect the recoverable value of the asset.

Trade and other receivables: Provisions for irrecoverable receivables are based on extensive historical evidence, and the best available information in relation to specific issues, but are unavoidably dependent on future events.

162 Deferred taxation: The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the relevant jurisdictions in the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain.

Provisions: Tiscali’s UK’s reorganisation provisions are based on the best information available to management at the balance sheet date. However, the future costs assumed are inevitably only estimates, which may differ from those ultimately incurred.

(s) Recent accounting developments The IASB and IFRIC have issued the following standards and interpretations, and endorsed by the European Union, with an effective date after these financial statements: IFRS 3 (Revised) ‘Business Combinations’ effective for annual periods beginning on or after 1 July 2009. IAS 27 (Revised) ‘Consolidated and separate financial statements’ effective for annual periods beginning on or after 1 July 2009. Standards, amendments and interpretations which have not yet been approved by the European Union and as such cannot be early adopted by Tiscali UK are as follows: IFRS 1 (Revised) ‘First-time Adoption of International Financial Reporting Standards’ and IFRS 1 (Amendment) Additional exemptions for first-time adopters’ effective for the year ending 31 December 2009. IFRS 9 ‘Financial Instruments’ effective for the year ending 31 December 2013. IAS 32 (Amendment) ‘Classification of Rights issues’ effective for the year ending 31 December 2011. IAS 39 (Amendment) ‘Financial Instruments: Recognition and Measurement: Eligible hedged items and Reclassification of financial assets: Effective date and transition’ effective for the year ending 31 December 2010. IFRIC 9 (Amendment) ‘Reassessment of Embedded Derivatives’ and IAS 39, ‘Financial Instruments: Recognition and Measurement of embedded derivatives’ effective for the year ending 30 June 2010. IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ effective for the year ending 30 June 2010. IFRIC 18 ‘Transfer of Assets from Customers’ effective for the year ending 31 December 2010. ‘Improvements to IFRSs 2009’ effective for the year ending 31 March 2010.

2. Segmental reporting Tiscali UK operates in one operating segment, being the UK telecoms operations with all of its revenues derived from telephony, internet and television services.

3. Loss before interest and taxation

Loss before interest and taxation is stated after charging: 2008 2007 2006 £m £m £m Depreciation of property, plant and equipment ...... 28 18 9 Amortisation of acquisition intangibles ...... 32 10 2 Amortisation of other intangible fixed assets...... 12 12 4 Impairment of goodwill (note 11)...... 20 — — Impairment of trade receivables ...... 10 18 15 Other employee costs...... 33 27 20 Rentals under operating leases — property ...... 5 3 2 Rentals under operating leases — non-property ...... 13 12 1 Cash settled share based payment charge ...... 4 3 —

163 Operating expenses are analysed as follows:

2008 2007 2006 £m £m £m Operating expenses excluding depreciation and amortisation ..... 252 178 152 Depreciation ...... 28 18 9 Amortisation and goodwill impairment ...... 64 22 6 Total operating expenses ...... 344 218 167

4. Exceptional items

The following items have been disclosed separately given their size and one-off nature:

Income statement Pre-tax Post-tax Note presentation loss Taxation loss £m £m £m 2008 Pipex integration...... (a) Operating expenses (12) — (12) 2007 Pipex integration...... (a) Operating expenses (9) — (9) VNL integration ...... (b) Operating expenses (3) — (3) 2006 VNL integration ...... (b) Operating expenses (11) — (11)

(a) Pipex integration

Tiscali UK acquired the Pipex UK internet access business in September 2007. Since that time Tiscali UK worked on the integration of Pipex into the Tiscali UK business, through a programme to transfer network operations, hosting, billing and customer management on to Tiscali UK systems. The transition was completed during the year ended 31 December 2008.

(b) VNL integration

Tiscali UK acquired the VNL internet access business in August 2006. Since that time Tiscali UK worked on the integration of VNL into the Tiscali UK business, through a programme to transfer network operations, hosting, billing and customer management on to Tiscali UK systems. The transition was completed during the year ended 31 December 2007.

5. Employee costs

Compensation earned by the key management comprising Tiscali UK’s board and operating directors, was as follows:

2008 2007 2006 £m £m £m Salaries and fees ...... 2 1 1 Performance bonuses ...... 2 1 1 Share-based payments ...... 4 3 — 852

6. Share-based payments

On 19 January 2007, the Tiscali UK Share Option Plan was established. Subject to the rules of the Scheme eligible employees were granted options to acquire shares in the Company at a future date at a price set at the date of the grant. All options granted are cash settled.

164 Options granted under the Plan (including directors) were as follows:

2008 2007 2006 Number Number Number Outstanding at the beginning of the year ...... 4,221 — — Granted during the year ...... 642 4,221 — Exercised during the year...... (329) — — Outstanding at the end of the year ...... 4,534 4,221 — Exercisable at the end of the year ...... 4,534 4,221 —

The options outstanding at 31 December 2008 have an exercise price £3,599 (31 December 2007: £3,599) and a contractual life of three years. The maximum life of the options is ten years after the date of grant. During the period zero share options were exercised (31 December 2008: 329 at a share price of £8,120).

The share option plan was settled on the 3rd July 2009 in cash as a result of the acquisition of Tiscali UK by TalkTalk Group Limited. The cash paid out per share of £4,521 was used as the basis of fair value of the share options in existence at 30 June 2009.

During 2007, 1,301 share options were granted to the senior management at an exercise price of £3,599. These options were granted subject to various performance conditions which included predefined EBITDA targets. The results for the year ended 31 December 2007 and 2008 did not meet the EBITDA performance conditions.

In addition, during 2007, 2,920 share options were granted to senior management at an exercise price of £3,599. These options vest at regular periods over the following three years.

During 2008, 642 share options were granted at an exercise price of £3,599. These options were granted subject to various performance conditions which included predefined EBITDA targets. The results for the year ended 31 December 2008 did not meet the EBITDA performance conditions.

The carrying amount of the liability relating to the cash-settled options at 31 December 2008 is £9 million plus an additional £1 million for National Insurance (31 December 2007: £4 million and 31 December 2006: nil). Subsequent to the acquisition of Tiscali UK by TalkTalk Group Limited, £8 million was paid out to senior management.

7. Interest expense and income (finance costs)

(a) Interest expense is analysed as follows:

2008 2007 2006 £m £m £m Interest on bank loans and overdrafts ...... 27 10 1 Amortisation of facility fees and similar charges...... 1 1 1 Foreign exchange losses...... 68 3 1 Movement in discount on deferred consideration ...... 5 4 — Other interest expense ...... 2 1 — 103 19 3

(b) Interest income is analysed as follows:

2008 2007 2006 £m £m £m Interest on cash and cash equivalents ...... 11—

Foreign exchange losses were incurred on translation of Euro denominated loans.

165 8. Taxation

The tax credit comprises: 2008 2007 2006 £m £m £m Current tax: UK corporation tax ...... — — — Deferred tax: Origination and reversal of timing differences...... — — — Adjustments in respect of prior years ...... — — — Total deferred tax ...... — — — Total tax credit ...... ———

The tax charge relating to Headline earnings (see note 10) for the year ended 31 December 2008 is nil (2007: nil; 2006: nil) representing an effective tax rate on pre-tax losses of nil per cent. (2008: nil per cent.; 2007: nil per cent.). The tax credit relating to statutory earnings for the year ended 31 December 2008 is £8 million (2007: credit of £5 million; 2006: credit of £1 million). The principal differences between the tax credit shown above and the amount calculated by applying the standard rate of UK corporation tax of 28.5 per cent. (2008: 30 per cent.; 2007: 30 per cent.) to loss before taxation are as follows: 2008 2007 2006 £m £m £m Loss before taxation ...... (221) (68) (53) Loss before taxation at 28.5% (2008: 30%; 2007: 30%) ...... (63) (20) (16) Items attracting no tax relief or liability ...... 26 12 12 Taxation losses not recognised ...... 37 8 4 Total tax credit ...... ———

166 The deferred tax liabilities recognised by Tiscali UK and movements thereon during the year are as follows: Total £m 2008 Deferred tax asset opening balance ...... 35 Debit to the income statement ...... (8) Deferred tax asset closing balance ...... 27 Deferred tax liability opening balance ...... (35) Credit to the income statement ...... 8 Deferred tax liability closing balance ...... (27) Deferred tax closing balance ...... — 2007 Deferred tax asset opening balance ...... 14 Deferred tax asset recognised ...... 26 Debit to the income statement ...... (5) Deferred tax asset closing balance ...... 35 Deferred tax liability opening balance ...... (14) Acquisition of subsidiaries ...... (26) Credit to the income statement ...... 5 Deferred tax liability closing balance ...... (35) Deferred tax closing balance ...... — 2006 Deferred tax asset opening balance ...... — Deferred tax asset recognised ...... 15 Debit to the income statement ...... (1) Deferred tax asset closing balance ...... 14 Deferred tax liability opening balance ...... — Acquisition of subsidiaries ...... (15) Credit to the income statement ...... 1 Deferred tax liability closing balance ...... (14) Deferred tax closing balance ...... —

Management considers to what extent it is probable that deferred tax assets will be realised. Deferred tax assets representing capital allowances and tax losses have been recognised to the extent that they are expected to be utilised. The deferred tax liability arises upon acquisition intangibles. From 1 April 2008, the UK statutory rate of corporation tax reduced from 30 per cent. to 28 per cent. The impact of this change on the value of deferred tax assets was recognised at 31 December 2008. At 31 December 2008, Tiscali UK had unrecognised deferred tax assets of £215 million (2007: £181 million; 2006: £187 million). A further deferred tax asset of £27 million (2007: £35 million; 2006: £14 million) has been recognised as management considers that there will be sufficient taxable profits against which these assets can be recovered. All assets may be carried forward indefinitely subject to certain restrictions on usage.

9. Equity dividends No dividends were paid by Tiscali UK during any period.

167 10. Reconciliation of Headline results to statutory results

Loss before Loss interest and before Loss for EBITDA taxation taxation the year £m £m £m £m 2008 Headline results ...... (15) (55) (157) (165) Exceptional items (see note 4) ...... (12) (12) (12) (12) Amortisation of acquisition intangibles and impairment of goodwill (see note 11) ...... — (52) (52) (52) Taxation on amortisation of acquisition intangibles. . . — — — 8 Statutory results ...... (27) (119) (221) (221)

Loss before interest Loss before Loss for EBITDA and taxation taxation the year £m £m £m £m 2007 Headline results ...... 2 (28) (46) (51) Exceptional items (see note 4) ...... (12) (12) (12) (12) Amortisation of acquisition intangibles and impairment of goodwill (see note 11) ...... — (10) (10) (10) Taxation on amortisation of acquisition intangibles. . . — — — 5 Statutory results ...... (10) (50) (68) (68)

Loss before interest Loss before Loss for EBITDA and taxation taxation the year £m £m £m £m 2006 Headline results ...... (24) (37) (40) (41) Exceptional items (see note 4) ...... (11) (11) (11) (11) Amortisation of acquisition intangibles and impairment of goodwill (see note 11) ...... — (2) (2) (2) Taxation on amortisation of acquisition intangibles. . . — — — 1 Statutory results ...... (35) (50) (53) (53)

Headline information is provided because the Directors consider that it provides assistance in understanding underlying performance.

11. Goodwill and other intangible assets

(a) Goodwill

2008 2007 2006 £m £m £m Opening net book value ...... 184 80 — Acquisition of subsidiaries (see note 13)...... — 108 80 Adjustments to contingent consideration ...... — (4) — Impairment of goodwill ...... (20) — — Closing net book value...... 164 184 80 Cost (gross carrying amount) ...... 184 184 80 Accumulated goodwill impairment ...... (20) — — Net carrying amount ...... 164 184 80

In 2007 an adjustment of £4 million was made to contingent consideration that related to the purchase of VNL during 2006.

168 Tiscali UK has only one cash generating unit being the UK telecoms operations. The cash flows of Tiscali UK are not separable into individual cash generating units as its cash flows are derived from shared assets and infrastructure. Tiscali UK tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the cash generating unit is determined by the fair value less cost of sale of the business. An impairment charge against goodwill of £20 million was recognised by the Directors at 31 December 2008. The events and circumstances leading to the impairment were triggered by the proposed sale of Tiscali’s UK business to a competitor in 2008 that then fell through. (b) Other intangible assets Other intangible fixed assets are analysed as follows: Operating Acquisition Total other intangibles intangibles intangibles £m £m £m 2008 Opening balance ...... 37 98 135 Additions ...... 8 — 8 Amortisation and impairment charges...... (12) (32) (44) Closing balance ...... 33 66 99 Cost (gross carrying amount) ...... 63 110 173 Accumulated amortisation ...... (30) (44) (74) Net carrying amount ...... 33 66 99 2007 Opening balance ...... 40 16 56 Acquisition of subsidiaries ...... — 92 92 Additions ...... 9 — 9 Amortisation and impairment charges...... (12) (10) (22) Closing balance ...... 37 98 135 Cost (gross carrying amount) ...... 55 110 165 Accumulated amortisation ...... (18) (12) (30) Net carrying amount ...... 37 98 135 2006 Opening balance ...... 4 — 4 Acquisition of subsidiaries ...... 35 18 53 Additions ...... 5 — 5 Amortisation and impairment charges...... (4) (2) (6) Closing balance ...... 40 16 56 Cost (gross carrying amount) ...... 46 18 64 Accumulated amortisation ...... (6) (2) (8) Net carrying amount ...... 40 16 56

Acquisition intangibles are removed once they are fully amortised.

169 Acquisition intangibles are analysed as follows: Customer bases Brands Total £m £m £m 2008 Opening balance ...... 76 22 98 Impairment charge...... — (8) (8) Amortisation ...... (19) (5) (24) Closing balance ...... 57 9 66 Cost (gross carrying amount) ...... 84 26 110 Accumulated amortisation and impairment charges ...... (27) (17) (44) Net carrying amount ...... 57 9 66 2007 Opening balance ...... 9 7 16 Acquisition of subsidiaries ...... 74 18 92 Amortisation ...... (7) (3) (10) Closing balance ...... 76 22 98 Cost (gross carrying amount) ...... 84 26 110 Accumulated amortisation ...... (8) (4) (12) Net carrying amount ...... 76 22 98 2006 Opening balance ...... — — — Acquisition of subsidiaries ...... 10 8 18 Amortisation ...... (1) (1) (2) Closing balance ...... 9716 Cost (gross carrying amount) ...... 10 8 18 Accumulated amortisation ...... (1) (1) (2) Net carrying amount ...... 9716

Customer bases relate primarily to the Pipex and VNL businesses, which were acquired in 2007 and 2006 respectively. The valuation of customer bases is derived from the discounted future cash flows expected from them, after a deduction for contributory assets. Brands relates to the brands acquired with the Pipex and VNL businesses, valued using the relief from royalty method.

170 12. Property, plant and equipment Network equipment Short and Fixtures leasehold computer and costs hardware fittings Total £m £m £m £m 2008 Opening balance ...... 3 68 5 76 Additions ...... 1 19 4 24 Depreciation ...... (1) (23) (4) (28) Closing balance ...... 364572 Cost (gross carrying amount) ...... 8 127 22 157 Accumulated depreciation ...... (5) (63) (17) (85) Net carrying amount ...... 364572 2007 Opening balance ...... 2 58 5 65 Business acquisition ...... 1 — 3 4 Additions ...... 1 26 — 27 Disposals ...... — (1) (1) (2) Depreciation ...... (1) (15) (2) (18) Closing balance ...... 368576 Cost (gross carrying amount) ...... 7 108 18 133 Accumulated depreciation ...... (4) (40) (13) (57) Net carrying amount ...... 368576 2006 Opening balance ...... 2 19 3 24 Business acquisition ...... — 13 4 17 Additions ...... 1 32 — 33 Depreciation ...... (1) (6) (2) (9) Closing balance ...... 258565 Cost (gross carrying amount) ...... 5 83 16 104 Accumulated depreciation ...... (3) (25) (11) (39) Net carrying amount ...... 258565

The carrying value of plant and equipment held under finance lease was £23 million at 31 December 2008 (2007: £17 million and 2006: £14 million).

171 13. Non-current asset investments

(a) Principal Tiscali UK investments

Tiscali UK has investments in the following subsidiary undertakings, which principally affected the profits or losses or net assets of Tiscali UK. To avoid a statement of excessive length, details of investments which are not significant have been omitted. All holdings are in equity share capital and give Tiscali UK a holding of 100 per cent. on consolidation.

Country of incorporation Name or registration Nature of business Tiscali Network Distribution Limited ...... England and Wales Network marketing Pipex Internet Limited ...... England and Wales Telecommunications Freedom to Surf Limited ...... England and Wales Non-trading Accent UK Limited ...... England and Wales Non-trading Nildram Limited ...... England and Wales Non-trading Trinite Limited ...... England and Wales Non-trading Pipex Communications Services ...... England and Wales Non-trading Pipex Broadband Limited ...... England and Wales Non-trading Highway One Limited ...... England and Wales Non-trading Pipex Networks Limited...... England and Wales Non-trading Pipex UK Limited ...... England and Wales Non-trading Homecall Payment Services Limited...... England and Wales Non-trading Toucan Residential Limited ...... England and Wales Non-trading Switch2 Telecoms Limited ...... England and Wales Non-trading Toucan Residential Ireland Limited ...... Ireland Customer services

(b) Acquisitions

(i) Pipex UK Internet Access Business

On 13 September 2007, Tiscali UK acquired the voice and broadband division of Pipex for a consideration of £189 million including £5 million of acquisition costs.

The following table sets out the book values of the identifiable assets and liabilities acquired and their provisional fair value to Tiscali UK:

Fair value Fair value Book value adjustments to Tiscali UK £m £m £m Non-current assets Acquisition intangibles ...... — 92 92 Property, plant and equipment ...... 14 (10) 4 Current assets Trade and other receivables ...... 30 — 30 Total assets ...... 44 82 126 Current liabilities Trade and other payables ...... (52) 7 (45) Total liabilities ...... (52) 7 (45) Total assets and liabilities ...... (8) 89 81 Goodwill ...... 108 Satisfied by Cash...... 189

Net Cash outflows in respect of the acquisition comprised: Cash Consideration ...... 189 189

172 No cash was acquired with Pipex. Fair value adjustments relate principally to: • the recognition of the following acquisition intangibles: • the customer bases comprising broadband, narrow band and voice customers of £74 million. The valuation was derived from the discounted future cash flows to be generated by the customer bases, after a deduction for contributory assets; and • a licence to continue to use the Pipex brand for a limited period, valued at £18 million using the relief from the royalty method, which reflects the discounted future cash flows saved from not incurring royalty payments. • the write down of property, plant and equipment to its market value; • the recognition of deferred tax, principally in respect of intangible assets; and • the recognition of unrecorded liabilities. The goodwill arising on the acquisition of Pipex is attributable primarily to the removal of a significant competitor to Tiscali UK in the residential broadband market and the future operating synergies arising from the combination.

(ii) Video Networks Limited On 26 August 2006 Tiscali UK purchased the entire share capital of VNL for a consideration of £134 million The consideration paid for VNL was 11.5 per cent. of the enlarged issued share capital of Tiscali, with an earn-out mechanism to increase to 20 per cent. based on performance, together with a deferred cash consideration. The following table sets out the book values of the identifiable assets and liabilities acquired and their provisional fair value to Tiscali UK:

Fair value Fair value Book value adjustments to Tiscali UK £m £m £m Non-current asset Acquisition intangibles ...... — 18 18 Intangible assets ...... 8 27 35 Property, plant and equipment ...... 17 — 17 Current assets Trade and other receivables ...... 9 — 9 Total assets ...... 34 45 79 Current liabilities ...... (12) (2) (14) Non-current liabilities ...... (11) — (11) Deferred tax liabilities ...... — — — Total liabilities ...... (23) (2) (25) Total assets and liabilities ...... 11 43 54 Goodwill ...... 80 134 Satisfied by: Shares in Tiscali UK...... 56 Deferred consideration ...... 77 Cash ...... 1 134 Net cash outflows in respect of the acquisition comprised: Cash consideration ...... 1 1

173 Fair value adjustments relate principally to: • the recognition of the following acquisition intangibles: • the customer bases comprising broadband, narrow band and voice customers of £10 million. The valuation derived from the discounted future cash flows expected to be generated by the customer bases, after a deduction for contributory assets; • a licence to continue to use the VNL brand for a limited period, valued at £8 million using the relief from the royalty method, which reflects the discounted future cash flows saved from not incurring royalty payments; • software, valued at £35 million; and • the recognition of deferred tax, principally in respect of intangible assets. The goodwill arising on the acquisition of VNL is attributable primarily to the removal of a significant competitor to Tiscali UK in the residential broadband market and the future operating synergies arising from the combination.

14. Stock

2008 2007 2006 £m £m £m Finished goods and goods for resale ...... 4 7 1

The difference between the balance sheet value of stock and its replacement cost is not material.

15. Trade and other receivables

Trade and other receivables comprise

2008 2007 2006 £m £m £m Trade and other receivables Trade receivables — gross ...... 77 89 49 Less provision for impairment ...... (35) (42) (16) Trade receivables — net ...... 42 47 33 Other receivables ...... 14 22 8 Prepayments and accrued income ...... 18 34 14 74 103 55

The average credit period taken on trade receivables, calculated by reference to the amount owed at the period end as a proportion of total revenue in the period, adjusted to take account of the timing of acquisitions, was 52 days (2007: 78 days; 2006: 59 days) Tiscali UK trade and other receivables are denominated in the following currencies:

2008 2007 2006 £m £m £m UK Sterling...... 74 103 55

The ageing of gross trade receivables is as follows:

2008 2007 2006 £m £m £m Notyetdue...... 7 10 6 0 to 2 months ...... 32 34 26 2 to 4 months ...... 7 7 4 Over 4 months...... 31 38 13 77 89 49

174 The ageing of Tiscali UK provisions for impairment of trade receivables is as follows:

2008 2007 2006 £m £m £m Notyetdue...... — — — 0 to 2 months ...... — — — 2 to 4 months ...... (4) (4) (3) Over 4 months...... (31) (38) (13) (35) (42) (16)

Movements in Tiscali UK provisions for impairment of trade receivables are as follows:

2008 2007 2006 £m £m £m Opening balance ...... (42) (16) (9) Charge to the income statement ...... (10) (18) (15) Receivables written off as irrecoverable ...... 17 5 8 Acquisition of business ...... — (13) — Closing balance ...... (35) (42) (16)

Trade receivables of £35 million (2007: £37 million; 2006: £27 million) were past due but not impaired. These balances primarily relate to residential and corporate fixed line customers. Tiscali UK has made provision based on historic rates of recoverability and all unprovided amounts are considered to be recoverable. The ageing analysis of these trade receivables is as follows:

2008 2007 2006 £m £m £m 0 to 2 months ...... 32 34 26 2 to 4 months ...... 3 3 1 35 37 27

16. Trade and other payables

2008 2007 2006 £m £m £m Current Trade payables ...... 135 94 64 Other taxes and social security costs ...... 10 6 2 Accruals and deferred income ...... 52 67 55 197 167 121

2008 2007 2006 £m £m £m Non-Current Other payables ...... 68 64 59

The average credit period taken on trade payables, calculated by reference to the amounts owed at the period end as a proportion of the amounts invoiced by suppliers in the period, adjusted to take account of the timing of acquisitions, was 158 days (2007: 142 days; 2006: 125 days).

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

Other payables represent the deferred purchase consideration on the purchase of VNL, of which £89,384,000 was due to be paid in instalments starting in 2011. The liability was discounted to fair value at acquisition and is being unwound at a rate of 7 per cent. per annum. The liability was settled on 3 July 2009 by a cash payment of £17million as part of the terms of the acquisition of Tiscali UK by TalkTalk Group Ltd.

Trade payables include amounts owed to related parties.

175 17. Cash and cash equivalents, loans and other borrowings Cash and cash equivalents are as follows: 2008 2007 2006 £m £m £m Cash at bank and in hand...... 15 24 1

The effective interest rate on bank deposits and money market funds was 3.5 per cent. (2007: 5.1 per cent.; 2006: 4.9 per cent.). Loans and other borrowings comprise: 2008 2007 2006 £m £m £m Current Obligations under finance leases ...... 12 8 5 Loans ...... 303 224 35 315 232 40 Non Current Obligations under finance leases ...... 11 9 8 11 9 8

Loans comprise loans from Tiscali UK Holdings Plc and Tiscali S.p.A. related parties. The Tiscali UK Holdings plc loan is denominated in Euro and UK Sterling and the interest rate is calculated at EURIBOR +4.5 per cent. per annum (2007: EURIBOR +3.0 per cent., 2006: EURIBOR +3.0 per cent. per annum), is repayable on demand and recorded all as current loan. The Tiscali S.p.A. loan is denominated in UK Sterling, is non-interest bearing, is repayable on demand and recorded all as current loan. The bank overdrafts are secured by a fixed and floating charge over the assets of the company. The fair value of short-term maturity loans and short-term finance lease liabilities approximates to the carrying amount because of the short maturity of these instruments. On 3 July 2009, the ultimate parent company, Tiscali UK Holdings Plc subscribed for one ordinary share with a par value of 10p at a value of £158 million in the Company. This was used to repay part of the loan outstanding to fellow Tiscali S.p.A. subsidiaries. The remaining balance of the loan to Tiscali S.p.A. subsidiaries has been repaid by the new parent company, TTGL. Undrawn committed facilities were nil at 31 December 2008 (31 December 2007: nil and 31 December 2006: nil).

18. Financial risk management and derivative financial instruments The book value and fair value of Tiscali UK’s financial assets, liabilities and derivative financial instruments, excluding Tiscali UK’s loans and other borrowings shown above, are as follows: Book and fair value 2008 2007 2006 £m £m £m Trade and other receivables ...... 74 103 55 Trade and other payables ...... (265) (231) (180) Tiscali UK’s activities expose it to a variety of financial risks including market risk (such as foreign exchange risk and interest rate risk), credit risk and liquidity risk. Tiscali UK’s principal assets subject to credit risk are cash and debtors. Tiscali UK’s liquidity risk is primarily attributable to its trade debtors.

(a) Foreign exchange risk Tiscali UK is exposed to foreign exchange risk largely in relation to loan borrowings denominated in Euro. Foreign exchange risk is not mitigated by any hedging instruments. Translation risk on converting overseas currency profits or losses is also not hedged and such profits and losses are converted into UK Sterling at average exchange rates throughout the period, however the impact is not significant.

176 Currency loans and a limited amount of trading activities are sensitive to movements in foreign exchange rates. This sensitivity can be analysed in comparison to period-end rates (assuming all other variables remain constant) as follows: 2008 2007 2006 £m £m £m Movement in the income statement: 10 per cent. movement in the UK Sterling/Euro exchange rate . . . 22 21 — The strengthening of UK Sterling results in a gain to the income statement. The impact of translating the net assets of foreign operations into UK Sterling is insignificant and excluded from the above sensitivity analysis. No foreign currency movements are recorded within reserves.

(b) Interest rate risk Tiscali UK’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at floating rates of interest and thus expose Tiscali UK to cash flow interest rate risk. These floating rates are linked to EURIBOR. The following table demonstrates the sensitivity for Tiscali UK to a reasonably possible change of 1 per cent. in the interest rates, with all other variables held constant, of Tiscali UK’s income statement (through the impact on floating rate borrowings). There is no impact on Tiscali UK’s equity. This analysis has been prepared on the assumption that the period-end positions prevail throughout the period, and therefore may not be representative of fluctuations in levels of borrowings. 2008 2007 2006 £m £m £m Movement in the income statement: 1 per cent. movement in the UK Sterling interest rate...... — — — 1 per cent. movement in the Euro interest rate ...... 2 1 — An increase in interest rates will result in a loss to the income statement.

(c) Liquidity risk Tiscali UK manages its exposure to liquidity risk by regularly reviewing long and short-term cash flow projections for the business against facilities and other resources available to it. The table below analyses Tiscali UK’s financial liabilities into relevant maturity groupings. The amounts disclosed in the table are the contractual undiscounted cash flows. Less More than 1to2 2to3 3to4 4to5 than 1 year years years years years 5 years Total £m £m £m £m £m £m £m 2008 Borrowings ...... 303 —————303 Finance leases ...... 12 7 3 1 — — 23 Trade and other payables ...... 197 — 89———286 Less than 1to2 2to3 3to4 4to5More than 1 year years years years years 5 years Total £m £m £m £m £m £m £m 2007 Borrowings ...... 224 —————224 Finance leases ...... 8 7 2 ———17 Trade and other payables ...... 167 — — 89 — — 256 Less than 1to2 2to3 3to4 4to5More than 1 year years years years years 5 years Total £m £m £m £m £m £m £m 2006 Borrowings ...... 35—————35 Finance leases ...... 5 5 3 ———13 Trade and other payables ...... 121 ———89—210

177 Tiscali UK’s liquidity risk is primarily attributable to its trade debtors. Tiscali UK manages its exposure to liquidity risk by regularly reviewing the collection and aging profile of its trade debtors and long and short term cash flow projections.

(d) Credit risk Tiscali UK’s principal assets subject to credit risk are cash and receivables. Tiscali UK has no significant concentration of credit risk with exposure spread over a large number of counterparties and customers. The credit quality of customers are established for all customers based on an internal rating criteria. Provision is made for any trade receivables that are considered to be irrecoverable. Tiscali UK does not use derivative financial instruments to mitigate credit risk.

