2008 Annual Report COLT Telecom Group S.A

Exceed Together

2008 Annual Report COLT Telecom Group S.A.

Data Voice Managed Services Contents 02 Group at a glance 04 Chairman’s overview 05 Chief Executive’s overview 06 The Board of Directors 08 Report of the Board of Directors 31 Directors’ responsibilities statements 32 Corporate Social Responsibility 36 Corporate governance statement 40 Directors’ remuneration report 46 Independent auditors’ report 47 Consolidated Financial statements 81 Selected ﬁnancial information 84 Company only annual accounts 87 Independent auditors’ report 96 COLT’s European ofﬁces 97 Investor information

Click on the above headings to navigate through the document Contents 02 Group at a glance 04 Chairman’s overview 05 Chief Executive’s overview 06 The Board of Directors 08 Report of the Board of Directors 31 Directors’ responsibilities statements 32 Corporate Social Responsibility Our vision 36 Corporate governance statement To be the most trusted 40 Directors’ remuneration report 46 Independent auditors’ report provider of converged Data, 47 Consolidated financial statements Voice and Managed Services 81 Selected financial information 84 Company only annual accounts to businesses across Europe. 87 Independent auditors’ report 96 COLT’s European offices 97 Investor information

Our goals Our strategy • To deliver an outstanding customer experience. • To increase the utilisation of our Network and Data • To deliver business innovation building on our unique Centre infrastructure by delivering services that meet fibre network and Data Centre infrastructure. the specific business needs of our different customer • To create an exciting and successful environment segments: Major Enterprise, SME and Wholesale. that attracts and retains the best people. • To deepen the relationship with our customers by • To achieve sustainable profit growth. providing them with a portfolio of managed network and managed IT services that reduce the overall cost and complexity of the management of their IT infrastructure. • To continue to selectively invest in new infrastructure, systems and technology that will allow us, and in turn our customers, to continue to lower the total cost of ownership of IT infrastructure. • To continue to evolve our business processes and organisational structure to reflect the changing business needs of our customers and to allow us to establish the shortest delivery timeframes and the highest service levels in the industry.

We will Exceed Together with our customers, shareholders, partners, suppliers and employees.

COLT Telecom Group S.A. | Annual Report 2008 1 Group at a glance

COLT is an award winning, leading provider of Data, Voice and Managed Services to business and government in Europe.

COLT specialises in providing Data, Voice and Managed Services to major enterprises, small and medium sized businesses and wholesale customers. COLT operates a 25,000km network that includes Metropolitan Area Networks (MANs) in 34 major European cities with direct fibre connections into 16,000 buildings and 18 COLT Data Centres as well as connecting a further 85 cities USA including New York, Boston, Newark and Chicago in the USA.

Customer Facing Divisions COLT is organised around the needs of its customers. It has three customer-facing divisions: Major Enterprise, Small and Medium 82 85 83 Enterprise (SME) and Wholesale. 84

Major Enterprise Division The Major Enterprise Division serves the needs of multinational and large national organisations typically with more than 1,000 employees. Sectors served include ﬁnancial services, broadcast and media and government bodies.

Small and Medium Enterprise Division The SME Division serves the needs of businesses typically with 30 to 1,000 employees, either directly or through our network of more than 650 partners who specialise in the IT and communications needs of these customers.

Wholesale Division Our Wholesale Division meets the needs of other telecoms operators by providing access to COLT’s European network to enable them GURGAON to take advantage of COLT’s access across Europe. COLT has full public operator status in 13 European countries with more than 400 ﬁxed and mobile interconnects worldwide. INDIA

Products COLT focuses on providing holistic solutions to customers’ communications needs with the highest quality, service and BANGALORE security. These are based on a standard portfolio of services supported by pan-European professional services expertise and industry-leading technology partners.

The fastest growing part of COLT is our Managed Services offering, leveraging our integrated network and Data Centre footprint. Our managed infrastructure and hosting services provide reliability The portfolio incorporates network and facilities, infrastructure and security for customers across Europe. They benefit from management services, application hosting services and managed Europe’s leading Data Centre infrastructure, with high performance, IT services. availability and ﬂexibility of service.

Data Voice Data services relate to the electronic transmission of information. COLT provides a broad portfolio of voice solutions, including Voice COLT has a broad portfolio ranging from the simple supply of over IP (VoIP) and non-VoIP services. COLT’s Voice services can bandwidth right through to sophisticated solutions and complete be a component of a larger solution or form a complete end-to-end end-to-end services to retail or wholesale customers. COLT’s Data service to retail and wholesale customers across Europe. Our Voice services include Ethernet, Internet Protocol Virtual Private Networks portfolio covers Corporate, Reseller and Wholesale Voice, VoIP and (IPVPN), Internet Protocol (IP) Voice, Internet Access and non-VoIP services, Intelligent Network (IN) services, customer Bandwidth services. contact solutions, white label products and network partnering.

Our Managed Services include application hosting, infrastructure Contact details for each of COLT’s ofﬁces are on page 96. management, IT services, network and facilities management.

COLT Telecom Group S.A. | Annual Report 2008 2 Group at a glance continued

39 38

STOCKHOLM

35 36 DUBLIN COPENHAGEN

MANCHESTER

BIRMINGHAM AMSTERDAM HAMBURG 02 LONDON THE HAGUE 2 16 25 01 13 3 15 HANNOVER ROTTERDAM 14 17 BERLIN 18 ANTWERP 12 11 19 26 GHENT 10 DUSSELDORF 09 20 28 03 04 COLOGNE 21 05 08 06 22 27 79 BRUSSELS 23 FRANKFURT PARIS 2 07 24 78 29 31 STUTTGART 30 77 80 32

33 34 44 43 59 81 BASEL MUNICH 40 47 VIENNA 56 48 45 57 55 50 49 46 58 51 41 52 ZURICH LYON 42 76 GENEVA 53 54 60 MILAN 62 64 63 74 TURIN 61 65 75 MARSEILLE 73 72 66

MADRID BARCELONA

LISBON ROME VALENCIA

68 67

70 69

01 Reading 23 Mainz 45 Salzburg 67 Bari Data Centre and 02 Bristol 24 Mannheim 46 Innsbruck 68 Naples Metropolitan Area Network (MAN) 03 Lille 25 Bremen 47 Schaffhausen 69 Catania 04 Kortrijk 26 Potsdam 48 St Gallen 70 Palermo MAN 05 Mons 27 Dresden 49 Pfaffikon 71 Cagliari 06 Charleroi 28 Leipzig 50 Winterthur 72 Nice COLT connected city 07 Luxembourg 29 Nuremburg 51 Zug 73 Montpellier 08 Liége 30 Erding 52 Lucerne 74 Toulouse Operational network managed end-to-end 09 Leuven 31 Karlsruhe 53 Lugano 75 Porto 10 Eindhoven 32 Strasbourg 54 Chiasso 76 Bordeaux Shared Service Operations 11 Breda 33 Böblingen 55 Berne 77 Nantes 12 Den Bosch 34 Esslingen 56 Biel/Bienne 78 Rennes Network connections between 13 Hoofddorp 35 Aarhus 57 Lausanne 79 Rouen cities are logical paths and may 14 Utrecht 36 Malmo 58 Nyon 80 Tours not reflect actual routes. 15 Hilversum 37 Gothenburg 59 Dijon 81 Poitiers 16 Almere 38 Oslo 60 Grenoble 82 Boston 17 Essen 39 Helsinki 61 Genoa 83 New York 18 Dortmund 40 Bratislava 62 Brescia 84 Newark 19 Wuppertal 41 Graz 63 Padua 85 Chicago 20 Neuss 42 Klagenfurt 64 Venice 21 Offenbach 43 St Polten 65 Bologna 22 Wiesbaden 44 Linz 66 Florence

COLT Telecom Group S.A. | Annual Report 2008 3 Chairman’s overview

Tim Hilton Chairman

2008 was a year of continued progress Corporate Social Responsibility for COLT despite more adverse market In 2008 we devoted increasing attention to Corporate Social conditions during the second half. Our Responsibility (CSR). COLT’s CSR strategy addresses the results reﬂect a consistent strategy and marketplace, environment, workplace and community. We aim the value of past investments. Our ongoing to be a trusted provider, delivering business results through investments in people, products, systems sustainable and responsible activity to gain competitive advantage. and infrastructure mean that COLT is well Recognising our responsibility to the environment, CO2 emissions positioned to meet the challenges ahead. reduction and energy cost management are important objectives for 2009.

Conclusion I am pleased with the results for 2008. The ongoing uncertainty in the global economy, however, means that full year 2009 revenues Financial results are difficult to predict. Challenging trading conditions are forecast for 2008 was a year of steady growth and progress for COLT 2009 for the business environment as a whole. Whilst there is a risk notwithstanding a challenging external environment. The financial that COLT may experience some impact in 2009, COLT will continue results showed positive trends on most of our key performance to manage its business tightly. I believe that COLT’s business indicators. 2008 was COLT’s second consecutive year of profitability, model is resilient. with an annual pre-tax profit of €71.9m. EBITDA increased to €303.9m, reflecting the changing mix in our revenue towards COLT already offers unrivalled pan-European managed network higher margin business. The trend of decline in total revenue also and Data Centre assets combined with award-winning customer continued, however in some areas the rate of decline slowed. service. We now need to move to the next level and deliver COLT was free cash flow positive for the third year running. solutions that strongly differentiate us, building on our reputation to be the most trusted provider of business communications COLT has in place underwriting commitments for an Open Offer across Europe. to raise approximately €200m before expenses. This means that COLT has secured sufficient funding to enable it to meet its strategic I would like to congratulate our CEO Rakesh Bhasin and his imperatives, provide adequate working capital for the foreseeable management team under whose leadership COLT has made future and repay the outstanding bonds. Our financial position substantial progress in transforming from a fixed line operator into continues to improve. a value-added Information Communication Technology (ICT) solutions and services provider. We remain committed to Management and Board that journey. The operating model launched in 2007 and fully implemented in 2008 was well received and has played an important role in None of this would be possible without our employees and improving customer experience. We have benefited from stability management team and I would like to thank them for their in our senior management team and have added new leaders in hard work and dedication throughout 2008. Major Enterprise and Managed Services. The newly established Managed Services Division will support COLT’s growth relating to this increasingly important component of our offering. Our search for a new Chief Financial Officer continues.

There have been some Board changes. Mark Ferrari, a Fidelity related Director, joined the Board on 1 January 2009 replacing John Remondi who retired on 31 December 2008. I would like to thank John for his commitment and invaluable contribution to the Company. COLT has beneﬁted hugely from his wisdom Tim Hilton and guidance over the past several years. Chairman

COLT Telecom Group S.A. | Annual Report 2008 4 Chief Executive’s overview

Rakesh Bhasin Chief Executive Ofﬁcer

Our operating model has enhanced our The year ended with €11.4m of net funds on the balance sheet, alignment with customers. Developing the first time COLT has reported a year end positive net cash marketing propositions with partners balance. COLT was free cash flow positive including exceptional and customers has helped to improve items. The Group’s free cash flow including exceptional items the effectiveness of the operating model increased by €8.4m to €45.7m. and deliver growth. Each of the Business Divisions contributed to growth in profit Operations and EBITDA and Data revenue continues The ICT market is growing, providing COLT with new and profitable to increase across all Divisions. opportunities to develop its business. We are well on the way to becoming an infrastructure-based ICT solutions and services provider for our customers.

In tough economic times customers can reduce the total cost Financial position of ownership by utilising COLT’s shared IT service platform of Data 2008 saw COLT’s annual pre-tax profit rise to €71.9m from €39.2m Centre, network and computing resources. Our unique Data Centre the previous year. and network assets are well placed geographically, supported by our shared service centres, to provide tailored solutions using standard Our continued evolution from a Voice to a Data and Managed service components. COLT continues to invest selectively in these Services business is reflected in the 8.7 per cent increase in Data assets to provide its unique pan-European business to business revenue to €916.0m compared with €842.6m in 2007. Data revenue application delivery platform. We expect customers to continue growth was depressed by the weakness of Sterling. Excluding to move across onto the new platforms to take advantage of cost currency movements, Data revenue grew by 12.3 per cent savings and improved functionality. The first phase of Next Generation compared with the previous year. Data revenue, which includes Network implementation will also serve to improve the speed of Managed Services, is the principal driver of COLT’s profitability and product introduction to the market and to improve capital efficiency. in 2008 it represented 54.7 per cent of total revenue; an increase of 4.5 percentage points on 2007. This improvement in revenue Outlook mix contributed to the increase in gross margin before depreciation Demand from our customers in 2009 is hard to predict. We may and exceptional items for the year by 0.9 percentage points be impacted by increased price pressure and some customers may to 39.4 per cent and an improvement in gross profit before delay or reduce their planned expenditure. However, the services depreciation from €646.7m to €659.7m. that COLT provides to its customers generally are essential rather than discretionary. Our annual total revenue decreased to €1,675.4m reflecting the ongoing market driven decline in Voice revenue, particularly Carrier COLT prides itself in maintaining close customer relationships and Voice. During 2008 the rate of decline in Corporate and Reseller understanding changing needs. We expect some increase in the Voice slowed. On a constant currency basis, our annual total outsourcing of ICT services as customers seek to reduce their revenue increased by 2.4 per cent. Voice revenue decreased by costs and leverage COLT’s assets rather than spend on building €77.6m or 9.3 per cent; €21.2m of this decrease can be attributed or upgrading their own infrastructures. We are well placed to take to the impact of regulatory reductions, however there was no net advantage of this trend. impact on COLT. After excluding the impacts of currency and fixed to mobile prices, Voice revenue fell by 5.0 per cent.

EBITDA1 grew by €26.5m to €303.9m. The increase in EBITDA beneﬁted from the Euro strengthening against Sterling in 2008. On a constant currency basis EBITDA would be €292.6m for 2008.

The Group’s operating proﬁt increased by €38.0m to €93.3m Rakesh Bhasin including an exceptional item of €17.0m. Chief Executive Ofﬁcer

1 EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

COLT Telecom Group S.A. | Annual Report 2008 5 COLT Telecom Group S.A. Board of Directors

Andreas Barth Tony Bates Rakesh Bhasin Non-executive Director, 64, was appointed Chief Operating Officer and Acting Group Chief Executive Officer, 46, was appointed to the Board on 1 September 2003. Chief Financial Officer, 52, was appointed to the Board on 13 December 2006. Andreas was formerly a member to the Board on 1 May 2004. Tony was Rakesh was previously President and of the Supervisory Board of TDS previously Group Finance Director of Chief Executive of KVH Co. Ltd, a Fidelity Informationstechnologie. He was EMI Group plc. Formerly Tony held senior Asia-focused telecom and network previously Senior Vice-President of positions at Habitat UK, Philip Morris UK solutions provider based in Tokyo and Compaq Computer Corporation and (now Altria, Inc.) and qualified with Arthur remains as non-executive Chairman has also worked for Thomson-CSF, Andersen. Tony is a Fellow of the Institute of that company. Rakesh has previously Texas Instruments and Ford. of Chartered Accountants. held senior positions at AT&T and Japan Telecom Company Limited.

Vincenzo Damiani Hans Eggerstedt Gene Gabbard Non-executive Director, 69, was appointed Senior Independent Director, 70, was Non-executive Director, 68, was appointed to the Board on 23 July 2002. Vincenzo appointed to the Board on 2 June 2003. to the Board on 6 January 2005. Gene is President of VIDA Consulting Srl and Hans is a member of the Supervisory is a member of the boards of Trillion non-executive director of Mediatica SpA. Board of Unilever Deutschland and Partners, Inc., Knology, Inc. and Hughes He is a former non-executive director a non-executive director of Jeronimo Communications, Inc. and a special of Banca di Roma and was previously Martins. Hans was previously Group limited partner of Ballast Point Ventures. Corporate Vice-President of EDS Corporation, Finance Director of Unilever. Gene was previously Executive Vice President of Digital Equipment Europe and President and Chief Financial Ofﬁcer General Manager of IBM Europe. of MCI Communications Corporation.

COLT Telecom Group S.A. | Annual Report 2008 6 COLT Telecom Group S.A. Board of Directors continued

Simon Haslam Dr Robert Hawley CBE Tim Hilton Non-executive Director, 51, was appointed Non-executive Director, 72, was appointed Chairman, 56, was appointed to the to the Board on 16 January 2007. Simon to the Board on 21 August 1998. Robert Board on 26 May 1999 and as Chairman is President of the Moonray Investors division is President of the Anglo-Korean Society on 16 January 2007. Tim is President of FIL Limited and is a director of FIL Limited and Chairman of Berkeley Resources of Devonshire Investors, a private equity and of various funds managed by FIL Limited Limited, Welsh Power Group Limited and firm affiliated with Fidelity Investments. and its subsidiaries. He is a Fellow of the Lister Petter Investment Holdings Limited. Devonshire manages a portfolio Institute of Chartered Accountants and was He is also Vice-Chancellor of the World of investments in telecommunications, previously an audit and consulting partner Nuclear University. Robert was previously venture capital, real estate and other with Deloitte, and a non-executive director Chief Executive of British Energy and businesses outside financial services. of Euroclear plc. Nuclear Electric and was also an advisor Tim was previously a partner of the US to HSBC Bank. corporate law firm Sullivan & Worcester LLP.

John Remondi H. Frans van den Hoven KBE Richard Walsh Non-executive Director, 72, was appointed Non-executive Director, 85, was appointed Non-executive Director, 62, was appointed to the Board on 31 December 2004. to the Board on 30 September 1996. to the Board on 1 June 2005. Richard John is an Executive Vice President and Frans is a member of the board of Hunter is MD, FMR LLC and a director of FIL Limited. a director of FMR LLC and is a director Douglas and a non-executive director Richard has held a number of senior of Asia Telecom Group, L.P., Pro-Build of two funds managed by FIL Limited. positions within the Fidelity organisation Holdings, Inc., W.R. Hambrecht and Co. Frans was previously joint Chairman and was previously with Digital Equipment and EnVivo Pharmaceuticals. John has of Unilever and non-executive Chairman Corporation. previously held a number of senior of ABN AMRO Bank. positions within the Fidelity organisation (resigned on 31 December 2008).

Mark Ferrari Non-executive Director, 52, was appointed to the board on 1 January 2009. He is Managing Director of Devonshire Investors and also serves as Chairman of FIML Natural Resources and Backyard Farms Holding, LLC and as director on the boards of a number of other Devonshire portfolio companies. Prior to joining Fidelity, Mark was Vice President of Finance at Kronos Inc and began his career at Ernst & Young.

COLT Telecom Group S.A. | Annual Report 2008 7 Report of the Board of Directors

WE listen Every year we ask 15,000 customers to tell us what they think of COLT in an independent survey. This feedback is invaluable.

COLT Telecom Group S.A. | Annual Report 2008 8 Report of the Board of Directors continued

We aim to leverage our assets efﬁciently to achieve our goal of sustainable proﬁt growth.

The Directors submit their report and audited Business review financial statements for the year ended This Report of the Board of Directors sets out an overview of the 31 December 2008. For the purposes of this development and performance of the business, a description of the report, ‘Company’ means COLT Telecom principal risks and uncertainties facing COLT and an indication Group S.A. and ‘Group’ or ‘COLT’ means the of likely future developments. Company and its subsidiary undertakings. Strategy COLT’s vision is to be the most trusted provider of Data, Voice Principal activity and Managed Services for businesses across Europe. We aim The Company is the holding company for the Group and is domiciled to increase the utilisation of our infrastructure by delivering services in Luxembourg. The principal activity of the Group is the provision that meet the speciﬁc business needs of our different customer of business communications solutions and services within Europe. segments: Major Enterprise, SME and Wholesale. We will work The Company was admitted to the Ofﬁcial List of the UK Listing to deepen the relationship with our customers by providing them Authority and to trading on the main market for listed securities with a portfolio of network and managed data centre services that of the London Stock Exchange PLC on 3 July 2006. The original reduce the overall cost and complexity of the management of their holding company, COLT Telecom Group plc, was listed on the IT infrastructure. We will continue to selectively invest in new London Stock Exchange on 17 December 1996. infrastructure, systems and technology that will allow us, and in turn our customers, to continue to lower the total cost of ownership of IT infrastructure. We will continue to evolve our business processes and organisational structure to reflect the changing business needs of our customers and to allow us to establish the shortest delivery timeframes and the highest service levels in the industry.

Our people COLT is organised to serve the needs of its customers. It has three customer-facing divisions: Major Enterprise Division, Small and Medium Enterprise Division and Wholesale Division. These divisions are supported by dedicated Group service divisions including Finance, Administration, Operations, Technology, Business Processes and Systems and the local country divisions. In 2008 the average number of employees increased by 10.1 per cent to 4,425 (4,019 in 2007). A signiﬁcant part of the increase in employee numbers during the year was attributable to customer-facing roles. The average number of employees in India increased during the year by 201 to 984.

COLT Telecom Group S.A. | Annual Report 2008 9 Report of the Board of Directors continued

During 2008 COLT completed a number of key hires to strengthen Our Wholesale Division seeks to be the network access provider the senior management team, to enhance our strategic focus on of choice for other telecom suppliers and service providers, Managed Services and reflect our commitment to meet changing to optimise pan-European assets and to generate cash for the customer demand. More details of our engagement with our business. Our focus is on making it easy to do business with COLT employees are set out on pages 32 to 35 in the CSR report. for operators that require a European presence. In addition we offer a set of white-label services that operators can resell to their own Customer facing divisions customers to complement their own network services capabilities. Our Major Enterprise Division experienced significant growth In 2008 the Wholesale Division performed well with strong Data in Data and Managed Services revenue largely as a result revenue growth. Revenues and margins in our Wholesale Voice of increased demand for our Virtual Private Network (VPN) business continued to decline owing to price erosion and regulatory Ethernet and Data Centre services. Details of the Division’s financial impacts. Details of the Division’s financial performance are shown performance are shown on pages 17 and 55 to 56. Significant on pages 19 and 55 to 56. customer deals during the year included the provision of a UK Data Centre for a major bank and proximity hosting for a Benelux- During 2008 the Ethernet services portfolio was extended with headquartered global banking organisation. The launch of a fully a pan-European virtual Hub and Spoke option, further strengthening managed service providing secure and reliable access to BOAT COLT’s position as a leading Ethernet service provider to Wholesale (a new market information service for the finance sector) heralded customers across Europe. A new Wholesale IPVPN service was the first of a number of connectivity deals for several new launched and our Carrier Voice over IP service was enhanced. international trading exchanges during the year. The Major By focusing on processes and customer interfacing systems and Enterprise Division also concluded a number of contracts with tools, the Division has made good progress in making the transition governments and public sector customers across Europe. from simple product sales to offering business solutions to our Wholesale customers. Additionally our global reach capability was improved with COLT- grade Ethernet services being made available to New York, Boston, Products Chicago and Newark in the USA together with a new interconnect COLT offers its customers a comprehensive portfolio of Data, Voice to the IP VPN network. and Managed Services. These are supported by a professional services team which helps customers plan, design, implement and Our Small Medium Enterprise (SME) Division consolidated operate highly effective solutions for their business needs. We also its position during 2008 and stabilised revenues after two years provide services that allow other licensed operators to use spare of decline, driven by the Voice market. Details of the Division’s capacity on COLT’s network. financial performance are shown on pages 18 and 55 to 56. Developing SME’s marketing proposition with partners and Customers benefited from a number of product developments customers has helped improve the effectiveness of the operating in 2008. The launch of our Next Generation Solutions strategy model and deliver growth, notwithstanding the impact of declining combining the Next Generation Network and COLT’s 18 Data Voice revenue particularly in Germany. Additionally, SME has made Centres into a single system was an important milestone during the significant progress in focusing on medium-sized customers in the year. Enhancements to COLT High Speed Service were successful SME range rather than the smaller customer segment. Developing in helping customers build storage area networks and connecting simple, standard services to make COLT easier to do business Data Centres. In addition VoIP Access, COLT’s new IP trunking with and continuing to recruit new partners and resellers remains service, was launched in 13 countries in Europe in response an important part of SME strategy. to growing customer demand for IP-based Voice Services. A number of service improvements were completed for the In 2008 SME benefited from a range of measures implemented Intelligent Networking portfolio to enhance service availability, to improve access to COLT’s services. The launch of a bundled service provisioning and customer support. COLT Total, our leading product menu responded to customers’ needs for component- SME product which provides a Voice/Data bundle that can include based solutions. The rollout of high speed Ethernet in the First Mile additional capabilities such as VoIP and managed Data services, was capability to 12 countries in Europe was substantially completed; also enhanced during the year. Additional information on products in this provides the ability to use copper wires to extend coverage 2008 is set out above within the commentary on Business Divisions. to customer sites beyond our fibre network. A range of VoIP services was implemented including VoIP Access for retail customers COLT won the Metro Ethernet Forum’s (MEF) prestigious and a service option for resellers in 12 countries. New online tools ‘EMEA Ethernet Service Provider of the Year’ Award for ‘Service and systems were rolled out to increase productivity and make Innovation’. This is the fourth year running that COLT has collected it easier for customers and partners to do business with COLT. an MEF accolade and it reaffirms our leadership in European Ethernet services.

COLT Telecom Group S.A. | Annual Report 2008 10 Report of the Board of Directors continued

Continued investment in our underlying Next Generation Solutions infrastructure will bring customer service and cost efﬁciency beneﬁts.

Infrastructure ready for customer handover. Finally a new Data hall at the We continue to invest to ensure our three customer-facing Business Barcelona Data Centre was commissioned to support Managed Divisions are supported by a world class underlying infrastructure. This Services business growth. investment has allowed our business to deliver improved performance and end-to-end service delivery improvements for our customers. To enable the continued expansion of our Data Centre business, we created a new support function, Data Centre Infrastructure Investment in new platforms Services, with responsibility for building and operating all of our The continued investment in our underlying Next Generation Data Centres and Nodes under a single management team. Services infrastructure has provided the expected customer service and cost efficiency benefits. The Multi Service Platform (MSP) rolled Investment in Shared Service Centres out in London, Paris and Frankfurt in 2008 supports our multiple We continued to develop our Shared Service Centres in India and award winning Ethernet service. It is already delivering service Barcelona during 2008. improvements to our customers resulting in a more cost effective means of providing that service to the business. The IP Multimedia Our Shared Service Operations in India support service delivery, Subsystem and Next Generation IN platforms are now supporting network operations and services, finance and accounting, billing, some of the core networking traffic. Our plan for 2009 includes professional services, technology, systems, sales and marketing. network platform improvement and the migration of existing products In April 2008 we moved our Shared Service Operations in Bangalore onto these platforms to enhance end-to-end performance for the to new, larger offices to provide additional capacity and business products and to provide service delivery improvements for our continuity. In September 2008 COLT India started to support the customers. Additionally the new platforms will enable the Group’s first external customer, KVH, from our Bangalore office. development of several new Voice and Data products. KVH is a subsidiary of Fidelity. During 2008 COLT India teams undertook to industrialise the operations to make the processes Further investment in our COLT Managed Utility Service Platform scalable, robust and measurable. The Group will look to harness will provide the base from which we can deliver an increased range this to attract further new customers. In 2008 COLT India of Managed Services including the development of the ‘Software headcount grew 25 per cent by 219 to 1,107 (Gurgaon 868 and as a Service’ platform. It is anticipated that ‘Software as a Service’ Bangalore 239), with most of this growth attributable to our new will be available to our customers in 2009. facility in Bangalore, including 81 employees transferred from KVH.

