UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 20-F

                                   (Mark One)

       REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                                       OR

  X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
       ACT OF 1934

      For the fiscal year ended 31 December 2002
                                       OR

       TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
       EXCHANGE ACT OF 1934


                        For the transition period from to

                         Commission file number 0-28970

                             COLT TELECOM GROUP plc
             (Exact name of Registrant as specified in its charter)

                                     England
                 (Jurisdiction of incorporation or organization)

         Beaufort House, 15 St. Botolph Street, London EC3A 7QN, England
                    (Address of principal executive offices)

Securities  registered or to be registered pursuant to Section 12(b) of the Act:
None.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each representing the right to receive four Ordinary
Shares, nominal value 2.5p each; Ordinary Shares, nominal value 2.5p each;
Warrants to purchase Ordinary Shares, nominal value 2.5p each; Units consisting
of 12% Senior Discount Notes due 2006 and Warrants to purchase Ordinary Shares,
nominal value 2.5p each; and 2% Senior Convertible Notes due 2005.

Securities for which there is a reporting  obligation  pursuant to Section 15(d)
of the Act: None.

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

Ordinary Shares, nominal value 2.5p each:              1,507,536,535


Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

                      Yes  X          No

Indicate by check mark which financial statement item the registrant has elected
to follow

                     Item 17                  Item 18  X


<PAGE>
                      PRESENTATION OF FINANCIAL INFORMATION



            Our Financial Statements,  incorporated herein by reference from the
2002 Annual  Report of COLT Telecom  Group plc (the "2002 Annual  Report"),  are
presented  in British  pounds  sterling.  In this  report,  references  to "U.S.
dollars," or "$" are to the currency of the United States, references to "pounds
sterling," "pounds," "(pound)," "pence" or "p" are to the currency of the United
Kingdom,  and references to "(euro)" are to Euros.  Solely for your convenience,
this report contains  translations of certain pounds sterling  amounts into U.S.
dollars  at  specified  rates.  These   translations   should  not  be  read  as
representations  that the pounds sterling amounts  actually  represent such U.S.
dollar amounts or could be converted into U.S.  dollars at the rate indicated or
at any other  rate.  Unless  otherwise  indicated,  the  translations  of pounds
sterling into U.S. dollars have been made at $ 1.6095 per (pound)1.00,  the noon
buying rate in the City of New York for cable  transfers  in pounds  sterling as
certified  for customs  purposes by the  Federal  Reserve  Bank of New York (the
"Noon Buying Rate") on 31 December 2002. See "Exchange  Rates" in Item 3 of this
report for additional exchange rate information. On 2 June 2003, the Noon Buying
Rate was 1.6372 per (pound)1.00.

            We prepare our  financial  statements  using  accounting  principles
generally accepted in the United Kingdom ("U.K.  GAAP"), which differ in certain
respects  from  accounting  principles  generally  accepted in the United States
("U.S.  GAAP").  The principal  differences  between U.K. GAAP and U.S. GAAP are
summarised in "Summary of Differences Between U.K. Generally Accepted Accounting
Principles and U.S. Generally Accepted Accounting  Principles ("GAAP")" included
in note 25 to the Financial Statements referred to above.