(e) Capital management Capital constitutes Tiscali UK’s working capital (receivables and payables) and the equity and funding provided by its parent company. The primary objective of Tiscali UK’s capital management is to ensure that it is in a position to meet its ongoing payment obligations at any time. Capital management is managed by the ultimate parent entity and capital funding is received through the form of intercompany borrowings. Tiscali UK therefore does not have any external borrowings.

19. Provisions Reorganisation Other Total £m £m £m 2008 Opening balance ...... 8 1 9 Charge to income statement...... 12 15 27 Utilised in the year ...... (18) (9) (27) Closing balance ...... 279 2007 Opening balance ...... 15 — 15 Charge to income statement...... 12 6 18 Utilised in the year ...... (19) (5) (24) Closing balance ...... 819 2006 Opening balance ...... 3 — 3 Charge to income statement...... 12 — 12 Closing balance ...... 15 — 15

Provisions are categorised as follows: Reorganisation Reorganisation provisions relate to the integration of acquired businesses and are typically expected to be utilised over the 12 months following the announcement of the reorganisation. Other Other provisions constitute dilapidations and similar property costs, provisions for legal issues and provisions for film and television rights, the cost of which is based on television subscriber numbers. All such provisions are assessed by reference to the best available information at the balance sheet date.

178 20. Invested capital 2008 2007 2006 £m £m £m Opening balance ...... 55 21 74 Net loss for the year ...... (221) (68) (53) Issue of share capital ...... — 102 — Closing balance ...... (166) 55 21

21. Analysis of changes in net debt Exchange Opening Cash flow movements Closing £m £m £m £m 2008 Cash And Cash Equivalents ...... 24 (9) — 15 24 (9) — 15 Loans And Other Borrowings ...... (224) (11) (68) (303) Finance Leases ...... (17) (6) — (23) (241) (17) (68) (326) Net Debt ...... (217) (26) (68) (311) 2007 Cash And Cash Equivalents ...... 1 23 — 24 123—24 Loans And Other Borrowings ...... (35) (185) (4) (224) Finance Leases ...... (13) (4) — (17) (48) (189) (4) (241) Net Debt ...... (47) (166) (4) (217) 2006 Cash And Cash Equivalents ...... 8 (7) — 1 8 (7) — 1 Loans And Other Borrowings ...... 1 (35) (1) (35) Finance Leases ...... (3) (10) — (13) (2) (45) (1) (48) Net Debt ...... 6 (52) (1) (47)

22. Commitments under operating leases Tiscali UK leases network infrastructure and offices under non-cancellable operating leases. The leases have varying terms, purchase options, escalation clauses and renewal rights. Tiscali UK had outstanding commitments for future minimum lease payments due as follows: 2008 2007 2006 £m £m £m Within one year ...... 8 9 9 In two to five years ...... 26 26 34 After five years ...... 11 17 13 45 52 56

23. Capital commitments 2008 2007 2006 £m £m £m Expenditure contracted, but not provided for in the financial statements ...... — 4 4

179 24. Pension arrangements Tiscali UK provides various defined contribution pension schemes for the benefit of a significant number of its employees, the cost of which for the year was £1 million (31 December 2007: £1 million; 31 December 2006: £1 million).

25. Contingent liabilities At 31 December 2008, certain companies within Tiscali UK had guaranteed the following facilities of Tiscali UK Holdings Plc, a related party, a A400 million of Senior Secured Exchange Notes; a A50,000,000 senior revolving credit facility agreement; and a A150 million facility agreement (repaid February 2008). This guarantee was secured by a fixed and floating charge over the assets of the respective companies. Following 31 December 2008, the covenants related to the above facilities were not observed and a formal standstill agreement was reached by the key lenders suspending capital and interest payments. Upon acquisition of Tiscali UK by TTGL, Tiscali UK was released from the above guarantees.

26. Related party transactions Tiscali UK had the following disclosable transactions: Tiscali UK Tiscali Holdings Tinet Tiscali S.P.A. Plc BV Italy S.r.l. £m £m £m £m 2008 Revenue for services provided...... 9 — — 2 Expenses for services received ...... (7) — (2) (11) Net interest expense ...... — (33) — — Amounts owed by Tiscali UK — loan . . . — (303) — — Amounts owed by Tiscali UK — trade payables ...... (2) — (1) (37) Tiscali UK Tiscali Tiscali Holdings Tinet Tiscali Service S.P.A. Plc BV Italy S.r.l. S.r.l. £m £m £m £m £m 2007 Revenue for services provided...... 10 — — — 2 Expenses for services received ...... (5) — (2) — (8) Net interest expense ...... — (7) — — Amounts owed by Tiscali UK — loan . . . (3) (221) — — — Amounts owed by Tiscali UK — trade payables — — — (1) (19) Tiscali UK Tiscali Tiscali Tiscali Holdings Tinet Motoring Service S.P.A. Ltd BV S.r.l. S.r.l. £m £m £m £m £m 2006 Revenue for services provided...... 2 — — 1 7 Expenses for services received ...... (4) — (1) — (7) Amounts owed by Tiscali UK — trade payables ...... (4) (6) (1) — (4) All related party transactions are unsecured, non-interest bearing and payable on demand, except with Tiscali UK Holdings Plc, formerly Tiscali UK Holdings Ltd, the terms are equivalent to those that prevail in arm’s length transactions.

27. Post balance sheet events On 8 May 2009 TTGL, a subsidiary of Carphone Warehouse entered into an agreement to acquire Tiscali UK Limited (a subsidiary of Tiscali S.p.A.) and its subsidiaries as a going concern. The acquisition was completed on 3 July 2009 (although the Tiscali UK business has been consolidated since 1 July 2009).

180 On 3 July 2009, Tiscali UK Holdings Plc subscribed for one ordinary share with a par value of 10p at a value of £158 million in Tiscali UK. This was used to repay part of the loan outstanding to Tiscali S.p.A. and its subsidiaries. The remaining balance of the loan has been repaid by the new parent company, TTGL. Also on 3 July 2009, TTGL paid £17million to the original shareholders of VNL in part-settlement of the deferred consideration (arisen on the acquisition of VNL by Tiscali UK Holdings Limited during 2006). The remaining balance owing to the VNL shareholders was converted to one ordinary share in Tiscali UK Holdings Limited prior to the acquisition.

28. Transition to IFRS These financial statements, for the years ended 31 December 2008, 31 December 2007, 31 December 2006 are the first financial statements prepared by Tiscali UK in accordance with International Financial Reporting Standards. Accordingly, Tiscali UK has prepared consolidated financial statements which comply with IFRSs applicable as at 31 December 2008, and the significant accounting policies meeting those requirements are described in note 1. Opening balance sheet Consolidated financial statements for Tiscali UK have not been previously prepared and presented. As a result the requirement in IFRS 1 to present reconciliations from the previous GAAP for equity, profit and loss and cash flows is not applicable. The opening balance sheet as at the date of transition to IFRS is set out below: 1 January 2006 £m Non-current assets Goodwill ...... — Other intangible assets ...... 3 Property, plant and equipment ...... 23 Deposits ...... 4 30 Current assets Stock ...... — Trade and other receivables ...... 68 Cash and cash equivalents ...... 8 76 Total assets ...... 106 Current liabilities Trade and other payables ...... 1 Loans and other borrowings ...... (2) Provisions ...... — (1) Non-current liabilities Trade and other payables ...... (29) Loans and other borrowings ...... (2) (31) Total liabilities ...... (32) Net assets ...... 74 Equity Invested capital...... 74 Funds attributable to equity shareholders ...... 74

29. Ultimate parent company For each of the respective periods the immediate parent company was Tiscali UK Holdings Plc (formerly Tiscali UK Holdings Limited), a company incorporated in the United Kingdom. Tiscali UK’s ultimate parent undertaking and controlling party was Tiscali S.p.A. which is incorporated in Italy. Tiscali S.p.A. was the parent company of both the smallest and largest groups which include the company and prepare consolidated accounts. From 3 July 2009 the ultimate parent company was Carphone Warehouse.

181 SECTION F: ERNST & YOUNG LLP’S REPORT ON THE HISTORICAL CONSOLIDATED FINANCIAL INFORMATION SET OUT IN SECTIONS D AND E OF PART V OF THIS DOCUMENT

Ernst & Young LLP Apex Plaza Forbury Road Reading RG1 1YE

Tel: 020 7951 2000 Fax: 020 7951 1345 www.ey.com/uk

The Directors TalkTalk Telecom Group PLC 11 Evesham Street London W11 4AR 29 January 2010

Dear Sirs

Tiscali UK Limited and its subsidiaries We report on the consolidated financial information of Tiscali UK Limited and its subsidiaries for the years ended 31 December 2006, 2007 and 2008 and the six months ended 30 June 2009 set out in Sections D and E of Part Vof the Prospectus (as defined below) (the “Financial Information”). We express no opinion in respect of the six month period ended 30 June 2008 set out in the Financial Information which is marked unaudited. The Financial Information has been prepared for inclusion in the prospectus dated 29 January 2010 of TalkTalk Telecom Group PLC (the “Prospectus”) on the basis of the accounting policies set out in Sections D and E of Part V of the Prospectus. This report is required by item 20.1 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that item and for no other purpose. Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I to the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus.

Responsibilities The directors of TalkTalk Telecom Group PLC are responsible for preparing the Financial Information on the basis of preparation set out in note 1 to the financial information and in accordance with International Financial Reporting Standards as adopted by the European Union. It is our responsibility to form an opinion as to whether the Financial Information gives a true and fair view, for the purposes of the Prospectus, and to report our opinion to you.

Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the Financial Information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the Financial Information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Information is free from material misstatement whether caused by fraud or other irregularity or error.

182 Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion In our opinion, the Financial Information gives, for the purposes of the Prospectus, a true and fair view of the state of affairs of Tiscali UK Ltd and its subsidiaries as at the dates stated and of its losses, cash flows and changes in equity for the periods then ended in accordance with the basis of preparation set out in Note 1a of Sections D and E of Part V of the Prospectus and in accordance with International Financial Reporting Standards as adopted by the European Union.

Declaration For the purposes of Prospectus Rule 5.5.3R (2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with item 1.2 of Annex I of the Prospectus Directive Regulation.

Yours faithfully

Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. A list of members’ names is available for inspection at 1 More London Place, London SE1 2AF, the firm’s principal place of business and registered office

183 PART VI

PROFIT FORECAST

1. Profit forecast for the TalkTalk Group The slides accompanying Carphone Warehouse’s analysts’ day presentation on 22 April 2009 guided for “broadly flat year-on-year” revenue for the TalkTalk Group. The slides included charts indicating visually, but not in numbers, the approximate margin levels for the TalkTalk Group at a Headline EBITDA level (before and after subscriber acquisition costs and marketing) and at a Headline EBIT level. This guidance was updated in the slides accompanying Carphone Warehouse’s preliminary half year results release published on 27 November 2009. These slides reiterated the “flat year-on-year” revenue guidance and stated that revenue for Tiscali UK (acquired since the analysts’ presentation referred to above) is expected to be approximately £300 million for the period to 31 March 2010. The slides also included guidance for the year to 31 March 2010 of approximately 8.7 per cent. for Headline EBIT margins for the TalkTalk Group including Tiscali UK. The profit forecast as stated above (the “Profit Forecast”) is correct as at the date of publication of this document and is supported by latest available internal forecasts. The basis of preparation and assumptions underlying the Profit Forecast are set out below. The Profit Forecast covered Headline EBIT, rather than profit before taxation, because at the time of issue, the Carphone Warehouse Directors considered that this guidance was of particular interest to investors. The tax rate that is expected to apply to pre-tax profits is primarily the UK Corporation tax rate, adjusted where relevant for uncertainties and the resolution of historical issues.

2. Basis of preparation The Profit Forecast has been prepared on a basis consistent with the accounting policies adopted by the TalkTalk Group. However, it excludes the allocated central costs described in note 1 of Section B of Part Vof this document. The Profit Forecast has been prepared on the basis of IFRS.

3. Principal assumptions The Profit Forecast has been prepared by the TalkTalk Directors on the basis of the assumptions below. The assumptions that are exclusively outside the influence of the TalkTalk Directors include: • no material change in regulation or the interpretation thereof; and • no material change in tax laws or interpretations. The assumptions that the TalkTalk Directors can influence include: • no material deterioration in trading performance; and • no material change in the terms of trade with major suppliers.

184 4. Reporting Accountants’ report in respect of the Profit Forecast for the TalkTalk Group for the year ending 31 March 2010

The Board of Directors on behalf of TalkTalk Telecom Group PLC 11 Evesham Street London W11 4AR

Credit Suisse Securities (Europe) Limited One Cabot Square London E14 4QJ

UBS Limited 1 Finsbury Avenue London EC2M 2PP

29 January 2010

Dear Sirs

TalkTalk Telecom Group PLC (“TalkTalk”) We report on the profit forecast comprising projected revenue and EBIT margins for TalkTalk and its remaining subsidiaries (but excluding allocated central costs, as noted in paragraph 2 of Part VI of the Prospectus) following the Demerger (as defined in the prospectus issued by TalkTalk dated 29 January 2010 (the “Prospectus”) excluding Tiscali UK Limited and its subsidiaries up to 30 June 2009 (“the Demerged TalkTalk Group”) for the year ending 31 March 2010 (the “Profit Forecast”). The Profit Forecast, and the material assumptions upon which it is based are set out in Part VI of the Prospectus. This report is required by Annex I item 13.2 of Commission Regulation (EC) No 809/2004 (the “Prospectus Directive Regulation”) and is given for the purpose of complying with that rule and for no other purpose.

Responsibilities It is the responsibility of the directors of the Company (together the “Directors”) to prepare the Profit Forecast in accordance with the requirements of the Prospectus Directive Regulation. It is our responsibility to form an opinion as required by the Prospectus Directive Regulation as to the proper compilation of the Profit Forecast and to report that opinion to you. Save for any responsibility arising under Prospectus Rule 5.5.3R(2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus.

Basis of Preparation of the Profit Forecast The Profit Forecast has been prepared on the basis stated in Part VI of the Prospectus and is based on the audited interim financial results for the six months ended 30 September 2009, the unaudited management accounts for the three months ended 31 December 2009 and a forecast for the three months to 31 March 2010. The Profit Forecast is required to be presented on a basis consistent with the accounting policies of the Demerged TalkTalk Group.

185 Basis of opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included evaluating the basis on which the historical financial information included in the Profit Forecast has been prepared and considering whether the Profit Forecast has been accurately computed based upon the disclosed assumptions and the accounting policies of the Demerged TalkTalk Group. Whilst the assumptions upon which the Profit Forecast are based are solely the responsibility of the Directors, we considered whether anything came to our attention to indicate that any of the assumptions adopted by the Directors which, in our opinion, are necessary for a proper understanding of the Profit Forecast have not been disclosed or if any material assumption made by the Directors appears to us to be unrealistic. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Profit Forecast has been properly compiled on the basis stated. Since the Profit Forecast and the assumptions on which it is based relate to the future and may therefore be affected by unforeseen events, we can express no opinion as to whether the actual results reported will correspond to those shown in the Profit Forecast and differences may be material. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion In our opinion, the Profit Forecast has been properly compiled on the basis stated and the basis of accounting used is consistent with the accounting policies of the Demerged TalkTalk Group.

Declaration For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 of the Prospectus Directive Regulation.

Yours faithfully

Deloitte LLP Chartered Accountants Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (“DTT’’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTT and its member firms.

186 PART VII

UNAUDITED PRO FORMA FINANCIAL INFORMATION SECTION A: UNAUDITED PRO FORMA FINANCIAL INFORMATION The unaudited consolidated pro forma statement of net assets set out below has been prepared to illustrate the effect of the Demerger on the net assets of the TalkTalk Group as if the Demerger had taken place as at 30 September 2009. The information, which is produced for illustrative purposes only, by its nature addresses a hypothetical situation and, therefore, does not represent the TalkTalk Group’s actual financial position or results. The unaudited pro forma statement of net assets is compiled on the basis set out in the notes below. TalkTalk TalkTalk Group Group net assets Adjustments pro forma Note 1 Note 2 net assets £m £m £m Non-current assets Goodwill ...... 461 — 461 Other intangible assets ...... 359 — 359 Property, plant and equipment ...... 241 — 241 Loans to related parties...... 104 (104)(ii) — Non-current asset investments ...... 1 — 1 Deferred tax assets ...... 149 — 149 1,315 (104) 1,211 Current assets Stock ...... 3 — 3 Trade and other receivables...... 199 — 199 Cash and cash equivalents...... 16 — 16 218 — 218 Total assets ...... 1,533 (104) 1,429 Current liabilities Trade and other payables ...... (396) — (396) Corporation tax liabilities ...... (32) — (32) Loans and other borrowings ...... (2) — (2) Provisions ...... (35) — (35) (465) — (465) Non-current liabilities Trade and other payables ...... (4) — (4) Loans and other borrowings ...... (375) (115)(i)(ii)(iii) (490) (379) (115) (494) Total liabilities ...... (844) (115) (959) Net assets ...... 689 (219) 470

Notes (1) The financial information has been extracted, without material adjustment, from the financial information of the TalkTalk Group for the six months ended 30 September 2009, as set out in Part V of this document. (2) Represents: (i) cash dividends of £204 million from the TalkTalk Group to the New Carphone Warehouse Group through the drawdown of third party borrowings; (ii) the settlement by the New Carphone Warehouse Group of net intercompany loan balances of £104 million, used to repay this amount of third party borrowings; and (iii) estimated Demerger transaction related costs of £15 million through the drawdown of third party borrowings. (3) No adjustment has been made to reflect the trading results of the TalkTalk Group and Carphone Warehouse PLC related costs since 30 September 2009, nor have adjustments been made for the Tele2 France acquisition, the UK Telco Limited acquisition, the interim dividend of 1.45 pence per Carphone Warehouse Share paid in January 2010 and the special interim dividend of 3.2 pence per Carphone Warehouse Share in respect of the financial year ending 31 March 2010. (4) The TalkTalk Group pro-forma net debt as at 30 September 2009 of £476 million represents: (i) cash and cash equivalents of £16 million; (ii) current loans and other borrowings of £2 million and (iii) non-current loans and other borrowings £490 million.

187 SECTION B: REPORTING ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Board of Directors on behalf of TalkTalk Telecom Group PLC 11 Evesham Street London W11 4AR

Credit Suisse Securities (Europe) Limited One Cabot Square London E14 4QJ

UBS Limited 1 Finsbury Avenue London EC2M 2PP

29 January 2010

Dear Sirs

TalkTalk Telecom Group PLC (“TalkTalk”) We report on the pro forma financial information (the “Pro forma financial information”) set out in Part VII of the prospectus dated 29 January 2010 (the “Prospectus”), which has been prepared on the basis described in notes 1-3 of Section A of Part VII of the Prospectus for illustrative purposes only, to provide information about how the Demerger (as defined in the Prospectus) might have affected the financial information presented on the basis of the accounting policies adopted by TalkTalk in preparing the financial statements for the period ended 30 September 2009. This report is required by Annex I item 20.2 of Commission Regulation (EC) No 809/2004 (the “Prospectus Directive Regulation”) and is given for the purpose of complying with that requirement and for no other purpose.

Responsibilities It is the responsibility of the directors of TalkTalk (together the “Directors”) to prepare the Pro forma financial information in accordance with Annex I item 20.2 and Annex II items 1 to 6 of the Prospectus Directive Regulation. It is our responsibility to form an opinion, in accordance with Annex I item 20.2 of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you in accordance with Annex II item 7 of the Prospectus Directive Regulation. Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus. In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.

188 Basis of Opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the Directors. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of TalkTalk. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards or practices.

Opinion In our opinion: (a) the Pro forma financial information has been properly compiled on the basis stated; and (b) such basis is consistent with the accounting policies of TalkTalk.

Declaration For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 of the Prospectus Directive Regulation.

Yours faithfully

Deloitte LLP Chartered Accountants Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (“DTT’’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTT and its member firms.

189 PART VIII

UNITED KINGDOM TAXATION CONSIDERATIONS The following paragraphs, which are intended as a general guide only, are based on current UK tax law and published HMRC practice in force at the date of this document, either of which is subject to change at any time, possibly with retrospective effect. They summarise certain limited aspects of the UK taxation consequences of the implementation of the Proposals and relate only to the position of Carphone Warehouse Shareholders who hold their Carphone Warehouse Shares beneficially as an investment, unless otherwise indicated, and who are resident, and in the case of individuals ordinarily resident, in (and only in) the UK for taxation purposes at all relevant times. The tax position of certain categories of Carphone Warehouse Shareholders who are subject to special rules (such as dealers in securities, broker-dealers, insurance companies, collective investment schemes and persons who have acquired (or are deemed for tax purposes to have acquired) their Carphone Warehouse Shares by reason of an office or employment) is not considered. If you are in any doubt as to your taxation position or if you are subject to taxation in any jurisdiction other than the UK, you should consult an appropriate professional adviser without delay.

1. Taxation of chargeable gains 1.1 Cancellation of Carphone Warehouse Shares and receipt of New Carphone Warehouse Ordinary Shares and New Carphone Warehouse Cancellation Shares pursuant to the Scheme Carphone Warehouse Shareholders should not be treated as making a disposal or part disposal of their Carphone Warehouse Shares as a result of receiving New Carphone Warehouse Ordinary Shares and New Carphone Warehouse Cancellation Shares in exchange for Carphone Warehouse Shares pursuant to the Scheme, and so no chargeable gain or allowable loss should arise. New Carphone Warehouse Ordinary Shares and New Carphone Warehouse Cancellation Shares should be treated having been acquired at the same time and for the same consideration, as those Carphone Warehouse Shares from which they are derived.

1.2 Issue of TalkTalk Shares pursuant to the New Carphone Warehouse Demerger Reduction New Carphone Warehouse Cancellation Shareholders should not be treated as making a disposal or part disposal of their New Carphone Warehouse Cancellation Shares as a result of receiving TalkTalk Shares in exchange for New Carphone Warehouse Cancellation Shares pursuant to the New Carphone Warehouse Demerger Reduction and so no chargeable gain or allowable loss should arise. TalkTalk Shares should be treated as having been acquired at the same time and for the same consideration, as the New Carphone Warehouse Cancellation Shares that were cancelled pursuant to the New Carphone Warehouse Demerger Reduction.

1.3 Combined effect of the Proposals In summary, the New Carphone Warehouse Ordinary Shares and the TalkTalk Shares (together, the “Post Demerger Shares”) that will be held by a Carphone Warehouse Shareholder following the Demerger (a “Post Demerger Shareholder”) should collectively be treated as the same asset, and having been acquired at the same time and for the same consideration, as Carphone Warehouse Shares. Accordingly, following the Demerger, a Carphone Warehouse Shareholder’s original base cost in its Carphone Warehouse Shares would be apportioned between its New Carphone Warehouse Ordinary Shares and its TalkTalk Shares by reference to the market quotations of New Carphone Warehouse Ordinary Shares and TalkTalk Shares respectively on the first day of dealings in each of the respective shareholdings.

1.4 Sections 137 and 138 of the Taxation of Chargeable Gains Act 1992 For a Carphone Warehouse Shareholder who, alone or together with persons connected with him, holds more than five per cent. of, or any class of, shares in or debentures of Carphone Warehouse, it is a condition for the treatment described in the paragraphs immediately above that the Proposals are being effected for bona fide commercial reasons and do not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is an avoidance of liability to UK corporation tax or capital gains tax. Carphone Warehouse Shareholders are advised that tax clearance under section 138 of the Taxation of Chargeable Gains Act 1992 has been obtained from HMRC that it is satisfied that this condition has been met.

190 1.5 Transactions in securities In certain circumstances, section 703 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”) and Chapter 1 Part 13 of the Income Tax Act 2007 (“ITA 2007”) may apply where a person obtains a tax advantage as a consequence of a “transaction in securities”. Tax clearance has been obtained from HMRC under section 707 of ICTA 1988 and section 701 of ITA 2007 confirming that no notice under section 703 of ICTA 1988 or section 698 of ITA 2007, respectively, should be served in respect of the Proposals.

1.6 Subsequent disposal of Post Demerger Shares A subsequent disposal or deemed disposal of Post Demerger Shares by a Post Demerger Shareholder who is resident or, in the case of individuals, ordinarily resident in the UK for tax purposes may, depending on individual circumstances (including the availability of exemptions and reliefs), give rise to a chargeable gain or allowable loss for the purposes of UK taxation on chargeable gains. A Post Demerger Shareholder who is neither resident nor, in the case of individuals, ordinarily resident in the UK for tax purposes and who does not return to the UK within five years of the disposal will not be liable for UK tax on chargeable gains on a subsequent disposal or deemed disposal of Post Demerger Shares unless that Post Demerger Shareholder carries on a trade, profession or vocation in the UK through a branch or agency or, in the case of a company, a permanent establishment and the Post Demerger Shares have been used, held or acquired for the purpose of such branch, agency or permanent establishment. Such Post Demerger Shareholders may be subject to foreign taxation on any gain under local law.

2. Taxation of dividends Under current UK tax law, no tax will be withheld from dividend payments made by New Carphone Warehouse or TalkTalk in respect of the Post Demerger Shares. An individual who holds Post Demerger Shares, who is resident in the UK for tax purposes and who receives a dividend from the shares will be entitled to a tax credit which may be set off against his total income tax liability on the dividend. The tax credit will be equal to 10 per cent. of the aggregate of the dividend and the tax credit (the “gross dividend”), which is also equal to one-ninth of the amount of the net cash dividend received. The tax credit will be treated as discharging the individual’s liability to income tax in respect of the gross dividend, unless and except to the extent that the gross dividend, when added to all other income of the Post Demerger Shareholder in the relevant tax year, falls above the threshold for the higher rate of income tax. In this case, the individual will, if the dividend is received prior to 6 April 2010, to that extent, pay tax calculated as 32.5 per cent. of the gross dividend less the related tax credit. So, for example, a dividend of £90 will carry a tax credit of £10 and the income tax payable on the dividend by an individual liable to income tax at the higher rate would be 32.5 per cent. of £100, namely £32.50, less the tax credit of £10, leaving a net tax charge of £22.50 (which is 25 per cent. of the net cash dividend received). With effect from 6 April 2010, to the extent that an individual receives a dividend falling above the threshold for higher rate tax, the individual will be subject to tax on the gross dividend exceeding the threshold at the rate of 42.5 per cent. Taking into account the related tax credit, the effective rate of tax on the net cash dividend received will be 36.1 per cent. An individual who holds Post Demerger Shares, who is resident in the UK for tax purposes and is not liable to income tax in respect of the gross dividend will not be entitled to any payment from HMRC in respect of any part of the tax credit. Subject to the provisions of any double tax agreement between the UK and its country of residence, a Post Demerger Shareholder who is not resident in the UK for tax purposes will not generally be entitled to claim repayment of the tax credit attaching to any dividend paid on the Post Demerger Shares. Persons who are not resident in the UK should consult their own professional advisers as to whether they are entitled to claim any part of the tax credit, the procedure for doing so and what relief for credit may be claimed in the jurisdiction in which they are resident for tax purposes in respect of such tax credit. A Post Demerger Shareholder resident (or otherwise subject to tax) outside the UK may also be subject to local taxation on dividend income under the law of that other jurisdiction. A corporate shareholder who holds Post Demerger Shares and who is resident in the UK for tax purposes will not normally be liable to corporation tax in respect of any dividend on the shares. Such corporate shareholders will not be able to claim repayment of the tax credit attaching to such dividend.

191 3. Inheritance tax The Post Demerger Shares are UK assets for the purposes of UK inheritance tax. A gift of such shares by, or on the death of, an individual Post Demerger Shareholder may (subject to certain exemptions and reliefs) give rise to a liability to UK inheritance tax even if the Post Demerger Shareholder is neither domiciled nor deemed to be domiciled in the UK for tax purposes.

4. Stamp duty and SDRT No stamp duty or SDRT should be payable by Carphone Warehouse Shareholders as a result of the cancellation of Carphone Warehouse Shares and the issue of New Carphone Warehouse Ordinary Shares and New Carphone Warehouse Cancellation Shares under the Scheme or as a result of the cancellation of the New Carphone Warehouse Cancellation Shares and the issue of TalkTalk Shares under the New Carphone Warehouse Demerger Reduction. Subject to an exemption for certain low value transactions, any subsequent conveyance or transfer on sale of Post Demerger Shares held in certificated form will be subject to stamp duty at the rate of 0.5 per cent. of the amount or value of the consideration given for the transaction (rounded up to the next multiple of £5). A charge to SDRTat the rate of 0.5 per cent. of the amount or value of the consideration given will also arise on an unconditional agreement to transfer such shares, although that liability, including any interest (but not penalties), will be cancelled and any SDRT already paid will be repaid if, within six years of the SDRT liability arising, a transfer is executed pursuant to the agreement and stamp duty is duly paid on that transfer. Where Post Demerger Shares are held in uncertificated form within CREST, a paperless transfer of shares within CREST will generally be subject to SDRT at the rate of 0.5 per cent. of the amount or value of the consideration given. CREST is obliged to collect and account for SDRT to HMRC on relevant transactions settled within the system, such SDRT generally being payable by the transferee or purchaser. Special rules apply in connection with clearance services and depositary receipts systems. The above statements are intended to summarise the current position and are intended as a general guide only. Transfers to certain categories of person are not liable to stamp duty or SDRT and others may be liable at a higher rate or may, although not primarily liable for SDRT, be required to notify and account for it. In particular, the above statements do not apply to certain intermediaries or to persons connected with depositary arrangements or clearance services. Investors other than those to which the above general advice applies are strongly recommended to consult their own professional tax advisers.