Investment in Data Centres In Barcelona, our multilingual Customer Service Centre now handles In response to continued customer demand for Data Centre 1.2 million inbound and outbound calls each year and is the frontline capacity and Managed Services we successfully completed the helpdesk for both service delivery and service assurance for all our delivery of three major Data Centre expansion projects during 2008. customers across Europe in 12 different languages. Headcount A newly constructed London Data Centre was accepted into service in Barcelona has increased from 215 to 255 to accommodate the by the customer and two new Data halls in Amsterdam were made growing number of business customers.

COLT Telecom Group S.A. | Annual Report 2008 11 Report of the Board of Directors continued

Investment in IT Regulatory environment Our significant investment in IT is being managed by our Business The market for business communications is highly competitive but Processes and Systems teams. This includes improvements to our is still influenced strongly by regulation. Within the European Union, sales process through the introduction of salesforce.com and the national regulatory authorities (NRAs) operate within a common sales offer management system. It also includes improvements regulatory framework, which focuses economic regulation on to order management through electronic ordering and workflow those communications providers which are found to have Significant for the service delivery process and customer self service through Market Power (SMP), a concept equivalent to competition COLT Online. The new retail billing platform should be ready for law dominance. NRAs conduct regular reviews of specified use in 2009. The ongoing costs of running the systems have been communications markets to assess whether there is effective reduced through transformation of the Data Centre infrastructure, competition or if one or more providers have SMP. If SMP is found, with applications supported on virtual servers and improvements the NRA must impose some form of regulatory remedy. NRAs are to storage and backup infrastructure. Other systems are being also required under the European framework to impose certain constantly maintained and enhanced including introduction regulatory obligations on all communications providers in order of support for new products. to guarantee minimum standards of consumer protection.

Competition For COLT, the implementation of the European framework is generally The telecommunications industry is highly competitive in the areas beneficial, since it provides the basis for NRAs to regulate the terms where alternative operators compete. This is particularly true where and prices on which COLT can purchase off-net access and other the opportunity for product differentiation is low and customers’ wholesale services from incumbent operators, such as BT. Such purchasing decisions are largely price driven, for example off-net access is important to extend COLT’s reach and to serve in switched Voice traffic and point-to-point bandwidth services. customers in locations outside its own fibre network. Consequently, although the volume of switched Voice traffic has increased significantly over the last ten years, the price for such COLT itself has generally not been found to have SMP and thus services has declined over this period. Competition is continuing does not face a significant regulatory burden. COLT only has SMP to generate downward price pressure across the market for in the market for wholesale fixed call termination services, for which business telecommunications services, including Voice and Data. every fixed operator is regulated. COLT must also comply with the Most operators’ response to this situation has been to attempt general provisions on consumer protection which are applicable to move into the value-added segments of the market. The fixed- to all communications providers. line sector is subject to increased competitive pressure from the mobile sector. To date this has principally been in the form of fixed- In Switzerland, the EU framework does not apply, although mobile substitution, where the ubiquity and ease of a mobile phone the approach to the regulation of the communications sector has led to customers making calls from mobiles that could is comparable. One major difference is that there is significantly otherwise be made from fixed lines. less scope for the Swiss regulator to prescribe in advance the terms on which the dominant operator must provide wholesale In every country in which it operates, COLT competes primarily with access services; normally the regulator in Switzerland can only the incumbent Public Telephone Operator (PTO) in the fixed line intervene in the case of a dispute. market. COLT also faces competition for Voice and Data traffic from a number of alternative service providers. In addition, COLT There is a potentially significant dispute between the mobile faces competition for cross-border business from a number operators and the German regulator regarding charges for mobile of pan-European operators, together with competition from new termination. In 2007, the mobile operators challenged the regulator’s market entrants. power to fix rates and whether those rates were reasonable. The courts have judged that the regulator did have the power Systems Integrators (SIs) which provide integrated IT systems are to fix rates but the actual level of mobile termination rates is not increasingly entering the telecoms market as they look to add expected to be resolved until 2010. The judgement to date more value to their offerings by integrating telecommunications is favourable to COLT but if it is reversed COLT would have to pay services into their existing products. Whilst COLT has not sought higher charges to mobile operators without being able to reclaim to compete with SIs there is growing competition for Managed all of such higher charges from customers in most cases. Services including application hosting, infrastructure management, IT services, and network and facilities management from SIs and COLT will continue to engage with regulators to ensure that the other Data Centre operators. The integration of the 18 COLT Data regulatory environment continues to be favourable for COLT’s Centres with our pan-European network gives COLT a competitive business and investments. advantage over pure Data Centre operators.

The Voice market is also subject to competition from VoIP operators, who have offerings in the small and medium size corporate markets. COLT also regards the competition that will come from such new technologies and market entrants as important inﬂuences on its medium to long term proﬁtability as customers migrate to those new services and technologies.

COLT Telecom Group S.A. | Annual Report 2008 12 Report of the Board of Directors continued

Key performance indicators

1,679.6 1,675.4 916.0 39.4% 303.9 54.9 45.7* 310.1 38.5% 842.6 277.4

37.3 259.7

39.2

Revenue Data revenue Gross margin before EBITDA1 Proﬁt before tax and Free cash ﬂow 2 Capital expenditure €m €m depreciation and exceptional items €m exceptional items €m €m €m I Year ended 31 December 2007 I Year ended 31 December 2008 *Including exceptional items of €17.0m

Financial review and key performance indicators Key performance indicators COLT’s key performance indicators (KPIs) for 2008 are detailed The Board of Directors monitors the financial performance of the above and discussed within this financial review. Explanations Group’s operations on a regular basis. The KPIs have been of how they have been calculated and their purpose in assessing calculated in line with the amounts presented in the financial the performance of the business are set out below. statements unless otherwise stated. Details of the most significant KPIs used by the Group are: Unless indicated otherwise, the following commentary is based • Revenue: Revenue and its growth are used for internal on financial statement variances including the impact of exchange performance analysis and by investors to assess the rate movements. Certain key financial metrics are stated at constant performance of the business. currency, converting 2008 non-Euro currency measures at 2007 • Data revenue: The level and growth of higher margin Data exchange rates. revenue is also used for internal performance analysis and by investors to assess the performance of the business. • Gross margin before depreciation per cent: This is calculated as revenue less interconnect and network costs as a percentage of revenue. It provides a useful measure of the profitability of the network, before depreciation and operating expenses. • EBITDA: EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items. We believe that EBITDA represents a meaningful measure of the underlying operating profitability of the Group. • Free cash flow: Free cash flow is net cash generated from operating activities less net cash used in investing activities and net finance costs paid. Free cash flow provides an evaluation of the cash generated from the Group’s operations. • Capital expenditure: Cash capital expenditure is the amount of the Group’s funds which have been spent on the purchase of assets retained within the business.

These KPIs have been considered in the following review of the ﬁnancial performance of the business, including by segment where applicable.

1 EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items. 2 Free cash flow is net cash generated from operating activities less net cash used in investing activities and net finance costs paid.

COLT Telecom Group S.A. | Annual Report 2008 13 Report of the Board of Directors continued

Five year revenue summary

€2,000m

721.0 670.4 712.1 590.3 523.8

235.6 In 2008 our €1,000m 246.7 382.8 363.4 389.6 Data revenue grew by 842.6 916.0 694.9 717.9 767.2

0 04 05 06 07 08 8.7% I Corporate and Reseller Voice I Carrier Voice I Data

Revenue Revenue is analysed in the following section in total, by segment and by product type. Product types are Data (including Managed Services) and Voice, split between Carrier and Corporate and Reseller.

2004 2005 2006 2007 2008 €m €m €m €m €m Total revenue 1,796.6 1,821.7 1,801.0 1,679.6 1,675.4 Increase in Deferred revenue – 4.4 15.5 35.3 1.8

Total revenue in 2008 decreased by 0.3 per cent compared with 2007 but increased by 2.4 per cent after adjusting for the adverse impact of the continuing fall in Sterling against the Euro during the year.

The growth in Data revenue of 8.7 per cent was principally due to Ethernet and Managed Services offerings. Before the impact of exchange movements, deferred revenue which results primarily from upfront installation payments for Data services, increased by €23.6m during 2008. Net of a €21.8m exchange loss, deferred revenue increased by €1.8m to €185.1m. Voice revenue declined overall by 9.3 per cent and excluding the impact of regulatory decreases in ﬁxed to mobile prices, reduced by 6.7 per cent. Corporate and Reseller Voice declined by 11.3 per cent and Carrier Voice reduced by 4.5 per cent.

COLT Telecom Group S.A. | Annual Report 2008 14 Report of the Board of Directors continued

WE respond Continued investment in our Network, Data Centre infrastructure and people helps us respond to customer needs; delivering business innovation and world class performance.

COLT Telecom Group S.A. | Annual Report 2008 15 Report of the Board of Directors continued

Data revenue ﬁve year trend Corporate and Reseller Voice revenue ﬁve year trend

€1,000m €800m +8.7% +1.2% +9.8% -7.0% +6.9% -11.9% +3.3% -11.3%

€500m €400m 916.0 712.1 721.0 842.6 670.4 767.2 717.9 590.3 694.9 523.8

0 0 04 05 06 07 08 04 05 06 07 08

Data revenue Corporate and Reseller Voice Data revenue continued to grow during 2008, driven by Ethernet Corporate and Reseller Voice revenue declined 11.3 per cent during and Managed Services. 2008 although the rate of reduction decreased compared to 2007. Of the 11.3 per cent decline, 2.7 percentage points were due The implementation of the Multi Service Platform (MSP) which began to reductions in mobile termination rates. in 2008 will assist further Ethernet growth in 2009. A key feature of the growth in Managed Services revenue was the continued The revenue decline continued to be mainly in Germany, which investment in Data Centre infrastructure to meet growth in demand. accounted for 7.4 percentage points of the total Group decrease. The disruption caused by the mobile operators’ dispute with the We have yet to see material reductions in growth rates caused German regulator regarding mobile termination rates continues by the impacts of the credit crunch and wider economic downturn. to have an impact and continuing competitive pressures across However, there are indications of increased caution on the part the Voice market and reductions in mobile termination rates have of some of our customers. COLT is not expected to be immune also contributed to the decline. to the economic downturn. However, our exposure is in part mitigated by the longer term nature of many of our contracts and the non discretionary, utility nature of our products.

COLT Telecom Group S.A. | Annual Report 2008 16 Report of the Board of Directors continued

Carrier Voice revenue ﬁve year trend Major revenue

€400m €800m -1.7% -5.1%

-8.3% 172.0 187.6 -32.1% -4.5%

€200m €400m 389.6 382.8 363.4

+8.9% 528.9 246.7 235.6 485.5

0 0 04 05 06 07 08 07 08

I Corporate and Reseller Voice I Data

Carrier Voice revenue Major Enterprise Division revenue As expected, the Group continued to experience highly competitive Data revenue from Major Enterprise customers increased conditions in the Carrier Voice market, as well as continued by 8.9 per cent, driven by a focus on high margin Ethernet and revenue decline from the market disruption in Germany as already Managed Services. The growth in Managed Services in particular mentioned. The benefits of Carrier Voice centralisation within our was influenced by long term Data Centre contracts with global Wholesale Division also helped to stabilise revenue during 2008 financial services customers. We also added connectivity for with growth in international revenue offsetting declines in European several new international trading exchanges. Growth rates during fixed and mobile terminations. the year were not materially impacted by the downturn in the economic environment, despite financial sector customers constituting 40 per cent of the Division’s revenue or less than 20 per cent of the Group’s total revenue.

Voice revenue declined by 8.3 per cent with 4.7 percentage points of the decline arising in the UK due largely to the impact of the movement in the Sterling to Euro exchange rate. A further 3.7 percentage points of the decline arose in Germany where the disruption caused by the mobile operators’ regulatory dispute, reductions in mobile termination rates and competitive pressures across the Voice market continue to have a negative impact.

COLT Telecom Group S.A. | Annual Report 2008 17 Report of the Board of Directors continued

SME revenue

€500m

317.1 -13.2% 275.1

€250m Data revenue from SME customers increased by

171.7 +8.7% 186.6

0 % 07 08 8.7 I Corporate and Reseller Voice I Data

SME Division revenue Data revenue from SME customers increased by 8.7 per cent, principally as a result of growth in COLT Total, our combined Voice/Access product for this market, and Ethernet. This growth was underpinned by the development of the SME marketing proposition with our partners and customers to improve the effectiveness of the operating model.

Voice revenue declined by 13.2 per cent of which 10.8 percentage points related to Germany, owing to the continued decline in our legacy Carrier Pre-Select (CPS) product, particularly in the consumer and micro-business (typically less than 30 employees) markets. The situation in Germany is further exacerbated by the mobile operators’ regulatory dispute as well as reductions in mobile termination rates.

COLT Telecom Group S.A. | Annual Report 2008 18 Report of the Board of Directors continued

Wholesale revenue Geographical revenue trend

€600m €800m

246.7 -4.5% 235.6

€300m €400m

668.1 85.6 -10.4% 76.7 615.5 513.3 469.5

311.8 292.6 185.4 +8.1% 200.5 239.0 245.2

0 0 07 08 07 0807 0807 0807 08

I Carrier Voice I Corporate and Reseller Voice Germany UK France Strategic Markets I Data

Wholesale Division revenue Revenue by main geographical market Data revenue from Wholesale customers increased by 8.1 per cent, Total revenue decreased in Germany by 8.5 per cent, reﬂecting the driven by demand from our larger customers for our Ethernet continued Voice competitiveness and regulatory environment in products. that country. UK revenue decreased by 6.2 per cent as a result of the depreciation of Sterling against the Euro but on a constant Voice revenue from Wholesale customers decreased by 6.0 per cent currency basis UK revenue increased by 9.1 per cent, mainly driven overall of which 3.4 percentage points was a result of a decline by Data revenue. Revenue in France increased by 2.6 per cent in carrier voice revenue in Germany arising from the mobile operators’ reflecting increased Data revenue. Revenue in the remaining regulatory dispute in that country. A further 2.9 percentage points countries (Strategic Markets) increased by 8.5 per cent, also of the decline was in Carrier Voice and Corporate & Reseller Voice driven by Data. in France due to competitive pressure.

Enhancements to our product portfolio were delivered through Cost of sales Carrier VoIP access across all countries along with the transition Cost of sales including exceptional items decreased by €31.1m to an IMS VoIP platform as part of our Next Generation to €1,195.7m driven by the reduced total revenue and improved Solutions strategy. mix of higher margin Data revenue. Included within cost of sales in 2008 was an exceptional credit of €17.0m which resulted from the resolution of a complex billing issue relating to the period 2004-2007.

COLT Telecom Group S.A. | Annual Report 2008 19 Report of the Board of Directors continued

WE implement In 2008 we successfully completed the delivery of three major Data Centre expansion projects.

COLT Telecom Group S.A. | Annual Report 2008 20 Report of the Board of Directors continued

Gross proﬁt before exceptional items Five year selling, general and administrative expenses

€500m 100% €400m +2.8% -1.0% -1.0% -3.7% 462.7 452.8 418.5

345.3 369.3 355.8 313.9 377.1 373.2* 366.7 €250m 50% €200m

0 0 0 04 05 06 07 08 04 05 06 07 08 I Gross proﬁt • Gross proﬁt before depreciation % * Includes exceptional cost of €9.3m

Gross profit before exceptional items Operating expenses Gross profit continued to improve, increasing by 2.2 per cent Selling, general and administrative expenses (SG&A) decreased during 2008. Gross margin before depreciation and exceptional by 3.7 per cent during 2008. However, without the effect of weaker items increased by 0.9 percentage points to 39.4 per cent. Both Sterling during the year, there would have been an increase increases were driven by the improved revenue mix towards higher of 3.5 per cent on a constant currency basis, as a significant margin Data revenue, particularly Ethernet and Managed Services proportion of costs are denominated in Sterling. offerings, notwithstanding continued upward price pressure on costs such as electricity. During 2008 we focused on improved productivity. However, a controlled increase in SG&A expenses during the year was Network depreciation increased by 1.6 per cent owing to increased essential to drive profitable revenue growth, principally in the investment in network assets to drive growth in Data revenue. following areas: • Additional resource in Operations to continue service delivery improvements and in customer-facing divisions to drive sales. • Expansion of the Barcelona Shared Service Centre. • Additional resource to drive Managed Services expansion.

COLT Telecom Group S.A. | Annual Report 2008 21 Report of the Board of Directors continued

Five year EBITDA summary Divisional operating proﬁt/(loss) before exceptional items

€400m €75m

+9.6% €50m +6.8% +2.4% +10.2% 76.3

55.3 €200m €25m 48.7 35.6 31.0 31.7 303.9 270.9 277.4 253.7 230.2 0 (4.1) (11.3)

0 (€25m) 04 05 06 07 08 07 0807 0807 0807 08

Major SME Wholesale Total

EBITDA1 Operating result (before exceptional items) EBITDA continued its recent annual upward trend, increasing The Group operating profit before exceptional items increased by 9.6 per cent to €303.9m in 2008. On a constant currency by €21.0m driven by the EBITDA improvement. basis EBITDA would have been €292.6m for the year, reflecting the improved gross margins from higher margin Data revenue Major Enterprise growth offset in part by the controlled growth in SG&A expenses. Operating profit for the Major Enterprise Division increased by €0.7m driven by increased revenue offset by higher costs. EBITDA trends by segment are materially in line with segmental operating profit. SME Operating losses for the SME Division decreased by €7.2m. The improved mix of both higher margin Data revenue and higher margin product sales within Voice revenue, and the reduced SG&A costs more than offset the decrease in overall SME revenue.

Wholesale Similarly the Wholesale Division operating proﬁt increased by €13.1m with the improved mix of higher margin Data revenue more than offsetting the reduction in overall revenue.

1 EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

COLT Telecom Group S.A. | Annual Report 2008 22 Report of the Board of Directors continued

Group operating Five year proﬁt after tax summary (before exceptional items) proﬁt before exceptional €100m items increased by

54.9 39.2 0 €21.0m (9.5)

(129.6) (162.0) (€100m)

(€200m) 04 05 06 07 08

Finance income and finance costs Profit after tax before exceptional items Finance income increased by €1.1m to €9.3m (2007: €8.2m) Profit after tax continued its annual improvement, increasing reflecting higher cash balances and improved cash management. by €15.7m to €54.9m in 2008. Finance costs and similar charges decreased by €0.9m to €22.7m (2007: €23.6m).

Exchange losses The exchange losses in the year ended 31 December 2008 totalled €8.0m, primarily due to the revaluation of Sterling denominated assets and liabilities into Euros.

Taxation

2007 2008 €m €m Group tax charge – – Gross tax losses carried forward – without time limits 1,217.1 1,329.0 Gross tax losses carried forward – time limited 339.5 272.4 Total tax value of losses 1,556.6 1,601.4 Other timing differences 1,184.1 1,106.9 Total unrecognised gross tax asset 2,740.7 2,708.3

The majority of the above time limited losses must be utilised by 31 December 2011 and all must be utilised in the country of origin. They remain subject to legislative provisions and to agreements with the various tax authorities in the jurisdictions in which the Group operates. The other timing differences mainly arose from our assets being depreciated more quickly in our ﬁnancial accounts than in our tax accounts.

COLT Telecom Group S.A. | Annual Report 2008 23 Report of the Board of Directors continued

Free cash ﬂow summary Free cash ﬂow €50m increased by *

€25m €8.4m 45.7* 37.3

19.1 10.7 0

(14.2)

(€25m) 04 05 06 07 08

* Includes €17.0m exceptional item

Cash ﬂow

Free cashﬂow 2004 2005 2006 2007 2008 €m €m €m €m €m

EBITDA 230.2 253.7 270.9 277.4 303.9 Net cash used in capital expenditure† (183.9) (182.8) (229.4) (259.7) (310.1) Movements in working capital and provisions (excluding deferred revenue) (26.0) (31.6) 9.9 (10.4) 23.3 Movement in deferred revenue – 3.2 13.5 42.9 23.3 Non-cash items 3.1 3.6 0.6 0.1 0.1 Exceptional items – – (9.3) – 17.0 Net finance costs (37.6) (35.4) (37.1) (13.0) (11.8) Free cash flow including exceptional items (14.2) 10.7 19.1 37.3 45.7

† Capital expenditure is reported on a cash not an accruals basis.

Free cash inﬂow increased by €8.4m to €45.7m reﬂecting increases in EBITDA, exceptional items, deferred revenue and other working capital, offset by increased capital expenditure. Within working capital, receivables decreased due to improved timeliness of collections.

Capital expenditure increased by €50.4m to €310.1m reflecting increased customer Data revenue orders and increased investment in Data Centres mainly to support increased COLT Managed Services orders as shown opposite.

COLT Telecom Group S.A. | Annual Report 2008 24 Report of the Board of Directors continued

Capital expenditure The increase in capital €400m expenditure related to Managed Services revenue reﬂects investment in new Data Centre space across Europe mainly resulting from €200m new customer contracts.

310.1 259.7 229.4 183.9 182.8

0 04 05 06 07 08

Capital expenditure Other capital expenditure, representing non customer-specific core Year ended network and office infrastructure, internal IT projects and network 2007 2008 €m €m inventory, increased by €0.5m to €65.4m. Key expenditure Capital expenditure primarily related to: in 2008 was for the MSP Next Generation Network infrastructure, Data revenue* 172.6 188.5 representing a foundation for improved customer functionality Managed services revenue* 22.2 56.2 and cost efficiencies for the Group. There was also significant 65.4 Other* 64.9 investment during the year on our Next Generation Billing project, 310.1 Total capital expenditure 259.7 due for completion in 2009, which is also expected to yield future cost efficiencies. These projects represent major long * This analysis is estimated based on the term investment. proportion of fixed asset additions.

Capital expenditure related to Data revenue is primarily expenditure on new equipment both on customer premises and elsewhere in the network to support the acquisition of new Data revenue customer contracts. These contracts are typically for periods in excess of one year. Capital expenditure for these purposes increased broadly in line with Data revenue growth.

The increase in capital expenditure related to Managed Services revenue reflects investment in new Data Centre space across Europe mainly resulting from new customer contracts. This expenditure has a longer payback period with substantial initial investment leading to sustained future revenue streams. COLT’s policy is to generally build out Data Centres in response to customer demand rather than on a speculative basis.

Wherever possible we try to manage the initial Data and Managed Services cash investment through up-front customer payments and accordingly, before the impact of exchange movements, deferred revenue increased by €23.6m during 2008. Net of a €21.8m exchange loss, deferred revenue increased by €1.8m to €185.1m.

COLT Telecom Group S.A. | Annual Report 2008 25 Report of the Board of Directors continued

Cash and debt summary (as at 31 December)

€1200m

€600m 1167.3

854.0

638.7

328.3 262.2 262.2 273.6 262.2 196.3 231.1 0 04 05 06 07 08

I Cash I Debt

Liquidity and capital resources • Customer service: If COLT does not continue to provide a high The Group’s cash and cash equivalents increased by €42.5m level of customer service, there is a risk that business prospects during 2008. The Group also moved from a net debt to a net cash could be harmed and COLT’s financial performance adversely position by the end of 2008. In light of the underwritten Open Offer affected. launched today, COLT is well placed to repay its bonds, which • IT: The telecommunications business in general, and COLT’s mature in December 2009. in particular, is heavily dependent on IT systems. If the Group fails to maintain, develop and implement new IT systems successfully Principal risks and uncertainties COLT’s business and operations will be negatively affected. The management of COLT’s business and the execution of the • Infrastructure: Physical loss, damage or limitation of capacity Group’s strategy are subject to a number of risks and uncertainties. to one or more of COLT’s Data Centres, network management The key risks facing the business are set out below: centres and network could disrupt our business or customers’ • Economic conditions: A significant downturn in economic business. Again, this could have an adverse impact on the conditions could adversely affect COLT’s results. Much of our Group’s business, financial condition and operating results. business centres on implementing information technology (IT) • Shared Service Centres: Physical loss, damage or restriction solutions for large corporate customers. A downturn in economic of timely access to the Group’s Shared Service Centres in Gurgaon conditions may cause existing and potential customers to delay and Bangalore, India and Barcelona, Spain could disrupt COLT’s or avoid the purchase of such solutions, or may lead to business or customers’ business. Again, this could have an consolidation of customers or increased bad debt. However, adverse impact on the Group’s business, financial condition and it may also increase opportunities as our customers seek operating results. to reduce costs and outsource their operations. • Customer churn: Customer churn happens when customers • Competition: The telecommunications industry is highly stop subscribing to one or more of COLT’s products or services. competitive. Competition in the industry is based upon a number COLT is vulnerable to customer churn because some of its of factors including strategy, price, network quality, technology, products have become commoditised and many of its customers products and services and customer service. Failure to deliver do not commit to long term contracts. Customer churn leads on any of these aspects could have an adverse effect on COLT’s to reduced revenues from lost business and could adversely affect business, financial condition and operating results. COLT’s business. • Changes in technology: The industry is also subject to rapid • Suppliers: The Group is reliant on a consistent and effective technological changes. However, it is not possible to predict with supply chain to meet its business plan commitments. Any any certainty the effect of any changes on COLT’s business. financial or operating weakness of COLT’s telecommunications • Regulation: The telecommunications industry is highly regulated equipment or service suppliers or COLT’s IT software suppliers in all the countries where COLT provides services. The Group is could affect the Group’s performance. therefore subject to uncertain and changing regulatory issues that • Capital: COLT may require additional capital to finance the could potentially affect the way we operate in different jurisdictions. Group’s investment and working capital requirements. Failure to finance capital requirements adequately could adversely affect the execution of the Group’s strategy.

COLT Telecom Group S.A. | Annual Report 2008 26 Report of the Board of Directors continued

COLT’s cash and cash equivalents increased by €42.5m. The Group also moved from a net debt to a net cash position by the end of 2008.