            References   in  this  report  to  the   following   companies   and
organisations  include their  subsidiaries  and affiliates:  ABN-AMRO Bank ("ABN
AMRO"); Albacom Ltd. ("Albacom"); Arcor Mannesmann Telecommunications ("Arcor"),
a consortium  with  Vodafone  Group plc,  Deutsche  Bahn AG and  Deutsche  Bank;
Belgacom S.A.  ("Belgacom");  Berlin Stock Exchange  ("Berlin Stock  Exchange");
Bloomberg L.P. ("Bloomberg"); BT Group plc ("BT"); BT Ignite ("BT Ignite"), part
of BT Group plc; Bull S.A. ("Bull"); Cable & Wireless Communications plc ("Cable
& Wireless");  Cadbury Schweppes plc, ("Cadbury Schweppes"); Canon Communication
& Image France ("Canon  Communication  & Image");  CEGEDIM Group S.A.  ("CEGEDIM
Group");  Group Cegetel,  a joint venture  between Vivendi  Universal,  Vodafone
Group  plc,  BT and  SBC  Communications  Inc.  ("Cegetel");  CIENA  Corporation
("CIENA");  Cisco Systems Inc. ("Cisco");  CompleTel Europe N.V.  ("Completel");
Corning, Inc. ("Corning");  DAT va ("DAT");  Deutsche Bank AG ("Deutsche Bank");
Deutsche Bundesbank  ("Bundesbank");  Deutsche Telekom AG ("Deutsche  Telecom");
e.Biscom  S.p.A.   ("eBiscom");   Energis  Communications  Limited  ("Energis");
Europcar International a subsidiary of Volkswagen A.G.  ("Europcar");  Fitec SAS
("Fitec");  France Telecom;  Global  Crossing Ltd.  ("Global  Crossing");  Exane
S.A."(Group  Exane"); HVB Info, a subsidiary of  Hypo-und-vereinsbank  A.G ("HVB
Info");   Independent   Technology  Systems  Limited  ("Independent   Technology
Systems");  JazzTel plc  ("JazzTel");  Jean Paul  Gaultier  ("Jean Paul Gaultier
organisation"); KPN Telecom B.V. ("KPN"); KPN Qwest, a joint venture between KPN
and Qwest Communications International,  Inc. ("KPNQwest");  LDCommunications SA
("LDCom");  Level 3  Communications,  Inc.  ("Level 3"); La Banque  Federale des
Banques Populaires ("La Banque Federale des Banques  Populaires");  London Stock
Exchange   Limited   ("London  Stock   Exchange");   Marconi  plc   ("Marconi");
McCann-Erikson    Worldgroup    ("McCann-Erikson");     McDonalds    Corporation
("McDonalds"); MCI Inc.
<PAGE>

("MCI");  Northern  Telecom  Limited  ("Nortel");  Novis  Telecom SA  ("Novis");
NetDoktor.dk  ("NetDoktor");  Oracle Corporation ("Oracle");  Pernod Ricard S.A.
("Pernod Ricard Europe"); Pirelli Spaelectrica ("Pirelli");  Priority Telecom NV
("Priority Telecom"); PT Comunicacoes,  S.A. and PT Prime-Solucoes  Empresariais
de  Telecomunicacoes e Sistemas,  S.A. ("PT  Comunicacoes/PT  Prime");  Rabobank
Group  ("Rabobank");  Retevision  S.A.  ("Retevision");  Radio  Telefis  Eireann
("RTE")   Siemens  A.G.   ("Siemens");   Skyguide   ("Skyguide");   Swisscom  AG
("Swisscom");  T-Systems  International GmbH  ("T-Systems");  TDC Switzerland AG
("TDSunrise");  Telekom  Austria;  Telecom  Italia  S.p.A.  ("Telecom  Italia");
Telefonaktiebolaget  LM  Ericsson   ("Ericsson");   Telefonica  de  Espana  S.A.
("Telefonica");  Telenet AG  ("Telenet");  Universal  Music  Group,  ("Universal
Music") Van Doome Partnership ("Van Doome"); Versatel Telecom International N.V.
("Versatel");  Wind-Infostrada ("Wind-Infostrada"), a joint venture between ENEL
and France Telecom.

            References  in this  report  to "we,"  "our,"  "us,"  "COLT"  or the
"Company"  refer  to  COLT  Telecom  Group  plc  and,  where  appropriate,   its
subsidiaries and to its predecessors and, where appropriate, their subsidiaries.