192 PART IX DIRECTORS, RESPONSIBLE PERSONS, CORPORATE GOVERNANCE AND EMPLOYEES

1. Responsibility The TalkTalk Directors and the Proposed Director, whose names appear at paragraph 2.1 below, and TalkTalk accept responsibility for the information contained in this document. To the best of the knowledge of the TalkTalk Directors, and the Proposed Director and TalkTalk (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information.

2. TalkTalk Directors 2.1 The following table sets out information relating to each of the TalkTalk Directors as at the date of this document: Name Age Position Charles Dunstone ...... 45 Chairman Roger Taylor ...... 45 Non-executive deputy chairman Dido Harding ...... 42 Proposed chief executive officer Amy Stirling...... 40 Chief financial officer David Goldie ...... 46 Group commercial director John Gildersleeve ...... 65 Non-executive director John Allwood ...... 58 Non-executive director Jessica Burley...... 44 Non-executive director Brent Hoberman ...... 41 Non-executive director 2.2 The business address of the TalkTalk Directors is 11 Evesham Street, London W11 4AR. 2.3 Set out below are the business experience and principal business activities performed outside of TalkTalk by the TalkTalk Directors, as well as the dates of their initial appointment as TalkTalk Directors, where applicable. Charles Dunstone is currently chief executive officer of Carphone Warehouse and is chairman of TalkTalk. As the founder of Carphone Warehouse he was instrumental in creating the TalkTalk Business following the acquisition of Opal in 2002. Since then he has directed the continued development of the TalkTalk Business to become one of the leading fixed line voice and broadband telecommunications businesses in the UK. Following the Demerger, he will also be chairman of New Carphone Warehouse. He is also chairman of the Prince’s Trust and a non-executive director of The and General Trust Plc and Independent Media Distribution Plc. Charles has been a TalkTalk Director since 20 January 2010. Roger Taylor is currently chief financial officer of Carphone Warehouse and is deputy chairman of TalkTalk. Roger has been in his current role since January 2000. He has played a key role in the creation and growth of the TalkTalk Business both organically and through taking the lead role in a number of strategic acquisitions. He therefore has an invaluable understanding of how the TalkTalk Business operates. Following the Demerger, he will also be chief executive officer of New Carphone Warehouse. Roger has been a TalkTalk Director since 20 January 2010. Dido Harding is the proposed chief executive officer of TalkTalk. Prior to her appointment Dido was Sainsbury’s convenience director, having been appointed to Sainsbury’s operating board in March 2008. Dido joined Sainsbury’s from Tesco PLC where she held a variety of senior roles both in the UK and international businesses. Prior to this, she worked at Kingfisher plc and Thomas Cook Limited where she gained considerable retail experience. She was appointed as a non-executive director of The British Land Company PLC in January 2010. Dido is expected to take up her role as chief executive officer of TalkTalk before TalkTalk Admission. Amy Stirling is currently chief financial officer of the TalkTalk Business and is chief financial officer of TalkTalk. Amy joined Carphone Warehouse in 2000 and became chief financial officer of the TalkTalk Business in 2006. Amy has over 10 years’ experience in the telecommunications industry and has played a key role in the management and integration of those significant businesses acquired by the TalkTalk Business prior to taking up her current position. Amy has been a TalkTalk Director since 20 January 2010.

193 David Goldie is group commercial director of TalkTalk. David has over 25 years’ experience in the telecommunications industry and has carried out a number of senior roles within the TalkTalk Group since he joined Carphone Warehouse in November 2002 following the acquisition of Opal. He has considerable knowledge of the TalkTalk Business having been its chief executive officer between 2005 and June 2008 during which time he also served on the Carphone Warehouse Board. Since then, he has focused on major commercial projects, corporate development and the TalkTalk Group’s regulatory affairs. He has been a TalkTalk Director since 20 January 2010.

John Gildersleeve is a non-executive director of TalkTalk. John joined the Carphone Warehouse Board in June 2000 and became non-executive chairman in July 2005. He was appointed a non-executive director of The British Land Company PLC in September 2008. Previously, he was an executive director of Tesco PLC until he retired in February 2004. He was chairman of Gallaher Group PLC until April 2007 and chairman of EMI Group PLC until September 2007. Prior to this he was a non-executive director of Group PLC from 1998 to 2000. He will also become non-executive deputy chairman of New Carphone Warehouse. John has been a TalkTalk Director since 20 January 2010.

John Allwood is a non-executive director of TalkTalk. John was previously chief operating officer and latterly group finance director of plc. Prior to this, he was managing director of Telegraph Media Group Limited. Formerly, he was chief executive of Orange UK and also chief executive of Mirror Group plc. John is currently a member of Exeter University Council and chairman of Market Evolution Limited, a specialist media consultancy. He is also a non-executive director of New Carphone Warehouse. John has been a TalkTalk Director since 20 January 2010.

Jessica Burley is a non-executive director of TalkTalk. Jessica has over 20 years’ experience in the advertising and publishing industry and is currently a non-executive director of Jacques Vert Plc. She is currently a non-executive director of the Audit Bureau of Circulation, although she will have left this role by the time of TalkTalk Admission and until recently, she was managing director of The National Magazine Company. Prior to this, Jessica was chief operating officer for ACP-NatMag. She previously held senior positions at Business, a subsidiary of FT Group, and Future Publishing Limited. Jessica has been a TalkTalk Director since 20 January 2010.

Brent Hoberman is a non-executive director of TalkTalk. Brent co-founded lastminute.com in April 1998 with Martha Lane Fox. He was lastminute.com’s chief executive officer until it was sold in 2005 during which period he had overseen the company’s flotation on the London Stock Exchange in March 2000. Brent has subsequently founded mydeco the innovative online service for home design and furniture. He is also a Governor of University of the Arts, London, a non-executive director of , non- executive chairman of Where Are You Now? Limited, a member of the Business Council for Britain and a Young Global Leader for the World Economic Forum. Brent also continues to be an angel investor in several other internet companies. Brent has been a TalkTalk Director since 20 January 2010.

3. TalkTalk Directors’ interests

3.1 The direct and indirect interests (all of which are beneficial) of the TalkTalk Directors in Carphone Warehouse as at 28 January 2010 (being the latest practicable date prior to the publication of this document) and the interests of the TalkTalk Directors in Carphone Warehouse as they are expected to subsist immediately following TalkTalk Admission are set out in the following table:

Interests in Carphone Warehouse Interests in Carphone Warehouse immediately following TalkTalk as at 28 January 2010 Admission Number of voting Percentage of issued Number of voting Percentage of issued rights in respect share capital of rights in respect share capital of of Carphone Carphone of Carphone Carphone TalkTalk Director Warehouse Shares Warehouse Warehouse Shares Warehouse Charles Dunstone...... 296,144,535 32.40 — — Roger Taylor ...... 978,678 0.11 — — Amy Stirling ...... 536,687 0.06 — — David Goldie ...... 945,460 0.10 — — John Gildersleeve...... 246,000 0.03 — —

194 3.2 The direct and indirect interests (all of which are beneficial) of the TalkTalk Directors in TalkTalk as at 28 January 2010 (being the latest practicable date prior to the publication of this document) and the interests of the TalkTalk Directors in TalkTalk as they are expected to subsist immediately following TalkTalk Admission are set out in the following table: Interests in TalkTalk Shares Interests in TalkTalk Shares as at immediately 28 January 2010 following TalkTalk Admission Number of voting Percentage of Number of voting Percentage of rights in respect issued share rights in respect issued share TalkTalk Director of TalkTalk Shares capital of TalkTalk of TalkTalk Shares capital of TalkTalk Charles Dunstone ...... — — 296,144,535 32.40 Roger Taylor ...... — — 978,678 0.11 Amy Stirling ...... — — 536,687 0.06 David Goldie...... — — 945,460 0.10 John Gildersleeve ...... — — 246,000 0.03 3.3 The direct and indirect interests (all of which are beneficial) of the TalkTalk Directors in CPW Retail (for the purposes of the CPWG VES) as at 28 January 2010 (being the latest practicable date prior to the publication of this document) and the interests of the TalkTalk Directors in CPW Retail as they are expected to subsist immediately following TalkTalk Admission are set out in the following table: Interests in CPW Retail Interests in CPW Retail immediately as at 28 January 2010 following TalkTalk Admission Number of A ordinary shares of 1 pence Number of A ordinary shares of 1 pence TalkTalk Director each in the capital of CPW Retail each in the capital of CPW Retail Roger Taylor* ...... 1,070 1,070 * Roger Taylor has been granted awards under the CPWG VES in respect of these A ordinary shares in CPW Retail, although the shares have not yet been issued. The subscription monies for this subscription for A ordinary shares in CPW Retail will be loaned to Roger Taylor by CPW Retail. 3.4 The direct and indirect interests (all of which are beneficial) of the TalkTalk Directors in TTGL (for the purposes of the CPWG VES and the TTG VES) as at 28 January 2010 (being the latest practicable date prior to the publication of this document) and the interests of the TalkTalk Directors in TTGL as they are expected to subsist immediately following TalkTalk Admission are set out in the following table: Interests in TTGL Interests in TTGL as at immediately 28 January 2010 following TalkTalk Admission Number of A ordinary Number of C ordinary Number of A ordinary Number of C ordinary shares of 1 pence shares of 1 pence shares of 1 pence shares of 1 pence each in the capital each in the capital each in the capital each in the capital TalkTalk Director of TTGL of TTGL of TTGL of TTGL Amy Stirling* ...... 120 — 120 — David Goldie* ...... 120 — 120 — Roger Taylor** ...... — 1,070 — 1,070 * The subscription monies for each of these subscriptions of A ordinary shares in TTGL were loaned to these TalkTalk Directors by TTGL. ** The subscription monies for this subscription for C ordinary shares in TTGL were loaned to Roger Taylor by CPW Retail. 3.5 Taken together, the combined percentage interest of the TalkTalk Directors in voting rights in respect of the issued ordinary share capital of Carphone Warehouse as at 28 January 2010 (being the latest practicable date prior to the publication of this document) was approximately 32.69 per cent. 3.6 Taken together, the combined percentage interest of TalkTalk Directors in voting rights in respect of the issued ordinary share capital of TalkTalk immediately following TalkTalk Admission will be approximately 32.69 per cent. 3.7 Save as disclosed in this paragraph 3, the TalkTalk Directors have no interests in the shares of any of TalkTalk’s subsidiaries.

195 3.8 Details of options over Carphone Warehouse Shares held by the TalkTalk Directors as at 28 January 2010 (being the latest practicable date prior to publication of this document) are set out below. They are not included in the interests of the TalkTalk Directors shown in the table in paragraph 3.1 above. No. of Carphone Exercise Date from Warehouse price which Option holder Shares (£) exercisable Expiry date Roger Taylor...... 200,000 1.50 19/05/2002 19/05/2010 Roger Taylor...... 200,000 2.00 19/05/2002 19/05/2010 Roger Taylor...... 240,000 1.25 21/05/2004 21/05/2011 Roger Taylor...... 500,000 0.83 11/06/2005 11/06/2012 Roger Taylor...... 444,444 0.90 06/06/2006 06/06/2013 Roger Taylor...... 675,000 — 28/07/2007 28/07/2014 Roger Taylor...... 675,000 — 28/07/2008 28/07/2014 Roger Taylor...... 482,537 — 04/06/2010 04/12/2016 Roger Taylor...... 482,538 — 04/06/2011 04/12/2016 Total for Roger Taylor ...... 3,899,519 David Goldie ...... 379,136 — 04/06/2010 04/12/2016 David Goldie ...... 379,136 — 04/06/2011 04/12/2016 Total for David Goldie...... 758,272 Amy Stirling...... 106,667 0.90 06/06/2006 06/06/2013 Amy Stirling...... 52,734 — 28/07/2007 28/07/2014 Amy Stirling...... 52,734 — 28/07/2008 28/07/2014 Amy Stirling...... 145,588 — 04/06/2010 04/12/2016 Amy Stirling...... 145,588 — 04/06/2011 04/12/2016 Total for Amy Stirling ...... 503,311 Overall total ...... 5,161,102 3.9 Following TalkTalk Admission and subject to Remuneration Committee approval, TalkTalk intends to grant Dido Harding the following options or awards:

TalkTalk DSOP Options over such number of TalkTalk Shares as is equivalent to 600,000 divided by the average closing price of TalkTalk Shares over the 60 days following TalkTalk Admission.

TTG VES Options over such number of Participation Shares as is equivalent to 10 per cent. of the total number of Participation Shares available under the TTG VES. 3.10 Save as disclosed in this paragraph 3, no TalkTalk Director nor their immediate families, nor any person connected with any such TalkTalk Director within the meaning of section 252 of the Act has any interests (beneficial or non-beneficial) in the share capital of Carphone Warehouse, TalkTalk or any of their respective subsidiaries. 3.11 Save as disclosed in this paragraph 3, no other person involved in TalkTalk Admission has an interest which is material to TalkTalk Admission.

196 4. TalkTalk Directors’ remuneration and pensions 4.1 Remuneration The remuneration (excluding pension contributions) of the TalkTalk Directors for the year ended 31 March 2009 (in their capacity as Carphone Warehouse Directors or employees of the Carphone Warehouse Group) is set out in the table below: Basic Taxable Annual salary/fees benefits bonuses Total TalkTalk Director £000 £000 £000 £000 Charles Dunstone ...... 588 — — 588 Roger Taylor...... 388 14 — 402 John Gildersleeve ...... 400 — 400 Amy Stirling...... 194 10 174 378 David Goldie ...... 313 14 49 376 The Carphone Warehouse Group provided loans to Amy Stirling and David Goldie in the year ended 31 March 2009 to settle tax liabilities arising on a share gift; these loans were outstanding at 31 March 2009. Interest is charged on the loans at market rates, and the loans are repayable in the year ending 31 March 2011.

4.2 Pensions The payments made by the Carphone Warehouse Group to defined contribution pension schemes on behalf of executive TalkTalk Directors (in their capacity as Carphone Warehouse Directors or employees) for the year ended 31 March 2009 are set out in the table below: Pension contribution TalkTalk Director £’000 Roger Taylor ...... 19 Amy Stirling ...... 10 David Goldie ...... 65

5. Service contracts of the TalkTalk Directors

5.1 Executive TalkTalk Directors’ service agreements TalkTalk has entered into the following service agreements with the executive TalkTalk Directors: Date of TalkTalk Director Agreement Charles Dunstone ...... 20January 2010 Roger Taylor ...... 20January 2010 Amy Stirling ...... 20January 2010 David Goldie...... 20January 2010 Charles Dunstone is employed as chairman pursuant to the terms of a service agreement with TalkTalk dated 20 January 2010, the terms of which take effect from TalkTalk Admission. Under the terms of the agreement, Charles is paid a basic annual salary of £360,000 and is eligible to receive a discretionary annual bonus based on both individual and company performance. In addition, he is entitled to contributions towards a health insurance scheme, life assurance cover, payment of private medical insurance subscriptions and a pension scheme contribution of 5 per cent. of his salary. Charles is also entitled to the use of a chauffeur. His appointment is terminable by either party on not less than 12 months’ written notice. Charles is subject to certain non-competition and non-solicitation covenants for a period of 12 months following the termination of his employment. The agreement is governed by English law. Dido Harding is the proposed chief executive officer and has been appointed pursuant to the terms of a service agreement with TTGL dated 9 November 2009 which is expected to be assigned or novated to TalkTalk after TalkTalk Admission. Dido will be paid a basic annual salary of £500,000 and will be eligible to receive a discretionary annual bonus based on both individual and company performance. In addition, she will be entitled to contributions towards a health insurance scheme, life assurance cover, payment of private medical insurance subscriptions and a pension scheme contribution of 10 per cent. of her salary. Dido will also be entitled to a monthly car allowance. Her appointment will be terminable by either party on not less

197 than six months’ written notice for the first 26 weeks of her employment and thereafter on not less than 12 months’ written notice. Dido will be subject to certain non-competition and non-solicitation covenants for a period of 12 months following the termination of her employment. The agreement will be governed by English law. In addition and by way of compensation for loss of benefits from her previous employment, TalkTalk has agreed to pay Dido a sum equivalent to 80 per cent. (gross) of her first year’s salary, payable in two tranches over the first six months of her employment. Amy Stirling is employed as chief financial officer pursuant to the terms of a service agreement with TalkTalk dated 20 January 2010, the terms of which take effect from TalkTalk Admission. Under the terms of the agreement, she is paid a basic annual salary of £375,000 and is eligible to receive a discretionary annual bonus based on both individual and company performance. In addition, she is entitled to contributions towards a health insurance scheme, life assurance cover, payment of private medical insurance subscriptions and a pension scheme contribution of 5 per cent. of her salary. She is also entitled to a monthly car allowance. Her appointment is terminable by either party on not less than 12 months’ written notice. Amy is subject to certain non-competition covenants for a period of 12 months following the termination of her employment and non-solicitation covenants for a period of 12 months following the termination of her employment. The agreement is governed by English law. David Goldie is employed as group commercial director pursuant to the terms of a service agreement with TalkTalk dated 20 January 2010, the terms of which take effect from TalkTalk Admission. Under the terms of the agreement, David is paid a basic annual salary of £325,000 and is eligible to receive a discretionary annual bonus based on both individual and company performance. In addition, he is entitled to contributions towards a health insurance scheme, life assurance cover, payment of private medical insurance subscriptions and a pension scheme contribution of 20 per cent. of his salary. David is also entitled to a monthly car allowance. His appointment is terminable by either party on not less than 12 months’ written notice. David is subject to certain non-competition and non-solicitation covenants for a period of 12 months following the termination of his employment. The agreement is governed by English law.

5.2 Non-executive TalkTalk Directors’ letters of appointment Roger Taylor has agreed to serve as a non-executive deputy chairman of TalkTalk. He is paid an annual fee of £75,000 pursuant to the terms of a letter of appointment with TalkTalk dated 20 January 2010, the terms of which take effect from 1 April 2010. This appointment can be terminated by either party on 6 months’ notice and will terminate automatically if Roger is removed from office by a resolution of TalkTalk Shareholders or is not re-elected to office after serving an expected 3-year term. Roger is subject to certain non-competition and non-solicitation covenants following the termination of his employment. If the Demerger does not become effective by the Demerger Long Stop Date, TalkTalk may terminate the appointment with immediate effect. John Gildersleeve has agreed to serve as a non-executive TalkTalk Director. He is paid an annual fee of £72,500 pursuant to the terms of a letter of appointment with TalkTalk dated 20 January 2010, the terms of which take effect from 1 April 2010. This appointment can be terminated by either party on 3 months’ notice and will terminate automatically if John is removed from office by a resolution of TalkTalk Shareholders or is not re-elected to office after serving an expected 3-year term. If the Demerger does not become effective by the Demerger Long Stop Date, TalkTalk may terminate the appointment with immediate effect. John Allwood has agreed to serve as a non-executive TalkTalk Director. He is paid an annual fee of £65,000 pursuant to the terms of a letter of appointment with TalkTalk dated 20 January 2010, the terms of which take effect from 1 April 2010. This appointment can be terminated by either party on 3 months’ notice and will terminate automatically if John is removed from office by a resolution of TalkTalk Shareholders or is not re-elected to office after serving an expected 3-year term. If the Demerger does not become effective by the Demerger Long Stop Date, TalkTalk may terminate the appointment with immediate effect. Jessica Burley has agreed to serve as a non-executive TalkTalk Director. She is paid an annual fee of £60,000 pursuant to the terms of a letter of appointment with TalkTalk dated 20 January 2010, the terms of which take effect from 1 April 2010. This appointment can be terminated by either party on 3 months’ notice and will terminate automatically if Jessica is removed from office by a resolution of TalkTalk Shareholders or is not re-elected to office after serving an expected 3-year term. If the Demerger does not become effective by the Demerger Long Stop Date, TalkTalk may terminate the appointment with immediate effect. Brent Hoberman has agreed to serve as a non-executive TalkTalk Director. He is paid an annual fee of £50,000 pursuant to the terms of a letter of appointment with TalkTalk dated 20 January 2010, the terms of

198 which take effect from 1 April 2010. This appointment can be terminated by either party on 3 months’ notice and will terminate automatically if Brent is removed from office by a resolution of TalkTalk Shareholders or is not re-elected to office after serving an expected 3-year term. If the Demerger does not become effective by the Demerger Long Stop Date, TalkTalk may terminate the appointment with immediate effect.

6. Corporate governance TalkTalk is committed to high standards of corporate governance. As at the date of this document, TalkTalk is not required to and does not comply with the Combined Code. However, save as disclosed in this paragraph 6, TalkTalk will comply with the Combined Code from TalkTalk Admission.

6.1 The TalkTalk Board The TalkTalk Board comprises four executive TalkTalk Directors and five non-executive TalkTalk Directors. Charles Dunstone is the chairman and Roger Taylor is non-executive deputy chairman. John Gildersleeve is the senior independent non-executive TalkTalk Director. Dido Harding is the proposed chief executive officer and is expected to commence that role before TalkTalk Admission. Amy Stirling is chief financial officer and David Goldie is group commercial director. John Allwood, Jessica Burley and Brent Hoberman are also non-executive TalkTalk Directors. Charles Dunstone is not considered to be independent on his appointment as chairman primarily because of the size of his shareholding in TalkTalk following completion of the Proposals and because he was previously chief executive officer of Carphone Warehouse. In this regard, TalkTalk is not compliant with the Combined Code. However, the TalkTalk Board believes that the appointment benefits the TalkTalk Group given that Charles Dunstone is the founder of Carphone Warehouse in which TalkTalk was created and his knowledge of the TalkTalk Business is important to the future development of TalkTalk. There will also be a clear division of responsibilities between the chairman and the chief executive officer. In accordance with the Combined Code, Carphone Warehouse has consulted major shareholders in Carphone Warehouse regarding Charles Dunstone’s proposed appointment as chairman following completion of the Proposals and such appointment received unanimous support. It may be the case that for a short period of time after TalkTalk Admission that Charles Dunstone is also acting chief executive officer of TalkTalk until Dido Harding commences her new role. This is only a temporary measure and the TalkTalk Board believes that there is sufficient balance within the TalkTalk Board to counteract any adverse consequences of Charles Dunstone carrying out both roles during such interim period. However, were Charles Dunstone to hold simultaneously the office of chairman and chief executive of TalkTalk, this would constitute non-compliance with the Combined Code. All of the non-executive TalkTalk Directors, except Roger Taylor, are considered to be independent. Roger Taylor is not considered to be independent because he was previously chief financial officer of Carphone Warehouse and is also chief executive officer of New Carphone Warehouse where Charles Dunstone is also chairman. Although John Gildersleeve was a non-executive director of Carphone Warehouse for more than nine years, the TalkTalk Board does not believe this affects his independence given he satisfies all of the other tests of independence set out in the Combined Code and that TalkTalk is a new company completely separate to Carphone Warehouse. Therefore, at least half of the TalkTalk Board excluding the chairman are independent non-executive TalkTalk Directors in compliance with the Combined Code. The TalkTalk Board believes that this provides further balance within the board composition to support Charles Dunstone being chairman. TalkTalk may appoint additional independent non-executive TalkTalk Directors in the future.

6.2 Board meetings The TalkTalk Board will meet formally at least six times a year, with additional meetings as required. All board papers will be sent out on a timely basis with sufficient information for the TalkTalk Directors to be able to discharge their duties. The company secretary will ensure that all board papers are sent out to non- attending TalkTalk Directors and that, where possible, any comments they have are received beforehand, so that they can be expressed at the meeting. There will be a clear and documented division of responsibilities between the roles of the chairman and the chief executive officer. There will also be documented schedules of matters reserved to the TalkTalk Board

199 and matters delegated to committees of the TalkTalk Board. Such reserved matters will include decisions on strategic and policy issues, the approval of published financial statements and major acquisitions and disposals, authority levels for expenditure, treasury and risk management policies.

6.3 Board committees

There will be three key TalkTalk Board committees: audit, remuneration and nomination. The committees will be provided with sufficient resources via the company secretary and, where necessary, will have direct access to independent professional advisers to undertake their duties.

TalkTalk Audit Committee

The TalkTalk Audit Committee will comprise the following independent non-executive TalkTalk Directors: Jessica Burley, John Gildersleeve and John Allwood, who will act as chairman. Roger Taylor will also be a member.

All of the committee members have extensive commercial experience. The TalkTalk Audit Committee will meet at least three times during the year.

The chairman of the TalkTalk Audit Committee will update the TalkTalk Board on any significant issues that may have arisen at the TalkTalk Board meeting following each TalkTalk Audit Committee meeting.

The chief financial officer and other senior management will attend the TalkTalk Audit Committee meetings by invitation of the TalkTalk Audit Committee. Representatives of the external auditors and other senior executives will also attend these meetings by invitation of the committee. The external and internal auditors will have direct access to the TalkTalk Audit Committee during formal meetings and time will be set aside for them to have private discussions with the TalkTalk Audit Committee, in the absence of management.

The terms of reference under which the TalkTalk Audit Committee will operate set out the following key duties of the TalkTalk Audit Committee:

• to monitor the integrity of the financial statements of TalkTalk and any formal announcements relating to TalkTalk’s financial performance, reviewing significant financial reporting judgements contained in them;

• to review TalkTalk’s internal financial controls and, unless expressly addressed by a separate risk committee of the TalkTalk Board composed of independent TalkTalk Directors, or by the TalkTalk Board itself, to review TalkTalk’s internal control and risk management systems and approve the appointment or termination of employment of the head of internal audit;

• to monitor and review the effectiveness of TalkTalk’s internal audit function;

• to make recommendations to the TalkTalk Board in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor, for the TalkTalk Board to put to TalkTalk Shareholders for their approval in general meeting;

• to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements;

• to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the TalkTalk Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken;

• to consider the major findings of internal investigations and management’s response;

• to consider other topics, as defined by the TalkTalk Board; and

• to refer matters to the TalkTalk Board which, in its opinion, should be addressed at a meeting of the TalkTalk Board.

The TalkTalk Board will make funds available to the TalkTalk Audit Committee to enable it to take independent legal, accounting or other advice when the TalkTalk Audit Committee reasonably believes it necessary to do so.

200 The terms of reference also state that the TalkTalk Audit Committee should review arrangements by which employees of the TalkTalk may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters.

TalkTalk Remuneration Committee The TalkTalk Remuneration Committee will comprise the following independent non-executive TalkTalk Directors: Jessica Burley, Brent Hoberman and John Gildersleeve, who will act as chairman. Roger Taylor will also be a member. The TalkTalk Remuneration Committee will meet at least twice a year. Other TalkTalk Directors, the company secretary, representatives from the human resources teams, and advisers will attend by invitation only. The terms of reference under which the TalkTalk Remuneration Committee will operate state that the TalkTalk Remuneration Committee is authorised by the TalkTalk Board: • to investigate the remuneration paid to the directors and senior management of other companies of a similar size in a comparable industry sector in the UK and the relative performance of such companies; • to obtain information on the remuneration of any employee of the TalkTalk Group; • to seek advice from the company secretary and the in-house legal and human resources departments and to obtain legal, human resources and other independent professional advice; • to secure the attendance of any person with relevant experience and expertise at committee meetings if it considers this appropriate; • to determine remuneration packages, including salaries, pensions, bonuses, share options or other long term incentive arrangements and all other terms and conditions of service and termination payments of executive board directors within the TalkTalk Group and the chairman of TalkTalk; • to recommend and monitor the level and structure of remuneration including pensions and compensation payments for senior management; • to approve any new contract of employment within the TalkTalk Group where the total remuneration and benefits payable to the employee in respect of salary, including bonuses, would exceed £500,000 (or its equivalent) per annum or the gross amount of compensation (ignoring mitigating or any other factors reducing the amount payable) on termination of any such contract would exceed £500,000 (or its equivalent); • to approve any contract of employment within the TalkTalk Group which has an original fixed term of two years or more taking into account any period of notice required to terminate such contract; • to approve any contract of employment within the TalkTalk Group requiring more than 12 months’ notice to determine; • to approve the confirmation of the employment of executive TalkTalk Directors beyond the normal retirement age of 65; • to act as the sole body instructed and authorised to exercise any power or discretion vested in the TalkTalk Board under any share option or bonus or incentive schemes of whatever nature established for the benefit of employees of the TalkTalk Group; • to agree the policy for authorising claims for expenses from the chief executive and chairman of TalkTalk; • to be aware of and advise on any major changes in employee benefits structures throughout TalkTalk; • to be exclusively responsible for establishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration consultants who advise the TalkTalk Remuneration Committee; • to report the frequency of, and attendance by members at, TalkTalk Remuneration Committee meetings in TalkTalk’s annual reports; • to make available the TalkTalk Remuneration Committee’s terms of reference in accordance with the Combined Code, review the same and, where necessary, update them annually;

201 • to produce each year a remuneration report, including pensions, on behalf of TalkTalk; and • to review and/or determine other matters that may be delegated by the TalkTalk Board to the TalkTalk Remuneration Committee from time to time.