These risks are managed and continuously monitored through an fixed rate interest terms. The remainder of the Group’s outstanding established risk management process embedded at both Divisional bonds issued in December 1999 are also due for redemption within and Group-wide levels. The risk management process formalises 12 months (December 2009). management’s activities around the identification, prioritisation and ongoing assessment of risks. Changes in both the external and During 2008 the Group did not use any derivative financial instruments internal environments are reviewed on a periodic basis to ensure to manage treasury risk. their impacts on COLT’s risk profile and exposure are understood and mitigated if necessary. Risk mitigation strategies are discussed Further information is provided in note 22 of the attached and actions, ownership and implementation dates are agreed financial statements. accordingly. The progress of mitigation activities is tracked by dedicated risk champions in the business, and update reports are Liquidity risk provided to the Audit Committee. The risk management process is The Group has financed its operations historically through a mixture aligned to the annual budget process to ensure risk-related spends of issued share capital and long term senior unsecured loan notes. are considered, and where necessary, incorporated. On a yearly COLT’s outstanding notes are due for repayment on 15 December basis, senior management collectively revisits the Group-level risks 2009. COLT had cash and cash equivalents of €273.6m to ensure the overall risk management process remains aligned at 31 December 2008. On 20 February 2009, COLT launched to COLT’s business objectives and the operating environment. an Open Offer to raise €201m before expenses, which is fully underwritten by certain Fidelity parties. In the view of management, Treasury policy this provides COLT with adequate funding to support its working The Group operates a centralised treasury function. The Group’s capital requirements and facilitate repayment of the Notes. treasury operations are conducted within a framework of policies and risk management procedures approved by the Board. The Excess cash balances are invested either in AAA unsecured money Board reviews the risks and associated polices and procedures, market mutual funds or placed on short term money market cash including overall treasury strategy on a regular basis. deposits with approved counterparties, prior to being invested in the Group’s operating companies to fund their operations The primary objectives of the centralised treasury function are on an as needs basis. to optimise the return on the Group’s cash surpluses, manage the working capital and foreign currency requirements of the Group Foreign currency risk and ensure the Group has access to the debt and capital markets The Group’s principal revenues, costs, assets and liabilities, including as well as alternative short term funding options. external and intra-Group debt financing, were denominated in Euros during 2008. Of the remaining revenues, costs, assets and liabilities, In addition to liquidity and credit concentration risk, the Group’s the largest non-Euro denominated balances, and those to which the principal financial risk exposures arise from foreign currency Group is subject to the most significant exchange risk, are in Sterling. exchange and interest rates. These are mitigated however, by a majority of the Group’s transactions being denominated in Euros The Euro strengthened by 16 per cent against Sterling during 2008. and the Group’s external debt is also Euro denominated, containing We estimate the impact on operating profit was €21.5m.

COLT Telecom Group S.A. | Annual Report 2008 27 Report of the Board of Directors continued

Interest rate risk The Group’s policy is to finance the Group centrally using a mixture The Company has reduced the uncertainty associated with fluctuating of equity and long term capital markets issues. The Group’s interest rates by raising debt at fixed rates. As interest is earned on remaining 7.625 per cent Euro bonds become due for redemption cash deposits at variable as well as fixed rates, changes in interest at par on 15 December 2009. On 20 February 2009 following rates will have an impact on the amount of interest income earned. a review of its financing structure the Board announced an Open Offer to raise €201m before expenses. The Open Offer is fully Concentration of credit risk underwritten by certain Fidelity parties. The proceeds from the The Group considers its exposure to credit risk at 31 December Open Offer will strengthen COLT’s balance sheet and provide to be as follows: resources which will allow COLT to repay its outstanding bonds, which become due in December 2009, while implementing its 2008 2007 €m €m business plan. Money market deposits 130.0 – Money market fund 69.0 74.8 Likely future developments Total money market fund and deposits 199.0 74.8 The business environment and market conditions are likely to be Bank deposits 74.6 156.3 challenging in the foreseeable future. The telecommunications Trade receivables 220.2 253.3 industry will continue to be competitive, pricing pressure will Other receivables and VAT recoverable 26.6 44.8 continue to be intense and the pace of innovation and technological 520.4 529.2 change will remain fast moving. Furthermore, the global economic downturn will continue to affect businesses across Europe: their Financial assets that potentially subject the Group to a concentration ability to pursue discretionary programmes and, in many cases, of credit risk consist principally of accounts receivable and cash and maintain core business efforts. Nevertheless, growing revenue, cash equivalent deposits. Concentration of credit risk with respect introducing more innovative services and technologies, improving to trade receivables is considered limited given that the Group’s the Group product mix and margins, managing costs and capital customer base is large and unrelated and distributed across expenditure and achieving significant improvements in EBITDA different countries and industries. Due to this, management believes and free cash flow will continue to be our priorities. there is no further credit risk provision required in excess of the normal provision for bad and doubtful receivables. In this environment, COLT will continue to focus on its Data revenue growth, particularly Ethernet and Managed Services. In addition, Investments in bank and money market deposits are in accordance we will continue to develop and deliver new products and services, with established internal treasury policies which dictate that an especially in Managed Services. Late in 2008 we launched our new investment’s long term credit rating is no lower than single A. Managed Services Division. The purpose of this Division is to assist As at 31 December 2008 the Group had €130.0m on deposit with our customer-facing business Divisions in addressing the significant four counterparties for a maximum of three months. The largest growth in demand for IT and network services. We see Managed deposit with any one party was €40.0m. Additionally the Group Services as fundamental to driving our revenue growth over the next invests in AAA unsecured money market funds where the five years as the market for this offering is fast growing, thereby investment is limited to a maximum of the lower of €50 million mitigating the decline in some of our more traditional products such or 2.5 per cent of the fund, subject to a minimum of €1 billion fund as Voice. We will continue to invest wisely and opportunistically size and various other qualitative requirements. in our Data Centre and network infrastructure while continuing with our key internal investments, especially in our India Shared The Group has not experienced any losses to date on its Services centres. deposited cash. COLT’s customer segment-led operating model, introduced in 2007, Capital management will continue to enhance our focus in managing our resources, The following table summarises the current capital of the Group: people and infrastructure. We will continue delivering optimum solutions for the particular requirements of different customer 2008 2007 €m €m segments, further building our reputation as a premier customer- Cash and cash equivalents 273.6 231.1 oriented ICT business. Borrowings Long term – (262.2) Post balance sheet event – €201m Open Offer Short term (262.2) – On 20 February 2009 following a review of its financing Net funds/(debt) 11.4 (31.1) structure the Board announced an Open Offer to raise €201m Equity 942.3 936.7 before expenses. The Open Offer is fully underwritten by certain Capital 1,723.9 1,723.3 Fidelity parties.

Dividends The Directors are not recommending the payment of a dividend (2007: €nil).

COLT Telecom Group S.A. | Annual Report 2008 28 Report of the Board of Directors continued

Annual General Meeting Auditors The Annual General Meeting of the Company (the ‘AGM’) is to be PricewaterhouseCoopers S.à r.l. are the independent auditors held at K2 Building, Forte 1, 2a rue Albert Borschette, L-1246, of the Company. Their reappointment as the Company’s auditors, Luxembourg on Thursday 30 April 2009, starting at 11.00 a.m. together with authority for the Directors to fix their remuneration, (Luxembourg time). The notice convening the meeting is in will be proposed at the AGM. a separate document sent to shareholders. All proposals in the notice of the meeting to be considered at the AGM will be decided Share capital by a poll of shareholders. Details of the changes in the number of the Company’s ordinary shares in issue are set out in note 14 of the Financial Statements Directors on page 65. The Directors have authority to allot ordinary shares The Directors of the Company and those who served during the in the Company and to dis-apply pre-emption rights, as permitted year are listed with their biographical details on pages 6 and 7. under the Company’s Articles of Association. It is the Directors’ John Remondi retired from the Board on 31 December 2008 and stated intention to comply with the Association of British Insurers’ Mark Ferrari was appointed to fill the vacancy as a Director on guidelines with respect to the allotment and pre-emption limits 1 January 2009. In accordance with the Company’s Articles of with regard to the issue of ordinary shares in the Company. Association, all the Directors will retire at the AGM. All of the retiring Directors, being eligible, will stand for re-election as Directors and The AGM notice will also contain a resolution asking shareholders Mark Ferrari will stand for election as a Director. to grant the Company authority to purchase its own shares. No shares have been purchased and no contract has been Directors’ interests entered into under any such authority in the past. The interests of the Directors in the Company’s ordinary shares at 1 January 2008 or if later, their date of appointment, and at Shareholders 31 December 2008 or if later, their date of appointment*, were: Two trusts are set up for facilitating the holding of shares in the Company by employees and the executive Directors. Details Number of Ordinary Shares of these trusts, including the number of the Company’s ordinary Director 1 Jan 08 31 Dec 08 shares held by them, are given in note 14 of the Financial Andreas Barth 21,827 21,827 Statements on pages 65 to 69. Tony Bates 86,666 86,666 Rakesh Bhasin 100,000 100,000 As at 18 February 2009, the following shareholders have notified Vincenzo Damiani 57,701 58,729 the Company of their interest in three per cent or more of the Hans Eggerstedt 25,606 25,606 Gene Gabbard 15,580 15,580 Company’s issued ordinary shares: Simon Haslam –– Robert Hawley 38,381 38,381 Shareholder Number of Ordinary Shares 1 Tim Hilton 15,360 15,360 FMR LLC 219,441,220 John Remondi 66,666 66,666 Fidelity Investors Limited Partnership and 2 Frans van den Hoven 47,552 47,552 Fidelity Investors Limited Partnership IV 133,138,457 3 Richard Walsh ––Orbis Investment Management Limited 72,761,266 FIL Limited4 67,286,001

*Mark Ferrari has not been included in these tables as he was 1 FMR’s interest is held: appointed to the Board on 1 January 2009. He does not hold (a) directly by FMR, 195,357,303 ordinary shares; (b) through the holding of a wholly owned subsidiary, Fidelity Management Trust any interests in the Company’s ordinary shares. Company, that as trustee holds 9,996,565 ordinary shares for The COLT, Inc. 2004 Annuity Trust; and (c) through the holding of a wholly-owned investment advisory subsidiary, Strategic There was no change in these interests between 31 December 2008 Advisers, Inc., that as manager of a charitable foundation has voting power over and 20 February 2009. 14,087,352 ordinary shares for the Fidelity Non-Profit Management Foundation. 2 Fidelity Investors Limited Partnership’s holding is of 104,357,703 ordinary shares Details of the Directors’ interests in options over the Company’s and Fidelity Investors Limited Partnership IV’s holding is of 28,780,754 ordinary shares. Both entities are Delaware limited partnerships, the general partner ordinary shares are set out on page 45. Details of the Directors’ of which (Northern Neck Investors Corp.) is owned by, and the shareholders service agreements are set out on page 43. of which are, certain shareholders and employees of FMR. By virtue of this relationship both FMR and Northern Neck Investors Corp. are both interested in these shares. Indemnities 3 Held by funds managed by Orbis Investment Management Limited. Orbis The Company has entered into indemnities with each of the Investment Management Limited is a Bermuda company. Directors. Notwithstanding the fact that the Company is not a UK 4 FIL Limited’s interest in ordinary shares is held (i) through a nominee account incorporated company, the indemnities are in the form of Qualifying in respect of its own holding of 66,976,086 ordinary shares and FIL Foundation’s Third Party Indemnity Provisions consistent with s234 of the UK holding of 236,493 ordinary shares over which FIL retains the voting rights through a voting trust and (ii) through a holding of 73,422 ordinary shares over which Companies Act 2006. The indemnities are available for inspection FIL exercises voting control but which are beneficially owned by the MoneyBuilder at the registered ofﬁce of the Company. UK Index Fund, a sub-fund of Fidelity Investments Fund OEIC.

COLT Telecom Group S.A. | Annual Report 2008 29 Report of the Board of Directors continued

Fidelity Relationship Agreement f) Voting rights On 5 May 2006, the Company entered into a Relationship Each share issued and outstanding in COLT Telecom Group S.A. Agreement with FMR LLC, Fidelity Investors Limited Partnership represents one vote. The Articles of Association of COLT Telecom and FIL Limited (‘Fidelity’). Under the Agreement, Fidelity, and Group S.A. do not provide for any voting restrictions. In accordance where appropriate its affiliates, have agreed that more than half of with the Articles of Association a record date for the admission to the Directors of the Company will be non-Fidelity related Directors, a general meeting may be set. The Articles of Association further that Fidelity will not compete with the Group on network services provide that certificates for the shareholdings and proxies be without the consent of the non-Fidelity related Directors and that received by the Company a certain time before the date of the any agreements between Fidelity and the Group will be on an arm’s relevant meeting. In accordance with the Articles of Association the length basis and subject to the approval of the non-Fidelity related Board of Directors may determine such other conditions that must Directors. Additionally, the Relationship Agreement provides that be fulfilled by shareholders for them to take part in any meeting Fidelity will not acquire ordinary shares of the Company if that of shareholders in person or by proxy. would result in the Company ceasing to comply with the UKLA’s requirement for an adequate free float to be maintained. The g) Shareholders’ agreements with transfer restrictions Agreement continues in force while Fidelity or its affiliates hold at COLT Telecom Group S.A. has no information about any least 30 per cent of the issued ordinary shares of the Company. agreements between shareholders, which may result in restrictions on the transfer of securities or voting rights. The current Fidelity related Directors under the Agreement are Rakesh Bhasin, Mark Ferrari, Simon Haslam, Tim Hilton and Richard h) Appointment of Board members, amendment of Articles Walsh. Additionally, John Remondi was a Fidelity related Director of Association who served during the year until his resignation on 31 December The appointment and replacement of Board members and 2008. Details of transactions with Fidelity and its affiliates in 2008 the amendment of the Articles of Association are governed are given in note 24 of the Financial Statements on page 79. by Luxembourg Law and the Articles of Association (in particular Chapters 3 and 4). The Articles of Association are published Article 11 report under the Investors Section on www.colt.net. The following disclosures are made in compliance with Article 11 of the Luxembourg Law on Takeovers of 19 May 2006. i) Powers of the Board of Directors The Board of Directors is vested with the broadest powers a) Share capital structure to manage the business of the Company and to authorise and COLT Telecom Group S.A. has issued one class of shares which perform all acts of disposal and administration falling within the are admitted to trading on the London Stock Exchange. No other purposes of the Company. securities have been issued by COLT Telecom Group S.A. The issued share capital of COLT Telecom Group S.A. as of In common with the Articles of Association of other Luxembourg 31 December 2008 amounts to €850,659,470 represented public limited companies, the Company’s Articles of Association by 680,527,576 shares. COLT Telecom Group S.A. has a total provide full power to the Board to issue shares on a non-pre-emptive authorised share capital of €1,250,000,000. All shares issued basis, but the Board has confirmed that, as a matter of policy by COLT Telecom Group S.A. have equal rights as provided it intends to comply with the pre-emption guidelines supported by for by Luxembourg Company Law and as set forth in the Articles the Association of British Insurers and the National Association of of Association of COLT Telecom Group S.A. Pension Funds to the extent practical for a Luxembourg company. Furthermore, the Board may purchase, acquire or receive COLT b) Transfer restrictions Telecom Group S.A.’s own shares in the Company up to ten per As of the 2008 AGM, all the COLT Telecom Group S.A. shares cent of the issued share capital from time to time on behalf of are freely transferable but shall be subject to the restrictions on COLT Telecom Group S.A., subject to prior authorisation by the shareholdings set forth in Article 8 of the Articles of Association. General Meeting of shareholders and on such terms as the Board may decide in accordance with the law. c) Major shareholdings The details of shareholders holding more than three per cent of the j) Significant agreements or essential business contracts issued share capital of COLT Telecom Group S.A. as notified The Board of Directors is not aware of any significant agreements to COLT Telecom Group S.A. are set forth on page 29. to which COLT Telecom Group S.A. is a party and which take effect, alter or terminate upon a change of control of the Company d) Special control rights following a takeover bid. The Board of Directors has considered All the issued and outstanding shares of COLT Telecom Group S.A. essential business contracts and concluded that there are none. have equal voting rights and there are no special control rights attaching to shares of COLT Telecom Group S.A. k) Agreements with directors and employees No agreements between COLT Telecom Group S.A. and its Board e) Control system in employee share scheme members or employees exist that provide for compensation if the COLT Telecom Group S.A. is not aware of any issues regarding Board members or the employees resign or are made redundant section e) of Article 11 of the Luxembourg Law on Takeovers without valid reason or if their employment ceases because of of 19 May 2006. a takeover bid other than as disclosed in the Remuneration Report on page 43.

COLT Telecom Group S.A. | Annual Report 2008 30 Report of the Board of Directors continued

Corporate Social Responsibility The Corporate Social Responsibility Review on pages 32 to 35 sets out the charitable and political donations made by the Group, the employment policies of the Group and action taken to involve employees in the business of the Group. That Review forms part of this report by cross-reference.

Creditors and supplier payment policy Where goods or services have been supplied in accordance with terms agreed with a supplier, it is the policy of the Group that the supplier is paid in accordance with those terms. The Company is a holding company and has no trade creditors. At 31 December 2008, the number of days of annual purchases represented by year end creditors for the Group was 28 days (2007: 32 days).

Approved by the Board of Directors and signed on its behalf by

Caroline Grifﬁn Pain Company Secretary 20 February 2009

Directors’ responsibilities statements

The directors confirm that, to the best of each person’s knowledge: The financial statements are published on the Company website. (a) the consolidated financial statements prepared in accordance The maintenance and integrity of the website is the responsibility with International Financial Reporting Standards (IFRS) as adopted of the Directors. Legislation in Luxembourg governing the by the European Union, give a true and fair view of the assets, preparation and dissemination of financial statements may differ liabilities, financial position and profit of COLT Telecom Group S.A. from legislation in other jurisdictions. and the undertakings included in the consolidation taken as a whole; and Approved by the Board of Directors and signed on its behalf by (b) the Report of the Board of Directors includes a fair review of the development and performance of the business and the position of COLT Telecom Group S.A and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

So far as the Directors are aware there is no relevant audit information of which the Group’s auditors are unaware and they have each taken all the steps that they ought to have taken as a Director to be aware Caroline Grifﬁn Pain of any relevant audit information and to establish that the Group’s Company Secretary auditors are aware of that information. 20 February 2009

The names and positions of the members of the Board of Directors are stated on pages 6 and 7.

COLT Telecom Group S.A. | Annual Report 2008 31 Corporate Social Responsibility

Key performance indicators for 2009:

COLT’s commitment to its people, A set of KPIs have been established for 2009; we will report on our its communities and the environment. progress in achieving these measures in the next annual review.

In 2008 we placed greater emphasis on Corporate Social Environment • Improve the Power Unit Efficiency (PUE) of our Responsibility (CSR) activities. As our strategy for growth is Data Centres by 10% by 2010. implemented, so the need to minimise any negative impacts our • Reduce number of flights by 5%. activities have on our communities and our environment increases. • Reduce consumption of paper in our offices by 10%. • Achieve ISO 14001 accreditation in at least one COLT country by end 2009. At COLT we believe in reducing the negative effects of our business and expanding the positive contributions our people and products Marketplace • 75% of core suppliers with a defined CSR Policy can make to a sustainable future. We are committed to projects by end 2009. that are both good for COLT and good for the environment and • Establish and embed a robust Customer Scorecard, communities in which we operate. to measure and respond to the satisfaction level of all our customers. Last year we examined opportunities across every aspect of the organisation for COLT to improve its environmental and social Workplace • Reduce voluntary turnover rate of our employees. performance. Working with Business in the Community and the Community Carbon Trust we have created a programme of 11 work streams • 200 days volunteered by COLT employees. to provide a focus and structure for these activities.

The work streams are organised around four key areas of Environment, Marketplace, Workplace and Community. Each is sponsored by a member of the senior management team and increased resource has been committed to managing the programme. A CSR Steering Group, chaired by CEO Rakesh Bhasin, meets quarterly to monitor the progress of each work stream. Reports are then provided to the Board, with Rakesh taking executive responsibility for the CSR activity of the company.

A network of country and divisional CSR teams helps with the implementation and delivery of projects within each work stream. COLT’s new, enhanced intranet provides an effective channel for communicating the achievements of the programme to all staff, as well as encouraging them to contribute as individuals.

COLT Telecom Group S.A. | Annual Report 2008 32 Corporate Social Responsibility continued

Environment Improve the efﬁciency Reduce consumption of our Data Centres of paper in our by 10% by 2010 ofﬁces by 10%

Reduce number Achieve ISO 14001 of ﬂights by 5% accreditation in at least one COLT country by end 2009

Environment In 2008 we established a programme to investigate fresh air Becoming a low carbon company cooling in the design of our Data Centres. This is effective at much Our greatest environmental impact derives from the energy higher atmospheric temperatures than free air cooling, reducing consumed in providing our core products and services, through further the need for constant mechanical cooling and thus lowering our Data Centres and pan-European network. To minimise this and our energy consumption. Research has also been undertaken into achieve our target of improving the efficiency (PUE) of our Data whether a modular design for new Data Centres can provide Centres by 10% by 2010, we are taking a dual approach for our greater energy savings. In addition, 2008 saw a highly successful Data Centres. We have a programme of measures to optimise their ‘switch off’ campaign across all COLT offices, where awareness energy efficiency while at the same time we are re-examining their was raised about the carbon impact of leaving on electrical design, putting a premium on low carbon features. For our network, equipment such as PCs, photocopiers and office lights. we continue to invest in new equipment that improves energy efficiency and requires less space. We are also addressing the level of air travel undertaken by employees. We have a target of reducing the number of flights For the first time we have measured our impact on the environment by 5% for 2009. Our new travel policy promotes the principle by evaluating our carbon footprint for the UK. Using data provided of avoiding unnecessary trips, using rail whenever possible, with by COLT to quantify both direct and indirect emissions, external air travel as a last resort. We are also investing in web and video- consultants have calculated the Company’s annual carbon footprint conferencing technology as a more time-efficient alternative. in the UK to be 37,141 tonnes of carbon dioxide equivalent (tCO2e) An initial video conferencing network covering the UK, France, of emissions. Germany, Spain and India was established at the end of 2008, with an expanded network covering offices in all countries planned This figure provides a benchmark for future measurement and the for June 2009. evidence to help us set priorities within our overall CSR programme. It is anticipated that carbon measuring exercises will be rolled out across the Group.

To reduce our carbon footprint, resources are focused on a series of energy efﬁciency initiatives rather than carbon offsetting measures. COLT subscribes to the principle that the greenest unit of energy is the unit which is not consumed.

Our programme of energy saving measures at our Data Centres will begin by concentrating on improving cooling air ﬂows and optimising temperature settings. A project tasked with pooling the processing power of our internal servers has reduced the number of servers by 130 to date.

COLT Telecom Group S.A. | Annual Report 2008 33 Corporate Social Responsibility continued

Key performance Marketplace indicators for 2009: 75% of core suppliers with a deﬁned CSR Policy

Establish and embed a customer scorecard

We have continued working to improve recycling and reduce the Marketplace quantity of paper used. In 2009 we aim to reduce the amount Creating and demanding low emission alternatives of paper used in our offices by 10%. The new electronic format of It is estimated that the ICT sector accounts for 2% of global carbon this report is one such example. Offices in France and Spain lead emissions. COLT is focused on reducing its contribution to these the company in recycling, demonstrating best practice within the emissions. We have created a dedicated work stream to develop Group for other countries to follow. During 2008 offices in the sustainable propositions for our customers, helping them to reduce Netherlands and the UK introduced recycling schemes. their own carbon footprint. In 2009 we will establish and embed a robust Customer Scorecard, to measure satisfaction ratings COLT recognises the need to effectively co-ordinate its environmental at key customer touch points and inform improvements plans that activity. We therefore commenced a programme to organise respond to the satisfaction level of all our customers. our existing environmental management system to qualify for ISO 14001 certification. This accreditation process, including the Maintaining a good relationship with suppliers is key to any drafting of COLT’s Environmental Policy, will commence in 2009 successful and sustainable business. In 2008, we launched our in at least one country that COLT operates in, and will then be Sustainable Code of Conduct. This goes beyond previous rolled out to the rest of the Group in the following years. requirements to respect the UN Universal Declaration of Human Rights and International Labour Organisation Conventions and We comply with all relevant legislation in the countries in which comply with national human rights and employment legislation. we operate and we closely monitor our compliance with the It takes the next step by incorporating relevant social, economic European Union Environmental Directive. and environmental factors into the procurement decision-making process, together with the traditional factors of quality, time, cost and security of supply.

The launch of a new e-sourcing tool in July 2008, combined with our Sustainable Procurement Policy, allows us to select our suppliers more carefully, especially on their environmental and CSR performance. We will monitor the level of our suppliers’ accreditation to ISO 14001 and will work with core suppliers to ensure that 75% have a deﬁned CSR Policy in place by the end of 2009.

COLT Telecom Group S.A. | Annual Report 2008 34 Corporate Social Responsibility continued

Workplace Community Reduce voluntary 200 days volunteered turnover rate of by COLT employees our employees

Workplace Community Creating a great place to work Working together to make a difference Ensuring our people have the right skills and abilities to drive the Every business is part of the community in which it operates. business forward is fundamental at COLT. To enable a reassessment At COLT, our goal is to play a positive role and make a difference. of these core skills our HR team has developed a new competency framework for staff at every level of the organisation. At the children’s Christmas parties more than 1,200 presents were donated by employees and distributed to local charities chosen The new framework will support an improved approach to training by them in that country. COLT also donated €31,000 to charity and development, enabling the delivery of more specific and during the year, up from €29,000 in 2007. No contributions were relevant training. It will provide for succession planning and allow made to any political organisations. employees to clearly identify the skills required and next steps they need to take for advancement. We anticipate that these initiatives As a communications company, the education of our future will have a positive impact on our employees and that this will generations is close to our hearts. In 2008 we launched a scheme be reflected in a fall in voluntary turnover rates of our employees. in our London office for volunteers to act as reading mentors one lunchtime a week in two local schools. So far 32 staff have given In recruitment, equality of opportunity remains central to our over 200 hours of their time helping 16 students to raise their levels culture. COLT is committed to attracting and retaining the best of attainment. In 2009 we aim to raise the level of COLT volunteering people and discrimination on the grounds of race, gender, age, to 200 days across the whole organisation. gender orientation, religious beliefs or disability is not acceptable and contravenes our policies in this area. Work on our city networks is always carried out in ways that minimise the disruption and inconvenience to those using the area. Health and safety remains of paramount importance and COLT Continuing our unbroken record since 1993 when COLT connected aims to eliminate all unnecessary and unacceptable risks from the its first customer, we were once more honoured in 2008 with a City workplace and reduce all remaining risks as far as possible. Whilst of London Corporation Gold Award for considerate contracting. meeting or exceeding UK and European legislative requirements, our aim is to become a company that sets the standards for health Next year, working with Business in the Community, we will build and safety best practice within the telecommunications industry. on this activity to develop a comprehensive charity and volunteering policy to guide our community activity across the Group. Throughout the year, we organised social events for our staff and their families. November saw the celebration of Diwali in our centres 2008 has seen COLT take a big step forward in its environmental in India, while children’s Christmas parties were arranged in Europe. and social activities. We plan to make further progress in the years to come. The plans put in place during the year have already produced results and have created a platform from which to deliver and contribute even more in 2009.