                           FORWARD-LOOKING STATEMENTS

            This  report,  including  the  documents  that are  incorporated  by
reference,  contains  statements,  which constitute  forward looking  statements
within the meaning of the Private  Securities  Litigation Reform Act of 1995 and
U.S.  Federal  Securities  laws. These  forward-looking  statements  appear in a
number of places in this  report and  include,  among other  things,  statements
concerning:

            o     our strategies,

            o     beliefs or current expectations of our management,

            o     the  business  plan,  its  advantages  and  our  strategy  for
                  implementing the business plan,

            o     anticipated  growth  of  the  communications  and  information
                  services industry,

            o     expectations as to our future revenues,  margins, expenses and
                  capital requirements,

            o     anticipated  dates on which we will  begin  providing  certain
                  services or reach  specific  milestones in the business  plan,
                  and

            o     other  statements of  expectations,  beliefs,  trends,  future
                  plans  and  strategies,  anticipated  developments  and  other
                  matters that are not historical facts.

            You  should  be aware  that  these  forward-looking  statements  are
subject to risks and  uncertainties,  including those Risk Factors  described in
Item 3(D) of this report, financial, regulatory,  environmental, industry growth
and trends,  that could cause actual events or results to differ materially from
those  expressed or implied by the statements.  The most

                                      -2-
<PAGE>

important factors that could prevent us from achieving our stated goals include,
but are not limited to:

            o     the  adverse  effects of a highly  competitive  market for our
                  products and services,

            o     our  vulnerability  to adverse  general  economic and industry
                  conditions because of leverage,

            o     our ability to obtain future financing on acceptable terms and
                  to sufficiently fund the business plan,

            o     changes in our key management professionals, and

            o     adverse changes in laws or regulations.

            The information  contained in this report and the documents that are
incorporated by reference, including information under the headings "Information
on the Company" and  "Operating  and Financial  Review and  Prospects"  identify
other important factors that could cause such differences. We have no obligation
to  release  publicly  the  result  of any  revision  to  these  forward-looking
statements  that may be made to reflect events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.


                                      -3-
<PAGE>

                                     PART I

ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

            Not Applicable.

ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

            Not Applicable.

ITEM 3.     KEY INFORMATION

     A.     Selected Financial Data

            The  selected  financial  data below is derived  from the  Financial
Statements,  incorporated  herein by reference from our 2002 Annual Report.  The
audited  financial  statements at 31 December,  2000,  2001 and 2002 and for the
three fiscal years then ended have been audited by  PricewaterhouseCoopers  LLP,
Independent Chartered  Accountants,  as indicated in their report which is filed
as an exhibit to this  report.  The  selected  financial  data should be read in
conjunction  with the Financial  Statements  and related  notes,  as referred to
above, as well as Item 5 - "Operating and Financial Review and Prospects."


                                      -4-
<PAGE>



<TABLE>
<CAPTION>

Profit and Loss Account Data

Amounts in accordance
with U.K. GAAP                                                       Year ended 31 December
                                 --------------------------------------------------------------------------------------------------
                                         1998              1999              2000             2001             2002            2002
                                  (pound)'000       (pound)'000       (pound)'000      (pound)'000      (pound)'000           $'000
<S>                                  <C>               <C>               <C>              <C>            <C>             <C>
Turnover                              215,052           401,552           686,977          905,687        1,027,258       1,653,372
Gross profit (loss)                    42,701            77,947           120,073          (35,983)        (424,686)       (683,532)
Operating loss                        (34,130)          (65,321)          (84,913)        (359,931)        (778,594)     (1,253,147)
Loss on ordinary activities
before taxation                       (55,602)         (101,261)         (116,860)        (360,369)        (718,282)     (1,156,075)
Loss for year                         (55,602)         (101,261)         (116,860)        (360,369)        (718,282)     (1,156,075)
Basic and diluted loss per
share                            (pound)(0.10)     (pound)(0.16)     (pound)(0.17)    (pound)(0.48)    (pound)(0.48)     $    (0.77)
Dividends declared per
share                            (pound) 0.00      (pound) 0.00      (pound) 0.00     (pound) 0.00     (pound) 0.00      $     0.00
Weighted average number
of Ordinary Shares (`000)             542,706           631,816           693,385          745,550        1,507,164       1,507,164
Basic and diluted loss per
ADS                              (pound)(0.41)     (pound)(0.64)     (pound)(0.67)    (pound)(1.93)    (pound)(1.91)     $    (3.07)
Dividends declared per ADS       (pound) 0.00      (pound) 0.00      (pound) 0.00     (pound) 0.00     (pound) 0.00      $     0.00
Weighted average number
of ADSs (`000)                        135,677           157,954           173,346          186,388          376,791         376,791