TalkTalk Nomination Committee The TalkTalk Nomination Committee will comprise the following TalkTalk Directors: Jessica Burley and John Gildersleeve, who will act as chairman. Roger Taylor will also be a member. The TalkTalk Nomination Committee will meet as and when required to discuss succession planning and consideration of appropriate appointments to the TalkTalk Board and not less than twice a year. The TalkTalk Nomination Committee will be responsible for succession planning at TalkTalk Board level, overseeing the selection and appointment of TalkTalk Directors, regularly reviewing the structure, size and composition of the TalkTalk Board and making its recommendations to the TalkTalk Board. It will assist in evaluating the commitments of individual TalkTalk Directors and the balance of skills, knowledge and experience on the TalkTalk Board. The key duties of the TalkTalk Nomination Committee set out in its terms of reference are: • to carry out a formal selection process of candidates, and then propose to the TalkTalk Board, and make recommendations regarding, appointments to the TalkTalk Board; • to be responsible for identifying and nominating for the approval of the TalkTalk Board, candidates to fill vacancies as and when they arise; • to evaluate the balance of skills, knowledge and experience on the TalkTalk Board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment; • to review annually the time required from each non-executive TalkTalk Director and assess whether the non-executive TalkTalk Director is spending enough time to fulfil his or her duties; • to consider candidates from a wide range of backgrounds; • to give full consideration to succession planning in the course of its work, taking into account the challenges and opportunities facing TalkTalk; • to regularly review the structure, size and composition (including the skills, knowledge and experience) of the TalkTalk Board and make recommendations to the TalkTalk Board with regard to any changes; • to keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace; • to make a statement in the annual report about its activities; the process used for appointments and explain if external advice or open advertising has not been used; the membership of the TalkTalk Nomination Committee, number of TalkTalk Nomination Committee meetings and attendance over the course of the year; • to make available its terms of reference, explaining clearly its role and the authority delegated to it by the TalkTalk Board; and • to ensure that on appointment to the TalkTalk Board, non-executive TalkTalk Directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside TalkTalk Board meetings.

6.4 Risk management and internal control TalkTalk has established a risk management programme that will assist management throughout the TalkTalk Group to identify, assess and mitigate business, financial, operational and compliance risks. The TalkTalk Board views management of risk as integral to good business practice. The programme is designed to support management’s decision making and to improve the reliability of business performance.

6.5 Model Code TalkTalk has established and, following TalkTalk Admission, intends to comply with, a code of securities dealing equivalent to the Model Code published in the Listing Rules. The code applies to the TalkTalk Directors and relevant employees of the TalkTalk Group.

202 7. Employees 7.1 The average numbers of employees in the TalkTalk Business for the three years ended 31 March 2007, 29 March 2008 and 31 March 2009 is set out below: Average number of employees 2009 4,035 2008 4,249 2007 3,485 7.2 As at 31 December 2009 (being the latest practicable date prior to the date of this document), 4,620 people were employed in the TalkTalk Business. Of the 4,620 employees, approximately 83 per cent. were located in the United Kingdom and 17 per cent. were located overseas.

8. TalkTalk Directors’ confirmations None of the TalkTalk Directors has been during the five years prior to the date of this document: (a) convicted in relation to a fraudulent offence; (b) associated with any bankruptcy, receivership or liquidation while acting in the capacity of a member of the administrative, management or supervisory body or of senior manager of any company; (c) subject to any official public incrimination and/or sanction by statutory or regulatory authorities (including designated professional bodies); or (d) disqualified by a court from acting as a member of the administrative, management or supervisory bodies of any issuer or from acting in the management or conduct of the affairs of any issuer.

9. Conflicts of interest 9.1 Save as disclosed in this paragraph 9.1, in respect of any TalkTalk Director, there are no actual or potential conflicts of interests between any duties they have to TalkTalk and the private interests and/or other duties they may also have and there are no interests, including conflicting ones: (a) each of Charles Dunstone, Roger Taylor, Amy Stirling, David Goldie and John Gildersleeve has an interest in Carphone Warehouse Shares and, with effect from the Demerger Effective Time, will have an interest in TalkTalk Shares (for further information refer to paragraphs 3.1 and 3.3 of Part IX of this document); (b) Roger Taylor will have an interest in CPW Retail A ordinary shares (for further information refer to paragraph 3.3 of Part IX of this document); (c) Roger Taylor has an interest in TTG C ordinary shares (for further information refer to paragraph 3.4 of Part IX of this document); (d) each of David Goldie and Amy Stirling has an interest in TTGL A ordinary shares (for further information refer to paragraph 3.4 of Part IX of this document); (e) each of David Goldie, Amy Stirling and Roger Taylor holds options over Carphone Warehouse Shares (for further information refer to paragraph 3.8 of Part IX of this document); (f) each of Charles Dunstone, Roger Taylor, John Allwood and John Gildersleeve is a New Carphone Warehouse Director; and (g) each of Charles Dunstone and Roger Taylor is a director of other companies in the New Carphone Warehouse Group (for further information refer to paragraph 10 of Part IX of this document). 9.2 No TalkTalk Director was selected to be a director of TalkTalk pursuant to any arrangement or understanding with any major customer, supplier or other person having a business connection with the TalkTalk Group. 9.3 No restrictions have been agreed by any TalkTalk Director on the disposal within a certain period of time of his or her holding in TalkTalk securities, save for 400,000 TalkTalk Shares which will be held by each of Amy Stirling and David Goldie following TalkTalk Admission, which are subject to performance conditions and are restricted until June 2010.

203 9.4 There are no family relationships between any of the TalkTalk Directors.

10. Directorships and partnerships Save as set out below, the TalkTalk Directors have not held any directorships of any company, other than those companies in the TalkTalk Group which are subsidiaries, or been a partner in a partnership at any time in the five years prior to the date of this document: TalkTalk Director Current directorships/partnerships Former directorships/partnerships Charles Dunstone Acre 1132 Limited Antika Retail Limited Allied Developments Limited Bank of Scotland plc Best Buy Europe Cellcom Limited Daily Mail and General Trust plc Clareville Capital Partners LLP Independent Media Distribution plc CPW Mobile New Carphone Warehouse Evergreen Services Prince’s Trust Trading Limited Holdings Limited Royal Parks Foundation Fresh Telecom Limited The Fulwood Academy GEAB The Phone House AB GEAB TeleShop AB GEAB Telekonsult AB Halifax Limited HBOS plc IMD Media Limited ISE-NET Solutions Limited Martin Dawes Switched Services Limited Talk Mobile Limited Teletext Holdings Limited The Carphone Warehouse Limited The Carphone Warehouse Resources Limited The Carphone Warehouse Services Limited The Phone House Resources Limited

The Carphone Warehouse UK Limited The Phone House Holdings (UK) Limited

Roger Taylor Best Buy Europe Distributions Cellcom Limited Limited CPW Mobile Charterhouse Limited Fresh Telecom Limited CPW Action One Limited HSCCPW Limited CPW Brands Limited Martin Dawes Switched CPW Retail Holdings Limited Services Limited New Carphone Warehouse Papertimes Limited Omer Telecom Limited Telecoms Factoring Limited Pelham Limited The Carphone Warehouse Limited The Carphone Warehouse Limited The Carphone Warehouse Stormtide Limited Resources Limited The Carphone Warehouse Services Limited The Carphone Warehouse UK Limited The Kellan Group plc The Phone House Holdings (UK) Limited The Phone House Resources Limited The Phone Warehouse Spain SLU

204 TalkTalk Director Current directorships/partnerships Former directorships/partnerships Dido Harding Sainsbury’s Supermarkets Limited Jockey Club RaceCourses Limited Sainsbury’s Convenience Stores Racecourse Investments Limited Limited Tesco Stores Malaysia Sdn Bhd The British Land Company PLC

Amy Stirling Fresh Telecom Limited Martin Dawes Switched Services Limited The Carphone Warehouse Services Limited David Goldie The Fulwood Academy Carphone Warehouse UK Telco (GB) Limited Eurexel Limited Telecoms Factoring Limited John Gildersleeve E Pocket Software 1 LLP EMI Group Limited E Pocket Software 2 LLP EMI Group Senior Executive Figleaves Global Trading Limited Pension Scheme Trustee Markerpost Limited Limited New Carphone Warehouse EMI Group Senior Executive Runway London Limited Pension Trust Limited The British Land Company PLC Gallaher Group Limited Tower No 4 LLP Tower No 5 LLP Tower No 7 LLP UKFS 6 LLP WM.Low & Company plc Berlingske Media A/S

John Allwood New Carphone Warehouse GPC Limited Industry in Education Limited Koninklijke Wegener N.V. Mecom Group plc Mecom Finance Limited Paper Purchase and Management Limited Telegraph Media Group Limited West Ferry Printers Limited Jessica Burley Audit Bureau of Circulations Limited The National Magazine Company Jacques Vert Plc Limited

205 TalkTalk Director Current directorships/partnerships Former directorships/partnerships Brent Hoberman By Design (UK) Limited Last Minute Network Limited Founder Capital LLP Lastminute.com Limited Guardian Media Group Plc Urbanite Limited Where Are You Now? Limited The Destination Group Limited Globepost Limited Online Travel Corporation Limited All-hotels Limited Cordex Computer Services Limited Exhilaration Incentive Management Limited First Option Hotel Reservations Limited Gemstone Travel Limited Holiday Autos Group Limited Holiday Autos Holdings Limited Holiday Autos International Limited Holiday Autos U.K. and Ireland Limited Hotelworld Limited Joint Venture Travel Limited Lastminute.com Group Services Limited Lastminute.com Overseas Holdings Limited Lastminute.com UK Holdings Limited Online Travel Services Limited OTC Travel Management Limited Oxford Technology Solutions Limited Secret Hotels Limited Secret Hotels2 Limited Secret Hotels3 Limited Secret Hotels4 Limited Taskbrook Limited Travelbargains Limited Travelcoast Limited Travelstore.com Limited Exhilaration Travel Limited LM Media Services Limited Travel Network Limited Univillage Limited

206 PART X

ADDITIONAL INFORMATION

1. TalkTalk 1.1 TalkTalk was incorporated and registered in England and Wales on 15 December 2009 with the name New TalkTalk PLC and with registered number 07105891 as a public company limited by shares. On 20 January 2010, New TalkTalk PLC changed its name to TalkTalk Telecom Group PLC. 1.2 The principal legislation under which TalkTalk operates and under which the TalkTalk Shares have been created is the Act and regulations made thereunder. 1.3 TalkTalk is domiciled in England and Wales and its registered and head office is 11 Evesham Street, London W11 4AR (telephone number: +44 (0) 20 3417 1000). 1.4 TalkTalk has not traded since its incorporation. 1.5 Deloitte LLP, whose address is 2 New Street Square, London EC4A 3BZ, is the auditor of TalkTalk, and has been the only auditor of TalkTalk since its incorporation and is a member firm of the Institute of Chartered Accountants in England and Wales.

2. Share capital 2.1 On incorporation, TalkTalk’s share capital consisted of TalkTalk Shares and Redeemable Preference Shares. TalkTalk had the following shares in issue:

Number of shares Class of share in issue TalkTalk Shares ...... 1 Redeemable Preference Shares ...... 1 2.2 At a general meeting of TalkTalk held on 28 January 2010, it was resolved that: (a) the Scheme be approved and TalkTalk be authorised to appear by counsel at all necessary court hearings and to undertake to the Court to be bound thereby and to execute and do or procure to be executed and done all such documents, acts and things as may be necessary or desirable to be executed or done by it for the purposes of giving effect to the Scheme; (b) subject and conditional upon TalkTalk Admission, new TalkTalk Articles (as described in paragraph 3 of this Part X) be approved and adopted with effect from TalkTalk Admission; (c) subject to and conditional upon the Demerger becoming effective, the sum standing to the credit of the merger reserve arising in the books of account of TalkTalk as a result of the issue of the TalkTalk Shares pursuant to the Demerger (the “Merger Reserve”) be capitalised and applied in paying up in full at par the TalkTalk Capitalisation Share which shall be allotted and issued, credited as fully paid to any person nominated by the TalkTalk Directors for this purpose at a premium equal to the sum standing to the credit of the Merger Reserve less 0.1 pence; (d) subject to and conditional upon the Demerger becoming effective and upon the issue of the TalkTalk Capitalisation Share: (i) the issued share capital of TalkTalk be reduced by cancelling and extinguishing the TalkTalk Capitalisation Share in issue at the TalkTalk Reduction Record Time on terms that the holder of such TalkTalk Capitalisation Share shall be paid in cash an amount equal to the nominal value of the TalkTalk Capitalisation Share held by him; and (ii) the sum standing to the credit of the share premium account of TalkTalk at the Demerger Effective Time be reduced by cancelling and extinguishing that part of the share premium account equivalent to the amount which represented the proportion of the Merger Reserve which arose on the issue of the TalkTalk Shares at the Demerger Effective Time less 0.1 pence;

207 (e) subject to and conditional upon the Demerger becoming effective, the TalkTalk Directors be generally and unconditionally authorised:

(i) to exercise all the powers of TalkTalk to allot shares in TalkTalk, and grant rights to subscribe for or to convert any security into shares of TalkTalk (such shares, and rights to subscribe for or to convert any security into shares of TalkTalk being “relevant securities”):

(A) up to a maximum aggregate nominal amount of £925,000 as required for the purposes of the Demerger; and

(B) up to a maximum aggregate nominal amount of £304,702.76 (representing approximately one third of the expected issued ordinary share capital of TalkTalk immediately after the Demerger Effective Time and the nominal value of the TalkTalk Capitalisation Share); and further

(ii) to allot equity securities in connection with a rights issue in favour of the holders of TalkTalk Shares in the capital of TalkTalk, where the equity securities respectively attributable to the interests of all such holders are proportionate (as nearly may be) to the respective number of TalkTalk Shares held by them, up to an aggregate nominal amount of £609,405.50 (representing approximately two thirds of the expected issued ordinary share capital of TalkTalk immediately after the Demerger Effective Time) (after deducting from such limit any relevant securities allotted under paragraph (i) above);

provided that, unless previously revoked, varied or extended, this authority shall expire at the conclusion of the first annual general meeting of TalkTalk, except that TalkTalk may at any time before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the TalkTalk Directors may allot relevant securities in pursuance of such an offer or agreement as if this authority had not expired;

(f) subject to and conditional upon the issue of the New Carphone Warehouse Ordinary Shares and the New Carphone Warehouse Cancellation Shares pursuant to the Scheme, the Demerger be approved and, in connection with the Scheme and the Demerger:

(i) the TalkTalk Directors be authorised and instructed to do or procure to be done all such acts and things on behalf of TalkTalk and any of its subsidiaries as they consider necessary or expedient for the purpose of giving effect to the Demerger; and

(ii) the entry by TalkTalk into the Separation Agreements and such other documents as the TalkTalk Directors deem to be necessary or desirable for the purpose of giving effect to the Demerger be and are hereby approved and the TalkTalk Directors (or a duly authorised committee of the TalkTalk Directors) be authorised to carry the same into effect;

(g) subject to and conditional upon the Demerger becoming effective, the TalkTalk Directors be empowered pursuant to section 570(1) of the Act to allot equity securities of TalkTalk wholly for cash pursuant to the authority of the TalkTalk Directors under section 551 of the Act conferred by the resolution described in (e) above, as if section 561(1) of the Act did not apply to such allotment provided that:

(i) the power conferred by this resolution shall be limited to:

(A) the allotment of equity securities in connection with an offer of equity securities to the holders of TalkTalk Shares in proportion as nearly as practicable to their respective holdings of such shares, but subject to such exclusions or other arrangements as the TalkTalk Directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems arising under the laws or requirements of any overseas territory or by virtue of shares being represented by depository receipts or the requirements of any regulatory body or stock exchange or any other matter whatsoever; and

(B) the allotment, otherwise than pursuant to sub-paragraph (A) above, of equity securities up to an aggregate nominal value equal to £45,705.41 (representing approximately five per cent. of the expected issued ordinary share capital of TalkTalk immediately after the Demerger Effective Time); and

208 (ii) unless previously revoked, varied or extended, this power shall expire at the conclusion of the first annual general meeting of TalkTalk except that TalkTalk may before the expiry of this power make an offer or agreement which would or might require equity securities to be allotted after such expiry and the TalkTalk Directors may allot equity securities in pursuance of such an offer or agreement as if this power had not expired; (h) subject to and conditional upon the Demerger becoming effective, TalkTalk be unconditionally and generally authorised for the purposes of section 701 of the Act to make market purchases of TalkTalk Shares provided that: (i) the maximum number of TalkTalk Shares authorised to be purchased is 91,410,824 (representing approximately 10 per cent. of the expected number of TalkTalk Shares in issue immediately after the Demerger Effective Time); (ii) the minimum price which may be paid for any such TalkTalk Share is 0.1 pence; (iii) the maximum price which may be paid for a TalkTalk Share shall be an amount equal to 105 per cent. of the average middle market quotations for a TalkTalk Share as derived from the Daily Official List for the five business days immediately preceding the day on which the TalkTalk Share is contracted to be purchased; and this authority shall, unless previously renewed, revoked or varied, expire at the conclusion of the first annual general meeting, but TalkTalk may enter into a contract for the purchase of TalkTalk Shares before the expiry of this authority which would or might be completed (wholly or partly) after its expiry; (i) subject to and conditional upon TalkTalk Admission, a general meeting of TalkTalk other than an annual general meeting may be called on not less than 14 clear days’ notice; and (j) subject to and conditional upon the Demerger becoming effective and with effect from the Demerger Effective Time, the Discretionary Share Schemes be adopted for the purpose of making awards over TalkTalk Shares in substitution for awards over Carphone Warehouse Shares that are unexercised at the Share Scheme Deadline and: (i) the TalkTalk Directors be authorised to do all things necessary or expedient to carry the Discretionary Share Schemes into effect; (ii) subject to the rules of each of the Discretionary Share Schemes, the TalkTalk Directors be authorised to make such alteration or addition to the Discretionary Share Schemes or any of them as may be necessary in order to benefit the administration of the Discretionary Share Schemes at any time; and (iii) the TalkTalk Directors be authorised to establish further employee share schemes based on the Discretionary Share Schemes but modified to take account of local tax, exchange control or securities laws in any overseas jurisdiction provided that the shares made available under such further employee share schemes are treated as counting towards the limits on participation in each of the Discretionary Share Schemes; (k) subject to and conditional upon the Demerger becoming effective and with effect from the Demerger Effective Time, the TTG VES be adopted and: (i) the TalkTalk Directors be authorised to do all things necessary or expedient to carry the TTG VES into effect; (ii) subject to the rules of the TTG VES, the TalkTalk Directors be authorised to make such alteration or addition to the TTG VES as may be necessary in order to benefit the administration of the TTG VES at any time; (iii) the TalkTalk Directors be authorised to establish further employee share schemes based on the TTG VES but modified to take account of local tax, exchange control or securities laws in any overseas jurisdiction provided that the shares made available under such further employee share schemes are treated as counting towards the limits on participation in the TTG VES; and (iv) the TalkTalk Directors be and are hereby authorised to replace the TTG VES by the introduction of an approved company share option plan (“COSOP”) provided that any

209 replacement awards under such COSOP shall be equivalent to the original awards particularly in respect of eligibility, vesting and performance conditions.

(l) subject to and conditional upon the Demerger becoming effective and with effect from the Demerger Effective Time, the CPWG VES be adopted in respect of awards over shares in companies in the TalkTalk Group and:

(i) the TalkTalk Directors be authorised to do all things necessary or expedient to carry the CPWG VES into effect;

(ii) subject to the rules of the CPWG VES, the TalkTalk Directors be authorised to make such alteration or addition to the CPWG VES as may be necessary in order to benefit the administration of the CPWG VES at any time; and

(iii) the TalkTalk Directors be authorised to establish further employee share schemes based on the CPWG VES but modified to take account of local tax, exchange control or securities laws in any overseas jurisdiction provided that the shares made available under such further employee share schemes are treated as counting towards the limits on participation in the CPWG VES; and

(m) subject to and conditional upon the Demerger becoming effective and with effect from the Demerger Effective Time, the TalkTalk Share Schemes be adopted and:

(i) the TalkTalk Directors be authorised to make such amendments to the TalkTalk Share Schemes as may be necessary to obtain HMRC approval to the same and to do all things necessary or expedient to carry the TalkTalk Share Schemes into effect;

(ii) subject to the rules of the TalkTalk Share Schemes, the TalkTalk Directors be authorised to make such alteration or addition to the TalkTalk Share Schemes or any of them as may be necessary in order to benefit the administration of the TalkTalk Share Schemes at any time; and

(iii) the TalkTalk Directors be authorised to establish further employee share schemes based on the TalkTalk Share Schemes but modified to take account of local tax, exchange control or securities laws in any overseas jurisdiction provided that the shares made available under such further employee share schemes are treated as counting towards the limits on participation in the TalkTalk Share Schemes.

2.3 As at the date of this document, TalkTalk has the following shares in issue:

Number of shares Class of share in issue TalkTalk Shares ...... 1 Redeemable Preference Shares ...... 1

2.4 At the Demerger Effective Time, TalkTalk will have the following shares in issue (on the assumption that no new Carphone Warehouse Shares will be issued between the date of this document and the Scheme Effective Date):

Number of shares Class of share in issue TalkTalk Shares ...... 914,108,246 Redeemable Preference Shares ...... 1 TalkTalk Capitalisation Shares...... 1

2.5 The TalkTalk Shares are in registered form and are capable of being held in uncertificated form. Application has been made to Euroclear for the TalkTalk Shares to be enabled for dealings through CREST as a participating security. No temporary documents of title will be issued. The International Securities Identification Number (ISIN) for the TalkTalk Shares is GB00B4YCDF59. The rights attaching to the TalkTalk Shares are set out in paragraph 3.2 below.

210 3. Summary of the TalkTalk Articles The TalkTalk Articles, which were adopted conditional on TalkTalk Admission by a special resolution of TalkTalk passed on 28 January 2010, contain, inter alia, provisions to the following effect:

3.1 Objects Section 31 of the Act provides that the objects of a company are unrestricted unless any restrictions are set out in the articles. There are no such restrictions in the TalkTalk Articles and the objects of TalkTalk are therefore unrestricted.

3.2 Rights attaching to TalkTalk Shares (a) Voting rights (i) Pursuant to the Act and to the TalkTalk Articles and to any rights or restrictions as to voting attached to any class of shares, at any general meeting on a show of hands every member who (being an individual) is present in person has one vote. On a vote on a show of hands a proxy appointed by one member has one vote. On a vote on a show of hands, a proxy appointed by more than one member has one vote, if instructed to vote in the same way by all those members and is entitled to one vote for and one vote against, if instructed to vote in different ways by those members. (ii) On a poll every member present in person or by proxy has one vote for each share of which he is the holder. A member of TalkTalk shall not be entitled, in respect of any share held by him, to vote (either personally or by proxy) at any general meeting of TalkTalk unless all amounts payable by him in respect of that share in TalkTalk have been paid or credited as having been paid. (b) Joint holders In the case of joint holders of shares, only the vote of the senior holder who votes (and any proxies duly authorised by him) may be counted. For this purpose, the senior holder of a share shall be determined by the order in which the names of the joint holders stand in the register of members. (c) Dividends Subject to the provisions of the Act and of the TalkTalk Articles and to any special rights attaching to any shares, TalkTalk may by ordinary resolution declare dividends, but no such dividends shall exceed the amount recommended by the TalkTalk Board. All dividends shall be apportioned and paid pro rata according to the amounts paid up or credited as paid up (otherwise than in advance of calls) on the shares during any portion or portions of the period in respect of which the dividend is paid. Interim dividends may be paid provided that they appear to the TalkTalk Board to be justified by the profits available for distribution and the financial position of TalkTalk. Unless otherwise provided by the rights attached to any share, no dividends in respect of a share shall bear interest. The TalkTalk Board may, with the prior authority of an ordinary resolution of TalkTalk, offer the holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid instead of cash in respect of all or part of any dividend. Any dividend unclaimed after a period of 12 years from the date on which the dividend became due for payment shall (if the TalkTalk Board so resolves) be forfeited and shall revert to TalkTalk. (d) Return of capital On a winding-up of TalkTalk, the surplus of assets available for distribution shall be divided among the members in proportion to the amounts paid up on their respective shares at the commencement of the winding-up or, with the sanction of a special resolution of the company, be divided amongst the members in specie in such manner as shall be determined by the liquidator.

3.3 Rights and restrictions attaching to the Redeemable Preference Shares (a) Income Each holder of Redeemable Preference Shares shall be entitled, in priority to all other classes of shares in issue from time to time, to be paid out of profits of TalkTalk available for distribution a cumulative dividend for each Redeemable Preference Share, payable on 31 December annually, at a

211 rate per annum equal to 1 per cent. of its paid up nominal value (pro rata temporis, in the case of a period of less than a year and provided that no such dividend shall be payable in respect of any period ending on or prior to 31 December 2010).

(b) Capital

On a return of capital on a winding-up or a reduction of capital or otherwise (other than on conversion, redemption or purchase of shares or a capitalisation issue), each Redeemable Preference Share shall confer on the holder of that Redeemable Preference Share the right, before repayment of the capital paid up on other classes of share capital, to repayment of the nominal amount paid up on the Redeemable Preference Share together with any arrears, deficiency or accruals of any dividend, such arrears, deficiency or accruals to be calculated to the date of the return of capital and to be payable whether or not such dividend has been declared or earned. The Redeemable Preference Shares shall not confer any further right to participate in the surplus assets of TalkTalk.

(c) Voting at general meetings

The Redeemable Preference Shares shall carry no votes and a holder of a Redeemable Preference Share shall not, by virtue of its holding of that Redeemable Preference Share, have any right to receive notice of, attend, speak or vote at any general meeting of TalkTalk unless a resolution is to be proposed to wind up TalkTalk or a resolution is to be proposed which varies, modifies, alters or abrogates the rights attaching to the Redeemable Preference Shares.

(d) Redemption

Subject to the provisions of the Act, a Redeemable Preference Share shall be redeemed 100 years from its date of issue or at any time prior thereto at the option of TalkTalk. The holder of a Redeemable Preference Share which is subject to redemption shall surrender to TalkTalk on or before the date for redemption the share certificate for such Redeemable Preference Share in order that it may be cancelled and upon cancellation TalkTalk shall pay to the holder the nominal value of such Redeemable Preference Share together with any arrears, deficiency or accruals of any dividend, such arrears, deficiency or accruals to be calculated to the date of such redemption and to be payable whether or not such dividend has been declared or earned.

(e) Cancellation

Redeemable Preference Shares redeemed pursuant to the TalkTalk Articles shall be cancelled and TalkTalk shall not be entitled to re-issue the same.

3.4 Rights and restrictions attaching to the TalkTalk Capitalisation Shares

(a) Income

The TalkTalk Capitalisation Shares shall have no right to dividends or other distributions.

(b) Capital

(i) On a return of capital on a winding-up or otherwise, the holders of the TalkTalk Capitalisation Shares shall be entitled to the nominal value paid up or credited as paid up on such TalkTalk Capitalisation Shares after paying to the holders of any and all other classes of share in the capital of TalkTalk then in issue the nominal value paid up or credited as paid up on those shares, together with the sum of £10,000,000 on each such share.

(ii) The holders of the TalkTalk Capitalisation Shares shall not be entitled to any further right of participation in the assets of TalkTalk.

(c) Transfer

The TalkTalk Board my decline to register any transfer of any of the TalkTalk Capitalisation Shares to any person of whom they do not approve and decline to give any reason for that disapproval. If the TalkTalk Board declines to register a transfer of any of the TalkTalk Capitalisation Shares, it shall within two months after the date the transfer was lodged with TalkTalk send to the transferee notice of its decision not to register the transfer and the relevant instrument of transfer.

212 (d) Voting (i) Unless a resolution to vary the rights of the TalkTalk Capitalisation Shares is proposed, holders of the TalkTalk Capitalisation Shares shall not be entitled to receive notice of nor to attend (either in person or by proxy) any general meeting of TalkTalk. Holders of TalkTalk Capitalisation Shares shall have no right to speak or vote at any such meeting. (ii) If a resolution to vary the rights of the TalkTalk Capitalisation Shares is proposed, the holders of the TalkTalk Capitalisation Shares shall be entitled to receive notice of and to attend (either in person or by proxy) and vote at the general meeting of TalkTalk at which such resolution is to be voted upon. Upon a show of hands every such holder who is present in person shall have one vote and upon a poll every such holder who is present in person or by proxy shall have one vote for every TalkTalk Capitalisation Share held by him.

3.5 Transfer of shares Save in the case of shares which have become participating securities for the purposes of the CREST Regulations, title to which may be transferred by means of a relevant system such as CREST without a written instrument, all transfers of shares must be effected by an instrument of transfer in writing in any usual form or in any other form approved by the TalkTalk Board. The instrument of transfer shall be executed by or on behalf of the transferor and, except in the case of fully paid shares, by or on behalf of the transferee. The TalkTalk Board may, in its absolute discretion, refuse to register any transfer of certificated shares unless: (a) it is in respect of a share which is fully paid up; (b) it is in respect of a share on which TalkTalk has no lien; (c) it is in respect of only one class of share; (d) it is in favour of a single transferee or not more than four joint transferees; (e) it is duly stamped (if required); and (f) it is lodged at the registered office together with the relevant share certificate(s) and such other evidence as the TalkTalk Board may reasonably require to show the right of the transferor to make the transfer, provided that the TalkTalk Board may not exercise such discretion in such a way as to prevent dealing from taking place on an open and proper basis. The TalkTalk Board may, in its absolute discretion, refuse to register the transfer of an uncertificated share which is in favour of more than four persons jointly or in any other circumstances permitted by the CREST Regulations (subject to any relevant requirements of any recognised stock exchange(s) to which the shares are admitted). If the TalkTalk Board refuses to register a transfer it must, within two months after the date on which the transfer was lodged with TalkTalk, send notice of the refusal to the transferee together with its reasons for refusal.