COLT Telecom Group S.A. | Annual Report 2008 35 Corporate governance statement

The Board recognises that good corporate been granted to any non-executive Director since 2002. There governance is in the best interests of all is no intention to grant options to non-executive Directors in the shareholders. This statement describes future. During 2008 Mr Damiani exercised his options and the Company’s corporate governance Dr Hawley’s options lapsed. Accordingly no non-executive arrangements. Director holds any options. In the circumstances, the Board does not consider that these historical options compromised The Combined Code on Corporate Governance the independence of these Directors. The Combined Code on Corporate Governance (the ‘Combined Code’) was issued in its amended form by the UK Financial Frans van den Hoven is an independent non-executive director Reporting Council in June 2006 and further amended in June 2008. of two funds managed by FIL Limited. His role in this capacity involves In its prospectus dated 5 May 2006 the Company stated its intention the oversight of FIL Limited on behalf of the funds’ shareholders. to voluntarily comply with the Combined Code so far as it is practical As he is independent of Fidelity management, the Board does for a Luxembourg company to do so. There is no similar corporate not consider that these external directorships compromise his governance regime in Luxembourg. Throughout the year ended independence. Mr van den Hoven is not a member of any of the 31 December 2008, the Company complied with the provisions Board committees. of Section 1 of the Combined Code in all respects save only for the matters described in this statement which relate to the Group Frans van den Hoven and Robert Hawley have been non-executive on an ongoing basis. These matters as at 31 December 2008 Directors for over nine years. The Board does not consider this were as follows: to compromise their independence as the composition of the Board as a whole, including the executive Directors, has changed Richard Walsh, a Fidelity related non-executive Director, is a member significantly over this time. All directors are subject to annual of the Remuneration Committee. Mr Walsh has significant recent re-election under the Company’s Articles of Association. The Board and relevant executive experience of HR and remuneration; has considered the guidance in the Combined Code that serving accordingly the Board concluded that it was in the best interests more than nine years could be relevant to the determination of COLT to include Mr Walsh as a member of the Remuneration of a non-executive Director’s independence. However, the Board Committee. Additionally, the Board believes that it is important is satisfied that Mr van den Hoven and Dr Hawley remain that Fidelity is represented on the Remuneration Committee. independent and continue to make a valued contribution COLT appointed a new Managing Director, Human Resources as independent non-executive Directors. in the second half of 2008, following an extensive period of interim management of the function. Succession planning During 2008 the Nomination Committee undertook a succession The Board considers the independence of the non-executive planning exercise for the Board. An assessment of skills, attributes Directors on an annual basis. Five members of the Board are and experiences was conducted and the Nomination Committee employed by Fidelity or its affiliates. These are the Chairman, the identified areas of knowledge and expertise that the Board would Chief Executive Officer, and three of the non-executive Directors: look for in future non-executive appointments. In conclusion it was Mark Ferrari, Simon Haslam and Richard Walsh (and formerly agreed to supplement those skills and competencies supporting John Remondi). The appointment of Directors employed COLT’s strategy to transition to an ICT solutions and services by a company’s major shareholder is common and the Fidelity provider. The Nomination Committee also took account of external related non-executive Directors, although not independent perceptions of independence. Plans are in place to introduce under the provisions of the Combined Code, are independent new Board members as part of a Board refresh programme. of management and accordingly exercise their judgement in the An independent search firm, MWM, was retained to conduct interests of all shareholders. The Company is also able to carry a search for a new independent non-executive Director. on its business independently of its major shareholders by virtue of the Fidelity Relationship Agreement, details of which are set out The Board in the Report of the Board of Directors on page 8. This agreement The Board has twelve members and it comprises the Chairman, requires that any agreements between Fidelity and the Group will the Chief Executive Officer, one other executive Director and nine be on an arm’s length basis and subject to the consent of the non-executive Directors. Biographical details of the Directors are non-Fidelity related Directors; Fidelity related Directors abstain set out on pages 6 and 7. from voting. There is a division of responsibility between the Chairman, The Board considers each of the remaining six non-executive Tim Hilton, and the Chief Executive Officer, Rakesh Bhasin. Directors namely: Andreas Barth, Vincenzo Damiani, The Chairman is responsible for keeping the strategic direction Hans Eggerstedt, Gene Gabbard, Robert Hawley and of the Group under review and for ensuring that the Board functions Frans van den Hoven to be independent, notwithstanding the effectively. His commitments other than to the Group are set following relationships or circumstances. out on page 7. They were disclosed to the Board prior to his appointment, and have not changed during the year. The Chief Vincenzo Damiani and Robert Hawley held share options for part Executive Officer is responsible for the operation and development of the year details of which are set out on page 45. They were of the Group’s business. granted their options at a time when this was permitted under then applicable corporate governance provisions. Options have not

COLT Telecom Group S.A. | Annual Report 2008 36 Corporate governance statement continued

Senior Independent Director Annual Reappointment Hans Eggerstedt is the Senior Independent Director (SID). The role Under the Company’s Articles of Association, at each AGM all of the SID is to act as an alternative conduit to the Board for the Directors appointed since the previous AGM retire and seek communication of shareholder concerns; to act as chairman of election, and all other Directors retire and seek re-election. This meetings of the independent non-executive Directors which are means that no Director can hold office for more than one year not attended by the Chairman; and to lead the annual performance unless re-elected by shareholders. evaluation of the Chairman. Operation of the Board Induction The Board met five times in 2008. The attendance of each of the On appointment, Directors undertake an induction process which Directors at the meetings held in 2008 while a Director was: is designed to develop their knowledge and understanding of the Meetings Meetings Percentage Group’s business through visits to various operating sites, Director held attended attended presentations on relevant technology, product demonstrations, Andreas Barth 5 5 100% briefings from management and a familiarisation with investor Tony Bates 5 5 100% perceptions of the Group. The Directors’ knowledge and Rakesh Bhasin 5 5 100% understanding of the Group’s business is refreshed throughout Vincenzo Damiani 5 5 100% the year and with briefings as necessary on corporate governance Hans Eggerstedt 5 5 100% Gene Gabbard 5 5 100% and regulatory compliance. The training needs of the Directors Simon Haslam 5 5 100% are periodically reviewed by the Board. Robert Hawley 5 5 100% Tim Hilton 5 5 100% Evaluation John Remondi 5 5 100% The effectiveness of the Board is vital to the success of COLT. Frans van den Hoven 5 5 100% During 2008 the Board undertook its annual evaluation of its Richard Walsh 5 5 100% performance and that of its Committees and their continuing ability to act as effective bodies. The process is managed by the Chairman and the Company Secretary. The SID led an assessment The Board is scheduled to meet five times in 2009. Additional of the Chairman’s performance. A detailed online questionnaire meetings will be held as required. was completed by all Board members to facilitate the evaluation process. The results were collated by an external agency. The During 2008 the non-executive Directors and the Chairman met Chairman and Company Secretary discussed individual responses at the end of each meeting without the executive Directors present with Board members. The SID discussed the conclusions of the and it is intended that this will happen in 2009. During 2008 the Chairman’s appraisal with the Board, then Chairman. Summary independent non-executive Directors met twice without the Fidelity results were presented to the Board for discussion and to identify related Directors present and it is intended that this will happen improvements for the future. at least once in 2009.

Questions were both qualitative and quantitative designed to The Board is primarily responsible for decisions on Group strategy, generate a detailed narrative response and to enable the Board including approval of strategic plans, annual budgets, interim and to measure trends. Comments were invited on a wide range full year ﬁnancial statements and reports, accounting policies and of issues including the contribution of the Board to strategy and all material capital projects, investments and disposals. There risk management, management reporting, the decision making is a schedule of matters reserved for approval by the Board. process, the logistics of Board meetings, the composition and operation of the Board and progress on issues raised in the Each Director is provided with monthly reports which include previous year’s evaluation. Particular attention was paid to issues ﬁnancial information and information on revenue streams and the raised by shareholder activists relating to independence and the Group’s support functions. When there is a Board meeting, this inclusion of Fidelity-related Directors. To supplement the formal information is circulated to the Directors in advance of the meeting, annual evaluation the Nomination Committee conducted an together with details of all other business items to be considered assessment of skill sets and competencies as described on page 36. at the meeting. The Directors are encouraged to supplement this As recommended by the Combined Code the reviews of Directors information through direct contact with the Group’s senior serving for more than six years were particularly rigorous. Following management. Each of the Directors can take independent advice this comprehensive review the Board has concluded that each at the expense of the Company. Director contributed effectively to the Board and demonstrated full commitment to the role and that the Board and each of the Board Committees were effective.

Attendance In 2008 there were no absences from Board meetings. In the event that a Director has been unable to attend all meetings of the Board or Board Committees of which he is a member, the Director is invited to confirm that he remains committed to the role and has the requisite time available to perform the role.

COLT Telecom Group S.A. | Annual Report 2008 37 Corporate governance statement continued

Board Committees independent auditors must be approved by the Committee or within The Board has delegated speciﬁc responsibilities to three standing a category pre-approved by the Committee, and within the Committees. The membership of these Committees and a summary maximum charge set by the Committee. The policy is consistent of their main duties under their terms of reference are set out with ethical standards published by the Auditing Practices Board below. The full terms of reference may be viewed on the Company’s in December 2004. Generally the independent auditors will not be website: www.colt.net. approved to perform a service in which they participate in activities that are normally undertaken by management or act in an advocacy The Committees are provided with the resources required to role for COLT or may be required to audit their own work. The undertake their duties and they are able to take independent policy includes a list of types of prohibited services which include advice at the expense of the Company. The Company Secretary but are not limited to book-keeping, internal audit outsourcing acts as secretary to each of these Committees. or valuation services unless these activities are not subject to audit procedures, HR services and legal services. The Policy In addition to the standing Committees, the Board occasionally on the Provision of Services by the External Auditor is available delegates speciﬁc tasks to ad-hoc Committees of the Board. on the website at www.colt.net.

Audit Committee Remuneration Committee Hans Eggerstedt is the Chairman of the Audit Committee. The Robert Hawley is the Chairman of the Remuneration Committee other members of the Committee are Andreas Barth, Vincenzo and the other members are Andreas Barth, Vincenzo Damiani and Damiani and Gene Gabbard. Hans Eggerstedt and Gene Gabbard Richard Walsh. Fidelity related Directors abstain from voting on the are the Committee members identified as having recent and remuneration of any other Fidelity related Director. The Managing relevant financial experience. Andreas Barth was appointed and Director, Human Resources, normally attends meetings of the Robert Hawley resigned as a member of the Audit Committee Committee in an advisory capacity. The Remuneration Committee on 1 October 2008. met five times in 2008. The attendance of each of the Directors at the meetings held in 2008 while a Committee member was: The Chief Financial Officer, the Chief Executive Officer, the Senior Meetings Meetings Percentage Director of Audit, Risk and Security and representatives from the Director held attended attended independent auditors usually attend meetings of the Committee. Andreas Barth 5 5 100% Vincenzo Damiani 5 5 100% The Committee met four times in 2008. The attendance of each Robert Hawley 5 5 100% of the Directors at the meetings held in 2008 while a Committee Richard Walsh 5 5 100% member was: The duties of the Committee are to review the remuneration policy, Meetings Meetings Percentage Director held attended attended to determine the remuneration of executive Directors and to Andreas Barth 1 1 100% exercise discretion on behalf of the Board in relation to employee Vincenzo Damiani 4 4 100% benefit schemes. The Directors’ Remuneration Report on pages 40 Hans Eggerstedt 4 4 100% to 45 provides details of how the Committee discharged its duties Gene Gabbard 4 4 100% in 2008. Robert Hawley 3 3 100% Nomination Committee The Committee met with PricewaterhouseCoopers S.à r.l, the Tim Hilton is the Chairman of the Nomination Committee and the Company’s independent auditors, during 2008 without any other members are Andreas Barth, Vincenzo Damiani and Robert Company management present and it is intended that it will meet Hawley. Fidelity related Directors abstain from voting on the with PricewaterhouseCoopers S.à r.l. in 2009 again without senior appointment of any other Fidelity related Director. management. The Nomination Committee met five times in 2008. The attendance The duties of the Committee are to review the integrity of the of each of the Directors at the meetings held in 2008 while financial statements, to review the effectiveness of the internal a Committee member was: control policies, to review the procedures for managing risks, Meetings Meetings Percentage to oversee the internal audit function, to consider the appointment Director held attended attended of and relationship with the independent auditors and to review Andreas Barth 5 5 100% procedures for handling allegations from whistle-blowers. Vincenzo Damiani 5 5 100% Robert Hawley 5 5 100% During 2008, the Committee considered, among other matters, Tim Hilton 5 5 100% compliance with the provisions of the Combined Code and with accounting developments, the financial control environment and The duties of the Committee are to recommend to the Board risk management and control. succession planning strategy, to select and recommend a preferred candidate for appointment to the Board or to a specific role on the To guard against the objectivity and the independence of the Board or Board Committee and to recommend to the Board the independent auditors being compromised, the Committee has continuation in office of non-executive Directors. adopted a policy under which any service provided by the

COLT Telecom Group S.A. | Annual Report 2008 38 Corporate governance statement continued

The activities of the Committee on succession planning are Internal control described in more detail on page 36. During 2008, the Committee The Board has overall responsibility for the Group’s system of internal considered the appointment of one non-executive Director. Mark controls and for reviewing its effectiveness. The system of internal Ferrari is a Fidelity related Director and for this reason neither an control is designed to manage, rather than eliminate, risk of failure external search consultancy nor open advertising was used when to achieve business objectives and can only provide reasonable appointing him. The Committee also conducted a review of the and not absolute assurance against material misstatement or loss composition of all the Board Committees during 2008 and based and accords with the 2005 UK Turnbull guidance. Throughout on those findings recommended a change in membership of the 2008, and up until the date of this report, there has been an Audit Committee to ensure that all members were perceived to ongoing risk management process for identifying, evaluating and be independent in accordance with Combined Code guidance. managing material risks faced by the Group. Such risks are evaluated at both divisional and Group-wide levels, with management Relations with shareholders considering the impacts should such risks occur, the likelihood The Group utilises its website, www.colt.net to communicate of occurrence, and strategies to manage those risks. Where a wide range of information about the Group. required, mitigating activities are agreed to reduce risk exposure, and progress is formally tracked by dedicated champions in the The Group has a policy of maintaining an active dialogue with business. The effectiveness of the system of internal control and institutional shareholders through individual meetings with senior risk management process is reviewed annually by the Board. management and participation in conference calls. The views of shareholders expressed during these meetings and calls are On a yearly basis, senior management collectively revisit the Group- reported to the Board. Analysts and brokers briefings are also level risks to ensure the overall risk management process remains circulated to the Board so that an understanding of the views aligned to COLT’s business objectives and the operating environment. of major shareholders can be developed. The annual revisit of Group-level risks also acts as a key input to the development of the Group Internal Audit Plan for the year, The Board recognises that one of the main opportunities for non- which comprises individual reviews that are conducted to identify institutional shareholders to question the Board is at the Annual and mitigate risks in the business. General Meeting and for this reason it is the practice that each of the Directors attends the meeting whenever possible. All Directors The Audit Committee conducts reviews of the risk management attended the 2008 AGM. Any shareholder is free to contact the process and system of internal controls. To achieve this, the Group’s Head of Investor Relations at any time. Committee receives regular updates on key risks and control priorities such as business controls, IT security, business continuity Statement of Directors’ responsibilities planning, tone at the top and anti-fraud procedures. Further, The statement of Directors’ responsibilities is included within the the Audit Committee reviews the results from all internal audits Report of the Board of Directors. undertaken and tracks management’s progress in remediating identified control issues. Going concern On 20 February 2009 the Board announced an Open Offer to raise The Group operates a management structure with clear delegated €201m before expenses. The Open Offer is fully underwritten authority levels and clear functional reporting lines and accountability. by certain Fidelity parties subject to certain standard underwriting The Group operates a comprehensive budgeting and financial conditions and on the basis that the proposed capital reduction reporting system, which compares actual performance to budget is approved by shareholders at the Extraordinary General Meeting on a monthly basis. All capital expenditure, other purchases and (EGM) on 17 March 2009. Approval requires a two thirds majority expenses are subject to appropriate authorisation procedures. of those who vote and the Board has received irrevocable This, together with the internal controls and risk management commitments from certain Fidelity entities and other parties process, allows management to monitor financial and operational to support the proposals, together representing 64.7% of the performance and compliance controls on a continuing basis and voting shares. to identify and respond to business risks as they arise.

The Directors, after making appropriate enquiries and taking into account the arrangements made to raise additional capital through the Open Offer, believe that they have a reasonable basis for concluding that the Group has adequate facilities to continue as a going concern. Accordingly the ﬁnancial statements have been prepared on a going concern basis.

COLT Telecom Group S.A. | Annual Report 2008 39 Directors’ remuneration report

The Directors’ Remuneration Report sets out Elements of remuneration for executive Directors the Group’s policy on remuneration. The report Executive Directors receive base salary, performance bonus, also sets out for each Director the remuneration long-term incentives, deﬁned contribution pensions and other usual earned in 2008, their interests in share options beneﬁts. Payment of bonus and vesting of long-term incentives are and other long-term incentive plans and their dependent upon the achievement of performance targets that are contractual relationship with the Company. set beforehand by the Committee.

The Directors’ Remuneration Report, which has been approved Salary and bonus and adopted by the Board of Directors, will be put to shareholders Base salaries for the executive Directors are set when they are at the Annual General Meeting for approval. The report sets out appointed to the role and are reviewed annually. Base salary reflects how the principles in Section 1.B of the Combined Code have experience, responsibility and market value. been voluntarily applied. Bonus amounts are based upon demanding financial targets and Remuneration Committee the achievement of personal predetermined business objectives. During the year the Remuneration Committee consisted of three Bonuses are subject to upper limits of 200 per cent of salary for independent non-executive Directors and Richard Walsh, a Fidelity Tony Bates and Rakesh Bhasin. Annual bonuses do not form part related Director, who has recent and relevant HR experience. of pensionable earnings. Executive Directors’ bonus payments Robert Hawley is the Chairman of the Committee and the other for the year were at the level of 83 per cent to 85 per cent members are Andreas Barth, Vincenzo Damiani and Richard Walsh. of maximum bonus potential based on Mr Bates’ and Mr Bhasin’s respective performance. The Combined Code on Corporate Governance section of the Corporate Governance Statement on page 36 sets out the number The targets set for 2008 were as follows: of meetings, attendance and duties of the Committee and sets out Mr Bates and Mr Bhasin: 60 per cent on financial targets relating why the Board considers it appropriate for a Fidelity related director to Data Revenue (over achieved), CMS Revenue (mostly achieved), to be a member of the Committee. Data and Managed Services bookings (mostly achieved), EBITDA (over achieved), Free Cash Flow (achieved) and Gross Capex Normally attending meetings of the Committee, in an advisory (mostly achieved). capacity, is the Managing Director, Human Resources. The Committee also appointed and received advice from Watson Wyatt Mr Bates: 40 per cent on personal targets relating to business on salary, benefits and other remuneration trend data which the development and overall management including, management Committee has used when considering the appropriate level of of operations in India, improvements in performance of HR function, remuneration for its executive Directors. In addition, Slaughter and supporting major customer transactions and refinancing strategy – May has provided guidance on the rules of the share option plans. (mostly achieved).

Remuneration policy Mr Bhasin: 40 per cent on personal targets relating to business The Group’s policy is to place a significant emphasis on performance- development and overall management including senior related elements of total remuneration for executive Directors and management team building, product profitability, development senior executive officers and to align their interests with those and implementation of strategy – (mostly achieved). of shareholders. Pay within COLT is considered in determining executive Directors’ remuneration. Further details of Tony Bates’ and Rakesh Bhasin’s remuneration are set out on pages 41, 44 and 45. Base salary reflects an executive’s experience, responsibility and market value. Performance bonuses for senior executives are subject to upper limits that range between 50 per cent and 200 per cent of salary. Each year, performance targets are set for bonuses that link partly to the Group’s financial targets and partly to personal business goals such as quality of service, revenue success, process improvements and introduction of new technologies.

The policies relating to each of the components of total remuneration are subject to regular review in order to ensure that they remain competitive, stimulating and challenging. The total reward package is geared towards driving exceptional effort through the variable elements of the package. The ability to have an impact on shareholder value will inﬂuence the mix of the total reward package. Base salaries and performance bonuses are benchmarked regularly against other appropriate sectors, in particular, telecommunications operators and technology companies.

COLT Telecom Group S.A. | Annual Report 2008 40 Directors’ remuneration report continued

Proportion of ﬁxed and variable remuneration

100%

22% 25%

45% 45%

1% 5% 3% 1% I Variable long-term incentives I Bonus 27% 26% I Beneﬁts I Fixed base pension I Pay 0 Tony Rakesh Bates Bhasin

Proportion of fixed and variable remuneration The Company has three plans currently available for long-term The table below shows the approximate targeted proportion incentives. In addition, rights remain outstanding under two plans of fixed and variable remuneration for the executive Directors. established by COLT Telecom Group plc, the previous holding The annual cash bonus plan supports financial and operational company of COLT prior to redomiciliation to Luxembourg in 2006: performance, whilst the long-term incentive element is reward the Option Plan and the Deferred Share Bonus Plan. Options over for superior performance over the longer term and the numbers shares granted under the plan to Directors are set out in the table in the table take into account the likelihood of payment. on page 45. Further details of the plans are set out in note 14 on pages 65 to 69. Proportion of fixed and variable remuneration The Remuneration Committee considered making awards of shares Fixed Variable with a three year performance metric during 2008. However owing Base Long-term Pay Pension Benefits Bonus Incentives Total to the market volatility experienced as a result of the global economic (%) (%) (%) (%) (%) (%) crisis it was agreed not to make any such awards. Accordingly Tony Bates 27 5 1 45 22 100 no awards have made under COLT’s current Share and Option Rakesh Bhasin 26 1 3 45 25 100 Grant Plans during 2008; this remains under review.

COLT Telecom Group S.A. | Annual Report 2008 41 Directors’ remuneration report continued

Previous COLT Telecom Group plc plan Deferred Cash Plan Group Share Plan (‘Option Plan’) This plan was implemented to focus key employees on the financial Options were granted at an option price which was not less than results the Company needed to achieve during the financial year. the market value of the ordinary shares on the date of grant. All option awards since July 2003 have been subject to performance In 2007 Tony Bates was awarded an entitlement under the Deferred tests. As stated in the last Annual Report most of the awards Cash Plan. In 2007 the vesting was subject to performance lapsed as the performance tests were not achieved. However conditions relating to achieving a range of EBITDA. The target Tony Bates’ options granted at an exercise price of £2.30 in May for payout at 100 per cent was EBITDA in excess of €275m – the 2004 vested. The performance tests for the options granted 2007 achievement of EBITDA of €277m meant that the Deferred to Tony Bates in May 2004 were satisfied as COLT was free cash Cash Plan was paid in full. The 2007 Deferred Cash Plan is payable flow positive for at least one quarter in 2004, for two consecutive in two tranches in cash as two thirds in March 2009 and one third quarters in 2005 and for 2005 as a whole. in March 2010 provided that the participant remains employed by the Company or an associated company. The maximum No further grants will be made under this Option Plan. entitlement under the 2007 Deferred Cash Plan was €263,550, of which €162,000 has been accrued as at 31 December 2008, Current plans (2007: €61,100). Share Grant Plan The Share Grant Plan provides for awards to be made over In 2008 Tony Bates and Rakesh Bhasin were each awarded an Company shares. Awards do not vest until the third anniversary entitlement under the Deferred Cash Plan. The maximum award of the date of grant. Awards are made to high performing is equivalent to 100 per cent of basic salary for Mr Bates and executives and to attract senior employees to the Company. 118 per cent for Mr Bhasin. Vesting is subject to the following Subject to meeting performance conditions which are challenging target performance conditions with no payment for less than and reflect a real and meaningful improvement in performance, 80 per cent achievement of performance and payout at 100 per cent awards ordinarily vest on the third anniversary of the date of grant. for 110 per cent achievement of performance or more. The maximum individual limits for awards are 150 per cent of base salary however the Remuneration Committee can grant awards The 2008 achievement was as follows: Data Revenue (ex CMS) in excess of this limit if it is of the view that there are exceptional (over achieved); EBITDA (over achieved); ratio of Data capital circumstances to justify such awards. expenditure to Data revenue (not achieved) and positive free cash flow (achieved) meant that the 2008 Deferred Cash Plan is payable No awards were made during 2008. There are no awards outstanding at an achievement level of 79.3 per cent. The 2008 Deferred Cash under the Share Grant Plan, however the Remuneration Committee Plan is payable in two tranches in cash as one third in March 2009 plans to review awards in 2009. and two thirds in March 2010 provided that the participant remains employed by the Company or an associated company. Share Option Plan The Share Option Plan is divided into two parts; the ‘Approved The entitlement under the 2008 Deferred Cash Plan of €348,325 Part’ approved by HM Revenue & Customs for the purposes of the for Tony Bates and €493,280 for Rakesh Bhasin has been accrued Income and Corporation Taxes Act 1988 and the ‘Unapproved as at 31 December 2008 as follows: €419,000 (2007: €nil). Part’ which is not so approved. Options are granted at an option price which is not less than the market value of the ordinary shares It is intended that there will be annual awards under the Deferred on the date of grant. Subject to meeting performance conditions Cash Plan in future subject to performance metrics. which are challenging and reflect a real and meaningful improvement in performance, awards ordinarily vest on the third anniversary Share Incentive Plan of the date of grant. The maximum individual limits for awards are The Share Incentive Plan enables eligible employees to acquire 150 per cent of base salary, however, the Remuneration Committee COLT S.A. shares monthly through a one year savings plan, can grant awards up to 300 per cent of base salary if it is of the or through the award of free COLT S.A. shares and/or matching view that there are exceptional circumstances to justify such award. shares. The aggregate market value of free shares may not exceed £3,000 per annum. No awards were made during 2008. There are No awards were made during 2008. There are no awards no awards outstanding under the Share Incentive Plan. outstanding under the Share Option Plan, however the Remuneration Committee plans to review awards in 2009. Pension contributions and other benefits Pension contributions are determined based on employee age Deferred Share Bonus Plan and years of service and are made to defined contribution The Deferred Share Bonus Plan allows grants of awards over schemes. Benefits include, as appropriate: housing benefit, matching shares based on shares purchased by participants with private health insurance and other similar benefits commensurate monies earned under the annual bonus plan. The award of matching with market practice. shares is subject to performance conditions the same or similar to those relating to the Share Grant Plan. Participants must hold the shares for three years to obtain matching shares. No awards were made during 2008.

COLT Telecom Group S.A. | Annual Report 2008 42 Directors’ remuneration report continued

COLT v MSCI Europe Telecom Service Index

150

100

0 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 I COLT Telecom • MSCI Europe Telecom Services Index

Savings-related share option scheme (SAYE Scheme) Directors’ service agreements Participation in the Company’s SAYE Scheme is open to all eligible Rakesh Bhasin’s services are provided under a secondment employees and the executive Directors. Details of the participation agreement with FMR LLC. In the event of termination there is no of the executive Directors are set out on page 45. Under the SAYE right to compensation. The secondment was originally for three Scheme, employees may save between £5 and £250 a month with years to 13 December 2009 and in 2008 this was extended a savings institution and are granted options to acquire shares to 13 December 2011. However the secondment can be terminated in the Company. After a three year period, employees can use the by FMR LLC. or COLT Telecom Group Limited at any time, without proceeds of their savings account to exercise the options at a price compensation payable by COLT. established at the beginning of the three year period. The price established at the beginning of the three years is at the discretion Tony Bates has an employment contract that can be terminated of the Board of Directors and can be up to a 20 per cent discount by him giving six months’ notice. The contract can be terminated to the then market price of the Company’s shares; to date no such by the Company giving twelve months’ notice. In the event discount has been applied. The maximum number of shares under of termination, he has the right to receive an amount which is equal option for the 2008 Sharesave Scheme was two million. to his salary and other beneﬁts for the period of notice plus bonus equal to the average bonus percentage of salary achieved during Non-executive Directors the previous two years. The employment contract contains The remuneration of non-executive Directors is reviewed periodically a mitigation clause. by the Board. Non-executive Directors abstain from voting on their own remuneration. The fees were last increased in January 2006. The Chairman and non-executive Directors are engaged on letters Following an external benchmarking exercise, the basic fee for of appointment that set out their duties and responsibilities. The non-executive Directors was raised by €7,500 to €60,000 and appointment of the Chairman and the non-executive Directors can it was agreed to pay a separate fee of €7,500 to the Senior be terminated by them or by the Company giving three months’ Independent Director with effect from 1 January 2008. The Chairman notice. In every case, there is no right to compensation in the event of the Remuneration Committee and the Chairman of the Audit of termination. Committee and the members of the Audit Committee receive an additional fee of €7,500 in respect of these roles. All details All contracts summarised above are available for inspection at the are set out in the table on page 44. Registered Ofﬁce of the Company.