</TABLE>

                                      -5-
<PAGE>
<TABLE>

Amounts in accordance
with U.S. GAAP                                                       Year ended 31 December
                                 --------------------------------------------------------------------------------------------------
                                        1998             1999              2000              2001              2002            2002
                                 (pound)'000      (pound)'000       (pound)'000       (pound)'000       (pound)'000           $'000
<S>                                <C>               <C>               <C>              <C>             <C>             <C>

Turnover                             215,052          401,552           621,263           878,225         1,026,721       1,652,507
Gross profit (loss)                   42,701           77,947            90,133           (49,538)         (320,864)       (516,430)
Operating loss                       (36,312)         (69,024)         (104,532)         (362,586)         (674,098)     (1,084,961)
Loss on ordinary activities
before taxation                      (55,688)         (99,052)         (121,924)         (344,841)         (611,130)       (983,614)


Loss for year                        (55,688)         (99,052)         (121,924)         (344,841)         (611,130)       (983,614)

Basic and diluted loss per
share                           (pound)(0.11)    (pound)(0.16)     (pound)(0.18)     (pound)(0.54)     (pound)(0.41)     $    (0.65)
Dividends declared per share    (pound) 0.00     (pound) 0.00      (pound) 0.00      (pound) 0.00      (pound) 0.00      $     0.00
Weighted average number
of Ordinary Shares (`000)            499,528          631,816           693,385           745,550         1,507,164       1,507,164
Basic and diluted loss per
ADS                             (pound)(0.45)    (pound)(0.63)     (pound)(0.70)     (pound)(2.16)     (pound)(1.62)     $    (2.61)
Dividends declared per ADS      (pound) 0.00     (pound) 0.00      (pound) 0.00      (pound) 0.00      (pound) 0.00      $     0.00
Weighted average number
of ADSs (`000)                       124,882          157,954           173,346           186,388           376,791         376,791

</TABLE>

                                      -6-
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data

Amounts in accordance
with U.K. GAAP                                                       At 31 December
                                  --------------------------------------------------------------------------------------------------
                                         1998              1999              2000             2001             2002            2002
                                  (pound)'000       (pound)'000       (pound)'000      (pound)'000      (pound)'000           $'000
<S>                                  <C>               <C>               <C>              <C>            <C>             <C>
Total assets                        1,176,430         2,442,181         3,352,188        3,427,792        2,588,930       4,166,882
Creditors falling due after
more than one year
(including convertible debt)          671,522         1,205,321         1,426,307        1,318,025        1,193,899       1,921,581
Shareholders' equity                  387,068         1,000,875         1,501,857        1,624,359          955,010       1,537,088

<CAPTION>
Amounts in accordance
with U.S. GAAP                                                       At 31 December
                                  --------------------------------------------------------------------------------------------------
                                         1998              1999              2000             2001             2002            2002
                                  (pound)'000       (pound)'000       (pound)'000      (pound)'000      (pound)'000           $'000
<S>                                  <C>               <C>               <C>              <C>            <C>             <C>
Total assets                        1,177,581         2,441,518         3,382,231        3,475,302        2,738,745       4,408,008
Creditors falling due after
more than one year
(including convertible debt)          671,522         1,205,321         1,426,307        1,318,025        1,193,899       1,921,581
Shareholders' equity                  387,074           997,260         1,513,668        1,652,127        1,086,058       1,748,010

</TABLE>



                                      -7-
<PAGE>
Exchange Rates

            Solely for your  convenience,  this report contains  translations of
certain pounds  sterling  amounts into U.S.  dollars at specified  rates.  These
translations  should not be read as  representations  that the  pounds  sterling
amounts  actually  represent such U.S. dollar amounts or could be converted into
U.S.  dollars  at the rate  indicated  or at any other  rate.  Unless  otherwise
indicated,  the translations of pounds sterling into U.S. dollars have been made
at $ 1.6095 per (pound)1.00, the Noon Buying Rate on 31 December 2002.