3.6 Disclosure of interests in shares The provisions of rule 5 of the Disclosure and Transparency Rules govern the circumstances in which a person may be required to disclose his interests in the share capital of TalkTalk. Inter alia, this requires a person who is interested in 3 per cent. or more of the voting rights in respect of TalkTalk’s issued ordinary share capital to notify his interest to TalkTalk (and above that level, any change in such interest equal to 1 per cent. or more). In addition, the Code contains further provisions pursuant to which a person may be required to disclose his interests in the share capital of TalkTalk. Pursuant to the TalkTalk Articles, if a member, or any other person appearing to be interested in shares held by that member, has been issued with a notice pursuant to section 793 of the Act and has failed in relation to any shares (the “default shares”) to give TalkTalk the information thereby required within the prescribed period from the date of the notice, the following sanctions shall apply: (a) the member shall not be entitled in respect of the default shares to be present or to vote (either in person or by proxy) at any general meeting or at any separate meeting of the holders of any class of shares or on any poll or to exercise any other right conferred by membership in relation to any such meeting or poll; and

213 (b) where the default shares represent at least 0.25 per cent. in nominal value of their class: (i) any dividend or other money payable in respect of the shares shall be withheld by TalkTalk which shall not have any obligation to pay interest on it and the member shall not be entitled to elect in the case of a scrip dividend to receive shares instead of that dividend; and (ii) subject, in the case of uncertificated shares to the Uncertificated Regulations no transfer, other than an approved transfer, of any shares held by the member shall be required unless: (A) the member is not himself in default as regards supplying the information required; and (B) the member proves to the satisfaction of the TalkTalk Board that no person in default as regards supplying such information is interested in any of the shares which are the subject of the transfer. The above sanctions shall also apply to any shares in TalkTalk issued in respect of the default shares (whether on capitalisation, a rights issue or otherwise).

3.7 Changes in share capital TalkTalk may alter its share capital as follows: (a) it may by ordinary resolution, consolidate and divide all or any of its share capital into shares of larger amounts, cancel any shares which have not been taken or agreed to be taken by any person and sub-divide its shares or any of them into shares of smaller amounts; (b) subject to any consent required by law and to any rights for the time being attached to any shares, it may by special resolution reduce its share capital, any capital redemption reserve, any share premium account or other undistributable reserve in any manner; and (c) subject to the provisions of the Act and to any rights for the time being attached to any shares it may with the sanction of a special resolution enter into any contract for the purchase of its own shares.

3.8 Variation of rights Subject to the provisions of the Act, the special rights attached to any class of share in TalkTalk may be varied or abrogated in such manner as may be provided by those rights or, in the absence of such provision, either with the consent in writing of the holders of not less than three quarters in nominal value of the issued shares of the class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of the class convened and held as provided in the TalkTalk Articles (but not otherwise) and may be so varied or abrogated whilst TalkTalk is a going concern or while TalkTalk is or is about to be in liquidation. The quorum for such separate general meeting of the holders of the shares of the class shall be at least two persons holding or representing by proxy at least one-third of the nominal amount paid up on the issued shares of the relevant class (excluding any shares of that class held as treasury shares).

3.9 General meetings Pursuant to the Act, an annual general meeting is required to be held every year at such time and place as may be determined by the TalkTalk Board. The TalkTalk Board may convene any other general meeting whenever it thinks fit. General meetings may also be convened on the requisition of members pursuant to the Act. Pursuant to the Act, 21 clear days’ notice of every annual general meeting and 14 clear days’ notice of every other general meeting is required to be given (unless, at the relevant time, either of the conditions set out in sub-section 307 A(2) and sub-section 307 A(3), of the Act have not been met by TalkTalk, in which case at least 21 clear days’ notice will be required). The accidental omission to give notice to, or the non-receipt of such notice by, any person entitled to receive notice of the meeting will not invalidate any resolution passed or proceeding at any such meeting. No business may be transacted at any general meeting unless the requisite quorum is present when the meeting proceeds to business. Two persons entitled to attend and vote on the business to be transacted, each being a member present in person or a proxy for a member constitutes a quorum. With the consent of any meeting at which a quorum is present the chairman may adjourn the meeting. Notice of adjournment or of the business to be transacted at the adjourned meeting is not required unless the

214 meeting is adjourned for 14 days or more. No business may be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place.

3.10 Directors’ interests in contracts Save as provided below, a TalkTalk Director shall not vote on, or be counted in the quorum in relation to, any resolution of the TalkTalk Board or any committee of the TalkTalk Board in respect of any transaction or arrangement with TalkTalk in which he has an interest which may reasonably be regarded as likely to give rise to a conflict of interest. A TalkTalk Director shall be entitled to vote (and be counted in the quorum) (subject to the terms of any authorisation given to that TalkTalk Director by the TalkTalk Board) in respect of any resolution at such meeting if the resolution relates to one of the following matters: (a) the giving to him of any guarantee, security or indemnity in respect of money lent or obligations incurred by him at the request of or for the benefit of TalkTalk or any of its subsidiary undertakings; (b) the giving to a third party of any guarantee, security or indemnity in respect of a debt or obligation of TalkTalk or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part, either alone or jointly with others, under a guarantee or indemnity or by the giving of security; (c) where TalkTalk or any of its subsidiary undertakings is offering securities in which offer the TalkTalk Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which the TalkTalk Director is to participate; (d) relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares representing 1 per cent. or more of either any class of the equity share capital, or the voting rights, in such company; (e) relating to an arrangement for the benefit of the employees of TalkTalk or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; (f) concerning insurance which TalkTalk proposes to maintain or purchase for the benefit of TalkTalk Directors or for the benefit of persons including TalkTalk Directors; (g) the funding of expenditure by one or more TalkTalk Directors in defending proceedings against them or doing anything to enable such TalkTalk Directors to avoid incurring such expenditure provided that such funding is consistent with, or no more beneficial than the provisions of the TalkTalk Articles and is permitted pursuant to the provisions of the relevant legislation; or (h) the giving of an indemnity or indemnities in favour of one or more TalkTalk Directors which is/are consistent with, or no more beneficial than any such indemnity provided pursuant to the TalkTalk Articles (and provided such indemnities are permitted pursuant to the relevant legislation). A TalkTalk Director may not vote or be counted in the quorum on any resolution of the TalkTalk Board or committee of the TalkTalk Board concerning his own appointment as the holder of any office or place of profit with TalkTalk or any company in which TalkTalk is interested (including fixing or varying the terms of such appointment or its termination). Where proposals are under consideration concerning the appointments (including fixing or varying the terms of the appointment) of two or more TalkTalk Directors, such proposals may be divided and a separate resolution considered in relation to each TalkTalk Director. In each case, each such TalkTalk Director (if not otherwise debarred from voting) is entitled to vote (and be counted in the quorum) in respect of each resolution except that resolution concerning his own appointment.

3.11 Directors The aggregate fees which the TalkTalk Directors shall be entitled to receive for their services in the office of director shall not exceed £500,000 per annum, or such other sum as may from time to time be determined by an ordinary resolution of TalkTalk. Such sum (unless otherwise directed by the resolution of TalkTalk by which it is approved) shall be divided among the TalkTalk Directors in such proportions and in such manner as the TalkTalk Board may determine or, in default of such determination, equally. All of the TalkTalk Directors are entitled to be repaid all reasonable travelling, hotel and other expenses properly incurred by them in or about the performance of their duties as directors. If by arrangement with the

215 TalkTalk Board any TalkTalk Director performs any special duties or services outside his ordinary duties as a TalkTalk Director and not in his capacity as a holder of employment or executive office, he may be paid such reasonable additional remuneration which may be by a lump sum or by way of salary, commission, participation in profits or otherwise as the TalkTalk Board may determine.

3.12 Pensions and benefits The TalkTalk Board may exercise all the powers of TalkTalk to provide pensions or other retirement or superannuation benefits and to provide death or disability benefits or other allowances or gratuities (by insurance or otherwise) for any person who is or who has at any time been a TalkTalk Director or any director of a subsidiary company of TalkTalk or allied to or associated with TalkTalk or any such subsidiary or predecessor in business of TalkTalk or any such subsidiary (and for any member of his family including a spouse or former spouse or civil partner or former civil partner or any person who is or was dependent on him). For this purpose the TalkTalk Board may establish, maintain, subscribe and contribute to any scheme, trust or fund and pay premiums.

3.13 Borrowing powers The TalkTalk Board may exercise all the powers of TalkTalk to borrow money to guarantee, to indemnify and to mortgage or charge its undertakings, property and assets (present or future) and uncalled capital, or any part or parts thereof and, subject to the provisions of the relevant legislation, to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of TalkTalk or any third party. The aggregate amount for the time being outstanding in respect of monies borrowed by TalkTalk and its subsidiary undertakings and for the time being owing to persons outside TalkTalk and its subsidiary undertakings shall not at any time, without the previous sanction of an ordinary resolution of TalkTalk, exceed a sum equal to five times the aggregate of: (a) the amount paid up on the issued share capital of TalkTalk; and (b) the total of the capital and revenue reserves of the TalkTalk Group (including any share premium account, capital redemption reserve and credit balance on the profit and loss account) in each case, whether or not such amounts are available for distribution, all as shown in the relevant balance sheet of the TalkTalk Group but after certain adjustments as set out in the TalkTalk Articles.

4. Major shareholders 4.1 In so far as it is known to TalkTalk as at 28 January 2010 (being the latest practicable date prior to the publication of this document), the following persons are interested directly or indirectly in three per cent. or more of the voting rights in respect of the issued ordinary share capital of Carphone Warehouse: Percentage of issued Carphone Warehouse Number of Carphone share capital of Shareholder Warehouse Shares Carphone Warehouse Charles Dunstone ...... 296,144,535 32.40 David Ross ...... 155,204,845 16.98 Fidelity International Limited ...... 46,087,574 5.04 Jupiter Asset Management Limited ...... 29,570,218 3.23 Government of Singapore Investment Corporation Pte Limited . . . 27,489,275 3.01 4.2 Save as disclosed above, the TalkTalk Directors are not aware of any person who is interested directly or indirectly in three per cent. or more of the existing issued share capital of Carphone Warehouse. 4.3 As at 28 January 2010 (being the last practicable date prior to the publication of this document), Tim Morris was the sole shareholder in TalkTalk and therefore controlled all of the voting rights in TalkTalk. Following the issue of TalkTalk Shares pursuant to the Proposals (and on the assumption that no new Carphone Warehouse Shares will be issued between the date of this document and the Scheme Effective Date), it is expected that Tim Morris will be interested in 0.06 per cent. of the voting rights in TalkTalk. Save as disclosed in this paragraph and above, the TalkTalk Directors are not aware of any person who, at the date of this document or immediately following TalkTalk Admission, directly or indirectly, jointly or severally, exercise or could exercise control over TalkTalk. 4.4 As at 28 January 2010 (being the latest practicable date prior to the publication of this document), TalkTalk was not aware of any arrangements the operation of which may result in a change in control of TalkTalk.

216 4.5 None of TalkTalk’s major shareholders has or will have different voting rights attached to the shares they hold in TalkTalk. 4.6 As at 28 January 2010 (being the latest practicable date prior to the publication of this document) and in so far as is known to TalkTalk, the following persons will, directly or indirectly, be interested in three per cent. or more of the issued share capital of TalkTalk on the date of TalkTalk Admission (based on the assumption that the holdings of such persons in Carphone Warehouse as at 28 January 2010 do not change and that no other issues of Carphone Warehouse or TalkTalk Shares occur between the date of this document and TalkTalk Admission): Number of TalkTalk Percentage of issued TalkTalk Shareholder Shares share capital Charles Dunstone 296,144,535 32.40 David Ross 155,204,845 16.98 Fidelity International Limited 46,087,574 5.04 Jupiter Asset Management Limited 29,570,218 3.23 Government of Singapore Investment Corporation Pte Limited 27,489,275 3.01

5. Outstanding options and awards over Carphone Warehouse Shares Carphone Warehouse has granted the following options pursuant to the Carphone Warehouse Share Schemes which were unexercised as at 26 January 2010 (being the latest practicable date prior to the publication of this document): Total number of Exercise price per Carphone Warehouse Carphone Warehouse Option period Date of grant Shares under option Of which vested Share (pence) ending* 20/06/1999 223,900 223,900 — N/A 19/05/2000 406,100 406,100 150 19/05/2010 19/05/2000 200,000 200,000 200 19/05/2010 20/06/2000 311,600 311,600 150 N/A 21/05/2001 1,119,510 1,119,510 125 21/05/2011 11/06/2002 1,226,389 1,226,389 83 11/06/2012 06/06/2003 1,912,960 1,912,960 90 06/06/2013 20/01/2004 120,732 120,732 144 20/01/2014 28/07/2004 7,610,041 7,610,041 — 28/07/2014 01/08/2004 17,060 17,060 115 01/02/2010 19/01/2005 231,250 231,250 171 19/01/2015 12/04/2005 200,000 200,000 — 12/04/2015 07/06/2005 451,534 451,534 — 07/06/2015 01/08/2005 100,090 — 138 01/02/2011 02/02/2006 492,808 247,320 251 02/02/2016 01/08/2006 272,701 272,701 266 01/02/2010 01/08/2006 47,929 — 266 01/02/2012 04/12/2006 7,865,075 — — 04/12/2016 31/01/2007 112,500 38,529 310 31/01/2017 11/06/2007 350,592 — — 11/06/2017 01/08/2007 318,324 — 259 01/02/2011 01/08/2007 87,862 — 259 01/02/2013 09/11/2007 418,144 418,144 356 09/11/2017 29/11/2007 101,718 — — 29/11/2017 23/12/2008 7,000,000 — 88 23/12/2018 * The expiry date of some options is affected by the Demerger as set out in this Part X. In addition to the options granted under the Carphone Warehouse Share Schemes, Carphone Warehouse has granted outstanding options over 1,000,000 Carphone Warehouse Shares as summarised in paragraph 5.9 of this Part X. Any Carphone Warehouse Shares issued pursuant to the exercise of options or awards under the Carphone Warehouse Share Schemes on or prior to the Scheme Record Time will be subject to the terms of the Scheme. This will include any Carphone Warehouse Shares held by the Carphone Warehouse Employee Benefit Trust on or prior to the Scheme Record Time to enable it to satisfy options and awards under the

217 Carphone Warehouse Share Schemes. The Scheme will not extend to Carphone Warehouse Shares allotted or issued at any time after the Scheme Record Time. Save for the issue of the Post-Scheme Shares to New Carphone Warehouse on the Scheme Effective Date pursuant to the Scheme, Carphone Warehouse will not issue any shares after the Scheme Record Time until after the Scheme Effective Date. Subject to the consideration of the trustees of the Carphone Warehouse Employee Benefit Trust, the New Carphone Warehouse Ordinary Shares received by the Carphone Warehouse Employee Benefit Trust are expected to be transferred to a new trust, the New Carphone Warehouse Employee Benefit Trust, on Completion. TalkTalk Shares received by the Carphone Warehouse Employee Benefit Trust will be retained for the future benefit of employees of the TalkTalk Group. Participants in the Carphone Warehouse Share Schemes will receive separate explanatory letters explaining the effect of the Scheme on their options or awards and what action, if any, they may need to take. The provisions relating to the outstanding options and awards under the Carphone Warehouse Share Schemes and the effect of the Scheme on them are set out below. The following is a general summary of the position and is subject to modification, where necessary or desirable, on account of local laws or where the implementation of the proposed treatment of participants’ awards would, in the opinion of the Carphone Warehouse Board, be unduly onerous.

5.1 Millennium No 1 Scheme The rules of the Millennium No 1 Scheme do not provide a lapse date. The outstanding Millennium No 1 awards were granted in December 1999 and have been fully vested since 1 January 2001. The Carphone Warehouse Remuneration Committee has determined that the outstanding awards shall lapse at the Share Scheme Deadline. The Millennium No 1 Scheme will terminate at the Share Scheme Deadline.

5.2 Millennium No 2 Scheme All of the outstanding options granted under the Millennium No 2 Scheme are fully vested and may be exercised at any time up to the Share Scheme Deadline; any options that remain unexercised will lapse at that time, conditional upon the Scheme being sanctioned by the Court. The Millennium No 2 Scheme will terminate on the date of the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court.

5.3 CSOP Participants will be able to exercise their vested options at any time until the Share Scheme Deadline. Options that are not exercised will lapse at the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court. The CSOP will terminate on the date of the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court.

5.4 SAYE Scheme Participants will be able to exercise their unvested options, conditional upon the Scheme being sanctioned by the Court, during the period from the date of this document until the Share Scheme Deadline to the extent of the amounts then repayable (or notionally repayable) under the savings contracts related to those options. Any vested or unvested options that are not exercised will lapse at the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court. The SAYE Scheme will terminate on the date of the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court. As a result of the Proposals, the five year options granted in 2005, 2006 and 2007 under the SAYE Scheme and the three year options granted in 2007 under the SAYE Scheme will not reach their maturity dates. The Carphone Warehouse Board has determined that a cash goodwill payment shall be offered to the affected participants in compensation for the early termination of those options granted under the SAYE Scheme

218 which have an exercise price that is less than the market price of Carphone Warehouse Shares at the Share Scheme Deadline.

5.5 Discretionary Share Schemes The participants in each of the Discretionary Share Schemes will be able to exercise their vested options and awards at any time until the Share Scheme Deadline. Participants’ unexercised vested options and awards shall be automatically exchanged for replacement options and awards on the following basis: • half their vested options and awards (and will be asked to exchange half their unvested options) for a replacement option or award over New Carphone Warehouse Ordinary Shares on a one for one basis; and • half their vested options and awards (and will be asked to exchange half their unvested options) for a replacement option or award over TalkTalk Shares on a two for one basis. For every two Carphone Warehouse Shares subject to existing options or awards, the participant will receive options or awards over one New Carphone Warehouse Ordinary Share and two TalkTalk Shares. The exercise price (if any) will be adjusted such that the replacement options and awards will have a broadly equivalent value to the existing options. The exercise price will be determined by reference to the share price of TalkTalk Shares and New Carphone Warehouse Ordinary Shares over the 60 days following the date of TalkTalk Admission and New Carphone Warehouse Admission respectively. The replacement options and awards will be held on similar terms and conditions to the existing options and awards. The Demerger will not cause participants to be treated as leavers until they actually cease to be employed by the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group as the case may be. (a) ESOS All of the outstanding awards are vested in full. The participants will be able to exercise their awards at any time until the Share Scheme Deadline. Unexercised awards shall be automatically exchanged for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares, as outlined above. (b) Unapproved CSOP Participants will be able to exercise their vested options at any time up to the Share Scheme Deadline. Unexercised vested options shall be automatically exchanged for replacement options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares, as outlined above. Subject to participant consent, the options granted in December 2008 pursuant to the Unapproved CSOP will not be accelerated. Participants will automatically exchange their unvested options for new options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares, as set out above. Carphone Warehouse Shareholders will be asked to ratify some of the options, which were granted to employees of the Best Buy Europe Group. Replacement options shall be subject to the same performance conditions as those attaching to the existing options. (c) Performance Plan Participants will be able to exercise their vested awards at any time until the Share Scheme Deadline. Unexercised awards shall automatically be exchanged for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares, as outlined above. Replacement awards exchanged for unvested awards granted pursuant to the Performance Plan in December 2006 will be subject to new performance conditions that the Carphone Warehouse Remuneration Committee considers to be equivalent to those applying to the original awards. The replacement awards made in respect of the unvested awards are expected to vest in June 2010 and June 2011, on the same dates as the original awards would have vested.

5.6 CPWG VES The outstanding awards will survive the Demerger, subject to adjustments in order to provide awards equivalent to the original awards. The awards will continue to be subject to similar terms and conditions to the original awards.

219 5.7 TTG VES

The outstanding awards will survive the Demerger, subject to adjustments in order to provide awards equivalent to the original awards. The awards will continue to be subject to similar terms and conditions to the original awards.

5.8 Deferred Bonus Plan

Awards are made up of three elements, two of which have already vested, the with third due to vest in June 2010. The vested parts of the awards may be exercised at any time up to the Share Scheme Deadline. The unvested awards will vest and be exercisable, conditional upon the Scheme being sanctioned by the Court, pro-rata to that part of the vesting period that has elapsed.

The Deferred Bonus Plan will terminate and awards that are not exercised will lapse on the date of the Share Scheme Deadline, conditional upon the Scheme being sanctioned by the Court.

5.9 Other outstanding options over Carphone Warehouse Shares

In addition to the options granted under the Carphone Warehouse Share Schemes, Carphone Warehouse has granted outstanding and vested options over 1,000,000 Carphone Warehouse Shares to Michael Smith. In exchange for the cancellation of any such unexercised options over Carphone Warehouse Shares, New Carphone Warehouse and TalkTalk intend to grant replacement options to Mr Smith as follows:

• an option over 500,000 New Carphone Warehouse Ordinary Shares; and

• an option over 1,000,000 TalkTalk Shares.

The exercise price will be adjusted such that the replacement options will have a broadly equivalent value to the existing options. The exercise price will be determined by reference to the share price of the TalkTalk Shares and New Carphone Warehouse Ordinary Shares over the 60 days following the date of TalkTalk Admission and New Carphone Warehouse Admission respectively. The replacement options will be held on similar terms and conditions to the existing options.

6. Carphone Warehouse Share Schemes and TalkTalk Share Schemes

6.1 Effects of the Proposals on the Carphone Warehouse Share Schemes

A summary of the effects of the Proposals on options and awards granted pursuant to the Carphone Warehouse Share Schemes is set out in paragraph 5 of Part X of this document.

Subject to Carphone Warehouse Shareholder approval, TalkTalk and New Carphone Warehouse propose to adopt the Discretionary Share Schemes, the provisions of which are summarised below. Following Completion, the Discretionary Share Schemes will only be used to grant replacement options and awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares in exchange for options and awards over Carphone Warehouse Shares.

Subject to Carphone Warehouse Shareholder approval, TalkTalk and New Carphone Warehouse also propose to adopt the CPWG VES, the provisions of which are summarised below, in order to allow outstanding awards granted under the CPWG VES to survive the Demerger automatically, subject to adjustments in order to provide awards equivalent to the original awards. New Carphone Warehouse also intends to adopt the New Carphone Warehouse Share Scheme.

Subject to Carphone Warehouse Shareholder approval, TalkTalk also proposes to adopt the TTG VES, the provisions of which are summarised below, in order to allow outstanding awards granted under the TTG VES to survive the Demerger automatically, subject to adjustments in order to provide awards equivalent to the original awards.

In addition, subject to Carphone Warehouse Shareholder approval, the TalkTalk Group proposes to establish new TalkTalk Share Schemes, to operate from the date of Completion. The principal provisions of the new TalkTalk Share Scheme are summarised below.

220 6.2 Discretionary Share Schemes

(a) ESOS

The principal features of the ESOS that will apply to the grant of replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares in exchange for awards over Carphone Warehouse Shares are outlined below.

(i) Operation

The TalkTalk Board (or a duly authorised committee of the TalkTalk Board) will be responsible for administering the ESOS with regard to replacement awards granted over TalkTalk Shares.

The New Carphone Warehouse Board (or a duly authorised committee of the New Carphone Warehouse Board) will be responsible for administering the ESOS with regard to replacement awards granted over New Carphone Warehouse Ordinary Shares.

(ii) Eligibility

Any employee or executive director of a company in the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group who holds awards granted under the ESOS prior to the Share Scheme Deadline and who has chosen not to exercise his or her awards and has automatically exchanged his or her existing ESOS awards for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares.

(iii) Grant of awards

Existing awards are a subsisting right to acquire Carphone Warehouse Shares (a “Deferred Right”) upon the payment of such amount as the relevant board may determine (the “Deferred Right Price”).

The Deferred Right Price of the existing ESOS awards will be adjusted such that the replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares will have a broadly equivalent value to the existing awards. The exercise price will be determined by reference to the share price of TalkTalk Shares and New Carphone Warehouse Ordinary Shares over the 60 days following the date of TalkTalk Admission and New Carphone Warehouse Admission respectively.

The replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares will automatically be exchanged within such period as the relevant board may determine following the Share Scheme Deadline. However, at all times, the grant of awards will be subject to the terms of the Model Code for transactions in securities by directors.

Replacement awards may be granted over newly issued shares, treasury shares or shares held in an employee benefit trust.

(iv) Limits on the issue of shares

The ESOS is subject to the following overall limits on the number of New Carphone Warehouse Ordinary Shares and TalkTalk Shares which may be issued:

(A) in any 10 year period, not more than 10 per cent. of the issued ordinary share capital of New Carphone Warehouse and TalkTalk from time to time may be issued or issuable pursuant to rights acquired under the ESOS and any other employees’ share plans adopted by New Carphone Warehouse and TalkTalk; and

(B) in any 10 year period, not more than five per cent. of the issued ordinary share capital of New Carphone Warehouse and TalkTalk from time to time may be issued or issuable pursuant to rights acquired under the ESOS and under any discretionary share plan adopted by New Carphone Warehouse and TalkTalk.

For the purposes of these limits, options or other rights to acquire shares which lapse or have been released, do not count.

221 (v) Exercise of awards

The replacement Deferred Rights to acquire New Carphone Warehouse Ordinary Shares and TalkTalk Shares will normally be exercisable between three and 10 years following the date of grant of the original Deferred Right over Carphone Warehouse Shares.

(vi) Leavers

If a participant leaves the employment of the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group as the case may be for any reason, his replacement awards may only be exercised at the discretion of the relevant board and within such period as the relevant board may specify.

(vii) Change of control

In the event of a takeover, reconstruction or winding up of New Carphone Warehouse or TalkTalk, the replacement awards will become exercisable subject to certain time limits after which awards will lapse. Alternatively, awards shall be exchanged for new equivalent awards, where appropriate.

(viii) Rights attaching to shares

Shares allotted or transferred under the ESOS in respect of replacement awards will rank equally with all other New Carphone Warehouse Ordinary Shares or TalkTalk Shares, as appropriate, for the time being in issue (except for rights attaching to such shares by reference to a record date prior to the exercise of the award). New Carphone Warehouse or TalkTalk, as applicable, will apply for any new shares allotted under the ESOS to be admitted to listing on the Official List and to trading on the main market of the London Stock Exchange.

Alternatively, the relevant board may determine that, instead of paying the Deferred Right Price, an exercise of an award is satisfied by the number of shares representing the growth in value of a share between the Deferred Right Price and the market value of a share at exercise. The relevant board may also satisfy awards in cash, provided the participant receives the same economic value as would have been provided by an exercise of the replacement awards.

(ix) Variation of capital

In the event that there is a variation of share capital, demerger or other corporate event, the relevant board may make such adjustments as it considers appropriate to the number of shares subject to awards and the price payable on the exercise of awards.

(x) Alterations to the ESOS

The ESOS may at any time be altered by the relevant board in any respect. However, any alterations to the advantage of participants to the rules governing eligibility and the number of new shares available under the ESOS, terms of exercise and adjustment of awards must be approved in advance by the relevant shareholders in general meeting unless the alteration or addition is minor in nature and made to benefit the administration of the ESOS, to comply with the provisions of any existing or proposed legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group.

(b) Unapproved CSOP

The principal features of the Unapproved CSOP that will apply to the grant of replacement options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares in exchange for options over Carphone Warehouse Shares are outlined below.

(i) Operation

The TalkTalk Board (or a duly authorised committee of the TalkTalk Board) will be responsible for administering the Unapproved CSOP with regard to replacement options granted over TalkTalk Shares.

222 The New Carphone Warehouse Board (or a duly authorised committee of the New Carphone Warehouse Board) will be responsible for administering the Unapproved CSOP with regard to replacement options granted over New Carphone Warehouse Ordinary Shares. (ii) Eligibility Any employee or executive director of a company in the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group who holds options granted under the Unapproved CSOP prior to the Share Scheme Deadline and who has chosen not to exercise and has automatically exchanged his or her existing Unapproved CSOP options for replacement options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares. (iii) Grant of replacement options The replacement options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares may only be granted in the six months following the Share Scheme Deadline. However, at all times, the grant of options will be subject to the terms of the Model Code for transactions in securities by directors. Replacement options may be granted over newly issued shares, treasury shares or shares held in an employee share trust. No payment will be required for the grant of an option and options are not transferable (other than on the death of a participant). (iv) Option exercise price The exercise price of the existing Unapproved CSOP options will be adjusted such that the replacement options over New Carphone Warehouse Ordinary Shares and TalkTalk Shares will have a broadly equivalent value to the existing options. The exercise price will be determined by reference to the share price of TalkTalk Shares and New Carphone Warehouse Ordinary Shares over the 60 days following the date of TalkTalk Admission and New Carphone Warehouse Admission respectively. (v) Limits on the issue of shares No option may be granted under the Unapproved CSOP if it would cause the number of New Carphone Warehouse Ordinary Shares and TalkTalk Shares that may be issued or issuable pursuant to options and awards granted in the preceding 10 years, under any share scheme established by New Carphone Warehouse and TalkTalk, to exceed 10 per cent. of the issued ordinary share capital of New Carphone Warehouse and TalkTalk. If awards are to be satisfied by a transfer of existing shares, the percentage limit stated above will not apply. For the purposes of these limits, options or other rights to acquire shares which lapse or have been released, do not count. (vi) Exercise conditions The exercise of the replacement options granted to participants employed by the TalkTalk Group in exchange for the Unapproved CSOP options over Carphone Warehouse Shares granted in December 2008 will be conditional upon the participants meeting performance conditions related to the performance of the TalkTalk Group. The exercise of the replacement options granted to participants employed by the New Carphone Warehouse Group and the Best Buy Europe Group in exchange for the Unapproved CSOP options over Carphone Warehouse Shares granted in December 2008 will be conditional on meeting performance conditions related to the performance of the Best Buy Europe Group or the New Carphone Warehouse Group and the TalkTalk Group. (vii) Exercise of options Subject to the participant discharging any relevant tax liability and the satisfaction of the exercise conditions, an option will normally be exercisable between three and 10 years following the date of grant of the original Unapproved CSOP options over Carphone Warehouse Shares.