In line with prevailing market practice non-executive Directors’ COLT v MSCI Europe Telecom Services Index remuneration is paid wholly in cash. In the last twelve months, The graph above shows the Company’s share performance the non-executive Directors have received no element of their against the Morgan Stanley MSCI Europe Telecom Services Index remuneration in the form of options, beneﬁts or other incentives, (both rebased to 100 as at 1 January 2004). This Index was nor is it the intention of the Board that this should occur. selected because it is the principal index of European Telecom Service providers.

COLT Telecom Group S.A. | Annual Report 2008 43 Directors’ remuneration report continued

AUDITED INFORMATION Directors’ remuneration The table below sets out details of the remuneration receivable in respect of 2008 for Directors of the parent company of the Group.

Non-executive directors €000 SID Audit Committee Total Total Pension Pension Name Fee fee1 Comm. Fee 2 Chair Fee 3 2008 2007 2008 2007 Andreas Barth 60.0 – 1.9 – 61.9 52.5 – – Vincenzo Damiani 60.0 – 7.5 – 67.5 60.0 – – Hans Eggerstedt 60.0 7.5 7.5 7.5 82.5 67.5 – – Gene Gabbard 60.0 – 7.5 – 67.5 60.0 – – Simon Haslam4 –– – – – – – – Robert Hawley 60.0 – 5.6 7.5 73.1 67.5 – – Tim Hilton4 –– – – – – – – John Remondi4, 5 –– – – – – – – Frans van den Hoven 60.0 – – – 60.0 52.5 – – Richard Walsh4 –– – – – – – – Total 360.0 7.5 30.0 15.0 412.5 360.0 – –

1 An annual fee of €7,500 is paid to the Senior Independent Director. 2 An annual fee of €7,500 is paid to the members of the Audit Committee. On 30 September 2008 Robert Hawley resigned from and Andreas Barth was appointed as a member of the Audit Committee. 3 An annual fee of €7,500 is paid to the Chairmen of the Remuneration and Audit Committees respectively. 4 Simon Haslam is employed by FIL Limited and Mark Ferrari, Tim Hilton, John Remondi and Richard Walsh are employed by FMR LLC. They receive no remuneration from FIL Limited or FMR LLC attributable to their duties for the Company and, as set out in their letters of appointment, receive no remuneration from COLT. 5 John Remondi retired from the Board on 31 December 2008.

NB Mark Ferrari was appointed as Non-executive Director with effect from 1 January 2009.

Executive directors €000 Deferred Total Total Pension Pension Name Basic Salary1 Bonus Cash Plan5 Benefits2 2008 2007 2008 2007 Tony Bates3 439.2 729.2 348.3 13.7 1,530.4 1,394.7 87.9 98.6 Rakesh Bhasin4 527.2 896.2 493.3 71.1 1,987.8 1,634.6 23.5 2.3 Total 966.4 1,625.4 841.6 84.8 3,518.2 3,029.3 111.4 100.9

1 Tony Bates’ basic salary is paid in Sterling and Rakesh Bhasin’s in US dollars. 2 This figure includes, as appropriate: housing benefit, private health insurance and other similar benefits. Tony Bates does not receive housing benefit. 3 In 2007 Tony Bates was awarded a one-off retention bonus of €355,000. It is not intended that the Special Retention Bonus will be repeated. 4 Rakesh Bhasin’s services as Chief Executive Officer were provided under a secondment agreement with FMR LLC under which all the remuneration attributable to his duties to the Company was paid by the Company. 5 Details of the Deferred Cash Plan are shown on page 42.

No Directors waived emoluments during 2008 (2007: nil).

COLT Telecom Group S.A. | Annual Report 2008 44 Directors’ remuneration report continued

Special retention and deferred cash plan At 31 December 2008, €nil (2007: €266,200) was accrued under the special retention bonus and €162,000 (2007: €61,100) was accrued under the 2007 Deferred Cash Plan in respect of Tony Bates; additionally €173,415 and €245,584 was accrued under the 2008 Deferred Cash Plan in respect of Tony Bates and Rakesh Bhasin respectively.

Directors’ share options The table below sets out details of options under each of the Company’s share option plans held by the Directors of the Company.

The closing mid-point price of the Company’s ordinary shares on 31 December 2008 was £0.67 per share and the range during the year was £1.74 to £0.51.

Option plan Option Market exercise 31 Dec Date of value price per Usual date from which Usual Name 1 Jan 2008 Granted Exercised Lapsed 2008 exercise (£) share (£) first exercisable1,2 expiry date

Tony Bates 166,666 – – – 166,666 – – 2.3001 4 May 2007 to 4 May 2009 4 May 2014

Vincenzo Damiani 13,333 – 13,333 – – 7 Mar 2008 1.60 1.4400 29 Jul 2003 to 29 Jul 2007 29 Jul 2012

Robert Hawley 22,686 – – 22,686 – – – 22.4820 25 Nov 1999 to 25 Nov 2003 25 Nov 2008

1 In the case of options granted under the Option Plan before July 2003, usually 20 per cent of the shares under option become exercisable on each of the five anniversaries following the grant date. In the case of options granted since July 2003, usually 50 per cent of the shares under option become exercisable on the third anniversary of the grant date and 25 per cent of the shares under option become exercisable on each of the fourth and fifth anniversaries of the grant date. In certain circumstances, including the death of the option holder, options may become exercisable earlier. 2 Usually an option over shares is exercisable, or vests, only if a performance condition is met. No grants were made to Directors during 2008. 3 The aggregate gain on the exercise of share options during the year was £1,907.

SAYE Scheme There are no Directors in the SAYE scheme.

Approved by the Board of Directors and signed on its behalf by Dr R Hawley CBE, Chairman of the Remuneration Committee

COLT Telecom Group S.A. | Annual Report 2008 45 Independent auditors’ report to the shareholders of COLT Telecom Group S.A.

Independent auditors’ report to the shareholders of COLT Telecom Group S.A.

Report on the consolidated financial statements We have audited the accompanying consolidated financial statements An audit also includes evaluating the appropriateness of accounting of COLT Telecom Group S.A. (the ‘Company’) and its subsidiaries policies used and the reasonableness of accounting estimates (the ‘Group’), which comprise the consolidated balance sheet as at made by the Board of Directors, as well as evaluating the overall 31 December 2008, the consolidated income statement, consolidated presentation of the consolidated financial statements. We believe statement of recognised income and expense and consolidated cash that the audit evidence we have obtained is sufficient and flow statement for the year then ended, and a summary of significant appropriate to provide a basis for our audit opinion. accounting policies and other explanatory notes. Opinion Board of Directors’ responsibility for the consolidated In our opinion, these consolidated financial statements give a true financial statements and fair view of the financial position of the Group as at 31 December, The Board of Directors is responsible for the preparation and 2008, and of its financial performance and its cash flows for the fair presentation of these consolidated financial statements year then ended in accordance with International Financial in accordance with International Financial Reporting Standards Reporting Standards as adopted by the European Union. as adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant Report on other legal and regulatory requirements to the preparation and fair presentation of consolidated financial The Report of the Board of Directors, which is the responsibility statements that are free from material misstatement, whether due of the Board of Directors, is in accordance with the consolidated to fraud or error; selecting and applying appropriate accounting financial statements. policies; and making accounting estimates that are reasonable in the circumstances. Statement on corporate governance We also reviewed whether the Company’s voluntary Corporate Auditor’s responsibility Governance Statement reflects the compliance of COLT Telecom Our responsibility is to express an opinion on these consolidated Group S.A. with the nine provisions of the Combined Code (2006) financial statements based on our audit. We conducted our audit specified by the Listing Rules of the Financial Services Authority in accordance with International Standards on Auditing as adopted of the United Kingdom, and report if it does not. We were not by the Luxembourg Institut des Réviseurs d’Entreprises. Those required to consider whether the Board’s statements on internal standards require that we comply with ethical requirements and control cover all risks and controls, or form an opinion on the plan and perform the audit to obtain reasonable assurance effectiveness of the Company’s corporate governance procedures whether the consolidated financial statements are free from or its risk and control procedures. material misstatement. 20 February 2009 An audit involves performing procedures to obtain audit evidence PricewaterhouseCoopers S.à r.l. about the amounts and disclosures in the consolidated financial Luxembourg statements. The procedures selected depend on the auditor’s Réviseur d’entreprises judgment, including the assessment of the risks of material Represented by misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Marc Minet

COLT Telecom Group S.A. | Annual Report 2008 46 Consolidated income statement

Year ended 31 December 2008 Before After Year ended exceptional Exceptional exceptional 31 December items items items 2007 Notes €m €m €m €m

Revenue 2 1,675.4 – 1,675.4 1,679.6

Cost of sales Interconnect and network (1,015.7) 17.0 (998.7) (1,032.9) Network depreciation and amortisation (197.0) – (197.0) (193.9) (1,212.7) 17.0 (1,195.7) (1,226.8)

Gross proﬁt 462.7 17.0 479.7 452.8

Operating expenses Selling, general and administrative (355.8) – (355.8) (369.3) Other depreciation and amortisation (30.6) – (30.6) (28.2) (386.4) – (386.4) (397.5)

Operating proﬁt 2 76.3 17.0 93.3 55.3

Other income (expense) Finance income 9.3 – 9.3 8.2 Finance costs and similar charges 6 (22.7) – (22.7) (23.6) Exchange losses (8.0) – (8.0) (0.7) (21.4) – (21.4) (16.1)

Proﬁt before taxation 3 54.9 17.0 71.9 39.2 Taxation 8 –––– Proﬁt for the year 54.9 17.0 71.9 39.2 Basic earnings per share 9 €0.11 €0.06 Diluted earnings per share 9 €0.11 €0.06

Details of exceptional items are provided in note 7.

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

COLT Telecom Group S.A. | Annual Report 2008 47 Consolidated statement of recognised income and expense

Year ended 31 December 2008 2007 Notes €m €m

Profit for the year 71.9 39.2 Actuarial loss on defined benefit pension scheme 23 (1.8) – Pre-2008 defined benefit pension scheme deficit 23 (4.4) – Net exchange adjustments offset in reserves 14 (60.8) (27.9) Total recognised profit for the year 4.9 11.3

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

COLT Telecom Group S.A. | Annual Report 2008 48 Consolidated balance sheet

At 31 December 2008 2007 Notes €m €m ASSETS Non-current assets Intangible assets 10 66.2 77.9 Property, plant and equipment 11 1,194.4 1,198.2 Total non-current assets 1,260.6 1,276.1

Current assets Trade and other receivables 12 268.0 321.6 Cash and cash equivalents 13 273.6 231.1 Total current assets 541.6 552.7 Total assets 1,802.2 1,828.8

EQUITY Capital and reserves Share capital and share premium 14 1,723.9 1,723.3 Other reserves 14 (762.5) (702.1) Retained losses 14 (19.1) (84.5) Total equity 14 942.3 936.7

LIABILITIES Non-current liabilities Financial liabilities Non-convertible debt 22 – 262.2 Provisions 16 40.5 44.3 Retirement benefit obligations 23 6.2 – Total non-current liabilities 46.7 306.5

Current liabilities Trade and other payables 15 551.0 585.6 Non-convertible debt 22 262.2 – Total current liabilities 813.2 585.6

Total liabilities 859.9 892.1 Total equity and liabilities 1,802.2 1,828.8

The ﬁnancial statements on pages 47 to 83 were approved by the Board of Directors on 20 February 2009 and were signed on its behalf by:

Tony Bates Chief Operating Ofﬁcer

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

COLT Telecom Group S.A. | Annual Report 2008 49 Consolidated cash ﬂow statement

Year ended 31 December 2008 2007 Notes €m €m

Net cash generated from operating activities 17 367.6 310.0

Cash ﬂows from investing activities Purchase of non-current assets (310.5) (260.5) Proceeds from the disposal of non-current assets 0.4 0.8 Net cash used in investing activities (310.1) (259.7)

Cash flows from financing activities Finance costs and similar charges paid (20.8) (21.1) Finance income received 9.0 8.1 Issue of ordinary shares 0.6 0.2 Net cash used in financing activities (11.2) (12.8)

Net movement in cash and cash equivalents 46.3 37.5 Cash and cash equivalents at beginning of year 18 231.1 196.3 Effect of exchange rate changes on cash and cash equivalents 18 (3.8) (2.7) Cash and cash equivalents at end of year 13 273.6 231.1

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

COLT Telecom Group S.A. | Annual Report 2008 50 Notes to the consolidated ﬁnancial statements

1 Basis of presentation and principal accounting policies

COLT Telecom Group S.A. (‘COLT S.A.’ or ‘the Company’) together with its subsidiaries are referred to as ‘the Group’. The Group ﬁnancial statements consolidate the ﬁnancial statements of the Company and its subsidiaries as at and for the year ended 31 December 2008. COLT Telecom Group S.A. is a company domiciled in Luxembourg.

Basis of preparation The consolidated financial statements have been prepared under the historical cost convention modified for fair value where required. The accounting policies set out below have been consistently applied across Group companies to all periods presented in these consolidated ﬁnancial statements.

Going concern On 20 February 2009 the Board announced an Open Offer to raise €201 million before expenses. The Open Offer is fully underwritten by certain Fidelity parties, shareholders of COLT, subject to certain standard underwriting conditions and on the basis that the proposed capital reduction is approved by shareholders at the EGM on 17 March 2009. Approval requires a two thirds majority of those who vote and the Board has received irrevocable commitments from certain Fidelity entities and other parties to support the proposals, together representing 64.7% of the voting shares.

The Directors, after taking into account the expected proceeds of the Open Offer, believe that they have a reasonable basis for concluding that the Group has adequate facilities to continue as a going concern. Accordingly the ﬁnancial statements have been prepared on a going concern basis.

Basis of accounting The ﬁnancial statements of the Group have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) and IFRIC interpretations as endorsed by the EU and in accordance with Luxembourg laws and regulations.

The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amounts, events or transactions, the actual results ultimately may differ from those estimates.

Basis of consolidation The consolidated financial statements include those of the Company and all of its subsidiary undertakings. Subsidiary undertakings are those entities controlled directly or indirectly by the Company. Control arises when the Company has the ability to direct the financial and operating policies of an entity so as to obtain benefits from its activities.

Presentation currency The Group has a European-domiciled holding company and the Euro is the Group’s most signiﬁcant trading currency, therefore the Group’s ﬁnancial statements are presented in Euros.

Standards and interpretations not yet effective The IASB and IFRIC have issued the following standards and amendments to standards and interpretations that will apply to the Group.

• IAS 1 (Revised) ‘Presentation of Financial Statements’. • IAS 19 (Amendment) ‘Employee Beneﬁts’. • IAS 23 (Amendment) ‘Borrowing Costs’ (effective 1 January 2009 – subject to endorsement by the European Union). • IFRS 3 (Revised) ‘Business Combinations’.

The Group has not elected to early adopt these amendments. The Group is currently assessing the impact of these amendments and does not expect at this stage that they would signiﬁcantly impact the Group’s ﬁnancial position.

A summary of the more important Group accounting policies is set out below.

Exceptional items The Group separately identiﬁes and discloses one-off or unusual items (termed ‘exceptional items’). We believe this provides meaningful analysis of the trading results of the Group and aids readers’ understanding of the impact of such items. Therefore, in the discussion of the Group’s results of operations, reference is made to measurements before and after exceptional items. Exceptional items may not be comparable to similarly titled measures used by other companies.

COLT Telecom Group S.A. | Annual Report 2008 51 Notes to the consolidated ﬁnancial statements continued

Foreign currency transactions and translation Transactions denominated in foreign currencies are translated at the exchange rate prevailing at the time of the transaction. Monetary assets and liabilities are translated at the period end rate and any exchange differences are taken to the consolidated income statement. Exchange differences arising from the re-translation of the opening net assets of subsidiaries which are denominated in foreign currencies, and any related loans, together with the differences between income statements translated at average rates and rates ruling at the period end are taken directly to the translation reserve.

Revenue Revenue represents amounts earned for telecommunication services provided to customers (net of value added tax and intercompany revenue). Contracted income invoiced in advance for ﬁxed periods is recognised as revenue in the period of actual service provision. Installation fees are deferred and recognised in the consolidated income statement over the expected length of the customer relationship period (typically three to ﬁve years) or the contractual period, if longer. Data Centre revenues are recognised on an accruals basis over the term of the contract.

Proceeds from the sale of infrastructure qualify as revenue where the infrastructure was designated as built for resale at the outset and where the associated costs of construction have been classiﬁed as inventory for future sale. Where the infrastructure was not designated for resale and was classiﬁed as tangible non-current assets, the proceeds from these infrastructure sales are recorded net of costs as a gain or loss on the disposal of a non-current asset.

Charges to customers for services provided through the Group network where the Group is deemed to be acting as agent are reported net of service providers’ charges to the Group.

Cost of sales Cost of sales includes payments made to other carriers, depreciation of network infrastructure and equipment, direct network costs and construction costs associated with infrastructure sales.

Operating leases Costs in respect of operating leases are charged on a straight-line basis over the lease term. Operating lease incentives are recognised as a reduction in the rental expense over the lease term.

Segmental reporting The Group is managed around its three customer-facing divisions: Major Enterprise, Small and Medium Enterprise (SME) and Wholesale. COLT’s three Business Divisions correspond to its reportable segments in line with the information reported to its chief operating decision maker, the Executive Board.

The divisional operating results include all costs directly attributable to the divisions and the recharge of all shared network and other Service Division operating costs, including depreciation. The divisions use a shared network which is not divisible and therefore is classiﬁed as an unallocated corporate asset.

A geographical analysis of revenue and non-current assets is disclosed where material.

Intangible assets Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses.

Goodwill Goodwill arises on the purchase of subsidiary undertakings and represents the excess of the fair value of purchase consideration over the fair value of assets acquired. The goodwill was fully impaired during 2005.

Other intangible assets Intangible assets purchased separately, such as software that does not form an integral part of related hardware, are capitalised at cost. Amortisation is calculated to write off the cost of intangible ﬁxed assets on a straight-line basis over their expected economic lives which are between three and ﬁve years.

Property, plant and equipment Property, plant and equipment is recorded at historical cost less accumulated depreciation and any accumulated impairment losses. Network infrastructure and equipment comprises assets purchased and built, at cost, together with capitalised labour which is directly attributable to the cost of construction.

Depreciation is calculated to write off the cost of tangible ﬁxed assets on a straight-line basis over their expected economic lives as follows: Network infrastructure and equipment 5% – 20% per annum Office computers, equipment, fixtures and fittings and vehicles 10% – 33% per annum

COLT Telecom Group S.A. | Annual Report 2008 52 Notes to the consolidated ﬁnancial statements continued

Depreciation of network infrastructure and equipment commences from the date it becomes operational. Borrowing costs related to the purchase of property, plant and equipment are not capitalised.

The assets’ useful lives and residual values are reviewed and adjusted if appropriate at each balance sheet date.

Impairment The carrying values of property, plant and equipment and intangible assets other than goodwill are reviewed for impairment only when events indicate the carrying value may be impaired.

In an impairment test, the recoverable amount of the cash-generating unit or asset is estimated to determine the extent of any impairment loss. The recoverable amount is the higher of fair value less costs to sell and the value in use to the Group. An impairment loss is recognised to the extent that the carrying value exceeds the recoverable amount.

Deferred taxation Deferred tax is provided on all timing differences that arise between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and their tax base which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax at a future date, at rates that are expected to apply when the obligation crystallises, based on current tax rates and laws enacted or substantially enacted at the balance sheet date. Deferred tax assets and liabilities are recognised to the extent that it is regarded as probable that they will be recovered in the foreseeable future. Deferred tax is measured on a non-discounted basis.

Property provisions The Group provides for obligations relating to excess leased space and reinstatements in its properties. The provisions represent the net present value of the future estimated costs, with the unwinding of the discount included within the interest charge for the year.

Financial instruments Cash and cash equivalents For the purpose of preparation of the cash ﬂow statement, cash and cash equivalents includes cash at bank and in hand, and short-term deposits with a maturity period of three months or less. Interest income receivable on cash and cash equivalents is recognised as it is earned.

Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds, net of transaction costs, and the redemption value is recognised in the income statement over the period of the borrowings using the constant rate method.

Employee benefits Retirement benefit schemes Payments to defined contribution retirement benefit schemes are charged to the income statement on an accruals basis in the period in which contributions are payable to the schemes.

For defined benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, based on actuarial valuations. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside of the income statement and presented in the statement of recognised income and expense.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation, as reduced by the fair value of scheme assets. The present value of the defined benefit obligation is determined through consultation with independent actuaries, taking into account current market discount rates, current market values of investments and actual investment returns.

Share-based payments The cost of share-based employee compensation arrangements, whereby employees receive remuneration in the form of shares or share options, is recognised as an employee beneﬁt expense in the income statement.

The total expense is apportioned over the vesting period of the beneﬁt and is determined by reference to the fair value at the grant date of the shares or share options awarded and the number that are expected to vest. The assumptions underlying the number of awards expected to vest are subsequently adjusted to reﬂect conditions prevailing at the balance sheet date. At the vesting date of an award, the cumulative expense is adjusted to take account of the awards that actually vest.

COLT Telecom Group S.A. | Annual Report 2008 53 Notes to the consolidated ﬁnancial statements continued

Critical accounting policies and judgements The preparation of the consolidated financial statements under IFRS requires a number of estimates and assumptions to be made. In addition, management is required to exercise its judgement in the process of applying the Group’s accounting policies. Management continually evaluates the estimates, assumptions and judgements based on available information and experience. As the use of estimates is inherent in financial reporting, actual results could differ from these estimates. The Group believes that of its significant accounting policies, the following are considered to be critical to its financial condition and results and involve a higher degree of judgement and complexity.

Revenue recognition Revenue from switched services, which are generally billed in arrears, and from non-switched services, which are generally billed in advance, is recognised when services are provided. Revenue from installation activities is deferred and recognised over the expected length of the customer relationship period (typically three to ﬁve years), or the contractual period if longer. Judgement is required in the application of these principles.

Carrier revenue and payments to other operators When telephony trafﬁc is carried by other operators, the Group incurs interconnect costs. Some interconnect costs are subject to regulation by local regulatory authorities in the countries in which the Group operates. A regulatory determination may give rise to amendments, (most often in the form of reductions) to interconnect costs. The changes in regulated interconnect costs may or may not be in line with the change in market selling prices for telephony trafﬁc. Margins may therefore be eroded where selling prices fall faster than regulated interconnect costs.

The Group reviews its interconnect costs on a regular basis and adjusts the rate at which these costs are charged in the income statement in accordance with the estimated interconnect costs for the current period. The prices at which these services are charged are often regulated and can be subject to retrospective adjustment. Estimates are used in assessing the likely impact of these retrospective adjustments.

Receivables and provisions for doubtful debts The Group performs ongoing reviews of the bad debt risk within its receivables and makes provisions to reﬂect its views of the ﬁnancial condition of its customers and their ability to pay in full for amounts owing for services provided. Estimates based on historical and current experience are used in determining the level of debts that are not expected to be collected.

Property, plant and equipment Property, plant and equipment is recorded at historical cost less accumulated depreciation and any accumulated impairment losses. Network infrastructure and equipment comprises assets purchased and built, at cost, together with capitalised labour, directly attributable to the cost of construction.

COLT’s network assets are long-lived with cables and switching equipment operating for between ﬁve and 20 years. The annual depreciation charge is sensitive to the estimated service life allocated to each asset type. The Group reviews asset lives and residual values annually and changes them when it is considered necessary to reﬂect its current estimates of its remaining lives in light of changes in technology, the actual condition and expected utilisation of the assets concerned.

Impairment The carrying values of property, plant and equipment and intangible assets other than goodwill, within a cash generating unit, are reviewed for impairment only when events indicate the carrying value may be impaired. Impairment indicators include both internal and external factors. Examples of internal factors include analysing performance against budgets and assessing absolute ﬁnancial measures for indicators of impairment. Examples of external considerations assessed for indications of impairment include wider economic factors.

Where impairment indicators are present, the recoverable amounts of assets are measured. Asset recoverability requires assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets using cash flow projections which have been discounted at an appropriate rate. In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters. In particular, management has regard to assumptions in respect of revenue mix and growth rates, customer churn, EBITDA margins, timing and amount of capital expenditures, long term growth rates and the selection of appropriate discount rates.

Deferred tax assets The Group operates in a large number of different tax jurisdictions. Deferred tax assets require management judgement in determining the amounts to be recognised. In particular, signiﬁcant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income, time limits on the availability of taxable losses for carry forward together with any future tax planning strategies.

Provisions The Group’s provisions are established based on its best estimate at the balance sheet date of the amounts necessary to settle existing obligations or commitments as of each balance sheet date.

COLT Telecom Group S.A. | Annual Report 2008 54 Notes to the consolidated ﬁnancial statements continued

2 Segmental reporting

Operating segments The Group is managed around its three customer-facing divisions: Major Enterprise, Small and Medium Enterprise (SME) and Wholesale (including Carrier Voice operations), supported by four Service Divisions and the Country Division. COLT’s three Business Divisions correspond to its reportable segments in line with the information reported to its chief operating decision maker, the Executive Board.

Divisional revenue has been classiﬁed as Voice and Data to provide analysis of products and services that they provide. Voice revenue comprises services including the transmission of voice, data or video through a switching centre. Data revenue includes managed and non-managed network services, bandwidth services and voice trafﬁc which is delivered in a digital form (IP Voice). Voice revenue has been further split between Carrier Voice and Corporate and Reseller Voice. Carrier Voice revenue includes Voice services provided wholesale to other licenced operators, and Corporate and Reseller Voice revenue is all other Voice revenue.

The divisional operating results include all costs directly attributable to the Business Divisions and the recharge of all shared network and other Service Division operating costs, including depreciation. The bases used to recharge these costs may be further reﬁned in the future.

The divisions use a shared network which is not divisible and is therefore classiﬁed as an unallocated corporate asset. As such, all capital expenditure and depreciation are also classiﬁed as corporate, although depreciation is recharged. Other unallocated corporate assets and liabilities include cash, debt and provisions.

The Group has a large customer base and no undue reliance on any one major customer therefore no such related revenue is required to be disclosed by IFRS 8.