            The table  below sets forth,  for the  periods and dates  indicated,
certain information concerning the Noon Buying Rates for British pounds sterling
expressed in U.S.  dollars per pound.  On 2 June 2003,  the Noon Buying Rate was
$1.6372 per (pound)1.00.

                                                       Period
Period                  High          Low            Average(1)      Period End

  1998                  1.72         1.61              1.66              1.66
  1999                  1.68         1.55              1.61              1.61
  2000                  1.65         1.40              1.51              1.50
  2001                  1.50         1.37              1.44              1.45
  2002                  1.61         1.41              1.51              1.61
  2003 to (2 June)      1.65         1.55              1.61              1.64

(1) The  average  of the Noon  Buying  Rates on the last day of each full  month
during the period.

            The high and low exchange  rate for each of the last 6 months was as
follows:

           Month                            High              Low

           December 2002                    1.61              1.56
           January 2003                     1.65              1.60
           February 2003                    1.65              1.57
           March 2003                       1.61              1.56
           April 2003                       1.60              1.55
           May 2003                         1.65              1.59

     B. Capitalisation and Indebtedness

            Not Applicable.

     C. Reason for the Offer and Use of Proceeds

            Not Applicable.




                                      -8-
<PAGE>

     D. Risk Factors

            In addition to the other information  contained in this report,  you
should  carefully  consider the following  risk factors.  If any of the possible
events described below occurs, our business,  prospects,  financial condition or
results of operations could be materially and adversely affected.

To Maintain a  Competitive  Position  Within Our Industry,  We Must  Continually
Develop And Adapt Our Networks And Our Products To Meet Our Customers Needs

            Although  we have  completed  the  main  phase  of our city and long
distance network builds,  to be successful,  we must continue to further develop
and adapt our networks and the products and services  that we offer.  We must be
prepared to provide new categories of telecommunications services in response to
changing customer needs.  Failure to successfully  deliver products and services
desired by our customers (due to operating or technical  problems or otherwise),
could have a material  adverse effect on our business,  financial  condition and
operating results.

If We Do Not Effectively  Continue To Provide A High Level Of Customer  Service,
Our Business Prospects Could Be Harmed And Our Financial  Performance  Adversely
Affected

            We have grown  rapidly in the last few years as our assets have been
developed.  We expect the growth in revenues to  continue,  but the rate of that
growth to decline,  as we gain greater  utilisation of our assets. Our growth is
likely to place a  significant  strain on our  administrative,  operational  and
financial  resources  and  systems  as we expand the scope of our  services.  To
continue to manage our growth successfully,  we will have to further enhance our
operational,  management,  financial and information systems and controls and to
expand,  train and manage our employee  base.  In  addition,  as we increase our
service offerings and expand our targeted markets, we will have to cope with the
additional demands on our customer support,  sales, marketing and administrative
resources, whilst reducing our cost base.

            We  cannot  ensure  that  we  will be  able  to  manage  our  growth
effectively.  If we are unable to manage our  expansion or cope with  unforeseen
difficulties, we could lose customers, suffer damage to our reputation and incur
significant expenses. This could have a material adverse effect on our business,
financial condition and operating results.