223 (viii) Leavers If a participant leaves the employment of the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group as the case may be for any reason, his or her replacement options may only be exercised at the discretion of the relevant board and within such period as the relevant board may specify. (ix) Change of control In the event of a takeover, reconstruction or winding up of New Carphone Warehouse or TalkTalk, the replacement options will become exercisable subject to certain time limits after which awards will lapse. Alternatively, options shall be exchanged for new equivalent options, where appropriate. (x) Rights attaching to shares Shares allotted or transferred under the Unapproved CSOP in respect of replacement options will rank equally with all other New Carphone Warehouse Ordinary Shares or TalkTalk Shares, as appropriate, for the time being in issue (except for rights attaching to such shares by reference to a record date prior to the exercise of the option). New Carphone Warehouse or TalkTalk, as applicable, will apply for any new shares allotted under the Unapproved CSOP to be admitted to listing on the Official List and to trading on the main market of the London Stock Exchange. Alternatively, the relevant board may determine that, instead of paying the exercise price, an exercise of an option is satisfied by the number of shares representing the growth in value of a share between the exercise price and the market value of a share at exercise. (xi) Variation of capital In the event that there is a variation of share capital, demerger or other corporate event, the relevant board may make such adjustments as it considers appropriate to the number of shares subject to options and the price payable on the exercise of options. (xii) Alterations to the Unapproved CSOP The Unapproved CSOP may at any time be altered by the relevant board in any respect. However, any alterations to the advantage of participants to the rules governing eligibility and the number of new shares available under the Unapproved CSOP, terms of exercise and adjustment of options must be approved in advance by the relevant shareholders in general meeting unless the alteration or addition is minor in nature and made to benefit the administration of the Unapproved CSOP, to comply with the provisions of any existing or proposed legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group. (c) Performance Plan The principal features of the Performance Plan that will apply to the grant of replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares in exchange for awards over Carphone Warehouse Shares are outlined below. (i) General Under the Performance Plan, executive directors and selected employees of the Carphone Warehouse Group were granted awards entitling them to a fixed number of Carphone Warehouse Shares at the end of specified periods and subject to performance conditions and continued employment. All subsisting awards were made in the form of a nil priced option. The participants are, in general, able to exercise their options at any time after vesting until the tenth anniversary of the date of grant. The TalkTalk Board (or a duly authorised committee of the TalkTalk Board) will be responsible for administering the Performance Plan with regard to replacement options granted over TalkTalk Shares.

224 The New Carphone Warehouse Board (or a duly authorised committee of the New Carphone Warehouse Board) will be responsible for administering the Performance Plan with regard to replacement options granted over New Carphone Warehouse Ordinary Shares. (ii) Eligibility Any employee or executive of a company in the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group who holds unvested awards granted under the Performance Plan prior to Completion or who holds vested awards and has not chosen to exercise his or her vested awards and has automatically exchanged his or her existing Performance Plan awards for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares. (iii) Grant of awards The replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares may only be granted in the two months (or such other period as the relevant board may determine) following the Share Scheme Deadline. However, at all times, the grant of awards will be subject to the terms of the Model Code for transactions in securities by directors. Replacement awards may be granted over newly issued shares, treasury shares or shares held in an employee share trust. Benefits under the Performance Plan are not pensionable. Awards granted under the Performance Plan may not be transferred (other than on death) without the prior written agreement of the relevant board and if transferred remain subject to all the main terms and conditions of the original awards. No consideration is required for the grant of the award. (iv) Plan limits No award may be granted under the Performance Plan if it would cause the number of New Carphone Warehouse Ordinary Shares and TalkTalk Shares that may be issued or issuable pursuant to options and awards granted in the preceding 10 years, under any share scheme established by New Carphone Warehouse and TalkTalk, to exceed 10 per cent. of the issued ordinary share capital of New Carphone Warehouse and TalkTalk. If awards are to be satisfied by a transfer of existing shares, the percentage limit stated above will not apply. For the purposes of these limits, options or other rights to acquire shares which lapse or have been released, do not count. (v) Vesting of awards Awards vest subject to the achievement of performance conditions set at the time of grant and extending over a period which will normally be at least three years. For awards made in 2006, the performance conditions for the executive directors and senior executives with head office responsibilities are: (A) the vesting criteria for 50 per cent. of the award is the Carphone Warehouse Group total shareholder return (“TSR”) performance relative to the constituents of the FTSE 100 index measured at June 2010. The vesting criteria for the remaining 50 per cent. of the award is the Carphone Warehouse Group TSR performance compared to the position at the date of grant measured at June 2010 and June 2011; and (B) subject to these performance criteria, shares vest in two equal tranches in June 2010 and June 2011. The Carphone Warehouse Remuneration Committee has determined that unvested awards granted under the Performance Plan in December 2006 will automatically be exchanged for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares. The Carphone Warehouse Remuneration Committee has determined that the replacement awards granted in exchange for unvested awards shall be subject to a performance period that will end on the same dates as the performance periods applicable to the old unvested awards and that the replacement awards shall be subject to such performance conditions as the

225 Carphone Warehouse Remuneration Committee determines are equivalent to the performance conditions that applied to the original awards. Unexercised vested awards will automatically be exchanged for replacement awards over New Carphone Warehouse Ordinary Shares and TalkTalk Shares, as set out above. (vi) Leavers If a participant leaves the employment of the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group as the case may be for any reason, his or her replacement awards may only be exercised at the discretion of the relevant board and within such period as the relevant board may specify. (vii) Change of control In the event of a takeover, reconstruction or winding up of New Carphone Warehouse or TalkTalk, the replacement options will become exercisable, subject to certain time limits, after which awards will lapse. Alternatively, options shall be exchanged for new equivalent options where appropriate. On a change of control, reconstruction, merger, demerger or winding-up of New Carphone Warehouse or TalkTalk, the relevant board, in its absolute discretion, will determine the extent to which awards will become exercisable, subject to certain time limits, after which awards will lapse. Alternatively, if appropriate, awards shall be released (to the extent that they have not lapsed) in consideration for new awards, which are equivalent to the original awards but over shares in the acquiring company or another company. (viii) Rights attaching to shares Shares allotted or transferred under the Performance Plan in respect of replacement awards will rank equally with all other New Carphone Warehouse Ordinary Shares or TalkTalk Shares, as appropriate, for the time being in issue (except for rights attaching to such shares by reference to a record date prior to the exercise of the option). New Carphone Warehouse or TalkTalk, as applicable, will apply for any new shares allotted under the Performance Plan to be admitted to listing on the Official List and to trading on the main market of the London Stock Exchange. (ix) Adjustments to awards In the event of any rights or capitalisation issue, subdivision, consolidation, demerger, reduction, other variation of share capital, or other exceptional event, the relevant board may make such adjustment to the number of shares subject to awards as it considers appropriate. (x) Alterations to the Performance Plan The Performance Plan may at any time be altered by the relevant board in any respect. However, any alterations to the advantage of participants to the rules governing eligibility and the number of new shares available under the Performance Plan, terms of exercise and adjustment of options must be approved in advance by the relevant shareholders in general meeting unless the alteration or addition is minor in nature and made to benefit the administration of the Performance Plan, to comply with the provisions of any existing or proposed legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or the New Carphone Warehouse Group, the Best Buy Europe Group or the TalkTalk Group.

6.3 Value enhancement schemes (a) CPWG VES The principal features of the CPWG VES are outlined below. (i) General The CPWG VES is designed to enable participants to share in the incremental value of the Carphone Warehouse’s two main operating businesses, being the TalkTalk Group businesses and the Best Buy Europe Group businesses (each being a “Relevant Business”), in excess of an opening valuation of each Relevant Business, as determined by the Carphone Warehouse

226 Remuneration Committee with the first opening valuation being that at the start of the financial year ending 31 March 2010 as increased or decreased from time to time (“opening valuation”). Each award entitles a participant to hold a fixed number of a separate class of shares in subsidiary companies that hold Carphone Warehouse’s interests in each of the Relevant Businesses (“Participation Shares”). The TalkTalk Board (or a duly authorised committee of the TalkTalk Board) will be responsible for administering the CPWG VES with regard to Participation Shares in the TalkTalk Group businesses. The New Carphone Warehouse Board (or a duly authorised committee of the New Carphone Warehouse Board) will be responsible for administering the CPWG VES with regard to Participation Shares in the Best Buy Europe Group businesses. When the Participation Shares in the TalkTalk Group businesses vest they may be purchased by TalkTalk by the issue of TalkTalk Shares calculated by reference to the opening valuation and subject to the satisfaction of performance conditions and/ or on specified events as determined by the TalkTalk Remuneration Committee, and continued employment. When the Participation Shares in the Best Buy Europe Group businesses vest they may be purchased by New Carphone Warehouse by the issue of New Carphone Warehouse Ordinary Shares calculated by reference to the opening valuation and subject to the satisfaction of performance conditions and/or on specified events, as determined by the New Carphone Warehouse Remuneration Committee, and continued employment. The Participation Shares are initially acquired by participants at market value and such participants are offered a loan from either the TalkTalk Group or the New Carphone Warehouse Group at a commercial rate of interest in order to fund such purchase. When the awards vest, the Participation Shares will have a value equal to the corresponding percentage they represent of the incremental value (if any) in excess of the opening valuation of each Relevant Business at that time. Any loan made to the participants to acquire Participation Shares will be required to be repaid at that time. New Carphone Warehouse will issue new ordinary shares or procure the transfer of existing ordinary shares for the purpose of purchasing any Participation Shares in the Best Buy Europe Group businesses. TalkTalk will issue new ordinary shares or procure the transfer of existing ordinary shares for the purpose of purchasing any Participation Shares in the TalkTalk Group businesses. (ii) Eligibility In respect of awards of Participation Shares in the TalkTalk Group businesses: • outstanding awards granted to any employee or executive director of the Carphone Warehouse Group prior to the Share Scheme Deadline will survive the Demerger subject to adjustments in order to provide awards equivalent to the original awards; and • new awards may be granted to any executive director or employee of the TalkTalk Group invited to participate in the CPWG VES. In respect of awards of Participation Shares in the Best Buy Europe Group businesses: • outstanding awards granted to any employee or executive director of the Carphone Warehouse Group prior to the Share Scheme Deadline will survive the Demerger subject to adjustments in order to provide awards equivalent to the original awards; and • new awards may be granted to any executive director or employee of the New Carphone Warehouse Group or the Best Buy Europe Group invited to participate in the CPWG VES. (iii) Grant of awards Awards under the CPWG VES may only be granted within the period of 42 days following: • in respect of awards of Participation Shares in the TalkTalk Group businesses, the announcement by TalkTalk of its preliminary or interim results or the results for any other financial period;

227 • in respect of awards of Participation Shares in the Best Buy Europe Group businesses, the announcement by New Carphone Warehouse Group of its preliminary or interim results or the results for any other financial period; • the commencement of any eligible employee’s employment with a participating company; and • any day on which the relevant remuneration committee determines that exceptional circumstances exist which justify the grant of awards. No awards may be made more than 10 years after the original adoption of the CPWG VES by Carphone Warehouse. Benefits under the CPWG VES will not be pensionable. Awards may not be transferred (other than on death) without the prior written agreement of the relevant remuneration committee and, if transferred, will remain subject to the main conditions of the original award unless the relevant remuneration committee determines otherwise. No consideration other than participants paying market value for the Participation Shares will be required for the grant of an award. (iv) Level of award The level of award granted to each individual will be determined by the relevant remuneration committee, as advised by external advisers, within generally accepted market parameters, recognising different level of awards for performance, including exceptional performance. (v) Vesting of awards Awards will vest, subject to achievement of performance conditions set at the time of grant, with vesting extending in different parts over a period of time that will normally amount to at least three years in total unless early vesting provisions apply. The relevant remuneration committee will determine an opening valuation of each Relevant Business. It will also decide the regular intervals at which the performance conditions will be measured and the percentage of awards which should vest on such dates. The opening valuation for the first awards granted prior to the Demerger in respect of the Best Buy Europe Group businesses (as a whole) will be the valuation approved by the Carphone Warehouse Remuneration Committee. The opening valuation for the first awards in respect of the TalkTalk Group businesses granted prior to the Demerger (as a whole) will be the amount of invested capital as at the start of Carphone Warehouse’s financial year ending 31 March 2010 as increased or decreased from time to time. The performance conditions will be based on the incremental value of each Relevant Business in excess of each opening valuation and beyond an annual rate of return of seven per cent. for each Relevant Business on the amount of invested capital from time to time in each Relevant Business and which will be charged from the opening valuation. In respect of awards of Participation Shares in the TalkTalk Group businesses the performance conditions will also be underpinned by a minimum percentage of total shareholder return for the TalkTalk Shareholders at a compound rate of five per cent. per annum. In respect of awards of Participation Shares in the Best Buy Europe Group businesses the performance conditions will also be underpinned by a minimum percentage of total shareholder return for the New Carphone Warehouse Shareholders at a compound rate of five per cent. per annum. (vi) Early vesting provisions The Demerger will not cause participants to be treated as leavers in respect of outstanding awards granted prior to the Share Scheme Deadline until they actually cease to be employed by the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group as the case may be. An unvested award will normally lapse if the participant ceases to be an employee of the New Carphone Warehouse Group, the TalkTalk Group or the Best Buy Europe Group as the case may be. However, if a participant ceases to be employed in certain circumstances (for

228 example as a result of permanent incapacity, redundancy, a termination of employment without cause or unfair or wrongful dismissal or retirement or if the relevant remuneration committee determines), the rules allow the awards to continue in accordance with the vesting provisions. In such circumstances and at the request of a participant, the relevant remuneration committee may also determine, at its absolute discretion, the extent to which awards may vest early, having regard to the length of time the awards have been held and the extent to which the performance targets have been satisfied. If an award lapses when there is no early vesting then the participant will, unless the relevant remuneration committee decides otherwise, be required to transfer back all of his Participation Shares in the Best Buy Europe Group businesses to New Carphone Warehouse and all of his Participation Shares in the TalkTalk Group businesses to TalkTalk at the lower of market value or the amount of any outstanding loan (and any accrued interest) made to the participant or the amount the participant paid for the Participation Shares if no loan was made. If such market value is less than the amount of the outstanding loan (and any accrued interest) then the participant may be required to repay 20 per cent. of the remaining part of the loan subject to the discretion of the relevant remuneration committee. In respect of awards of Participation Shares in the TalkTalk Group businesses, on a change of control of either TalkTalk or of each Relevant Business an award may vest early if the relevant performance conditions have been achieved. If there is no vesting then all awards will survive. In respect of awards of Participation Shares in the Best Buy Europe Group businesses, on a change of control of either New Carphone Warehouse or of each Relevant Business an award may vest early if the relevant performance conditions have been achieved. If there is no vesting then all awards will survive. On a demerger of each Relevant Business, the awards will survive subject to any adjustments to reflect any reorganisation of share capital of any of the Relevant Businesses, New Carphone Warehouse or TalkTalk or any other material terms of the CPWG VES in order to provide awards equivalent to the original awards. On an initial public offering or sale of each Relevant Business, an award may vest if the relevant performance conditions have been achieved. If there is no vesting then all awards will survive, subject to any necessary adjustments to achieve equivalence to the original awards. On any other form of reconstruction or winding up of New Carphone Warehouse or TalkTalk, the relevant remuneration committee, at its absolute discretion, will determine the extent to which an award may vest, having regard to the length of time it has been held and the extent to which the performance conditions have been satisfied. Alternatively, if appropriate, awards may be released (to the extent not lapsed) in consideration for new awards which are equivalent to the original awards but over shares in the new companies. All participants will be entitled to participate in any return of capital to shareholders other than normal interim and final dividends. (vii) Plan limits On vesting, the purchase of Participation Shares in the TalkTalk Group businesses by TalkTalk in return for TalkTalk Shares may be satisfied by the issue of new ordinary shares or the transfer of existing ordinary shares. On vesting, the purchase of Participation Shares in the Best Buy Europe Group businesses by New Carphone Warehouse in return for New Carphone Warehouse Ordinary Shares may be satisfied by the issue of new ordinary shares or the transfer of existing ordinary shares. No award may be granted under the CPWG VES if it would cause the number of shares that may be issued or issuable pursuant to options and awards granted in the preceding 10 years under any share scheme established by New Carphone Warehouse or TalkTalk, to exceed 10 per cent. of the issued ordinary share capital of either company. If the awards are to be satisfied out of existing shares, the percentage limit stated above will not apply.

229 Alternatively, awards may also be satisfied by the transfer of treasury shares in which case the percentage limits set out in the current Association of British Insurers guidelines will apply.

(viii) Adjustments to awards

In the event of any rights issue or capitalisation, subdivision, consolidation or other variation of share capital or other exceptional event, the relevant remuneration committee may make such adjustments to the awards, as it considers appropriate.

(ix) Rights attaching to shares

The Participation Shares will carry no voting rights or rights to interim and annual dividends and their value on sale or liquidation is based on the satisfaction of the performance conditions. Generally, the Participation Shares do not offer any advantage over the rights and/or benefits attaching to New Carphone Warehouse Ordinary Shares or TalkTalk Shares. The relevant remuneration committee will have the flexibility at grant to determine whether a participant will be entitled to receive any other rights in connection with the Participation Shares.

Ordinary shares in New Carphone Warehouse and TalkTalk used for the purpose of the CPWG VES will rank equally alongside the other ordinary shares in each company in issue. Each company will apply to the UK Listing Authority and the London Stock Exchange for any new ordinary shares to be listed and admitted to trading respectively.

(x) Alterations to the CPWG VES

The relevant remuneration committee cannot alter the provisions of the CPWG VES to the material advantage of current participants or eligible participants without the prior approval of the relevant shareholders in general meeting unless such alterations are minor and are to benefit the administration of the CPWG VES, to take account of changes in legislation or to obtain or maintain a favourable taxation, exchange control or regulatory treatment of New Carphone Warehouse, TalkTalk or a Relevant Business, current participant or eligible participant or where failing to make such alteration would result in a current participant or eligible participant being materially disadvantaged, given the purpose for the introduction of the CPWG VES.

The relevant remuneration committee may also establish separate but commercially similar plans or appendices to the CPWG VES for the purpose of granting awards to eligible participants who are employed by non-UK companies or who are or may become primarily liable to tax outside the United Kingdom.

(xi) Termination

The CPWG VES will terminate on the tenth anniversary of its approval by Carphone Warehouse Shareholders or such earlier time as the relevant remuneration committee may determine but the rights of existing participants will not be affected. Once terminated, no further awards will be granted. (b) TTG VES The principal features of the TTG VES are outlined below. (i) General The TTG VES is designed to enable participants to share in the incremental value of the TalkTalk Group businesses (the “Relevant Business”), in excess of an opening valuation of the Relevant Business, as determined by the TalkTalk Remuneration Committee, with the first opening valuation being that at the start of the financial year ending 31 March 2010 as increased or decreased from time to time (“opening valuation”). Each award will entitle a participant either to purchase a fixed number of a separate class of shares or be granted nil priced or par value options (“options”) to acquire a separate class of shares in each case in the subsidiary company or companies that carry on the Relevant Business (“Participation Shares”).

230 The TalkTalk Board (or a duly authorised committee of the TalkTalk Board) is responsible for administering the TTG VES with regard to Participation Shares in the TalkTalk Group businesses. When the performance conditions have been satisfied and the awards vest and/or on specified events, as determined by the TalkTalk Remuneration Committee and, subject to continued employment, the Participation Shares may be purchased by TalkTalk by the issue of TalkTalk Shares or the options may be exercised and the resulting Participation Shares may be purchased by TalkTalk by the issue of TalkTalk Shares. Any Participation Shares that are initially purchased by participants will be acquired at market value and such participants will be offered a loan from TalkTalk or the Relevant Business at a commercial rate of interest in order to fund such purchase. When the awards vest, the Participant Shares will have a value equal to the corresponding percentage they represent of the incremental value (if any) in excess of the opening valuation of the Relevant Business at that time and may then be purchased by TalkTalk. Any loan made to the participants to acquire Participation Shares will be required to be repaid at that time. TalkTalk will issue new TalkTalk Shares or procure the transfer of existing TalkTalk Shares for the purpose of purchasing any Participation Shares. The TalkTalk Remuneration Committee shall also have the option, at its discretion, to replace the above scheme in whole or part by the introduction of an approved company share option plan (“COSOP”) provided that any replacement awards under such COSOP shall be equivalent to the original awards, particularly in respect of eligibility, vesting and performance conditions, as summarised below. (ii) Eligibility Outstanding awards granted to any employee or executive director of the Carphone Warehouse Group, prior to the Share Scheme Deadline will survive the Demerger subject to adjustments in order to provide awards equivalent to the original awards. New awards may be granted to any executive director or employee of the Relevant Business invited to participate in the TTG VES. However, it is intended that the main participants will be directors and senior executives and employees of the Relevant Business. (iii) Grant of awards Awards under the TTG VES may only be granted within the period of 42 days following: • the announcement by TalkTalk of its preliminary or interim results or the results for any other financial period; • the commencement of any eligible employee’s employment with a participating company; and • any day on which the TalkTalk Remuneration Committee determines that exceptional circumstances exist which justify the grant of awards. No awards may be made more than 10 years after the original adoption of the TTG VES by Carphone Warehouse. Benefits under the TTG VES will not be pensionable. Awards may not be transferred (other than on death) without the prior written agreement of the TalkTalk Remuneration Committee and, if transferred, will remain subject to the main conditions of the original award unless the TalkTalk Remuneration Committee determines otherwise. No consideration other than participants paying market value for the Participation Shares will be required for the grant of an award.

(iv) Level of award

The level of award granted to each individual will be determined by the TalkTalk Remuneration Committee, as advised by the external advisers, to the TalkTalk Remuneration Committee within generally accepted market parameters recognising different level of awards for performance including exceptional performance.

231 (v) Vesting of awards Awards will vest subject to achievement of performance conditions set at the time of grant, with vesting extending in different parts over a period of time that will normally amount to at least three years in total, unless the early vesting provisions apply. The Carphone Warehouse Remuneration Committee has determined an opening valuation of the Relevant Business. It has also decided the regular intervals at which the performance conditions will be measured and the percentage (if any) of awards which should vest on such dates. The opening valuation for the first awards will be the amount of capital invested in the Relevant Business as at the start of Carphone Warehouse’s financial year ending 31 March 2010 as increased or decreased from time to time. The performance conditions will be based on the incremental value of the Relevant Business in excess of the opening valuation and beyond an annual rate of return of seven per cent. on the amount of invested capital from time to time in the Relevant Business and which will be charged from the opening valuation. (vi) Early vesting provisions The Demerger will not cause participants to be treated as leavers in respect of outstanding awards granted prior to the Share Scheme Deadline until they actually cease to be employed by the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group as the case may be. An unvested award will normally lapse if the participant ceases to be an employee of the Relevant Business, the TalkTalk Group, the New Carphone Warehouse Group or the Best Buy Europe Group as the case may be. However, if a participant ceases to be employed in certain circumstances (for example as a result of permanent incapacity or if the TalkTalk Remuneration Committee determines) the rules allow the awards to continue in accordance with the vesting provisions. In such circumstances and at the request of a participant, the TalkTalk Remuneration Committee may also determine, at its absolute discretion, the extent to which awards may vest early, having regard to the length of time the awards have been held and the extent to which the performance targets have been satisfied. If an award lapses when there is no early vesting then the participant will, unless the TalkTalk Remuneration Committee decides otherwise, be required to transfer back any Participation Shares which he or she holds to TalkTalk at the lower of market value or the amount of any outstanding loan (and any accrued interest) made to the participant or the amount the participant paid for the Participation Shares if no loan was made. If such market value is less than the amount of the outstanding loan (and any accrued interest) then the participant may be required to repay 20 per cent. of the remaining part of the loan, subject to the discretion of the TalkTalk Remuneration Committee. Any options would be surrendered for no value. On a change of control of the Relevant Business, an award may vest early if the relevant performance conditions have been achieved. If there is no vesting then all awards will survive. On a demerger of the Relevant Business, the awards will survive, subject to any adjustments to reflect any reorganisation of share capital of the Relevant Business or TalkTalk or any other material terms of the TTG VES in order to provide awards equivalent to the original awards. On an initial public offering or sale of the Relevant Business, an award may vest if the relevant performance conditions have been achieved. If there is no vesting then all awards will survive, subject to any necessary adjustments to achieve equivalence to the original awards. All participants will be entitled to participate in any return of capital of the Relevant Business to TalkTalk Shareholders other than normal interim and final dividends. On any other form of reconstruction or winding up of the Relevant Business, the TalkTalk Remuneration Committee, at its absolute discretion, will determine the extent to which an award may vest, having regard to the length of time it has been held and the extent to which the performance conditions have been satisfied. Alternatively, if appropriate, awards may be released (to the extent not lapsed) in consideration for new awards which are equivalent to the original awards but over shares in the new companies.

232 (vii) Plan limits On vesting, the purchase of any Participation Shares by TalkTalk in return for TalkTalk Shares, may be satisfied by the issue of new TalkTalk Shares or the transfer of existing TalkTalk Shares. No award may be granted under the TTG VES if it would cause the number of shares that may be issued or issuable pursuant to options and awards granted in the preceding 10 years under any share scheme established by TalkTalk to exceed 10 per cent. of the issued ordinary share capital of TalkTalk. If the awards are to be satisfied out of existing shares, the percentage limit stated above will not apply. Alternatively, awards may also be satisfied by the transfer of treasury shares in which case the percentage limits set out in the current Association of British Insurers guidelines will apply. (viii) Adjustments to awards In the event of any rights issue or capitalisation, subdivision, consolidation or other variation of share capital or other exceptional event, the TalkTalk Remuneration Committee may make such adjustments to the awards as it considers appropriate. (ix) Rights attaching to shares The Participation Shares will carry no voting rights or rights to interim and annual dividends and their value on sale or liquidation is based on the satisfaction of the performance conditions. Generally, the Participation Shares do not offer any advantage over the rights and/or benefits attaching to TalkTalk Shares. The TalkTalk Remuneration Committee will have the flexibility at grant to determine whether a participant will be entitled to receive any other rights in connection with the Participation Shares. TalkTalk Shares used for the purpose of the TTG VES will rank equally alongside the other TalkTalk Shares in issue. TalkTalk will apply to the UK Listing Authority and the London Stock Exchange for any new TalkTalk Shares to be listed and admitted to trading. (x) Alterations to the TTG VES The TalkTalk Remuneration Committee cannot alter the provisions of the TTG VES to the material advantage of current participants or eligible participants without the prior approval of TalkTalk in general meeting unless such alterations are minor and are to benefit the administration of the TTG VES, to take account of changes in legislation or to obtain or maintain a favourable taxation, exchange control or regulatory treatment of TalkTalk or the Relevant Business, current participant or eligible participant or where failing to make such alteration would result in a current participant or eligible participant being materially disadvantaged, given the purpose for the introduction of the TTG VES. The TalkTalk Remuneration Committee may also establish separate but commercially similar plans or appendices to the TTG VES for the purpose of granting awards to eligible participants who are employed by non-UK companies or who are or may become primarily liable to tax outside the United Kingdom. (xi) Termination The TTG VES will terminate on the tenth anniversary of its approval by Carphone Warehouse Shareholders or such earlier time as the TalkTalk Remuneration Committee may determine but the rights of existing participants will not be affected. Once terminated, no further awards will be granted.

6.4 New TalkTalk Share Schemes (a) TalkTalk SAYE Scheme The principal features of the TalkTalk SAYE Scheme are outlined below. (i) General The TalkTalk SAYE Scheme is a Save-As-You-Earn share option scheme, designed to be approved by HMRC in accordance with the SAYE Code of the Income Tax (Earnings & Pensions) Act 2003.