The accounting policies adopted by each segment are described in note 1.

Corporate Major and Enterprise SME Wholesale eliminations Consolidated Year ended 31 December 2008 €m €m €m €m €m Revenue Carrier Voice – – 235.6 – 235.6 Corporate and Reseller Voice 172.0 275.1 76.7 – 523.8 Total Voice revenue 172.0 275.1 312.3 – 759.4 Data revenue 528.9 186.6 200.5 – 916.0 Total revenue 700.9 461.7 512.8 – 1,675.4

Result Operating profit (loss) before exceptional items 31.7 (4.1) 48.7 – 76.3 Exceptional items (note 7) – – – 17.0 17.0 Operating proﬁt (loss) after exceptional items 31.7 (4.1) 48.7 17.0 93.3 Finance income 9.3 Finance costs and similar charges (22.7) Exchange loss (8.0) Profit before and after taxation 71.9

Segment assets 83.2 52.8 115.8 1,550.4 1,802.2

Segment liabilities (248.7) (126.5) (135.0) (349.7) (859.9)

Other segment items Capital expenditure Intangible non-current assets (note 10) 36.2 36.2 Tangible non-current assets (note 11) 273.9 273.9 310.1 310.1 Amortisation and depreciation Intangible non-current assets (note 10) 22.8 22.8 Tangible non-current assets (note 11) 204.8 204.8 227.6 227.6

COLT Telecom Group S.A. | Annual Report 2008 55 Notes to the consolidated ﬁnancial statements continued

Corporate Major and Enterprise SME Wholesale eliminations Consolidated Year ended 31 December 2007 €m €m €m €m €m Revenue Carrier Voice – – 246.7 – 246.7 Corporate and Reseller Voice 187.6 317.1 85.6 – 590.3 Total Voice revenue 187.6 317.1 332.3 – 837.0 Data revenue 485.5 171.7 185.4 – 842.6 Total revenue 673.1 488.8 517.7 – 1,679.6

Result Operating proﬁt (loss) 31.0 (11.3) 35.6 – 55.3 Finance income 8.2 Finance costs and similar charges (23.6) Exchange loss (0.7) Profit before and after taxation 39.2

Segment assets 124.4 56.6 120.9 1,526.9 1,828.8

Segment liabilities (249.9) (139.0) (147.7) (355.5) (892.1)

Other segment items Capital expenditure Intangible non-current assets 31.4 31.4 Tangible non-current assets 244.5 244.5 275.9 275.9

Amortisation and depreciation Intangible non-current assets 21.3 21.3 Tangible non-current assets 200.8 200.8 222.1 222.1

Geographical information The Group has material revenue and assets in a number of foreign countries, including Germany, France, the UK, Spain, Italy and Switzerland. There are no material revenue or assets in the Company’s country of domicile, Luxembourg. Revenue by country is disclosed based on amounts invoiced and accrued. Inter-geographical revenue transactions are carried out at an arm’s length price.

The information in the table below is based on the location of the assets which is not materially different from the location of the customer.

External revenue Total non-current assets 2008 2007 2008 2007 €m €m €m €m

Germany 469.5 513.3 411.8 447.5 UK 292.6 311.8 247.4 250.1 France 245.2 239.0 149.1 139.9 Spain 158.6 138.0 132.6 130.1 Italy 136.6 127.8 54.1 49.1 Switzerland 95.3 87.0 82.2 68.3 Other 277.6 262.7 183.4 191.1 1,675.4 1,679.6 1,260.6 1,276.1

COLT Telecom Group S.A. | Annual Report 2008 56 Notes to the consolidated ﬁnancial statements continued

3 Profit before taxation

The following items have been included in arriving at proﬁt before taxation: Year ended 31 December 2008 2007 €m €m

Staff costs (note 5) 321.2 326.2 Network depreciation and amortisation Intangible assets (note 10) 2.7 5.0 Property, plant and equipment (note 11) 194.3 190.7 Other depreciation and amortisation Intangible assets (note 10) 20.1 16.3 Property, plant and equipment (note 11) 10.5 10.1 Receivables provision charge (note 12) 3.6 2.8 Loan interest (note 6) 20.0 20.0 Other operating lease rentals payable Property 39.4 39.1 Plant and equipment 143.0 137.9 Net foreign exchange losses 8.0 0.7

Services provided by the Group’s auditors and network of ﬁrms: Year ended 31 December 2008 2007 €m €m

Fees payable to the auditors for the audit of the annual accounts in respect of the current year 0.1 0.1

Fees payable to the auditors and their associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 1.8 1.9 1.9 2.0 Tax services 0.7 0.8 2.6 2.8

COLT Telecom Group S.A. | Annual Report 2008 57 Notes to the consolidated ﬁnancial statements continued

4 Directors

Year ended 31 December 2008 2007 €m €m

Aggregate emoluments 3.9 3.4

The Directors consider that only the Board of Directors has the authority and responsibility for planning, directing and controlling the activities of the Group and therefore there are no other key management personnel.

Further details on Directors’ emoluments are set out in the Audited Information in the Directors’ Remuneration Report on pages 44 to 45 which form part of these ﬁnancial statements (incorporated by cross reference).

5 Employee information

Average monthly number of people (including Directors) employed by the Group:

Year ended 31 December 2008 2007 By reportable segment: Major Enterprise 2,305 2,051 SME 1,330 1,254 Wholesale 790 714 4,425 4,019

Year ended 31 December 2008 2007 By geography: Europe 3,437 3,232 India 984 783 Rest of World 4 4 4,425 4,019

Year ended 31 December 2008 2007 €m €m Employee costs (for the above persons): Wages and salaries 287.5 286.3 Share option charge (note14) 0.1 0.7 Social security costs 43.9 42.7 Pension costs (note 23) 16.8 17.3 348.3 347.0 Less: employee costs capitalised (27.1) (20.8) 321.2 326.2

Capitalised employee costs are included in additions within the appropriate non-current asset category.

COLT Telecom Group S.A. | Annual Report 2008 58 Notes to the consolidated ﬁnancial statements continued

6 Finance costs and similar charges

Year ended 31 December 2008 2007 €m €m

Finance costs and similar charges on non-convertible notes 20.0 20.0 Other finance costs and similar charges 2.7 3.6 22.7 23.6

7 Exceptional items

A credit of €17.0m within cost of sales relating to the resolution of a complex billing issue during the period 2004-2007 has been recognised as an exceptional item in 2008.

There were no exceptional items in 2007.

COLT Telecom Group S.A. | Annual Report 2008 59 Notes to the consolidated ﬁnancial statements continued

8 Taxation

There is no Group tax charge arising in the years ended 31 December 2008 and 2007. The tax on the Group’s proﬁt before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to the proﬁts and losses of the consolidated companies as follows:

Year ended 31 December 2008 2007 €m €m

Profit before tax 71.9 39.2

Tax calculated at domestic tax rates applicable to proﬁts (losses) in the respective countries 21.3 10.3 Permanent differences (39.8) (35.8) Utilisation of previously unrecognised tax losses (8.7) (4.4) Temporary differences for which no deferred tax asset was recognised 27.2 29.9 – –

The weighted average applicable tax rate was 29.6% (2007: 26.7%). The increase is caused by a change in the accounting proﬁts and losses of the Group’s subsidiaries in the respective countries.

At 31 December 2008, total tax losses carried forward amounted to €1,601.4m (2007: €1,556.6m). At 31 December 2008, €1,329.0m (2007: €1,217.1m) of these losses are not time limited and €272.4m (2007: €339.5m) are time limited. The majority of the time limited losses must be utilised by 31 December 2011. All losses must be utilised in the country in which they arose. They remain subject to legislative provisions and to agreements with the various tax authorities in jurisdictions where the Group operates.

At 31 December 2008 the Group also had other timing differences of €1,106.9m (2007: €1,184.1m), the majority of which have arisen as a result of the carrying value of ﬁxed assets being higher for tax purposes than their value in the accounts.

The Group operates in a large number of different tax jurisdictions. Deferred tax assets require management judgement in determining the amounts to be recognised. In particular, signiﬁcant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income, time limits on the availability of taxable losses for carry forward together with any future tax planning strategies. Having regard to this at 31 December 2008, no deferred tax assets had been recognised by the Group.

The unprovided potential deferred tax asset was as follows:

At 31 December 2008 2007 €m €m

Capital allowances less depreciation 295.8 320.4 Short term temporary differences 32.5 30.4 Potential deferred tax asset 328.3 350.8 Tax value of losses Losses – without time limits 347.3 315.6 Losses – time expiring (within 10 years) 70.3 84.6 Total potential deferred tax asset after addition of losses 745.9 751.0

The total potential deferred tax asset has decreased by €5.1m from 2007. This is principally due to the impact of exchange losses partially offset by increased proﬁts.

COLT Telecom Group S.A. | Annual Report 2008 60 Notes to the consolidated ﬁnancial statements continued

9 Earnings per share

Basic earnings per share is based upon the proﬁt after tax for each year and the weighted average number of ordinary shares in issue in the year.

Year ended 31 December 2008 2007

Basic weighted average number of ordinary shares (m) 680.5 680.1 Dilutive ordinary shares from share options (m) 0.2 0.4 Diluted weighted average number of ordinary shares (m) 680.7 680.5 Profit for the year (€m) 71.9 39.2 Basic earnings per share (€) 0.11 0.06 Diluted earnings per share (€) 0.11 0.06

COLT Telecom Group S.A. | Annual Report 2008 61 Notes to the consolidated ﬁnancial statements continued

10 Intangible assets

Software Goodwill assets Total €m €m €m Cost At 1 January 2007 30.5 329.3 359.8 Additions – 31.4 31.4 Exchange differences – (24.4) (24.4) At 31 December 2007 30.5 336.3 366.8 Additions – 36.2 36.2 Exchange differences – (70.3) (70.3) At 31 December 2008 30.5 302.2 332.7

Accumulated amortisation At 1 January 2007 30.5 254.6 285.1 Charge for the year – 21.3 21.3 Exchange differences – (17.5) (17.5) At 31 December 2007 30.5 258.4 288.9 Charge for the year – 22.8 22.8 Exchange differences – (45.2) (45.2) At 31 December 2008 30.5 236.0 266.5

Net book value At 1 January 2007 – 74.7 74.7 At 31 December 2007 – 77.9 77.9 At 31 December 2008 – 66.2 66.2

COLT Telecom Group S.A. | Annual Report 2008 62 Notes to the consolidated ﬁnancial statements continued

11 Property, plant and equipment

Computers, equipment, Network fixtures, infrastructure fittings and and equipment vehicles Total €m €m €m Cost At 1 January 2007 4,190.8 195.6 4,386.4 Additions 230.2 14.3 244.5 Disposals (6.2) (3.8) (10.0) Exchange differences (101.8) (3.5) (105.3) At 31 December 2007 4,313.0 202.6 4,515.6 Additions 259.1 14.8 273.9 Disposals (4.6) (0.2) (4.8) Exchange differences (203.6) (19.4) (223.0) At 31 December 2008 4,363.9 197.8 4,561.7

Accumulated depreciation At 1 January 2007 3,022.9 172.7 3,195.6 Charge for the year 190.7 10.1 200.8 Disposals (2.9) (3.3) (6.2) Exchange differences (70.3) (2.5) (72.8) At 31 December 2007 3,140.4 177.0 3,317.4 Charge for the year 194.3 10.5 204.8 Disposals (2.2) (0.2) (2.4) Exchange differences (130.1) (22.4) (152.5) At 31 December 2008 3,202.4 164.9 3,367.3

Net book value At 1 January 2007 1,167.9 22.9 1,190.8 At 31 December 2007 1,172.6 25.6 1,198.2 At 31 December 2008 1,161.5 32.9 1,194.4

Included in network infrastructure and equipment at 31 December 2008 are payments on account and assets under construction of €59.9m (2007: €57.5m).

Indicator of impairment At 31 December 2008, the Group’s market capitalisation did not exceed its net assets resulting in an impairment indicator according to the requirements of IAS 36 ‘Impairment of Assets’. Under IAS 36, the Group prepared a value in use calculation to assess the carrying value of its total non-current assets of €1,260.6m.

The Group’s value in use calculation was derived from a cash flow forecast based on the Group’s most recent budgets approved by management. The cash flow forecast is sensitive to material changes in key assumptions, including those relating to Data revenue growth, Data profit margins, customer churn and capital expenditure. The rate used to discount the forecast cash flows is estimated by reference to the Group’s weighted average cost of capital, calculated to be 10.2% for 2008.

The value in use calculation supported the carrying value of the Group’s non-current assets as at 31 December 2008.

COLT Telecom Group S.A. | Annual Report 2008 63 Notes to the consolidated ﬁnancial statements continued

12 Trade and other receivables

At 31 December 2008 2007 €m €m Amounts falling due within one year: Trade receivables 258.1 299.8 Provision against doubtful debts (37.9) (46.5) Trade receivables – net 220.2 253.3 Other receivables 23.7 26.9 Prepayments and accrued income 21.2 23.5 VAT recoverable 2.9 17.9 268.0 321.6

The Group has a variety of credit terms depending on the customer. The Group has provided fully for all receivables over 180 days. Trade receivables between 60 and 180 days are provided for based on the age of the debt and other customer speciﬁc matters. COLT does not renegotiate credit terms.

The fair value of trade receivables as at 31 December 2008 is €220.2m (2007: €253.3m)

At 31 December 2008 2007 €m €m Movement in the allowance for doubtful debts: Balance at the beginning of the year (46.5) (55.9) Receivables written off during the year as uncollectable 9.0 9.8 Amounts recovered during the year 11.7 18.4 Provided during the year (15.3) (21.2) Exchange differences 3.2 2.4 Balance at the end of the year (37.9) (46.5)

In determining the recoverability of the trade receivables the Group considers any changes in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being distributed over many customers, in different countries and in different industries.

Aged analysis of trade receivables As of 31 December 2008, trade receivables of €35.4m (2007: €41.8m) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

Past due and not impaired between 0 and more than 90 days 90 days past due past due €m €m

Trade receivables at 31st December 2008 32.4 3.0 Trade receivables at 31st December 2007 35.3 6.5

Currency proﬁle of trade and other receivables The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

At 31 December 2008 2007 €m €m

Euro 208.3 238.7 Sterling 40.5 64.5 Swiss Franc 11.5 9.4 Other 7.7 9.0 268.0 321.6

COLT Telecom Group S.A. | Annual Report 2008 64 Notes to the consolidated ﬁnancial statements continued

13 Cash and cash equivalents

At 31 December 2008 2007 €m €m

Cash at bank and in hand 74.6 156.3 Short term bank deposits 199.0 74.8 273.6 231.1

Cash at bank and in hand and short term bank deposits comprises funds which the Group can access without restriction within a maximum of three months. During 2008 the effective interest rate on short term deposits was 4.4% (2007: 4.3%) and at 31 December 2008 these deposits had an average maturity of thirty eight working days (2007: one working day).

14 Statement of changes in shareholders’ equity

Ordinary Share Share Shares to Translation Other Retained Total shares capital premium be issued reserves reserves losses equity No. m €m €m €m €m €m €m €m

At 31 December 2006 680.1 850.1 872.9 4.4 (6.5) (674.5) (122.0) 924.4 Profit for the year ––––––39.2 39.2 Shares issued in the year 0.10.20.1––––0.3 Other reserve transfer –––––1.7(1.7) – Share option credit –––0.7–––0.7 Net exchange adjustments offset in reserves ––––(27.9) – – (27.9) At 31 December 2007 680.2 850.3 873.0 5.1 (34.4) (672.8) (84.5) 936.7 Profit for the year ––––––71.9 71.9 Pre-2008 defined benefit pension scheme deficit (see Note 23) ––––––(4.4) (4.4) Actuarial losses on retirement benefit obligations (see Note 23) ––––––(1.8) (1.8) Shares issued in the year 0.30.40.2––––0.6 Other reserve transfer –––––0.3(0.3) – Share option credit –––0.1–––0.1 Net exchange adjustments offset in reserves ––––(60.8) – – (60.8) At 31 December 2008 680.5 850.7 873.2 5.2 (95.2) (672.5) (19.1) 942.3

COLT Telecom Group S.A. | Annual Report 2008 65 Notes to the consolidated ﬁnancial statements continued

Share capital The authorised share capital at 31 December 2008 consisted of 1,000,000,000 ordinary shares with a nominal value of €1.25, of which 680,527,576 had been issued and were fully paid-up. All shares have the same rights and entitlements.

Other reserves Other reserves includes the special reserve and the reverse acquisition reserve which were both created during 2006.

Special reserve On 30 June 2006 COLT S.A. became the holding company of COLT Telecom Group Limited (formerly plc) under the terms of a Scheme of Arrangement (the ‘Scheme’) approved by COLT plc shareholders. The former COLT plc shareholders were issued new shares in COLT S.A. on a one-for-three basis under the terms of the Scheme. Immediately preceding the Scheme, the shareholders of COLT plc had approved a capital reduction which reduced share premium by €2.9bn and reduced retained losses by €2.8bn. The excess of share premium over retained earnings at that date of €60.9m was transferred to a ‘special reserve’ in the accounts of COLT plc which is not distributable to shareholders.

Reverse acquisition reserve Immediately following the approval of the Scheme, the former shareholders of COLT plc held the same economic interest in COLT S.A. as they held in COLT plc immediately prior to its implementation. Accordingly, the acquisition of COLT plc via the Scheme has been accounted for as a reverse acquisition under IFRS3 ‘Business Combinations’. For accounting purposes in a reverse acquisition, the acquirer (COLT plc) is the entity whose equity interests have been acquired and the issuing entity (COLT S.A.) is the acquiree. The effect of this is that the financial statements of the combined Group represent a continuation of COLT plc’s financial statements. The assets and liabilities of COLT plc have been recognised and measured in these financial statements at their pre-combination carrying amounts. The consolidated accumulated losses and other reserves of the combined Group are based on the amount of COLT plc’s pre-combination ‘total equity’.

The fair value of the consideration for the business combination, calculated in accordance with IFRS3 ‘Business Combinations’, was €nil. The fair value of the net assets and liabilities of COLT S.A. acquired by COLT plc was €nil. Therefore, no goodwill was recognised. As a result of the combination, a reverse acquisition reserve was created. This has been classiﬁed as part of ‘other reserves’ within equity.

Previous COLT Telecom Group plc plan Group Share Plan (‘Option Plan’) Options were granted at an option price which was not less than the market value of the ordinary shares on the date of grant. All option awards since July 2003 have been subject to performance tests. As stated in the last Annual Report most of the awards lapsed as the performance tests were not achieved. No further grants will be made under this Option Plan.

COLT Telecom Group S.A. | Annual Report 2008 66 Notes to the consolidated ﬁnancial statements continued

Details of grants made under the Option Plan are set out below:

Outstanding Granted Exercised Lapsed Outstanding Date Exercise Dates of Date of Options at 31 Dec in the in the in the at 31 Dec of grant price (£) vesting expiration granted 2007 year year year 2008

May 98 14.28 May 99 to May 03 May 08 276,666 77,746 – – (77,746) – Aug 98 19.80 Aug 99 to Aug 03 Aug 08 968,666 160,714 – – (160,714) – Nov 98 22.47 Nov 99 to Nov 03 Nov 08 469,358 76,818 – – (76,818) – Mar 99 33.90 Mar 00 to Mar 04 Mar 09 330,000 72,327 – – (18,665) 53,662 May 99 36.75 May 00 to May 04 May 09 195,000 18,664 – – (2,666) 15,998 Aug 99 38.22 Aug 00 to Aug 04 Aug 09 310,000 47,663 – – (5,333) 42,330 Nov 99 63.00 Nov 00 to Nov 04 Nov 09 266,833 38,998 – – (5,833) 33,165 Dec 99 73.17 Dec 00 to Dec 04 Dec 09 246,666 53,315 – – (8,331) 44,984 Feb 00 108.54 Feb 01 to Feb 05 Feb 10 248,333 39,989 – – (15,830) 24,159 May 00 67.83 May 01 to May 05 May 10 264,166 88,313 – – (28,330) 59,983 Jun 00 79.98 Jun 01 to Jun 05 Jun 10 282,000 60,151 – – (10,831) 49,320 Aug 00 57.48 Aug 01 to Aug 05 Aug 10 393,833 93,980 – – (13,330) 80,650 Aug 00 53.19 Aug 01 to Aug 05 Aug 10 105,833 18,741 – – (7,914) 10,827 Nov 00 58.44 Nov 01 to Nov 05 Nov 10 266,666 98,306 – – (24,161) 74,145 Dec 00 45.54 Dec 01 to Dec 05 Dec 10 252,440 81,728 – – (16,606) 65,122 Feb 01 40.11 Feb 02 to Feb 06 Feb 11 800,347 157,299 – – (63,824) 93,475 May 01 25.32 May 02 to May 06 May 11 288,833 48,154 – – (10,998) 37,156 Jun 01 21.30 Jun 02 to Jun 06 Jun 11 896,250 314,009 – – (55,900) 258,109 Aug 01 9.66 Aug 02 to Aug 06 Aug 11 488,166 105,805 – – (18,495) 87,310 Nov 01 5.16 Nov 02 to Nov 06 Nov 11 77,000 20,831 – – (12,332) 8,499 Dec 01 4.68 Dec 02 to Dec 06 Dec 11 470,166 232,714 – – (39,294) 193,420 Feb 02 1.23 Feb 03 to Feb 07 Feb 12 1,562,833 205,330 – – (29,657) 175,673 May 02 1.35 May 03 to May 07 May 12 24,166 4,998 – – – 4,998 Jul 02 1.44 Jul 03 to Jul 07 Jul 12 1,867,433 849,135 – (16,831) (294,065) 538,239 May 03 1.47 May 04 to May 08 May 13 16,666 6,667 – – – 6,667 Jul 03 2.31 Jul 06 to Jul 08 Jul 13 2,387,000 1,148,947 – – (320,655) 828,292 Oct 03 3.03 Oct 06 to Oct 08 Oct 13 20,000 10,000 – – (10,000) – Feb 04 3.39 Feb 07 to Feb 09 Feb 14 20,000 6,666 – – – 6,666 Apr 04 2.52 Apr 07 to Apr 09 Apr 14 6,666 6,666 – – – 6,666 May 04 2.31 May 07 to May 09 May 14 166,666 166,666 – – – 166,666 Mar 05 1.65 Mar 08 to Mar 10 Mar 15 256,666 239,998 – – (239,998) – Mar 05 1.50 Mar 08 to Mar 10 Mar 15 11,666,666 7,666,666 – – (7,666,666) – Apr 05 1.56 Apr 08 to Apr 10 Apr 15 55,833 55,833 – – (55,833) – Jun 05 1.68 Jun 08 to Jun 10 Jun 15 11,666 11,666 – – (11,666) – Aug 05 1.83 Aug 08 to Aug 10 Aug 15 1,043,250 866,523 – – (866,523) – Aug 05 1.83 Aug 08 to Aug 10 Aug 15 1,051,000 892,795 – – (892,795) – Sep 05 1.89 Sep 08 to Sep 10 Sep 15 666,666 666,666 – – (666,666) – Sep 05 1.89 Sep 08 to Sep 10 Sep 15 16,666 16,666 – – (16,666) – Oct 05 1.65 Oct 08 to Oct 10 Oct 15 66,666 66,666 – – (66,666) – Dec 05 1.68 Dec 08 to Dec 10 Dec 15 36,666 36,666 – – (36,666) – Mar 06 2.19 Mar 09 to Mar 11 Mar 16 13,333 13,333 – – – 13,333 14,844,818 – (16,831) (11,848,473) 2,979,514

Weighted average exercise price of options £5.80 – £1.44 £3.22 £16.08

COLT Telecom Group S.A. | Annual Report 2008 67 Notes to the consolidated ﬁnancial statements continued

Share Grant Plan The Share Grant Plan provides for awards to be made over Company shares. Awards do not vest until the third anniversary of the date of grant. Awards are made to high performing executives and to attract senior employees to the Company. Subject to meeting performance conditions which are challenging and reﬂect a real and meaningful improvement in performance, awards ordinarily vest on the third anniversary of the date of grant.

No awards were made during 2008. There are no awards outstanding under the Share Grant.

Share Option Plan The Share Option Plan is divided into two parts; the ‘Approved Part’ approved by HM Revenue & Customs for the purposes of the Income and Corporation Taxes Act 1988 and the ‘Unapproved Part’ which is not so approved. Options are granted at an option price which is not less than the market value of the ordinary shares on the date of grant. Subject to meeting performance conditions which are challenging and reﬂect a real and meaningful improvement in performance, awards ordinarily vest on the third anniversary of the date of grant.

No awards were made during 2008. There are no awards outstanding under the Share Option Plan.

Share Incentive Plan The Share Incentive Plan enables eligible employees to acquire COLT S.A. shares monthly through a one year savings plan, or through the award of free COLT S.A. shares and/or matching shares. The aggregate market value of free shares may not exceed £3,000 per annum.

No awards were made during 2008. There are no awards outstanding under the Share Incentive Plan.

COLT Savings-Related Share Option Scheme The COLT Savings-Related Share Option Scheme (the ‘SAYE Scheme’) was adopted on 28 April 2006 and operates for the beneﬁt of all eligible employees. Under the SAYE Scheme, employees may save between £5 and £250 a month with a savings institution and are granted options to acquire shares in the Company. After a three year period, employees can use the proceeds of their savings account to exercise the options at a price established at the beginning of the three year period.

Details of grants made under the SAYE Scheme are set out below:

Date of Exercise Date of Options Outstanding Granted in Exercised in Lapsed in Outstanding grant price (£) vesting granted at 31 Dec 07 the year the year1 the year at 31 Dec 08

December 20032 3.081 March 2008 19,441 5,915 – – (5,915) – December 20042 1.29 March 2009 67,443 54,083 – – (201) 53,882 December 2004 1.395 March 2008 1,245,886 607,782 – (313,989) (293,793) – December 20052 1.71 March 2010 80,272 71,794 – – (1,622) 70,172 December 2005 1.74 March 2009 1,252,647 635,008 – – (146,489) 488,519 December 20062 1.41 March 2011 92,971 92,971 – – – 92,971 December 2006 1.43 March 2010 1,175,623 1,052,536 – (2,427) (534,799) 515,310 December 20072 1.70 March 2012 10,293 10,293 – – – 10,293 December 2007 1.77 March 2011 482,797 482,797 – – (251,168) 231,629 December 20082 0.62 March 2013 147,304 – 147,304 – – 147,304 December 2008 0.65 March 2012 1,845,922 – 1,845,922 – – 1,845,922 3,013,179 1,993,226 (316,416) (1,233,987) 3,456,002

Weighted average exercise price of options £1.55 £0.65 £1.40 £1.54 £1.05

1 Of the options exercised in the year, 2,427 were early exercises 2 Each option holder entered into a four year savings contract

In March 2000, the Group established a QUEST to acquire, inter alia, shares in the Company to satisfy existing options granted under the Group’s SAYE Scheme. At 31 December 2008, no shares remained in the QUEST (2007: nil).

COLT Telecom Group S.A. | Annual Report 2008 68 Notes to the consolidated ﬁnancial statements continued

Share option charge As described in note 1, the cost of share-based employee compensation arrangements is recognised as an employee beneﬁt expense in the income statement. The ‘shares to be issued reserve’ represents the cumulative share option charge less amounts transferred to share premium on exercise of options.

For most grants made, the fair value has been calculated using the Black-Scholes model. The following assumptions were used in this model for share options granted during 2007 and 2008:

Options Options granted during granted during 2008 2007

Weighted average fair value £0.23 £0.67 Weighted average exercise price £0.65 £1.77 Weighted average share price at grant date £0.65 £1.77 Weighted average volatility 47% 47% Option life 4-5 years 4-5 years Expected dividend yield 0% 0% Risk free interest rate 2.3%-2.4% 5.25%

Volatility is estimated at the date of each grant with reference to the historical volatility in the Group’s share price over the previous two year period. In order for options to vest, participants must continue to be employed by the Group and the Group must meet certain non market-based performance conditions. The likelihood of these conditions being met is taken into account when the share option charge is calculated.

During 2008, 333,247 options were exercised. The average share price during the year was £1.29. Share options with exercise prices ranging from £0.62 to £108.54 were outstanding at the end of the year, with a weighted average remaining option life of ﬁve years.

COLT Deferred Bonus Plan The COLT Deferred Bonus Plan (the ‘Deferred Bonus Plan’) was adopted on 28 April 2006. The Deferred Share Bonus Plan allows grants of awards over matching shares based on shares purchased by participants with monies earned under the annual bonus plan. The award of matching shares is subject to performance conditions the same or similar to those relating to the Share Grant Plan. Participants must hold the shares for three years to obtain matching shares. No awards were made during 2008.

Details of grants made under the Deferred Bonus Plan are set out below:

Date of Date of Number Outstanding Granted in Exercised in Lapsed in Outstanding at grant vesting granted at 31 Dec 07 the year the year the year 31 Dec 08

Apr 06 Apr 09 6,529 4,504 – – – 4,504

On 22 March 1999 an Employee Beneﬁt Trust (‘EBT’) was established, and on 31 December 2008 it held 52,746 shares (2007: 70,460). These shares can be used to satisfy the Company’s obligations under the Deferred Bonus Plan.

COLT Telecom Group S.A. | Annual Report 2008 69 Notes to the consolidated ﬁnancial statements continued

15 Trade and other payables

At 31 December 2008 2007 €m €m

Trade payables 109.7 124.7 Other payables 10.2 12.6 Taxation and social security 24.9 23.3 Accruals 220.3 240.9 Deferred revenue 185.1 183.3 Accrued interest 0.8 0.8 551.0 585.6

The average credit period on purchases varies by supplier. The Group has ﬁnancial risk management policies in place to ensure that all payables are paid within the credit timeframe. The value of trade payables due in less than one year is €109.7m (2007: €124.7m).

16 Provisions

Property €m

At 1 January 2007 46.2 Amortisation of discount 2.4 Utilised in the year (3.4) Exchange difference (0.9) At 31 December 2007 44.3 Amortisation of discount 1.7 Utilised in the year (3.6) Exchange difference (1.9) At 31 December 2008 40.5

At 31 December 2008 2007 €m €m Maturity proﬁle of property provisions Within 1 year 12.0 9.6 Between 1 and 2 years 11.2 6.3 Between 2 and 5 years 7.6 19.8 Over 5 years 9.7 8.6 40.5 44.3

The Group provides for obligations relating to excess leased space and reinstatements in its properties. The provisions represent the net present value of the future estimated costs, with the unwinding of the discount included within the interest charge for the year. The provisions are discounted at 5.5% (2007: 5.5%).

COLT Telecom Group S.A. | Annual Report 2008 70 Notes to the consolidated ﬁnancial statements continued

17 Cash flow reconciliations a) Reconciliation of proﬁt for the year to net cash generated from operations Year ended 31 December 2008 2007 €m €m

Proﬁt for the year 71.9 39.2 Exchange differences 8.0 0.7 Finance costs and similar charges 22.7 23.6 Finance income (9.3) (8.2) Depreciation and impairment 227.6 222.1 Other non-cash items 0.1 0.1 Movement in receivables 40.4 28.8 Movement in payables 10.8 7.1 Movement in provisions (4.6) (3.4) Net cash generated from operations 367.6 310.0

b) EBITDA reconciliation Year ended 31 December 2008 2007 €m €m

Net cash generated from operations 367.6 310.0 Exceptional items (see note 7) (17.0) – Movement in receivables (40.4) (28.8) Movement in payables (10.8) (7.1) Movement in provisions 4.6 3.4 Other non-cash items (0.1) (0.1) EBITDA 303.9 277.4

EBITDA is earnings before net ﬁnance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

c) Free cash ﬂow reconciliation Year ended 31 December 2008 2007 €m €m

EBITDA 303.9 277.4 Exceptional items (see note 7) 17.0 – Movement in receivables 40.4 28.8 Movement in payables 10.8 7.1 Movement in provisions (4.6) (3.4) Other non-cash items 0.1 0.1 Finance costs paid (20.8) (21.1) Finance income received 9.0 8.1 Net cash used in investing activities (310.1) (259.7) Free cash inflow including exceptional items 45.7 37.3

Free cash ﬂow is net cash generated from operations less net cash used in investing activities and net interest paid.

COLT Telecom Group S.A. | Annual Report 2008 71 Notes to the consolidated ﬁnancial statements continued

18 Analysis of net (debt)/funds

At 31 At 31 December Exchange December 2007 Cash flow loss 2008 €m €m €m €m

Cash and cash equivalents 231.1 46.3 (3.8) 273.6 Non-convertible debt (262.2) – – (262.2) Total net (debt)/funds (31.1) 46.3 (3.8) 11.4

Analysed in the Balance Sheet: Cash and cash equivalents 231.1 273.6 Non-current liabilities (262.2) – Current liabilities – (262.2) Total net (debt)/funds (31.1) 11.4

19 Capital and other financial commitments

At 31 December 2008 2007 €m €m

Contracts placed for future plant and equipment capital expenditure not provided for in the financial statements 24.6 60.9

20 Operating lease commitments

Total commitments by period under non-cancellable operating leases: At 31 December 2008 Within 1 Between 1 More than Total year and 5 years 5 years €m €m €m €m

Property leases 300.3 39.5 120.5 140.3 Other 6.4 3.6 2.1 0.7 306.7 43.1 122.6 141.0

At 31 December 2007 Within 1 Between 1 More than Total year and 5 years 5 years €m €m €m €m

Property leases 355.6 42.7 130.5 182.4 Other 4.8 2.3 2.5 – 360.4 45.0 133.0 182.4

21 Contingent liabilities

The dispute between the German Regulator and the German mobile operators over mobile termination rates remains unresolved. On the matter of the Regulator’s power to set rates, the Court has ruled in the Regulator’s favour. However, the Court has still to rule on whether the size of the reductions imposed by the Regulator – 16% in November 2006 and a further 10% in December 2007 – were reasonable. We expect the Court to uphold the price reductions but COLT and its fellow ﬁxed line operators have the risk of a retrospective charge from the mobile operators, partially offset by contractually agreed revenue clawback which would be payable by customers.

From time to time, the Group is subject to legal or regulatory claims, proceedings, investigations or reviews, and may have claims against its suppliers. With the exception of the German regulatory matter set out above there are no pending claims, proceedings, investigations or reviews against the Group, which if determined adversely to the Group, have a material adverse effect on its liquidity or operations.

COLT Telecom Group S.A. | Annual Report 2008 72 Notes to the consolidated ﬁnancial statements continued

22 Financial instruments

Treasury policy The Group operates a centralised treasury function, the prime objective of which is to optimise the return on the Group’s cash balances and to manage the working capital requirements of the Group. In addition to liquidity risks, the Group’s principal ﬁnancial risk exposures arise from volatility in foreign currency exchange rates and interest rates. The Board reviews these risks and approves associated risk management policies, including treasury strategy.

Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by managing adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cashflows and matching maturity profiles of financial assets and liabilities.

The Group has ﬁnanced its operations historically through a mixture of issued share capital and long term senior unsecured loan notes. COLT’s outstanding notes are due for repayment on 15 December 2009. COLT had cash and cash equivalents of €273.6m at 31 December 2008. On 20 February 2009, COLT launched an Open Offer to raise €201m before expenses, which is fully underwritten by certain Fidelity parties. In the view of management, this provides COLT with adequate funding to support its working capital requirements and facilitate repayment of the notes.

Excess cash balances are invested either in AAA unsecured money market mutual funds or placed on short term money market cash deposits with approved counterparties, prior to being invested in the Group’s operating companies to fund their operations on an as needs basis.

Foreign currency risk The majority of the Group’s transactions and balances are denominated in Euros. The Group retains an exposure to other foreign currencies, principally in relation to Sterling transactions and balances. Fluctuation in exchange rates impact results through foreign exchange gains or losses, as well as causing reserves movements through translation of non-Euro denominated results, assets and liabilities.

Average and year end Sterling to Euro exchange rates used in the preparation of the ﬁnancial statements for 2008 and 2007 were as follows:

Average rate Rate as at for year 31 December

2008 1.258 1.022 2007 1.462 1.354

Interest rate risk The Group has reduced the uncertainty associated with fluctuating interest rates by raising debt at fixed interest rates. As interest is earned on cash deposits at variable as well as fixed rates, changes in interest rates will have an impact on the amount of interest income earned.

Concentration of credit risk Financial assets which potentially subject the Group to concentration of credit risk consist principally of trade and other receivables and cash. Cash includes short term and money market deposits as well as liquidity funds investments, all deposited for up to three months. Management believes the concentration of credit risk associated with trade and other receivables is minimised due to distribution over many customers in different countries and in different industries. Risks associated with the Group’s cash are mitigated by the fact that these amounts are placed across a number of high quality ﬁnancial institutions. The Group has not experienced any losses to date on its deposited cash.

Sensitivity analysis As a result of the procedures the Group has implemented to manage foreign currency exchange and interest rate risk as described above, a 10% increase in the value of the Euro relative to other currencies would lead to a corresponding decrease in the fair value of its non-Euro denominated cash and cash equivalents of approximately €1.4m (2007: €3.0m) and an increase in its equity translation reserve deﬁcit of €36.3m (2007: €46.6m). A 10% increase in interest earnings across all maturities would lead to a corresponding increase in the Group’s earnings of approximately €0.7m (2007: €0.9m) based on the interest bearing assets and liabilities held on 31 December 2008.

COLT Telecom Group S.A. | Annual Report 2008 73 Notes to the consolidated ﬁnancial statements continued

Currency proﬁle of cash and cash equivalents

At 31 December 2008 2007 €m €m Currency: Euro 256.4 201.1 Swiss Franc 4.8 9.9 Swedish Krona 3.2 1.6 Sterling 5.6 11.8 US Dollar 1.2 3.4 Other 2.4 3.3 Total 273.6 231.1

The Group’s cash and cash equivalents as at 31 December 2008 comprise a mix of investments in unsecured money market mutual funds which earn interest at variable rates and funds deposited for ﬁxed periods earning higher ﬁxed rates of interest.

Interest rate and currency proﬁle of borrowings

At 31 December 2008 Weighted Weighted average average period for Total interest which rate financial rate is fixed liabilities % Years €m

Euro non-convertible debt 7.6 1 262.2

At 31 December 2007 Weighted Weighted average average period for Total interest which rate financial rate is fixed liabilities % Years €m

Euro non-convertible debt 7.6 2 262.2

All borrowings are at fixed rates of interest. In addition, the Group’s provision of €40.5m (2007: €44.3m) for excess leased space and reinstatements (see note 16) is considered to be at floating rate. This is on the basis that when establishing the provision the cash flows have been discounted and the discount rate is subsequently re-appraised to ensure it reflects the current market assessment.

Maturity proﬁle of borrowings

At 31 December 2008 2007 €m €m

In less than one year 262.2 – In more than one year but not more than two years – 262.2 262.2 262.2

Fair value of borrowings

Book value Fair value At 31 December At 31 December 2008 2007 2008 2007 €m €m €m €m

Euro non-convertible debt 262.2 262.2 254.4 263.5

Fair values of borrowings have been estimated on the basis of market prices.

COLT Telecom Group S.A. | Annual Report 2008 74 Notes to the consolidated ﬁnancial statements continued

NON-CONVERTIBLE NOTES

December 1999 Non-convertible notes In December 1999, COLT plc issued Euro denominated unsecured non-convertible notes with aggregate principal amount at maturity of €320.0m. During 2001 and 2002 €57.8m of the notes were repurchased. The notes bear interest at the rate of 7.625% per annum, payable semi-annually beginning 15 June 2000 and mature on 15 December 2009. The notes rank pari passu in right of payment with all other unsubordinated unsecured indebtedness and are senior in right of payment to all subordinated indebtedness. The notes are redeemable, in whole or in part, at any time on or after 15 December 2004, initially at 103.8125% of their principal amount at maturity, plus accrued interest declining to 100% of their principal amount at maturity, plus accrued interest, on or after 15 December 2007.

Categories of ﬁnancial instruments At 31 December 2008 2007 €m €m Financial assets Cash and cash equivalents 273.6 231.1 Trade and other receivables 268.0 321.6 541.6 552.7

Financial liabilities Financial liabilities held at amortised cost 262.2 262.2 Other financial liabilities1 406.4 446.6 668.6 708.8

1 Includes provisions but does not include deferred revenue. See ‘December 1999 Non-convertible notes’ above for discussion on the contractual interest payments.

The following tables set out the contractual maturity analysis of the Group’s ﬁnancial liabilities: As at 31 December 2008 Trade Non-convertible and other debt payables* Provisions Total €m €m €m €m

2009 262.2 365.9 12.0 640.1 2010 – – 11.2 11.2 2011 – – 7.2 7.2 2012 – – 0.1 0.1 2013 – – 0.3 0.3 2014 and subsequent years – – 9.7 9.7 Total 262.2 365.9 40.5 668.6

* Excluding deferred revenue and pension liability. As at 31 December 2007 Trade Non-convertible and other debt payables* Provisions Total €m €m €m €m

2008 – 402.3 9.6 411.9 2009 262.2 – 6.3 268.5 2010 – – 10.9 10.9 2011 – – 6.1 6.1 2012 – – 2.8 2.8 2013 and subsequent years – – 8.6 8.6 Total 262.2 402.3 44.3 708.8

* Excluding deferred revenue and pension liability.

COLT Telecom Group S.A. | Annual Report 2008 75 Notes to the consolidated ﬁnancial statements continued

At 31 December 2008 2007 €m €m Financial assets pledged as collateral Bank guarantee deposits 11.5 15.3 Other guarantee deposits 3.9 4.1 15.4 19.4

Bank guarantee deposits are restricted cash funds and credit extensions granted by banks on a country basis. Other guarantee deposits are cash funds paid in advance to suppliers to secure contracts. These deposits have no expiry terms.

Capital risk management The following table summarises the current capital of the Group.

2008 2007 €m €m Cash and cash equivalents 273.6 231.1 Borrowings Long term – (262.2) Short term (262.2) – Net funds/(debt) 11.4 (31.1) Equity 942.3 936.7 Capital 1,723.9 1,723.3

The Group’s policy is to ﬁnance the Group centrally using a mixture of equity and long term capital markets issues. The Group’s remaining 7.625 per cent Euro bonds become due for redemption at par on 15 December 2009. On 20 February 2009 following a review of its ﬁnancing structure the Board announced an Open Offer to raise €201m before expenses. The Open Offer is fully underwritten by certain Fidelity parties. The proceeds from the Open Offer will strengthen COLT’s balance sheet and provide resources which will allow COLT to repay its outstanding borrowings, which become due in December 2009, while implementing its business plan.

23 Pension arrangements

Defined contribution schemes The Group operates a number of defined contribution pension schemes in its subsidiaries. Pension costs are charged to the income statement on an accruals basis in the period in which contributions are payable to the scheme. The pension cost for 2008 was €15.0m (2007: €15.5m). At 31 December 2008, there were no amounts outstanding in relation to defined contribution pension schemes (2007: €nil).

Employees in certain subsidiaries are members of pension schemes which are state sponsored multi-employer arrangements whereby COLT contributes to a combined fund in which information specific to COLT is not available. In accordance with IAS 19 ‘Employee Benefits’, these schemes have been accounted for as defined contribution schemes.

Defined benefit schemes The Group operates a pension scheme in Switzerland with gross assets and liabilities which were not material prior to 2008 and which was previously accounted for as a defined contribution scheme. The gross assets and liabilities became material in 2008, from which date the scheme has been accounted for as defined benefit in nature. As a result the accumulated scheme deficit as at 31 December 2007 of €3.2m was recognised directly in the Retained losses reserve in 2008 via the statement of recognised income and expense.

The most recent actuarial valuation for this scheme was carried out at 31 December 2008. The present value of the defined benefit deficit and the related current service cost were measured using the projected unit credit method resulting in a net defined pension deficit of €5.0m.

The Group also operates a scheme in France whereby employees are entitled to a lump-sum payable on retirement based on final salary and length of service. No payments are made during the employee’s service life therefore no assets are built up in the fund and the scheme contains only liabilities for future payments. The liability is not material, but for consistency with the Swiss scheme it has also been accounted for as defined benefit from 2008. As a result, the accumulated scheme liability as at 31 December 2007 of €1.2m was also recognised directly in the Retained losses reserve in 2008 via the statement of recognised income and expense.

The most recent actuarial valuation for this scheme was carried out at 31 December 2008 and produced a deﬁned beneﬁt pension liability of €1.2m. Since the scheme has only an immaterial liability with no corresponding pension scheme assets, no further detailed disclosures regarding the scheme have been provided in this note.

COLT Telecom Group S.A. | Annual Report 2008 76 Notes to the consolidated ﬁnancial statements continued

The total deﬁned beneﬁt pension scheme impact relating to years prior to 31 December 2007 recognised directly in equity in 2008 in the statement of recognised income and expense for the Swiss and French schemes was €4.4m.

The pension liability is composed as follows: Year ended 31 December 2008 €m

French scheme 1.2 Swiss scheme 5.0 Total liability 6.2

French scheme The scheme entitles employees to a lump-sum payable on retirement based on ﬁnal salary and length of service. No payments are made during the employee’s service life therefore no assets are built up in the fund and the scheme contains only liabilities for future payments.

Swiss scheme The following actuarial assumptions were adopted: Year ended 31 December 2008 %

Discount rate 3.25 Future pension increases 1.00 Expected rate of salary increases 2.50 Expected return on scheme’s assets 4.00

The overall expected rate of return on assets is calculated as the weighted average of the expected returns from each of the asset classes. The expected return on assets assumption is derived by considering the expected long term rates of return on plan investments.

Measurement of the defined benefit pension obligation is particularly sensitive to changes in certain key assumptions, including the discount rate. An increase or decrease of 0.5% in the discount rate would result in a respective €1.7m decrease or a €1.8m increase in the defined benefit obligation.

Mortality tables used are the ‘BVG’ 2005 tables. The assumed average life expectancy of a pensioner at retirement is 21.85 years for women and 17.9 years for men.

Amounts expensed in the income statement in respect of the deﬁned beneﬁt scheme are set out below: Year ended 31 December 2008 €m

Current service cost (1.8) Interest cost (0.6) Expected return on scheme’s assets 0.6 (1.8)

Current service costs have been included in selling, general and administrative expenses. Interest costs and expected return on the scheme’s assets have been included in other ﬁnance costs and similar charges. The cumulative actuarial loss recognised in the statement of recognised income and expense is €6.2m.

The amount included in the balance sheet arising from the deﬁned beneﬁt scheme is as follows: Year ended 31 December 2008 €m

Present value of deﬁned beneﬁt obligations (21.0) Fair value of scheme assets 16.0 Liability recognised in balance sheet (5.0)

COLT Telecom Group S.A. | Annual Report 2008 77 Notes to the consolidated ﬁnancial statements continued

Movements in the present value of deﬁned beneﬁt obligations were as follows: Year ended 31 December 2008 €m

At beginning of year (18.6) Current service cost (1.8) Interest cost (0.6) Beneﬁts paid out 0.7 Actuarial losses (0.6) Foreign exchange (0.1) At end of year (21.0)

Movements in the fair value of scheme assets were as follows: Year ended 31 December 2008 €m

At beginning of year 15.4 Expected return on plan assets 0.6 Employer contributions 1.8 Beneﬁts paid out (0.7) Actuarial losses (1.2) Foreign exchange 0.1 At end of year 16.0

Allocated as follows: €m

Cash 0.2 Bonds 10.3 Equities 2.3 Property 2.5 Other 0.7 16.0

All pension assets are insured.

The history of experience adjustments and change in assumption adjustments is as follows: Year ended 31 December 2008 €m

Present value of deﬁned beneﬁt obligations 21.0 Fair value of the scheme’s assets (16.0) Deficit in scheme 5.0

Experience adjustments on scheme liabilities (0.5) Experience adjustments on scheme assets (1.3) Total actuarial loss (1.8)

The estimated amount of cash contributions expected to be paid to the schemes during the year ended 31 December 2009 is €1.9m.

COLT Telecom Group S.A. | Annual Report 2008 78 Notes to the consolidated ﬁnancial statements continued

24 Transactions with related entities

Pursuant to a contract with the Group, certain FMR LLC (‘FMR’), Devonshire Investors and Fidelity Shared Services Ireland Ltd employees provide consulting and other services to the Group at agreed rates. The fees for these services for the year ended 31 December 2008 were approximately €3.3m (2007: €3.1m) for FMR LLC employees, €0.8m (2007: €nil) for Devonshire Investors employees and €0.1m (2007: €nil) for Fidelity Shared Services Ireland Ltd. At 31 December 2008, there were balances outstanding to FMR LLC, Devonshire Investors and for Fidelity Shared Services Ireland Ltd of €2.3m (2007: €0.8m), €0.4m (2007: €nil) and €0.1m (2007: €nil) respectively.

An amount of €8.7m was billed during 2008 to FIL and its subsidiaries for voice, data and managed services (2007: €27.0m). At 31 December 2008 there were balances outstanding from FIL and its subsidiaries of €1.5m (2007: €1.5m).

During the year an amount of €0.9m (2007: €0.5m) was paid to FIL for software and support services and at 31 December 2008 €0.2m (2007: €nil) was due to FIL.

An amount of €2.4m was billed during 2008 to HR Access, a subsidiary of FMR, for Data services (2007: €1.2m) and at 31 December 2008 €0.3m was due from HR Access.

During the year the Group entered into a business process outsourcing contract with KVH to provide offshoring services. During the year the Group billed €0.6m in respect of these services and at 31 December 2008 €0.3m was due from KVH.

During the year an amount of €nil was paid to Fidelity Business Services India Private Limited for professional services (2007: €0.2m).

The UK pension scheme is administered by FIL Pensions Management which is a wholly owned subsidiary of FIL. The fees for this service for the year ended 31 December 2008 were €0.1m (2007: €0.1m).

During the year, the Group entered into a number of currency transactions with FMR in response to currency needs which arose in the normal course of business. The total amount of currency purchased in this way was €16.4m (2007: €91.8m).

The Company has entered into an agreement with FIL Investments Luxembourg S.A. for administrative services for a charge of €0.1m (2007: €0.1m).

25 Post balance sheet event – Open Offer of shares

On 20 February 2009 following a review of its ﬁnancing structure the Board announced an Open Offer to raise €201m before expenses. The Open Offer is fully underwritten by certain Fidelity parties.

COLT Telecom Group S.A. | Annual Report 2008 79 Notes to the consolidated ﬁnancial statements continued

26 Subsidiary undertakings

The Company is the holding company of the Group and has the following principal operating subsidiary undertakings, each of which is a private company operating in its country of incorporation. The Company holds 100% of the allotted capital of all of its operating subsidiaries through intermediate holding companies and their results are included in the consolidated ﬁnancial statements. The ﬁnancial year end of all subsidiary undertakings is 31 December with the exception of COLT Technology Services India Private Limited which is 31 March.