233 (ii) Administration The TalkTalk SAYE Scheme shall be administered by the TalkTalk Board or a duly authorised committee of the TalkTalk Board. The TalkTalk Board has the power to make or vary the regulations for the administration and operation of the TalkTalk SAYE Scheme as long as these are consistent with the rules of the TalkTalk SAYE Scheme. The decision of the TalkTalk Board as to any matter, question or dispute arising from the TalkTalk SAYE Scheme shall be final and conclusive and binding on TalkTalk and participants. (iii) Eligibility All UK executive directors and employees of TalkTalk and participating companies within the TalkTalk Group will be eligible to participate in the TalkTalk SAYE Scheme, so long as they have been employed for a qualifying period (which will be determined by the TalkTalk Board and will not be a period longer than five years). (iv) The savings contract To participate in the TalkTalk SAYE Scheme, an eligible employee must enter into a Save- As-You-Earn contract (also known as a savings contract) with an appropriate savings carrier approved by TalkTalk, thereby agreeing to make monthly contributions of between £5 and £250 for a specified period of three, five or seven years. The TalkTalk Board has discretion to determine which of the savings contracts will be available in respect of any invitation to apply for options. A bonus is payable after the expiration of the period. Currently, the bonus payable after three years is equal to 0.3 times the monthly contributions, with a bonus of 2.2 and 5.2 times the monthly contributions for five and seven year contracts respectively. Applications to participate in the TalkTalk SAYE Scheme may be scaled down by the TalkTalk Board, in accordance with procedures laid down in the rules of the TalkTalk SAYE Scheme, if applications exceed the number of TalkTalk Shares available for the grant of options. Such scaling down may include reducing the level of bonuses, reducing monthly contributions above a certain level pro rata, or reducing the length of savings contracts. (v) Option price Options granted to acquire TalkTalk Shares under the TalkTalk SAYE Scheme will have an option price determined by the TalkTalk Board, which will be not less than the higher of: (A) 80 per cent. of the middle market quotation for such TalkTalk Shares as derived from the Daily Official List for the dealing day (or, if so determined by the TalkTalk Board the average of such quotations for the three dealing days) immediately preceding the date on which invitations to apply for options are issued to employees; and (B) where TalkTalk Shares are to be subscribed, their nominal value. (vi) Grant of options The number of TalkTalk Shares over which options may be granted must, as nearly as possible, be equal to, but not in excess of, that number of TalkTalk Shares which may be purchased out of the repayment proceeds (including, where the TalkTalk Board so allows, any bonus) of the relevant savings contract, at the option price. Options may be granted within the 42 days following the date of TalkTalk Admission. Thereafter, options may normally only be granted in the 42 days following the announcement by TalkTalk of its results for any period, or following a change in the legislation pursuant to which the TalkTalk SAYE Scheme is approved by HMRC or where there are circumstances considered by the TalkTalk Remuneration Committee to be exceptional. No options may be granted later than 10 years after the approval of the TalkTalk SAYE Scheme by TalkTalk Shareholders. No payment will be required for the grant of an option. Options are not transferable (other than to a personal representative on the death of a participant). Options will not be pensionable.

234 (vii) Limits on the issue of shares In any 10 year period, not more than 10 per cent. of the issued ordinary share capital of TalkTalk from time to time may be issued or issuable pursuant to rights acquired under the TalkTalk SAYE Scheme and any other employees’ share scheme adopted by TalkTalk. For the purposes of this limit, options or other rights to acquire shares which lapse or have been released do not count. However, shares subscribed for by the trustees of an employee benefit trust to satisfy rights granted under any employees’ share scheme adopted by TalkTalk and shares transferred from treasury do count towards this limit. (viii) Exercise of options Options will only normally be exercisable for the period of six months commencing on the third, fifth or seventh anniversary (as the case may be) of the starting date of the related savings contract and, if not exercised by the end of that period, the option will lapse. Earlier exercise may, however, be permitted in specified circumstances, including termination of employment as a result of death, injury, disability, redundancy, retirement or the sale of the subsidiary or business for which the participant works or in the event of a takeover of TalkTalk. (ix) Rights attaching to TalkTalk Shares All TalkTalk Shares allotted or transferred under the TalkTalk SAYE Scheme will rank equally with all other TalkTalk Shares for the time being in issue (save as regards any rights attaching to such shares by reference to a record date prior to the date of allotment or transfer) and TalkTalk will apply for any new TalkTalk Shares issued under the TalkTalk SAYE Scheme to be admitted to listing on the Official List and to trading on the main market of the London Stock Exchange. (x) Takeover of TalkTalk In the event of a takeover, reconstruction or winding up of TalkTalk, options may be exercised within six months of the change of control. Alternatively, options may be exchanged for new equivalent options, where appropriate. (xi) Variation of capital In the event of any rights or capitalisation issue, subdivision, consolidation, reduction or other variation of share capital, the TalkTalk Board may make (subject to receiving prior approval of HMRC) such adjustments as it considers appropriate to the number of TalkTalk Shares under option and/or the price payable on the exercise of options. (xii) Alterations to the TalkTalk SAYE Scheme The TalkTalk Board may alter the provisions of the TalkTalk SAYE Scheme in any respect (subject to the approval of HMRC) provided that the prior approval of TalkTalk Shareholders in general meeting is obtained for alterations or additions to the advantage of participants to provisions relating to eligibility, limits on participation and the number of new shares available under the TalkTalk SAYE Scheme, terms of exercise and adjustment of options. The requirement to obtain the prior approval of TalkTalk Shareholders will not, however, apply in relation to any alteration or addition which is minor in nature and made to benefit the administration of the TalkTalk SAYE Scheme, to comply with the provisions of any existing or proposed legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for TalkTalk, any of its subsidiaries or for participants. (xiii) Overseas employees The TalkTalk Board may grant options to overseas employees on different terms so as to take account of relevant overseas tax, securities or exchange control laws provided that the options are not overall more favourable than the terms of options granted to other employees. (b) TalkTalk DSOP The principal features of the TalkTalk DSOP are outlined below.

235 (i) General It is proposed to introduce the TalkTalk DSOP as an alternative new reward mechanism for employees of the TalkTalk Group businesses who will not participate in the TTG VES. It is the intention of the TalkTalk Remuneration Committee that, generally, in any one year, participants may only receive an award under one of such schemes. The TalkTalk DSOP will be divided into two parts: the main plan rules will be unapproved for UK tax purposes and will have a greater degree of flexibility than options granted under the addendum, entitled the “UK Approved Addendum”, which has been designed to qualify for approval by HMRC under the CSOP Code of the Income Tax (Earnings & Pensions) Act 2003. The UK Approved Addendum is intended to enable options to be granted to UK taxpayers in a tax efficient manner. The terms of options granted under the UK Approved Addendum are broadly identical to the terms of options granted under the main part of the TalkTalk DSOP, except to the extent necessary to obtain or maintain HMRC approval or as set out below. (ii) Operation The TalkTalk Board (or a duly authorised committee of the TalkTalk Board, which with regard to executive directors shall be the TalkTalk Remuneration Committee) is responsible for granting options and administering the TalkTalk DSOP. The TalkTalk DSOP is discretionary and will only operate in those years that the TalkTalk Board determines. Currently, it is expected that options will be granted twice per year. (iii) Eligibility Any employee or executive director of a company in the TalkTalk Group will be eligible to participate in the TalkTalk DSOP at the discretion of the TalkTalk Board. In order to be eligible for options granted under the UK Approved Addendum, executive directors will additionally have to work a minimum of 25 hours per week for the TalkTalk Group. (iv) Grant of options Options may be granted within the 42 days following TalkTalk Admission. Thereafter, options may normally only be granted in the 42 days following the announcement by TalkTalk of its results for any period, or following a change in the legislation relating to share option plans or where there are circumstances considered by the TalkTalk Board to be exceptional. Options may also be granted outside these periods in connection with the commencement of an eligible employee’s employment if this is appropriate. However, at all times, the grant of options will be subject to the terms of the Model Code for transactions in securities by directors. No options may be granted later than 10 years after the approval of the TalkTalk DSOP by TalkTalk Shareholders. Options may be granted over newly issued shares, treasury shares and shares purchased in the market in conjunction with or otherwise held by an employee benefit trust. The TalkTalk Board may determine that the number of shares subject to an option shall, at exercise, increase by such number of shares as could have been acquired by reinvesting the dividends which would otherwise have been received on those shares during the vesting period. No payment will be required for the grant of an option. Options are not transferable (other than on the death of a participant) without the consent of the TalkTalk Board. Options will not be pensionable. (v) Individual limits No employee may be granted options under the TalkTalk DSOP in any financial year over shares worth more than 200 per cent. of base salary, unless the TalkTalk Board determines that exceptional circumstances exist which justify exceeding this limit, in which case options shall not exceed 300 per cent. of base salary.

236 In applying this limit, no account will be taken of shares representing notional reinvestment of dividends on options or shares which have been awarded to ensure that a participant is not financially disadvantaged if he agrees to satisfy the TalkTalk Group’s social security liability in relation to his option. Options granted under the UK Approved Addendum are subject to a statutory limit such that no employee may at any one time hold subsisting options over shares worth more than £30,000 (calculated by reference to the market value of shares at the relevant date of grant) granted under the UK Approved Addendum or any other HMRC approved company share option plan established by a TalkTalk Group company or a company associated with a TalkTalk Group company. (vi) Option exercise price Options may be nil cost options if the TalkTalk Board so determines. If, however, an exercise price is payable, the price per share on the exercise of an option will not be less than the higher of: (A) where TalkTalk Shares are listed on a recognised stock exchange, the closing middle market quotation for a share for the dealing day immediately preceding the date the option is to be granted or, if the TalkTalk Board so determines, the average of such quotations for the three dealing days (or such other number of dealing days as the TalkTalk Board decides) immediately preceding the date the option is to be granted; or (B) where TalkTalk Shares are not so listed, a price agreed in advance with HMRC to be their market value; or (C) where shares are to be subscribed, their nominal value. (vii) Limits on the issue of shares The TalkTalk DSOP is subject to the following overall limits on the number of new TalkTalk Shares which may be subscribed for: in any 10 year period, not more than 10 per cent. of the issued ordinary share capital of TalkTalk from time to time may be issued or issuable pursuant to rights acquired under the TalkTalk DSOP and any other employees’ share plans adopted by TalkTalk. For the purposes of these limits, options or other rights to acquire shares which lapse or have been released, or options or awards which were granted prior to TalkTalk Admission do not count. However, shares subscribed for by the trustees of an employee benefit trust to satisfy rights granted under any employees’ share plans adopted by TalkTalk and shares transferred from treasury do count towards these limits. Where, instead of paying the exercise price, an option exercise is satisfied by the number of shares representing the growth in value of a share between the exercise price and the market value at the date of exercise, only the number of shares actually issued shall count towards these limits. (viii) Exercise of options Subject to the participant discharging any relevant tax liability, an option will normally be exercisable between the third and tenth anniversary of its grant, provided that any specified performance condition has been satisfied. (ix) Performance conditions It is intended that, for the initial grant of options under the TalkTalk DSOP to employees, the exercise of the options will be subject to continuing employment and may also be subject to performance conditions. If the TalkTalk Remuneration Committee considers it to be appropriate to extend participation in the TalkTalk DSOP to the TalkTalk Directors, options granted to the TalkTalk Directors would be subject to performance conditions. Prior to granting any options to the TalkTalk Directors, TalkTalk would consult with major shareholders as to the form of the performance measures to be used and would fully disclose the performance measures adopted in the remuneration report of the TalkTalk Directors.

237 The TalkTalk Board will regularly review any performance conditions for future option grants to ensure they are appropriate for TalkTalk and the prevailing recruitment market. The conditions may be varied in certain circumstances following the grant of an option so as to achieve their original purpose, taking account of the interests of TalkTalk Shareholders, but not so as to make their achievement any more or less difficult to satisfy. (x) Leavers If a participant leaves the employment of the TalkTalk Group by reason of death, injury, disability, redundancy, retirement or the sale of the business for which he works to a third party, options that have already vested on the date of cessation of employment can be exercised, in the event of death, within 12 months, and in all other circumstances, within six months following the date of cessation of employment. If a participant leaves the employment of the TalkTalk Group by reason of death, injury, disability, redundancy, retirement or the sale of the business for which he works to a third party, a proportion of any unvested options will vest and become exercisable, depending on the time which has elapsed between the grant of that option and the date of leaving and the extent to which performance conditions have been satisfied. Alternatively, the TalkTalk Board may determine that any unvested options will vest and become exercisable on the original vesting date, depending on the time which has elapsed between the grant of that award and the date of leaving and the extent to which performance conditions have been satisfied at the vesting date. In determining the proportion of an award which vests, in both cases, the TalkTalk Board may take into account such other factors, including the performance of TalkTalk and the conduct of the participant, as it deems relevant. Any options that have so vested can be exercised, in the event of death, within a period of 12 months and, in all other circumstances, within six months from the day on which the options vest. If a participant ceases to be an employee of the TalkTalk Group for any other reason, his or her option will normally lapse unless and to the extent the TalkTalk Board decides otherwise. (xi) Change of control In the event of a takeover, reconstruction or winding up of TalkTalk, a proportion of an option will vest and become exercisable depending on the time which has elapsed between the grant of that option and the change of control and the extent to which any performance conditions have been satisfied at that date. Again, in determining the proportion of an option which vests, the TalkTalk Board may take into account such other factors, including the performance of TalkTalk and the conduct of the participant, as it deems relevant. Alternatively, options may (or, if the TalkTalk Board so determines, shall) be exchanged for new equivalent options, where appropriate. In this case, any performance conditions will continue unless the TalkTalk Board determines otherwise. (xii) Rights attaching to shares Shares allotted or transferred under the TalkTalk DSOP will rank equally with all of the other TalkTalk Shares for the time being in issue (except for rights attaching to such shares by reference to a record date prior to the exercise of the option). TalkTalk will apply for any new TalkTalk Shares allotted under the TalkTalk DSOP to be admitted to listing on the Official List and to trading on the main market of the London Stock Exchange. The TalkTalk Board may also satisfy options in cash provided the participant receives the same economic value as would have been provided by an option over shares. Alternatively, the TalkTalk Board may determine that, instead of paying any exercise price payable, an exercise of an option is satisfied by the number of shares representing the growth in value of a share between the exercise price and the market value of a share at exercise. (xiii) Variation of capital In the event of any variation of share capital, demerger or other corporate event, the TalkTalk Board may make such adjustments as it considers appropriate to the number of shares subject to options and the price payable on the exercise of options. In the case of options granted

238 under the UK Approved Addendum, such adjustments will only be made to the extent permitted by HMRC. (xiv) Alterations to the TalkTalk DSOP The TalkTalk DSOP may at any time be altered by the TalkTalk Board in any respect. However, any alterations to the advantage of participants to the rules governing eligibility, limits on participation and the number of new shares available under the TalkTalk DSOP, terms of exercise and adjustment of options must be approved in advance by TalkTalk Shareholders in general meeting unless the alteration or addition is minor in nature and made to benefit the administration of the TalkTalk DSOP, to comply with the provisions of any existing or proposed legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or TalkTalk Group companies. Any amendment to a key feature of the TalkTalk DSOP which affects options granted under the UK Approved Addendum will require HMRC approval before it can take effect. (xv) Overseas employees The TalkTalk Board may grant options to overseas employees on different terms so as to take account of relevant overseas tax, securities or exchange control laws provided that the options are not overall more favourable than the terms of options granted to other employees.

7. Related party transactions

7.1 Save as disclosed in the financial information set out in the related party note to the financial information of TalkTalk for the six month period ended 30 September 2009 and the 26 week period ended 27 September 2008 (note 26 on page 85 of this document) and the financial years ended 31 March 2009, 29 March 2008 and 31 March 2007 (note 26 on page 125 of this document) which are set out in Part Vof this document, no member of the TalkTalk Group entered into transactions with related parties during those periods or, save as disclosed in paragraph 7.3 below, during the period between 30 September 2009 and 27 January 2010 (being the latest practicable date prior to the publication of this document).

7.2 Save as disclosed in the financial information set out in the related party note to the financial information of Tiscali UK for the six month periods ended 30 June 2009 and 30 June 2008 (note 24 on page 150 of this document) and the financial years ended 31 December 2008, 31 December 2007 and 31 December 2006 (note 26 on page 180 of this document) which are set out in Part Vof this document, neither Tiscali UK, nor any of its subsidiaries, entered into transactions with related parties during those periods or, save as disclosed in paragraph 7.3 below, during the period between 30 September 2009 and 27 January 2010 (being the latest practicable date prior to the publication of this document).

7.3 Between 30 September 2009 and 27 January 2010 (being the latest practicable date prior to the publication of this document), the TalkTalk Group has been party to the following transactions with related parties: Other New Best Buy Carphone Europe Warehouse Group Group £m £m Revenue for services provided ...... 5 — Expenses for services received...... (8) (1) Net interest income ...... — 1 Loans owed to the TalkTalk Group ...... — 132 Other amounts owed to the TalkTalk Group ...... 2 — Amounts owed by the TalkTalk Group ...... (23) — All products and services were provided at market rates.

8. Material contracts The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by TalkTalk or a member of the TalkTalk Group (i) within the two years immediately preceding the date of this document and are or may be material to the TalkTalk Group or (ii) at any time and contain

239 obligations or entitlements which are or may be material to the TalkTalk Group as at the date of this document.

8.1 A sale and purchase agreement dated 11 October 2006 between AOL LLC, AOL Participation II Sarl, AOL (UK) Limited (“AOL UK”), AOL Europe Services Sarl (together the “AOL Vendors”) and Carphone Warehouse (as amended and acceded to by CPW Broadband Services (UK) Limited and The Phone House Holdings (UK) Limited on 28 December 2006) (the “AOL Agreement”) Under the terms of the AOL Agreement, Carphone Warehouse, CPW Broadband Services (UK) Limited and The Phone House Holdings (UK) Limited (together, the “Purchasers”) agreed to purchase parts of the internet access and telephony services business and assets of the AOL LLC group (the “AOL Access Business”). As part of the purchase of the AOL Access Business, the Purchasers agreed to purchase, inter alia, the entire issued share capital of AOL Europe Operations Limited and AOL Services (UK) Limited, as well as certain assets and businesses held or controlled by AOL UK and AOL Europe Services Sarl through the purchase of the entire issued share capital of AOL Services Sarl. The initial consideration payable by the Purchasers for the AOL Access Business was £250,000,000 less intragroup debt. Further consideration of £120,000,000 (subject to certain adjustments) was payable in stages by the Purchasers. The consideration was subject to adjustment based on the number of subscribers at completion and working capital and capital expenditure adjustments. The AOL Agreement contains warranties and indemnities and certain restrictive covenants given by the AOL Vendors in favour of the Purchasers. The AOL Agreement is governed by English law.

8.2 A share sale agreement dated 8 May 2009 between TUK Holdings, Tiscali S.p.A., TTGL, and Tiscali UK (the “Tiscali Acquisition Agreement”) as amended by an amendment agreement dated 3 July 2009 and made between each of the parties to the Tiscali Acquisition Agreement and Tiscali Italia S.p.A. (the “Tiscali Amendment Agreement”) Under the terms of the Tiscali Acquisition Agreement, TTGL agreed to acquire Tiscali’s UK operations on a debt free basis through the purchase the entire issued share capital of Tiscali UK from TUK Holdings. TUK Holdings agreed to sell the majority of the shares in the capital of Tiscali UK to TTGL and, subject to completion of a settlement agreement between, among others, TUK Holdings and VNIL (the “VNIL Settlement Agreement”), would also sell the remainder of the shares (transferred to TUK Holdings by Video Networks International Limited (“VNIL”)) in Tiscali UK to TTGL (together the “Tiscali Shares”). The acquisition by TTGL of Tiscali UK was completed on 3 July 2009. The total cash consideration paid by TTGL under the Tiscali Acquisition Agreement was £236,000,000 (the “Reference Amount”), of which £35,400,000 was attributed as the initial purchase price for the Tiscali Shares (the “Tiscali UK Purchase Price”). The remainder of the Reference Amount was, after certain deductions for amounts payable by Tiscali UK to VNIL under the VNIL Settlement Agreement and amounts owed to Tiscali UK management under a Tiscali UK stock option plan, advanced to Tiscali UK to settle intragroup indebtedness, being all amounts owed by Tiscali UK group companies to TUK Holdings group companies (other than the Tiscali UK group companies). The working capital and broadband customer number adjustments are currently being agreed or determined by the parties pursuant to the terms of the Tiscali Acquisition Agreement. The Tiscali Acquisition Agreement contains certain customary warranties and restrictive covenants given by TUK Holdings in favour of TTGL, as well as specific indemnities in respect of certain actual or contingent liabilities of Tiscali UK. TTGL also gave limited purchaser warranties to TUK Holdings.

8.3 A deed of covenant dated 28 January 2010 between New Carphone Warehouse, Best Buy Distributions, Best Buy Europe and TalkTalk (the “Deed of Covenant”). The Deed of Covenant relates to certain protective covenants to be provided by New Carphone Warehouse, Best Buy Distributions and Best Buy Europe on the one hand, and TalkTalk on the other hand and becomes effective from Completion. Under the Deed of Covenant, New Carphone Warehouse, Best Buy Distributions and Best Buy Europe undertake to TalkTalk to comply with (and to procure that its affiliates comply with) certain restrictions in relation to the solicitation of employees and material customers and suppliers and certain non-compete issues for a period of two years after the date on which the Demerger becomes effective. TalkTalk also gives similar undertakings to New Carphone Warehouse, Best Buy Distributions and Best Buy Europe. The Deed of Covenant is governed by English law.

240 8.4 Joint Sponsors’ Agreement Carphone Warehouse, TalkTalk and New Carphone Warehouse entered into a Joint Sponsors’ Agreement with Credit Suisse and UBS on 29 January 2010 pursuant to which: • Carphone Warehouse has appointed Credit Suisse and UBS as joint sponsors in connection with the publication of the Scheme Document; • TalkTalk has appointed Credit Suisse and UBS as joint sponsors in connection with TalkTalk Admission; and • New Carphone Warehouse has appointed Credit Suisse and UBS as joint financial advisers in connection with New Carphone Warehouse Admission. The Joint Sponsors’ Agreement contains, among other things, certain warranties and undertakings given by Carphone Warehouse, TalkTalk and New Carphone Warehouse to Credit Suisse and UBS which are customary for an agreement of this nature. Carphone Warehouse, TalkTalk and New Carphone Warehouse have also given certain customary indemnities to Credit Suisse and UBS. The obligations of each of Credit Suisse and UBS under the Joint Sponsors’ Agreement are conditional upon the satisfaction or waiver of certain conditions, including the accuracy of the warranties referred to above. Credit Suisse and UBS may terminate the Joint Sponsors’ Agreement on or prior to TalkTalk Admission or New Carphone Warehouse Admission in certain specified circumstances that are typical for an agreement of this nature. The fees of Credit Suisse in connection with the Joint Sponsors’ Agreement are a financial advisory fee of £250,000, a sponsor’s fee of £1,500,000 and a discretionary fee of £250,000. The fees of UBS in connection with the Joint Sponsors’ Agreement are a completion fee of £1,500,000 and a discretionary fee of £375,000.

8.5 Demerger Agreement A summary of the terms of the Demerger Agreement is incorporated into this document by reference to Section A of Part V, pages 70 to 71 (inclusive) of the Scheme Document and the related definitions contained in Part XII of the Scheme Document.

8.6 Tax Sharing and Indemnification Agreement A summary of the terms of the Tax Sharing and Indemnification Agreement is incorporated into this document by reference to Section B of Part V, pages 71 to 72 (inclusive) of the Scheme Document and the related definitions contained in Part XII of the Scheme Document.

8.7 TalkTalk Revolving Credit Facility The multi-currency revolving credit facility agreement dated 13 March 2008 is an agreement between Carphone Warehouse and a syndicate of 15 relationship banks with ING Bank NV as agent to the lenders (the “TalkTalk Revolving Credit Facility”). An amended and restated facility agreement will be signed around the time of the Demerger. Under the terms of the TalkTalk Revolving Credit Facility, the lenders will make available a £550,000,000 unsecured multi-currency revolving credit facility to Carphone Warehouse as borrower. TalkTalk will become a party to the TalkTalk Revolving Credit Facility in addition to Carphone Warehouse on the Demerger becoming effective. Borrowings will accrue interest at a margin of between 1.5 per cent. and 3 per cent. over LIBOR and a non-utilisation fee is payable on amounts available but undrawn under the facility. An arrangement fee and utilisation fees are also payable under the terms of the agreement. The TalkTalk Revolving Credit Facility contains certain customary financial covenants to be given by Carphone Warehouse in favour of the lenders. The facility’s final maturity date is 13 March 2013.

8.8 TalkTalk Term Loan Agreement The term loan facility agreement dated 25 November 2009 is an agreement between Carphone Warehouse and The Royal Bank of Scotland Finance (Ireland), (“RBSFI”) (the “TalkTalk Term Loan Agreement”). Under the terms of the TalkTalk Term Loan Agreement, the lenders will make available a £100,000,000 unsecured term loan facility to Carphone Warehouse as borrower. TalkTalk will become a party to the TalkTalk Term Loan Agreement in addition to Carphone Warehouse, on the Demerger becoming effective. Borrowings will accrue interest at a margin of between 1.75 per cent. and 2.25 per cent. over LIBOR. An arrangement fee and utilisation fees are also payable under the terms of the agreement. The TalkTalk Term Loan Agreement contains certain customary financial covenants to be given by Carphone Warehouse in favour of RBSFI. The loan is available for draw down on the Demerger becoming effective and £25 million

241 is repayable on the second anniversary of the draw down and £75 million is repayable on the third anniversary of the draw down.

9. Significant subsidiaries On completion of the Demerger, TalkTalk will be the holding company of the TalkTalk Group and its principal subsidiaries and subsidiary undertakings will be as follows: Proportion of share Country of Name capital held (%) Incorporation Carphone Warehouse ...... 100 England and Wales CPW Broadband Services (Ireland) Limited ...... 100 Ireland TTGL ...... 100 England and Wales CPW Broadband Services (UK) Limited ...... 100 England and Wales Onetel Telecommunications Limited ...... 100 England and Wales Opal Telecom Limited ...... 100 England and Wales TalkTalk Telecom Limited ...... 100 England and Wales TalkTalk Direct Limited ...... 100 England and Wales TalkTalk UK Communication Services Limited ...... 100 England and Wales GIS Telecoms Limited ...... 100 England and Wales CPW Network Services Limited ...... 100 England and Wales Tiscali UK Limited...... 100 England and Wales Tiscali Network Distribution Limited ...... 100 England and Wales Pipex Internet Limited ...... 100 England and Wales Toucan Residential Ireland Limited ...... 100 Ireland

10. Working capital statement In the opinion of TalkTalk, the working capital available to the TalkTalk Group is sufficient for the TalkTalk Group’s present requirements, that is for at least the next 12 months following the date of this document.

11. Litigation Save for the Competition Appeal Tribunal proceedings described in paragraph 7.2 of Part II of this document, there are no governmental, legal or arbitration proceedings (including, so far as TalkTalk is aware, any such proceedings which are pending or threatened) during the 12 months preceding the date of this document, which may have, or have had in the recent past, a significant effect on TalkTalk’s and/or the TalkTalk Group’s financial position or profitability.

12. Significant change There has been no significant change in the trading or financial position of the TalkTalk Group since 30 September 2009, the date to which the TalkTalk Group’s last audited accounts were prepared.

13. Consents 13.1 Credit Suisse, whose address is One Cabot Square, London E14 4QJ, has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear. 13.2 UBS, whose address is 1 Finsbury Avenue, London EC2M 2PP, has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear. 13.3 Deloitte LLP, whose address is 2 New Street Square, London EC4A 3BZ is a member firm of the Institute of Chartered Accountants in England and Wales and has given and has not withdrawn its written consent to the inclusion of the reports in Parts V, VI and VII of this document in the form and context in which they are included and has authorised the content of that part of this document for the purposes of rule 5.5.3R(2)(f) of the Prospectus Rules. 13.4 Ernst & Young LLP, whose address is 1 More Place, London SE1 2AF is a member firm of the Institute of Chartered Accountants in England and Wales and has given and has not withdrawn its written consent to the inclusion of the report in Part V of this document in the form and context in which it is included and has

242 authorised the content of that part of this document for the purposes of rule 5.5.3R(2)(f) of the Prospectus Rules.

14. Costs and expenses TalkTalk will not receive any proceeds as a result of the Scheme or the Demerger. The total costs and expenses relating to the issue of these documents, the New Carphone Warehouse Prospectus and the Scheme Document and to the negotiation, preparation and implementation of the Scheme and Demerger are estimated to amount to £15 million and will be borne by TalkTalk.

15. General 15.1 Following TalkTalk Admission, TalkTalk will be subject to the provisions of the Code, including the rules regarding mandatory takeover offers set out in the Code. Under Rule 9 of the Code, when (i) a person acquires shares which, when taken together with shares already held by him or persons acting in concert with him (as defined in the Code), carry 30 per cent. per cent. or more of the voting rights of a company subject to the Code or (ii) any person who, together with persons acting in concert with him, holds not less than 30 per cent. but not more than 50 per cent. of the voting rights of a company subject to the Code, and such person, or any person acting in concert with him, acquires additional shares which increases his percentage of the voting rights in the company, then, in either case, that person, together with the persons acting in concert with him, is normally required to make a general offer in cash, at the highest price paid by him or any person acting in concert with him for shares in the company within the preceding 12 months, for all of the remaining equity share capital of the company. 15.2 The TalkTalk Shares will also be subject to the compulsory acquisition procedures set out in sections 979 to 991 of the Act. Under section 979 of the Act, where an offeror makes a takeover offer and has, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire not less than 90 per cent. of the shares to which the offer relates and, in a case where the shares to which the offer relates are voting shares, not less than 90 per cent. of the voting rights carried by those shares, that offeror is entitled to compulsorily acquire the shares of any holder who has not acquired the offer on the terms of the offer. 15.3 Since TalkTalk’s incorporation, there has been no takeover offer (within the meaning of Part 28 of the Act) for any TalkTalk Shares.

16. Sources and bases of selected financial and other information 16.1 In this document, unless otherwise stated, financial information relating to TalkTalk has been extracted (without material adjustment) from the historical consolidated financial information contained in Part Vof this document and is reported under IFRS. 16.2 Where information contained in this document has been sourced from a third party, it has been accurately reproduced and, so far as TalkTalk is aware and is able to ascertain from information published by the relevant third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. 16.3 The number of TalkTalk Shares for which applications will be made to the FSA for listing on the Official List and to the London Stock Exchange for admission to trading on its main market for listed securities has been calculated on the basis of 914,108,246 Carphone Warehouse Shares in issue on 28 January 2010 (being the latest practicable business day prior to the publication of this document) and on the assumption that all options over Carphone Warehouse Shares, whether granted pursuant to the Carphone Warehouse Share Schemes or otherwise, are exercised. Statements relating to percentage interests in the issued share capital of TalkTalk are calculated on the basis of 914,108,246 Carphone Warehouse Shares in issue on 28 January 2010 (being the latest practicable business day prior to the publication of this document) and on the assumption that no new Carphone Warehouse Shares will be issued between the date of this document and the Scheme Effective Date.