Name Country of incorporation Principal activities COLT Telecom Group Limited United Kingdom Management, administration and treasury services

COLT Telecommunications (unlimited company) United Kingdom Telecommunications and internet services provider

COLT Telecom GmbH Germany Telecommunications and internet services provider

COLT Télécommunications France SAS France Telecommunications and internet services provider

COLT Telecom AG Switzerland Telecommunications and internet services provider

COLT Telecom SpA Italy Telecommunications and internet services provider

COLT Telecom España SA Spain Telecommunications and internet services provider

COLT Telecom BV The Netherlands Telecommunications and internet services provider

COLT Telecom SA Belgium Telecommunications and internet services provider

COLT Telecom Austria GmbH Austria Telecommunications and internet services provider

COLT Telecom AB Sweden Telecommunications services provider

COLT Internet US Corp. USA Intra Group internet services provider

COLT Telecom US Corp. USA Intra Group telecommunications services provider

COLT Telecom A/S Denmark Telecommunications and internet services provider

COLT Telecom A.S. Norway Telecommunications and internet services provider

COLT Telecom – Serviços de Telecomunições, Unipessoal Lda Portugal Telecommunications and internet services provider

COLT Telecom Ireland Limited Ireland Telecommunications and internet services provider

COLT Telecom Finland OY Finland Telecommunications and internet services provider

COLT Technology Services India Private Limited India Intra Group support services

COLT Telecom CSC, S.L. Spain Customer support services

COLT Telecom Group S.A. | Annual Report 2008 80 2008 quarterly group ﬁnancial results (unaudited)

Group income statement

Q1 Q2 Q3 Q4 2008 Total €m €m €m €m €m

Revenue 410.9 416.3 420.7 427.5 1,675.4

Cost of sales Interconnect and network (251.1) (236.0) (253.1) (258.5) (998.7) Network depreciation (50.2) (49.3) (49.2) (48.3) (197.0) (301.3) (285.3) (302.3) (306.8) (1,195.7)

Gross proﬁt 109.6 131.0 118.4 120.7 479.7

Operating expenses Selling, general and administrative (87.7) (86.8) (90.9) (90.4) (355.8) Other depreciation and amortisation (7.8) (6.9) (6.8) (9.1) (30.6) (95.5) (93.7) (97.7) (99.5) (386.4)

Operating proﬁt 14.1 37.3 20.7 21.2 93.3

Other income (expense) Finance income 1.0 2.4 3.0 2.9 9.3 Finance costs and similar charges (5.7) (5.7) (5.7) (5.6) (22.7) Exchange gains (losses) (0.8) (0.5) 0.6 (7.3) (8.0) (5.5) (3.8) (2.1) (10.0) (21.4)

Proﬁt on ordinary activities before taxation 8.6 33.5 18.6 11.2 71.9 Taxation ––––– Proﬁt for the period 8.6 33.5 18.6 11.2 71.9

Basic diluted earnings per share €0.01 €0.05 €0.03 €0.02 €0.11

Diluted earnings per share €0.01 €0.05 €0.03 €0.02 €0.11

Other data:

Revenue growth Compared to equivalent period of prior year (3%) 2% 0% 1% 0% Compared to prior period (3%) 1% 1% 2% N/A

Gross proﬁt margin before depreciation and exceptional items 39% 39% 40% 40% 40%

EBITDA (€m)1 72.1 76.5 76.7 78.6 303.9 EBITDA margin 18% 18% 18% 18% 18%

1 EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

COLT Telecom Group S.A. | Annual Report 2008 81 Five year summary (unaudited)

Group income statement (after exceptional items)

Year ended 31 December 2004 2005 2006 2007 2008 €m €m €m €m €m

Revenue 1,796.6 1,821.7 1,801.0 1,679.6 1,675.4

Cost of sales Interconnect and network (1,199.7) (1,190.9) (1,166.2) (1,032.9) (998.7) Network depreciation (283.0) (620.2) (216.3) (193.9) (197.0) (1,482.7) (1,811.1) (1,382.5) (1,226.8) (1,195.7)

Gross proﬁt 313.9 10.6 418.5 452.8 479.7

Operating expenses Selling, general and administrative (366.7) (377.1) (373.2) (369.3) (355.8) Other depreciation and amortisation (42.0) (72.8) (29.9) (28.2) (30.6) (408.7) (449.9) (403.1) (397.5) (386.4)

Operating proﬁt (loss) (94.8) (439.3) 15.4 55.3 93.3

Other income (expense) Finance income 31.0 17.0 9.7 8.2 9.3 Finance costs and similar charges (98.5) (67.6) (44.8) (23.6) (22.7) Proﬁt on repurchase of debt 0.3 0.4 – – – Exchange gains (losses) – (0.3) 0.9 (0.7) (8.0) (67.2) (50.5) (34.2) (16.1) (21.4)

Loss on ordinary activities before taxation (162.0) (489.8) (18.8) 39.2 71.9 Taxation ––––– Profit (loss) for the year (162.0) (489.8) (18.8) 39.2 71.9

Basic earnings (loss) per share €(0.32) €(0.97) €(0.03) €0.06 €0.11

Diluted earnings (loss) per share €(0.32) €(0.97) €(0.03) €0.06 €0.11

Operating proﬁt (loss) after exceptional items (94.8) (439.3) 15.4 55.3 93.3

Exceptional items: Cost of sales ––––(17.0) Network depreciation – 334.7 – – – Selling, general and administrative – – 9.3 – – Other depreciation and amortisation – 25.5 – – –

Operating proﬁt (loss) before exceptional items (94.8) (79.1) 24.7 55.3 76.3

EBITDA1 230.2 253.7 270.9 277.4 303.9

1 EBITDA is earnings before net finance costs, tax, depreciation, amortisation, foreign exchange and exceptional items.

COLT Telecom Group S.A. | Annual Report 2008 82 Five year summary (unaudited) continued

Group balance sheet

At 31 December 2004 2005 2006 2007 2008 €m €m €m €m €m

Fixed assets 1,781.6 1,272.2 1,265.5 1,276.1 1,260.6 Current assets 988.0 675.8 554.2 552.7 541.6 Total assets 2,769.6 1,948.0 1,819.7 1,828.8 1,802.2

Equity shareholders’ funds 961.9 495.3 924.4 936.7 942.3 Creditors 1,739.0 1,400.7 849.1 847.8 819.4 Provisions for liabilities and charges 68.7 52.0 46.2 44.3 40.5 Total liabilities, capital and reserves 2,769.6 1,948.0 1,819.7 1,828.8 1,802.2

Group cash ﬂow Year ended 31 December 2004 2005 2006 2007 2008 €m €m €m €m €m

Net cash generated from operating activities 207.3 228.9 285.6 310.0 367.6 Net cash used in investing activities (183.9) (182.8) (229.4) (259.7) (310.1) Net ﬁnance costs (37.6) (35.4) (37.1) (13.0) (11.8) Issue of ordinary shares net of issue costs 0.9 1.4 444.9 0.2 0.6 Loan ﬁnance – 15.0 (15.0) – – Redemption of debt (494.3) (348.0) (583.4) – – Net movement in cash and cash equivalents (507.6) (320.9) (134.4) 37.5 46.3

Free cash inﬂow (outﬂow) (14.2) 10.7 19.1 37.3 45.7

COLT Telecom Group S.A. | Annual Report 2008 83 Company only Annual Accounts for the year ended 31 December 2008

COLT Telecom Group S.A. Société Anonyme K2 Building Forte 1 2a rue Albert Borschette L-1246 Luxembourg

COLT Telecom Group S.A. | Annual Report 2008 84 Directors’ report

Overview Board of Directors COLT Telecom Group S.A. (‘COLT S.A.’ or ‘the Company’) is the parent The following people were Directors of the Company during the year company of the COLT Telecom Group S.A. Group. The Company, ended 31 December 2008 and up to the date of this report unless together with its subsidiaries, is referred to as ‘COLT’ or ‘the Group’. otherwise speciﬁed: The Group is a leading provider of business communications offering A Barth Data, Voice and Managed Services to Major Enterprise and SME T Bates businesses and Wholesale customers across Europe. COLT S.A. was V Damiani incorporated in Luxembourg on 13 April 2006 and is listed on the G Gabbard London Stock Exchange. H F van den Hoven R Walsh COLT has evolved from its origins as a UK-centric business to a pan- H Eggerstedt European multinational business. With over 80% of COLT’s revenue Dr R Hawley and 90% of its network assets being based in mainland Europe and T Hilton a signiﬁcant number of key pan-European customers, the business J Remondi (resigned 31 December 2008) is best served with a holding company domiciled in mainland Europe, R Bhasin and in a country with strong EU credentials. S Haslam M Ferrari (appointed 1 January 2009) Financial performance and position The Company is the holding company for the Group and as such it does Article 11 report not trade on its own account. The Company publishes consolidated The following disclosures are made in compliance with Article 11 of the accounts which contain the full consolidated results of the Group. Luxembourg Law on Takeovers of 19 May 2006.

The Group generated total revenue of €1,675.4m (2007: €1,679.6m), a) Share capital structure EBITDA of €303.9m (2007: €277.4m) and a net proﬁt excluding COLT Telecom Group S.A. has issued one class of shares which are exceptional items of €54.9m (2007: €39.2m). The Group had total admitted to trading on the London Stock Exchange. No other securities assets at 31 December 2008 of €1,802.2m (2007: €1,828.8m) and have been issued by COLT Telecom Group S.A. The issued share net assets of €942.3m (2007: €936.7m) capital of COLT Telecom Group S.A. as of 31 December 2008 amounts to €850,659,473 represented by 680,527,576 shares. COLT Telecom The Company had net assets at 31 December 2008 of €1,716.4m Group S.A. has a total authorised share capital of €1,250,000,000. (2007: €1,717.0m) including €1,718.7m of investments in subsidiaries All shares issued by COLT Telecom Group S.A. have equal rights (all subsidiaries in the Group are 100% owned). as provided for by Luxembourg Company Law and as set forth in the articles of association of COLT Telecom Group S.A. The net loss of COLT S.A. for the year ended 31 December 2008 was €1.4m (2007: €4.0m). b) Transfer restrictions As of the AGM 2008, all the COLT Telecom Group S.A. shares are freely Equity transferable but shall be subject to the restrictions on shareholdings set COLT S.A. had issued share capital and share premium at 31 December forth in Chapter 8 of the Articles of Association. 2008 of €1,723.9m divided into 680,527,576 fully paid shares with a nominal value of €1.25 per share. As at 31 December 2008, the c) Major shareholdings Company did not directly hold any of its own shares. The details of shareholders holding more than three per cent of issued share capital of COLT Telecom Group S.A. as known to COLT Telecom Internal controls and processes Group S.A. are set forth on page 29. The Group’s back ofﬁce accounting processes are principally performed at a shared service centre in India. Work continued during the year d) Special contract rights on a major project to create a new billing system for the Group. The issued and outstanding shares of COLT Telecom Group S.A. have all equal voting rights and there are no special control rights attaching Likely future developments to shares of COLT Telecom Group S.A. The Group continues to focus on its core strategy of increasing revenue from Data and Managed Services whilst maintaining tight control over e) Control system in employee share scheme operating costs. COLT Telecom Group S.A. is not aware of any issues regarding section e) of Article 11 of the Luxembourg Law on Takeovers of 19 May 2006.

COLT Telecom Group S.A. | Annual Report 2008 85 Directors’ report continued

f) Voting rights with the pre-emption guidelines supported by the Association of British Each share issued and outstanding in COLT Telecom Group S.A. insurers and the National Association of Pension Funds to the extent represents one vote. The Articles of Association of COLT Telecom practical for a Luxembourg company. Furthermore, the Board may Group S.A. do not provide for any voting restrictions. In accordance purchase, acquire or receive COLT Telecom Group S.A.’s own shares with the Articles of Association a record date for the admission to in the Company up to ten per cent of the issued share capital from time a general meeting may be set. The Articles of Association further to time on behalf of COLT Telecom Group S.A., subject to prior provide that certificates on the shareholdings and proxies be received authorisation by the General Meeting of shareholders and on such by the Company a certain time before the date of the relevant meeting. terms as the Board may decide in accordance with the law. In accordance with the Articles of Association the Board of Directors may determine such other conditions that must be fulfilled by shareholders j) Significant agreements for them to take part in any meeting of shareholders in person The Board of Directors is not aware of any significant agreements or by proxy. to which COLT Telecom Group S.A. is a party and which take effect, alter or terminate upon a change of control of the Company following g) Shareholders’ agreements with transfer restrictions a takeover bid, and the effects thereof. COLT Telecom Group S.A. has no information about any agreements between shareholders, which may result in restrictions on the transfer k) Agreements with directors and employees of securities or voting rights. No agreements between COLT Telecom Group S.A. and its Board members or employees exist that provide for compensation if the Board h) Appointment of board members, amendment of Articles members or employees resign or are made redundant without valid of Association reason or if their employment ceases because of a takeover bid The appointment and replacement of board members and the or other than as disclosed in the Remuneration Report on page 40. amendment of Articles of Association are governed by Luxembourg Law and the Articles of Association (in particular Chapters 3 and 4) The annual accounts on pages 88 to 95 were approved by the Board that are published on www.colt.net. of Directors on 20 February 2009 and signed on their behalf by: i) Powers of the Board of Directors The Board of Directors is vested with the broadest powers to manage the business of the Company and to authorise and perform all acts of disposal and administration falling within the purposes of the Company.

In common with the Articles of Association of other Luxembourg public limited companies, the Company’s of Articles of Association provide full power to the Board to issue shares on a non-pre-emptive basis, but the Tony Bates Board has conﬁrmed that, as a matter of policy it intends to comply Director

COLT Telecom Group S.A. | Annual Report 2008 86 Independent auditors’ report to the shareholders of COLT Telecom Group S.A.

Independent auditors’ report to the shareholders of COLT Telecom Group S.A.

Report on the annual accounts We have audited the accompanying annual accounts of COLT circumstances, but not for the purpose of expressing an opinion Telecom Group S.A., which comprise the balance sheet as at on the effectiveness of the entity’s internal control. An audit also 31 December 2008 and the profit and loss account for the year includes evaluating the appropriateness of accounting policies ended 31 December 2008 and a summary of significant used and the reasonableness of accounting estimates made accounting policies and other explanatory notes. by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit Board of Directors’ responsibility for the annual accounts evidence we have obtained is sufficient and appropriate to provide The Board of Directors is responsible for the preparation and fair a basis for our audit opinion. presentation of these annual accounts in accordance with the Luxembourg legal and regulatory requirements relating to the Opinion preparation of the annual accounts. This responsibility includes: In our opinion, the accompanying annual accounts give a true and designing, implementing and maintaining internal control relevant fair view of the financial position of COLT Telecom Group S.A. to the preparation and fair presentation of annual accounts that as at 31 December 2008, and of its operations for the year are free from material misstatement, whether due to fraud or error; ended 31 December 2008 in accordance with Luxembourg legal selecting and applying appropriate accounting policies; and and regulatory requirements relating to the preparation of the making accounting estimates that are reasonable in the annual accounts. circumstances. Report on other Legal Regulatory Requirements Auditor’s responsibility The Directors’ report, which is the responsibility of the Board Our responsibility is to express an opinion on these annual accounts of Directors, is in accordance with the annual accounts. based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the ‘Institut des Réviseurs d’Entreprises’. Those standards require that we comply 20 February 2009 with ethical requirements and plan and perform the audit to obtain PricewaterhouseCoopers S.à r.l. reasonable assurance whether the annual accounts are free from Luxembourg material misstatement. Réviseur d’entreprises Represented by An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the Auditor’s judgment, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity’s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the Marc Minet

COLT Telecom Group S.A. | Annual Report 2008 87 Balance sheet

As at 31 December As at 31 December 2008 2007 Notes € € ASSETS Formation expenses 3 1,284,156 1,780,056

Fixed assets Financial assets Shares in afﬁliated undertakings 4 1,718,691,998 1,718,691,998

Current assets Cash at bank 76,282 148,196 Prepayments 50,944 107,363 Amount owed from affiliated undertakings 8 156,432 – Total assets 1,720,259,812 1,720,727,613

LIABILITIES Capital and reserves Subscribed capital 5 850,659,473 850,242,914 Share premium 5 873,228,170 873,047,516 Loss brought forward 10 (6,323,148) (2,312,168) Loss for the financial year (1,209,858) (4,010,980) 1,716,354,637 1,716,967,282 Creditors Amounts owed to afﬁliated undertakings becoming due and payable within one year 9 3,557,248 3,404,247 Other creditors becoming due and payable within one year 347,927 356,084 Total liabilities 1,720,259,812 1,720,727,613

The accompanying notes are an integral part of the annual accounts.

COLT Telecom Group S.A. | Annual Report 2008 88 Proﬁt and loss account

As at 31 December As at 31 December 2008 2007 Notes € € CHARGES Directors’ fees 425,289 669,499 Value adjustments in respect of formation expenses 3 495,900 495,900 Other administration expenses 11 240,669 2,558,994 Exceptional re-organisation costs 12 – 238,587 Other taxes 13 48,000 48,000 TOTAL CHARGES 1,209,858 4,010,980

INCOME Loss for the ﬁnancial year 1,209,858 4,010,980 TOTAL INCOME 1,209,858 4,010,980

The accompanying notes are an integral part of the annual accounts.

COLT Telecom Group S.A. | Annual Report 2008 89 Notes to the annual accounts

1 General

The Company was incorporated in Luxembourg on 13 April 2006 as a ‘société anonyme’ subject to Luxembourg law for an unlimited period of time. The status of the Company was changed on 27 June 2006 to become a billionaire 1929 Company in accordance with the law of 31 July 1929 concerning the ﬁscal regime of Holding companies. The Company has its registered ofﬁce at K2 Building, Forte 1, 2a rue Albert Borschette, L-1246 Luxembourg.

The objects of the Company are: participation in any manner in all commercial, industrial, ﬁnancial and other enterprises of Luxembourg or foreign nationality through the acquisition by participation, subscription, purchase, option or by any other means of all shares, stocks, debentures, bonds or securities; the acquisition of patents and licenses which it will administer and exploit; it may lend or borrow with or without security, provided that any monies so borrowed may only be used for the purposes of the Company, or companies which are subsidiaries of or associated with or afﬁliated to the Company; in general it may undertake any operations directly or indirectly connected with these objects whilst nevertheless remaining within the limits set out by the 31 July 1929 law on holding companies.

The Company also prepares consolidated ﬁnancial statements which are published according to the provisions of the law.

2 Basis of preparation and accounting policies

The annual accounts have been prepared in accordance with Luxembourg legal and regulatory requirements. The accounting policies and valuation rules (with the exception of those speciﬁed by the Law) are determined and applied by the Board of Directors.

Accounting period These annual accounts were prepared for the year to 31 December 2008.

Financial assets The shares in affiliated undertakings are stated at cost. In case of a durable depreciation in value according to the opinion of the Board of Directors, value adjustments are made in respect of fixed assets, so that they are valued at the lower figure to be attributed to them at the balance sheet date. These value adjustments are not continued if the reasons for which the value adjustments were made have ceased to apply.

Details of the Company’s direct subsidiary undertakings are set out in note 4 to the annual accounts.

Currency translation The Company maintains its books and records in Euro. The balance sheet is expressed in this currency.

Formation expenses, intangible, tangible and ﬁnancial assets denominated in currencies other than the Euro are translated at their historical exchange rates.

Other assets and liabilities denominated in currencies other than the Euro are translated at the exchange rates prevailing at the date of the balance sheet, unless this would lead to unrealised exchange gains.

Formation expenses Formation expenses include costs in connection with the incorporation of the Company and eventual capital increases. Formation expenses are amortised on a straight-line basis at an annual rate of 20%.

Prepayments This item includes expenditure incurred during the ﬁnancial year but relating to a subsequent ﬁnancial year.

COLT Telecom Group S.A. | Annual Report 2008 90 Notes to the annual accounts continued

3 Formation expenses

As at 31 December As at 31 December 2008 2007 € € Gross book value Opening and closing balance 2,524,503 2,524,503

Amortisation Opening balance 744,447 248,547 Amortisation for the year 495,900 495,900 Closing balance 1,240,347 744,447

Opening net book value 1,780,056 2,275,956

Closing net book value 1,284,156 1,780,056

4 Shares in affiliated undertakings

As at 31 December As at 31 December 2008 2007 € € Cost and net book value Opening and closing balance 1,718,691,998 1,718,691,998

The list of afﬁliated undertakings held as at 31 December 2008 is as follows: Net equity at Net loss 31 Dec 2008 for the year Investment value € €

COLT Lux Holding S.à r.l. – 100% 1,718,691,998 1,753,529,746 (37,175)

All subsidiaries have a balance sheet date of 31 December. In the opinion of the Board of Directors, there is no depreciation in the value of the shares in afﬁliated undertakings that can be considered as durable, and accordingly no value adjustment was required at 31 December 2008.

5 Subscribed and authorised capital

The Company’s authorised capital is €1,250,000,000 represented by 1,000,000,000 ordinary shares with a nominal value of €1.25 each. The subscribed share capital at 31 December 2008 is represented by 680,527,576 fully paid ordinary shares of €1.25 each as set out below.

Issued share capital Ordinary shares Share capital Share premium Total No.€€€

As at 1 January 2008 680,194,330 850,242,914 873,047,516 1,723,290,430 Issued during the year 333,246 416,559 180,654 597,213 As at 31 December 2008 680,527,576 850,659,473 873,228,170 1,723,887,643

COLT Telecom Group S.A. | Annual Report 2008 91 Notes to the annual accounts continued

6 Share option plans

Options granted since 2003 have not satisﬁed the performance conditions and accordingly will not have vested in 2008.

Details of grants made under the Option Plan are set out below:

Weighted average exercise price of options £5.80 – £1.44 £3.22 £16.08

COLT Telecom Group S.A. | Annual Report 2008 92 Notes to the annual accounts continued

Details of grants made under the SAYE Scheme are set out below:

Date of Exercise Date of Options Outstanding Granted in Exercised in Lapsed in Outstanding grant price (£) vesting granted at 31 Dec 07 the year the year1 the year at 31 Dec 08

Weighted average exercise price of options £1.55 £0.65 £1.40 £1.54 £1.05

1 Of the options exercised in the year, 2,427 were early exercises. 2 Each option holder entered into a four year savings contract.

COLT Deferred Bonus Plan The COLT Deferred Bonus Plan (the ‘Deferred Bonus Plan’) was adopted on 30 June 2006. The Deferred Share Bonus Plan allows grants of awards over matching shares based on shares purchased by participants with monies earned under the annual bonus plan. The award of matching shares is subject to performance conditions the same or similar to those relating to the Share Grant Plan. Participants must hold the shares for three years to obtain matching shares. No awards were made during 2008.

Details of grants made under the Deferred Bonus Plan are set out below:

Date of Date of Number Outstanding Granted in Exercised in Lapsed in Outstanding at grant vesting granted at 31 Dec 07 the year the year the year 31 Dec 08

Apr 06 Apr 09 6,529 4,504 – – – 4,504

COLT Telecom Group S.A. | Annual Report 2008 93 Notes to the annual accounts continued

7 Legal reserve

In accordance with Luxembourg law, the Company is required to transfer a minimum of 5% of its net profit for each financial year to a legal reserve. This requirement ceases to be necessary once the balance on the legal reserve reaches 10% of the issued share capital. The legal reserve is not available for distribution to the shareholders. No amounts have been transferred to a legal reserve during the current or prior periods as the Company has not yet made a profit.

8 Amounts owed by affiliated undertakings

All amounts owed by afﬁliated undertakings are non-interest bearing and due and payable within one year.

9 Amounts owed to affiliated undertakings

All amounts owed to afﬁliated undertakings are non-interest bearing and due and payable within one year.

10 Movements for the year on the profit and loss items

Loss Loss for brought the financial forward year €€

As at 1 January 2008 (2,312,168) (4,010,980) Movements for the year Allocation of the prior year’s losses (4,010,980) 4,010,980 Loss for the year – (1,209,858) As at 31 December 2008 (6,323,148) (1,209,858)

11 Other administration expenses

Other administration expenses includes professional fees, travel costs and other miscellaneous items.

12 Exceptional re-organisation costs

The exceptional costs in 2007 related to expenditure incurred in respect of the Group restructuring in 2006 which did not qualify as formation expenses.

COLT Telecom Group S.A. | Annual Report 2008 94 Notes to the annual accounts continued

13 Other taxes

The Company qualiﬁes as a billionaire 1929 holding company in accordance with the law of 31 July 1929. As such it is exempt from corporation tax but instead pays a special income tax which is calculated on distributed dividends, interest on securities and remuneration paid to directors. The amount payable in respect of this tax was €48,000 (2007: €48,000).

14 Related party transactions

During the year, the agreement for company secretarial and registrar services was cancelled with effect from 1 November 2007 (2007: €54,000).

On 16 May 2008, the Company together with COLT Luxembourg subsidiaries entered into a services agreement with FIL (Luxembourg) S.A. with effect from 1 November 2007 for administrative support for a charge of €65,000 per annum (2007: €10,833). As at 31 December 2008, €32,500 was due to FIL (Luxembourg) S.A.

During the year, the Company and other COLT Luxembourg subsidiaries entered into a sub-lease agreement with FIL (Luxembourg) S.A. for a total charge of €28,114 per annum for the Luxembourg ofﬁce space.

Directors’ remuneration recharged to the Company during the year for Directors employed by FMR LLC was €nil (2007: €160,000).

15 Post balance sheet event – Open Offer of shares

16 Commitments and guarantees

As at 31 December 2008 COLT Telecom Group Limited, an afﬁliated undertaking of the company, had a non-convertible debt liability of €262.2m, which is due for repayment on 15 December 2009. COLT Telecom Group S.A. has guaranteed the repayment of this debt and related interest costs. For further detail in relation to the repayment of the €262.2m debt, including use of the Open Offer proceeds (see Note 15 above), refer to Note 22 to the Company’s 2008 consolidated ﬁnancial statements.

COLT Telecom Group S.A. | Annual Report 2008 95 COLT’s European ofﬁces

Austria Italy Spain www.colt.net/at www.colt.net/it www.colt.net/es

Vienna Milan Madrid COLT Telecom Austria GmbH COLT Telecom SpA COLT Telecom España SA Kärntner Ring 10-12 Viale E. Jenner 56 C/ Telémaco 5 A-1010 Vienna 20159 Milan 28027 Madrid MD Austria: Alfred Pufitsch MD Italy: Achille De Tommaso MD Spain: Angel Rojo-Diez Tel: +43 1 20 500 0 Tel: +39 02 30 333 1 Tel: +34 91 789 9000 Fax: +43 1 20 500 199 Fax: +39 02 30 333 700 Fax: +34 91 789 9098

Belgium Netherlands Sweden www.colt.net/be www.colt.net/nl www.colt.net/se

Brussels Amsterdam Stockholm COLT Telecom NV/SA COLT Telecom BV COLT Telecom AB Zweefvliegtuigstraat 10 Van der Madeweg 12-14a PO Box 3458 Rue du Planeur 10 Postbus 94014 Luntmakargatan 18 B – 1130 Brussels 1090 GA Amsterdam SE – 103 69 Stockholm Interim MD Belgium: Christian Dekeyser Interim MD Netherlands: Marc van Meensal Sweden Tel: +32 2 790 16 16 Tel: +31 20 888 2020 MD Sweden: Fredrik Rahme Fax: +32 2 790 16 00 Fax: +31 20 888 2010 Tel: +46 8 781 80 00 Fax: +46 8 781 81 00

Denmark Portugal www.colt.net/dk www.colt.net/pt Switzerland www.colt.net/ch Copenhagen Lisbon COLT Telecom A/S COLT Telecom Serviços de Zürich Borgmester Christiansens Gade 55 Telecomunicações COLT Telecom AG 2450 Copenhagen SV UnipessoalLda Mürtschenstrasse 27 Interim MD Denmark: Per Soerenson Estrada da Outurela 118 CH – 8048 Zürich Tel: +45 70 21 23 30 Ediﬁcio B MD Switzerland: Hans Jörg Denzler Fax: +45 70 21 23 31 2790-114 Carnaxide Tel: +41 58 560 16 00 Interim MD Portugal: Carlos Jesus Fax: +41 58 560 26 10 Tel: +351 21 120 00 00 France Fax: +351 21 120 00 09 www.colt.net/fr United Kingdom www.colt.net Paris Republic of Ireland COLT Telecommunications France SAS www.colt.net/ie London 23 rue Pierre Valette COLT Telecommunications 92240 Malakoff Dublin Beaufort House MD France: Michel Calmejane COLT Telecom Ireland Limited 15 St. Botolph Street Tel: +33 1 70 99 55 00 15-16 Docklands Innovation Park London EC3A 7QN Fax: +33 1 70 99 56 06 East Wall Road Interim MD UK: Henri van der Vaeren Dublin 3 Tel: +44 20 7390 3900 Ireland Fax: +44 20 7390 3901 Germany MD Ireland: Gary Keogh www.colt.net/de Tel: +353 1436 5900 Fax: +353 1436 5901 Frankfurt COLT Telecom GmbH Central Business Services Herriotstraße 4 60528 Frankfurt MD Germany: Jürgen Hernichel Tel: +49 69 56606 0 Fax: +49 69 56606 1000

COLT Telecom Group S.A. | Annual Report 2008 96 Investor information

Listings AGM Ordinary shares of COLT Telecom Group S.A. are listed The 2008 Annual General Meeting of on the London Stock Exchange. COLT Telecom Group S.A. will be held at 11:00 am (Luxembourg time) on 30 April 2009 at: Solicitors K2 Building, Forte 1 Slaughter and May 2a rue Albert Borschette One Bunhill Row L-1246 Luxembourg London EC1Y 8YY Further Information Contact Registrars Investor Relations Computershare Investor Services (Channel Islands) Limited COLT Telecom Group, Beaufort House, P O Box 83 15 St. Botolph Street, London EC3A 7QN Ordnance House Tel: +44 20 7863 5314 31 Pier Road St Helier Registered Ofﬁce and Number Jersey JE4 8PW COLT Telecom Group S.A. Tel: +44 1534 825230 Société anonyme Fax: +44 1534 825315 K2 Building, Forte 1 2a rue Albert Borschette L-1246 Luxembourg BP 2174, L-1021 Luxembourg

R.C.S Luxembourg B 115.679

COLT Telecom Group S.A. | Annual Report 2008 97 Exceed Together