17. Documents on display Copies of the following documents are available for inspection during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) for the period up until TalkTalk Admission at the offices of Osborne Clarke, One London Wall, London EC2Y 5EB: (a) the memorandum of association of TalkTalk and the TalkTalk Articles;

243 (b) the historical consolidated financial information for the TalkTalk Group (excluding Tiscali UK and its subsidiaries) for the three financial years ended 31 March 2007, 29 March 2008 and 31 March 2009 and the six months ended 30 September 2009 and the 26 weeks ended 27 September 2008; (c) the Deloitte LLP letter on the historical consolidated financial information set out in Sections A and B of Part V of this document; (d) the historical consolidated financial information for Tiscali UK and its subsidiaries for the three financial years ended 31 December 2008, 31 December 2007 and 31 December 2006 and the six months ended 30 June 2009; (e) the Ernst & Young LLP letter on the historical consolidated financial information set out in Sections D and E of Part V of this document; (f) the Deloitte LLP letter on the profit forecast set out in Part VI of this document; (g) the Deloitte LLP letter on pro forma financial information set out in Part VII of this document; (h) the Separation Agreements; (i) the Scheme Document; and (j) this document.

18. Information incorporated by reference Where the information described below itself incorporates information by reference to another document (“further information”), the further information is not intended to form part of this document for any purpose. Page number in Information incorporated by reference Document reference this document Risks relating to the New Carphone Risk Factors of the New Carphone 13 Warehouse Business Warehouse Prospectus, pages 12 to 21 (inclusive) Information on the Proposals Parts I and II of the Scheme 25 Document, pages 12 to 52 (inclusive) Information on the New Carphone Part II of the New Carphone Warehouse 26 Warehouse Business Prospectus, pages 28 to 47 (inclusive) Summary of the Demerger Section A, Part V of the Scheme 241 Agreement Document, pages 70 to 71 (inclusive) Summary of the Tax Sharing and Section B, Part V of the Scheme 241 Indemnification Agreement Document, pages 71 to 72 (inclusive) Definitions contained in the New Part XI of the New Carphone Warehouse 13 and 26 Carphone Warehouse Prospectus Prospectus, pages 180 to 189 (inclusive) Definitions contained in the Scheme Part XII of the Scheme Document, 25 and 241 Document pages 132 to 142 (inclusive) Dated: 29 January 2010

244 PART XI

DEFINITIONS

The following definitions apply throughout this document unless the context otherwise requires: “Act” the Companies Act 2006 “Admission and Disclosure Standards” the requirements contained in the publication “Admission and Disclosure Standards” (as amended from time to time) containing, among other things, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchange’s main market for listed securities “AOL UK” AOL’s UK internet access business which was acquired by the TalkTalk Group in 2006 pursuant to the terms of the AOL Agreement (as defined and summarised in paragraph 8.1 of Part X of this document) “Best Buy” Best Buy Co., Inc. (incorporated in the state of Minnesota), whose registered office is at 7601 Penn Avenue South, Richfield, MN 55423, United States “Best Buy Distributions” Best Buy Distributions Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 06576708), whose registered office is at 100 New Bridge Street, London EC4V 6JA “Best Buy Europe” Best Buy Europe Distributions Limited (formerly registered under the name CPW Distributions Holdings Limited) (incorporated in England and Wales under the Companies Act 1985 with registered number 06534088), whose registered office is at 1 Portal Way, London W3 6RS “Best Buy Europe Group” Best Buy Europe and its subsidiaries and interests in joint ventures and associates from time to time “Best Buy Europe Joint Venture” the joint venture between Best Buy and Carphone Warehouse resulting from the Best Buy Europe Joint Venture Transaction. “Best Buy Europe Joint Venture the Carphone Warehouse Group’s disposal of a 50 per cent. interest in Transaction” its mobile retail and distribution businesses and the economic interests in its US joint ventures with Best Buy to Best Buy Europe in June 2008 “Bluebottle” Bluebottle UK Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 3744190), whose registered office is at The School House, 50 Brook Green, London W6 7RR “BT” BT Group plc (incorporated in England and Wales under the Companies Act 1985 with registered number 4190816), whose registered office is at 81 Newgate Street, London EC1A 7AJ “business day” a day (excluding Saturdays, Sundays and public holidays) on which banks are generally open for business in the City of London “Carphone Property” the portfolio of freehold property held by the New Carphone Warehouse Group “Carphone Warehouse” The Carphone Warehouse Group PLC (to be renamed TalkTalk Telecom Holdings Limited pursuant to the Proposals) (incorporated in England and Wales under the Companies Act 1985 with registered number 03253714), whose registered office is at 1 Portal Way, London W3 6RS “Carphone Warehouse Board” or the board of directors of Carphone Warehouse and “Carphone “Carphone Warehouse Directors” Warehouse Director” means any member of the Carphone Warehouse Board

245 “Carphone Warehouse Capital the proposed reduction of the share capital of Carphone Warehouse Reduction” involving the cancellation and the extinction of the Scheme Shares pursuant to the Scheme under section 641 of the Act as described in Part II of the Scheme Document “Carphone Warehouse Demerger the ordinary resolution numbered (4) to be proposed at the General Resolution” Meeting, as set out in the notice of General Meeting in Part XIVof the Scheme Document “Carphone Warehouse Employee Benefit the employee ownership trust established by a trust deed dated 1 April Trust” 1999 and made between Carphone Warehouse and Louvre Trustees Limited, as amended by a deed of amendment dated 30 October 2006 and made between Carphone Warehouse and Louvre Trustees Limited “Carphone Warehouse Group” Carphone Warehouse, its subsidiaries, its holding companies, and the subsidiaries of its holding companies, from time to time, the Best Buy Europe Group and Virgin Mobile France and, where the context so permits, each of them “Carphone Warehouse Reduction Court the hearing by the Court of the claim form to confirm the Carphone Hearing” Warehouse Capital Reduction under section 648 of the Act “Carphone Warehouse Reduction Court the order of the Court confirming the Carphone Warehouse Capital Order” Reduction and the associated re-registration of Carphone Warehouse as a private limited company and renaming as TalkTalk Telecom Holdings Limited “Carphone Warehouse Remuneration the remuneration committee of Carphone Warehouse Committee” “Carphone Warehouse Shareholders” holders of Carphone Warehouse Shares “Carphone Warehouse Shares” the ordinary shares of 0.1 pence each in the capital of Carphone Warehouse “Carphone Warehouse Share Schemes” the CSOP, the Discretionary Share Schemes, the Millennium No 1 Scheme, the Millennium No 2 Scheme, the SAYE Scheme, the CPWG VES and the TTG VES “Carphone Warehouse Special Interim the proposed special interim dividend of Carphone Warehouse of 3.2 Dividend” pence per Carphone Warehouse Share expected to be paid on 22 March 2010 “certificated” or in “certificated form” where a share or other security is not in uncertificated form (that is, not in CREST) “Code” the City Code on Takeovers and Mergers, issued by the Panel on Takeovers and Mergers “Combined Code” the Combined Code on Corporate Governance published by the Financial Reporting Council, from time to time “Communications Act” the “Completion” or “Demerger Effective the time at which the Demerger becomes effective, expected to be at or Time” around 4.30 p.m. on 26 March 2010 or such other time as the New Carphone Warehouse Court Order is registered by the Registrar of Companies “connected person” as defined in section 252 of the Act, and “persons connected” should be interpreted in the same way “Court” the High Court of Justice in England and Wales “Court Meeting” the meeting of the Scheme Shareholders to be convened pursuant to an order of the Court under section 896 of the Act and to be held at the offices of Osborne Clarke, One London Wall, London EC2Y 5EB at 10.00 a.m. on 24 February 2010 for the purposes of considering and, if

246 thought fit, approving the Scheme (with or without amendment) and any adjournment of such meeting “CPWG VES” The Carphone Warehouse Group PLC Value Enhancement Scheme “CPW Mobile” CPW Mobile Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 06330995), whose registered office is at 1 Portal Way, London W3 6RS “CPW Retail” CPW Retail Holdings Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 06585729), whose registered office is at 1 Portal Way, London W3 6RS “Credit Suisse” Credit Suisse Securities (Europe) Limited (incorporated in England and Wales under the Companies Act 1948 with registered number 00891554), whose registered office is at One Cabot Square, London E14 4QJ “CREST” the relevant system (as defined in the CREST Regulations) of which Euroclear is the Operator (as defined in the CREST Regulations) “CREST Proxy Instruction” the appropriate CREST message to make a proxy appointment by means of CREST “CREST Regulations” the Uncertificated Securities Regulations 2001 (SI 2001 No. 3755) “CREST sponsor” a CREST participant admitted to CREST as a CREST sponsor “CSOP” The Carphone Warehouse Company Share Option Plan “C&W” Cable and Wireless plc (incorporated in England and Wales with registered number 238525), whose registered office is at 3rd Floor, 26 Red Lion Square, London WC1R 4HQ “Daily Official List” the daily official list of the London Stock Exchange “Deferred Bonus Plan” The Carphone Warehouse Group PLC Annual Deferred Bonus Plan “Demerger” the proposed demerger of the TalkTalk Business on the terms and subject to the conditions set out in the Demerger Agreement “Demerger Agreement” the agreement relating to the Demerger between Carphone Warehouse, New Carphone Warehouse and TalkTalk to be entered into prior to the New Carphone Warehouse Court Hearing, a summary of the principal terms of which is set out in Part X of this document “Demerger Long Stop Date” 30 September 2010 or such other date as the Carphone Warehouse Board or the New Carphone Warehouse Board (as the case may be) may determine in its sole discretion “Disclosure and Transparency Rules” the disclosure and transparency rules made by the FSA pursuant to section 73A of the FSMA “Discretionary Share Schemes” the Unapproved CSOP, the ESOS and the Performance Plan “EBIT” earnings before interest and taxation “EBITDA” earnings before interest, taxation, depreciation and amortisation “EEA States” the member states of the European Economic Area “EPS” earnings per share “Equiniti” or “Registrars” Equiniti Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 06226088), whose registered office is at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA “ESOS” the Carphone Warehouse Executive Incentive Scheme “EU” the European Union

247 “EURIBOR” the Euro inter-bank offered rate “Euroclear” Euroclear UK & Ireland Limited, a company incorporated under the laws of England and Wales “Exchange Act” the US Securities Exchange Act 1934, as amended “Excluded Shares” any Carphone Warehouse Shares: (i) beneficially owned by New Carphone Warehouse or its nominees; or (ii) held by Carphone Warehouse in treasury, in each case at the Scheme Record Time “Forms of Proxy” as the context may require, either or both of (i) the blue form of proxy for use at the Court Meeting, and (ii) the white form of proxy for use at the General Meeting each of which accompanies the Scheme Document “FSA” the UK Financial Services Authority “FSMA” the Financial Services and Markets Act 2000 (as amended) “General Meeting” the general meeting of Carphone Warehouse Shareholders to be held at the offices of Osborne Clarke, One London Wall, London EC2Y 5EB at 10.15 a.m. on 24 February 2010 (or as soon thereafter as the Court Meeting shall have been concluded or adjourned) for the purpose of the Scheme, notice of which is set out in Part XIV of the Scheme Document, and any adjournment of such meeting “Headline results” results before the amortisation of acquisition intangibles, goodwill expense and goodwill impairment, and before exceptional items which are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance. The phrases “Headline earnings”, “Headline EPS”, “Headline EBIT” and “Headline EBITDA” should be interpreted in the same way “HMRC” HM Revenue and Customs “holder” a registered holder of shares, including any person entitled by transmission “IAS” International Accounting Standard “IASB” International Accounting Standards Board “IFRS” International Financial Reporting Standards as adopted by the European Union “IFRIC” International Financial Reporting Interpretations Committee “Japan” Japan, its possessions and territories and all areas subject to its jurisdiction or any political subdivision thereof “Joint Sponsors” Credit Suisse and UBS “Joint Sponsors’ Agreement” the joint sponsors’ agreement dated 29 January 2010 and made between Carphone Warehouse, New Carphone Warehouse, TalkTalk and the Joint Sponsors “KCOM” KCOM Group plc (incorporated in England and Wales under the Companies Act 1985 with registered number 0215068), whose registered office is at 37 Carr Lane, Hull HU1 3RE “LIBOR” London inter-bank offer rate “Listing Rules” the listing rules made by the FSA pursuant to section 73A of the FSMA “London Stock Exchange” London Stock Exchange plc

248 “members” where the context so provides, members of Carphone Warehouse, New Carphone Warehouse or TalkTalk, as the case may be, on the relevant register of members at any relevant date “Millennium No 1 Scheme” The Carphone Warehouse Millennium Share Award Scheme “Millennium No 2 Scheme” The Carphone Warehouse Millennium No 2 Share Option Scheme “Model Code” the model code on directors’ dealings in securities set out in the Listing Rules “New Carphone Warehouse” New Carphone Warehouse PLC (to be renamed Carphone Warehouse Group plc on or around 25 March 2010) (incorporated in England and Wales under the Act with registered number 07105905), whose registered office is at 1 Portal Way, London W3 6RS “New Carphone Warehouse Admission” the admission of up to 462,500,000 New Carphone Warehouse Ordinary Shares to listing on the Official List in accordance with the Listing Rules and to trading on the London Stock Exchange’s main market for listed securities in accordance with the Admission and Disclosure Standards “New Carphone Warehouse Articles” the articles of association of New Carphone Warehouse from time to time “New Carphone Warehouse Board” or the board of directors of New Carphone Warehouse and “New “New Carphone Warehouse Directors” Carphone Warehouse Director” means any member of the New Carphone Warehouse Board “New Carphone Warehouse Business” the business of the New Carphone Warehouse Group, principally comprising the Carphone Warehouse Group’s 50 per cent. interest in Best Buy Europe, its 47.5 per cent. interest in Virgin Mobile France, Carphone Property and small minority interests in certain other assets “New Carphone Warehouse Cancellation the B ordinary shares of 0.1 pence each in the capital of New Carphone Shares” Warehouse to be allotted and issued pursuant to the Scheme and the New Carphone Warehouse Articles, representing the holder’s entitlement to TalkTalk Shares if the Demerger becomes effective in accordance with its terms “New Carphone Warehouse Court the hearing by the Court of the claim form to confirm the Hearing” New Carphone Warehouse Demerger Reduction under section 648 of the Act “New Carphone Warehouse Court Order” the order of the Court confirming the New Carphone Warehouse Demerger Reduction “New Carphone Warehouse Demerger the proposed reduction of the share capital and share premium account Reduction” of New Carphone Warehouse under section 641 of the Act to be undertaken shortly after the Scheme Effective Date in connection with the Demerger “New Carphone Warehouse Demerger the special resolution numbered (2) to be proposed at the General Reduction Resolution” Meeting, as set out in the notice of General Meeting in Part XIVof the Scheme Document “New Carphone Warehouse Employee the employee benefit trust to be established by a deed of appointment Benefit Trust” by the trustee of the Carphone Warehouse Employee Benefit Trust “New Carphone Warehouse Group” the companies operating the New Carphone Warehouse Business from time to time which will include New Carphone Warehouse and its subsidiaries, subsidiary undertakings, joint ventures and associates from the Demerger Effective Time “New Carphone Warehouse Ordinary holders of New Carphone Warehouse Ordinary Shares Shareholders”

249 “New Carphone Warehouse Ordinary the ordinary shares of 0.1 pence each in the capital of New Carphone Shares” Warehouse to be allotted and issued pursuant to the Scheme and the New Carphone Warehouse Articles and the Subscriber Share “New Carphone Warehouse Prospectus” the prospectus prepared by New Carphone Warehouse in accordance with the Prospectus Rules and published in relation to the New Carphone Warehouse Group and the New Carphone Warehouse Ordinary Shares “New Carphone Warehouse Reduction 6.00 p.m. on the business day immediately prior to the date of the New Record Time” Carphone Warehouse Court Hearing “New Carphone Warehouse Share Carphone Warehouse Group plc 2010 Share Scheme Scheme” “ntl: Telewest business” ntl Business Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 03076222), whose registered office is at 160 Great Portland Street, London WIW 5QA “Ofcom” the Office of Communications, the independent regulator and competition authority for the UK communications industries “Official List” the official list of the UK Listing Authority “Onetel” the Onetel group of companies acquired by the TalkTalk Group from Centrica plc “operating free cash flow” represents Headline EBITDA less capital expenditure, plus or minus movements on working capital and non-cash movements in Headline EBITDA “Performance Plan” The Carphone Warehouse Group PLC Performance Share Plan approved by Carphone Warehouse Shareholders on 28 July 2004 “Pipex” Pipex UK Limited and Pipex Internet businesses Limited, the UK broadband and voice businesses acquired by Tiscali UK from Pipex Communications PLC “Post-Scheme Shares” the new ordinary shares of 0.1 pence each in the capital of Carphone Warehouse to be allotted and issued (credited as fully paid) to New Carphone Warehouse pursuant to the Scheme “primary listing” a listing by the FSA by virtue of which a company is subject to the full requirements of the Listing Rules (to be referred to as a “premium listing” with effect from 6 April 2010) “Proposals” the Reorganisation, the Resolutions, the Scheme, the Carphone Warehouse Capital Reduction, the New Carphone Warehouse Demerger Reduction, the Demerger, the issue of the TalkTalk Shares and the TalkTalk Capital Reduction, details of which are set out in Part I of this document “Proposed Director” Diana (Dido) Harding, the proposed chief executive officer of TalkTalk “Prospectus Rules” the prospectus rules made by the FSA pursuant to section 73A of the FSMA “Redeemable Preference Shares” the redeemable preference shares of £50,000 each in the capital of TalkTalk “Register” the register of members of Carphone Warehouse “Registrar of Companies” the Registrar of Companies in England and Wales, within the meaning of the Act “Regulatory Information Service” any channel recognised as a channel for the dissemination of regulatory information by listed companies as defined in the Listing Rules

250 “Reorganisation” the proposed reorganisation of the Carphone Warehouse Group to be effected prior to the Demerger Effective Time “Reporting Accountants” Deloitte LLP of 2 New Street Square, London EC4A 3BZ “Resolutions” the Scheme Resolution, the New Carphone Warehouse Demerger Reduction Resolution, the TalkTalk Capital Reduction Resolution, the Carphone Warehouse Demerger Resolution and the Share Schemes Resolutions, as set out in the notice of General Meeting in Part XIV of the Scheme Document “SAC” subscriber acquisition costs “SAYE Scheme” The Carphone Warehouse Group PLC Sharesave Scheme “Scheme” the scheme of arrangement proposed to be made under Part 26 of the Act between Carphone Warehouse and the Scheme Shareholders, with or subject to any modification, addition or condition approved by the Court and agreed by Carphone Warehouse, New Carphone Warehouse and TalkTalk “Scheme Court Hearing” the hearing by the Court of the claim form for the sanctioning of the Scheme “Scheme Court Order” the order of the Court sanctioning the Scheme under section 899 of the Act “Scheme Document” the circular dated the same date as this document, sent by Carphone Warehouse to Carphone Warehouse Shareholders containing details of the Proposals “Scheme Effective Date” the date on which the Carphone Warehouse Reduction Court Order (together with the Carphone Warehouse Statement of Capital attached thereto) is delivered to the Registrar of Companies and, accordingly, the Scheme becomes effective in accordance with its terms “Scheme Record Time” 6.00 p.m. on the business day immediately prior to the date of the Carphone Warehouse Reduction Court Hearing “Scheme Resolution” the special resolution numbered (1) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XIVof the Scheme Document “Scheme Shareholders” holders of a Scheme Share, and a “Scheme Shareholder” shall mean any one of these Scheme Shareholders “Scheme Shares” Carphone Warehouse Shares: (i) in issue at the date of the Scheme; (ii) issued after the date of the Scheme, but before the Voting Record Time; and (iii) issued at or after the Voting Record Time but on or before the Scheme Record Time on terms that the original or any subsequent holders are bound by the Scheme or in respect of which such holders shall have agreed in writing to be so bound, in each case, other than the Excluded Shares “SDRT” stamp duty reserve tax “Securities Act” the United States Securities Act 1933, as amended, and the rules and regulations promulgated under such Act “Separation Agreements” together, the Demerger Agreement and the Tax Sharing and Indemnification Agreement “Share Scheme Deadline” 12.00 p.m. on the date of the Scheme Court Hearing

251 “Share Schemes Resolutions” the ordinary resolutions numbered (5) to (13) (inclusive) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XIV of the Scheme Document “Subscriber Share” the initial ordinary share of 0.1 pence in the Capital of New Carphone Warehouse “TalkTalk” TalkTalk Telecom Group PLC (incorporated in England and Wales under the Act with registered number 07105891), whose registered office is at 11 Evesham Street, London W11 4AR “TalkTalk Admission” the admission of up to 925,000,000 TalkTalk Shares to listing on the Official List in accordance with the Listing Rules and to trading on the London Stock Exchange’s main market for listed securities in accordance with the Admission and Disclosure Standards “TalkTalk Articles” the articles of association of TalkTalk from time to time “TalkTalk Audit Committee” the audit committee of TalkTalk “TalkTalk Board” or “TalkTalk Directors” the board of directors of TalkTalk and “TalkTalk Director” means any member of the Talk Talk Board, together with, where the context so provides, the Proposed Director “TalkTalk Business” the UK fixed line telecommunications division of Carphone Warehouse, operated through a number of subsidiaries wholly owned by Carphone Warehouse and all of the trade marks, brand names and intellectual property associated with the division, which is proposed to be demerged in accordance with the Demerger Agreement and will be owned by TalkTalk following the Demerger Effective Time “TalkTalk Capitalisation Share” the single deferred ordinary share of 0.1 pence in the capital of TalkTalk created pursuant to the resolution described in paragraph 2.2 (c) of Part X of this document “TalkTalk Capital Reduction” the proposed reduction of the share premium account of TalkTalk under section 641 of the Act to be undertaken shortly after the Demerger Effective Time, as described in Part I of this document “TalkTalk Capital Reduction Resolution” the special resolution numbered (3) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XIVof the Scheme Document “TalkTalk Court Hearing” the hearing by the Court of the claim form to confirm the TalkTalk Capital Reduction under section 648 of the Act “TalkTalk Court Order” the order of the Court confirming the TalkTalk Capital Reduction “TalkTalk DSOP” The TalkTalk Telecom Group PLC 2010 Discretionary Share Option Plan “TalkTalk Group” or “Group” the companies operating the TalkTalk Business from time to time which will include TalkTalk and its subsidiaries and subsidiary undertakings from the Demerger Effective Time “TalkTalk Nomination Committee” the nomination committee of TalkTalk “TalkTalk Reduction Record Time” 6.00 p.m. on the business day immediately prior to the TalkTalk Court Hearing “TalkTalk Remuneration Committee” the remuneration committee of TalkTalk “TalkTalk SAYE Scheme” The TalkTalk Telecom Group PLC Savings Related Share Option Scheme “TalkTalk Share Schemes” the TalkTalk DSOP and the TalkTalk SAYE Scheme “TalkTalk Shares” the ordinary shares of 0.1 pence each in the capital of TalkTalk “TalkTalk Shareholders” holders of TalkTalk Shares

252 ‘TalkTalk Statement of Capital” the statement of capital showing, as altered by the TalkTalk Court Order, the information required by section 649 of the Act in respect of TalkTalk’s share capital “Tax Sharing and Indemnification the tax sharing and indemnification agreement to be entered into by Agreement” Carphone Warehouse, New Carphone Warehouse and TalkTalk, a summary of the principal terms of which is set out in Part X of this document “Tele2 France” Tele2 Mobile S.A.S., the French operations of Tele2 AB, which have been acquired by Virgin Mobile France “Tele2 UK” Old TalkTalk UK Communication Services Limited (formerly registered under the name Tele2 UK Communications Limited) (incorporated in England and Wales under the Companies Act 1985 with registered number 03565220), whose registered office is at 348- 350 Lytham Road, Blackpool, Lancashire FY4 IDW “Tiscali UK” Tiscali UK Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 3408171), whose registered office is at 11 Evesham Street, London W11 4AR and its subsidiaries “TTGL” TalkTalk Group Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 6534112), whose registered office is at 11 Evesham Street, London W11 4AR “TTG VES” The TalkTalk Group Value Enhancement Scheme “TUK Holdings” Tiscali UK Holdings Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 3907276), whose registered office is at Milton Gate, 60 Chiswell Street, London EC1Y 4AG “UBS” or “UBS Investment Bank” UBS Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 2035362) whose registered office is at 1 Finsbury Avenue, London EC2M 2PP “UK” or “United Kingdom” the United Kingdom of Great Britain and Northern Ireland “UKLA Rules” together, the Listing Rules, the Prospectus Rules and the Disclosure and Transparency Rules “UK Listing Authority” or “UKLA” the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA “UK Telco” UK Telco (GB) Limited, a fixed line voice and broadband supplier, (incorporated in England and Wales under the Companies Act 1985 with registered number 04341230), whose registered office is at 11 Evesham Street, London W11 4AR “Unapproved CSOP” the Unapproved Share Option Plan Schedule to the CSOP “uncertificated” or in “uncertificated in respect of a share or other security, where that share or other security form” is recorded on the relevant register of the share or security concerned as being held in uncertificated form in CREST and title to which may be transferred by means of CREST “US” or “United States” the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia and all other areas subject to its jurisdiction “US person” as defined in Regulation S, as promulgated under the Securities Act “VAT” value added tax as provided under the Value Added Tax Act 1994 “Virgin Mobile France” the joint venture operating a MVNO in France between Bluebottle, Carphone Warehouse and Financom S.A.S., operated by the French branch of Omer Telecom Limited

253 “VNL” Video Networks Limited (incorporated in England and Wales under the Companies Act 1985 with registered number 02740910), whose registered office is at 11 Evesham Street, London W11 4AR “Voting Record Time” 6.00 p.m. on the day which is two days before the date of the Court Meeting or, if such Court Meeting is adjourned, 6.00 p.m. on the day which is two days before the date of such adjourned meeting All references to legislation in this document are to the legislation of England and Wales unless the contrary is indicated. Any reference to any provision of any legislation shall include any amendment, modification, re-enactment or extension thereof. Words importing the singular shall include the plural and vice versa, and words importing the masculine gender shall include the feminine or neutral gender. For the purpose of this document, “subsidiary”, “subsidiary undertaking”, “undertaking” and “associated undertaking” have the meanings given by the Act.

254 PART XII

GLOSSARY The following terms have the following meanings throughout this document unless the context otherwise requires: “2G” second generation wireless telephony technology “3G” third generation of wireless telephony technology “ADSL” asymmetric digital subscriber line: ADSL technology enables data transmission over existing copper wiring at data rates several hundred times faster than analog modems, providing for simultaneous delivery of voice, video and data “ARPU” average revenue per user “BBC i-Player” a service provided by the BBC which enables users to view previously broadcast BBC radio and television programmes over the internet “broadband” data-transmission scheme in which multiple signals share the bandwidth of a medium “Canvas Project” a joint venture between the BBC, ITV, BT, Five, C4 and the TalkTalk Group involving the proposed development and promotion of a commercial technical standard that would allow viewers with a broadband connection to watch on-demand services, such as the BBC i-Player or the ITV Player on their television sets and other internet content, as well as ordinary linear television content, via a device such as a set-top box connected to the internet “churn” a measure of the number of subscribers moving into or out of a product or service over a specific period of time “CPS” carrier pre-select: the automated process under which voice customers can be switched from BT and other suppliers with no requirement to change telephone numbers, or to dial prefixes or to install dialler boxes “CRM” customer relationship management “DWDM” dense wave division multiplexing “Ethernet” is a protocol that controls data transmission over a communications network often referred to as a family of frame-based computer technologies for local area networks “GPS” global positioning system “HD” High Definition “IP” internet protocol: the packet data protocol used for routing and carriage of messages across the internet and similar networks. IP performs the addressing function and contains some control information to allow packets to be routed through networks “ISP” internet service provider “IT” information technology “LLU” local loop unbundling “Mbit/s” or “Mbps” unit of data transfer rate equal to 1,000,000 bits per second “MPF” or “full unbundling” metallic path facility: provides both broadband and telephony services to customers from TalkTalk Group exchange infrastructure “MVNO” mobile virtual network operator “narrowband” telecommunication service that carries voice information in a narrowband of frequencies

255 “NGN” next generation network “SMPF” or “partial unbundling” shared metallic path facility: provides both broadband and telephony services to customers from TalkTalk Group exchange infrastructure “switching” is the channelling of calls or data so as to connect two or more parties over one or more networks on a temporary basis for the duration of that connection “SME” small and medium sized enterprises “TDM” time division multiplexing: a digital data transmission method that takes signals from multiple sources, divides them into pieces which are then placed periodically into time slots, transmits them down a single path and reassembles the time slots back into multiple signals at the remote end of the transmission “unbundling” (in the UK) process by which BT makes available its local network to third party broadband service providers “VoIP” voice over internet protocol “wi-fi” trademark of the Wi-Fi Alliance often used as a general term for wireless networking technology that uses radio waves to provide wireless high-speed internet and network connections

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