We Are Subject To  Uncertain  And  Changing  Regulation  That Could  Change In A
Manner Adverse To Our Business

            The  telecommunications  industry  is  highly  regulated  in all the
countries where we provide services.  We are reliant on regulatory compliance to
engage in our  business.  We need  licences  or similar  permits to carry on our
business in each of these  countries.  Our ability to establish  and develop our
networks depends on obtaining and retaining appropriate licences,  which in some
cases will require  adopting  and  implementing  a new  regulatory  regime.  Our
ability to continue to provide  services  depends on our  licences  remaining in
force.  In some cases these licences have expiry dates. We cannot ensure that we


                                      -9-
<PAGE>

will be able to obtain,  maintain or renew  licences for our  services,  or that
these  licences  will be  issued  or  renewed  on  terms or with  fees  that are
commercially  viable.  If we were to lose our licences,  if we have  substantial
limitations  imposed upon our licence terms,  or if there are any changes in the
regulatory environment, it could have a material adverse effect on our business,
financial condition and operating results.

            The European Commission has issued a series of Directives which will
completely  overhaul the regulatory regime in all European Union ("E.U.") Member
States  (the "new  regulatory  package").  Our  business  may suffer  because of
regulatory  uncertainties  and  possible  delays,  inconsistencies  and  adverse
changes relating to the implementation of the new regulatory package. If the new
regulatory  package  is not  implemented  by the  deadline  of 25 July 2003 in a
particular country,  the regulatory authority in that country may not have power
to enforce regulation until it is implemented.

            We may also be the  subject of  burdensome  regulatory  requirements
imposed on us by regulators, including an obligation to pay money into universal
service funds.

Our Industry Is Highly Competitive With Participants That Have Greater Resources
Which Could  Intensify  Price  Competition And Limit Our Ability to Increase Our
Market Share

            The telecommunications  industry is highly competitive.  Competition
in the industry is based upon:

            o     price,

            o     customer service,

            o     network quality,

            o     products and services, and

            o     customer relationships.

            We compete with the dominant national  telephone  companies that for
many years have provided  local,  long-distance  and  international  services to
their customers. Their historically established networks,  substantially greater
resources,   closer  ties  to  governmental  authorities  and  longer  operating
histories give them a competitive advantage over younger companies like ours. We
expect that we will encounter greater competition as we expand our network,  and
we may suffer increased price  competition and or be unable to expand our market
share as competitive pressures increase.

            Our principal  competitor  in each market is the dominant  national,
public telephone operator. We also face competition from other operators in each
market, some of which, such as MCI, operate internationally.

            The financial failure of many of the alternative operators, although
reducing  competitive  pressures,  also  represents a short-term  risk, as these
companies are our wholesale customers as well as competitors, so cancellation of
their  business  reduces  revenues.  These  failures also  represent an enhanced
credit risk exposure.

                                      -10-
<PAGE>
            There is also the risk that increased  competition  will materialise
from those  carriers  that emerge from Chapter 11, or having gone through  other
forms of debt  restructuring,  have beneficial  financial  structures and assets
acquired at low cost.

We May Not Be Able To Obtain And Maintain Government Approvals And Rights-of-Way
To Successfully Operate Our Business

            Much of our business development,  expansion and operation depend on
our ability to obtain  licences and permits  from  central and local  government
authorities and acceptable agreements for public and private  rights-of-way.  We
cannot  ensure  that we will be able to  maintain  our  existing  approvals  and
rights-of-way or that we will be able to obtain the approvals and  rights-of-way
required  to connect  new  customers  and enter new  markets  as needed.  If our
existing approvals or rights-of-way were cancelled or not renewed, or if we were
unable to obtain the approvals or rights-of-way to expand in accordance with our
plans,  then these events could have a material  adverse effect on our business,
financial condition and operating results.

We May Not See A Return On Our Investment In Our Network

            The  development  and  construction  costs of our  networks has been
substantial, and as the demand for our network services is uncertain, we may not
make an economic return on our investment. In some locations, the investment may
prove not to be  commercially  justifiable.  We cannot give an assurance that we
will make an economic  return from  investments  in our  networks  nor as to the
timing  of our  doing so.  In the  event  that we fail to  generate  significant
revenue  from  our  network  services  or fail  to do so in the  time  scale  we
envisage,  our  business,  financial  condition  and results of  operations  may
suffer.

Rapid Technological Changes Can Lead To Equipment Obsolescence

            The telecommunications  industry is subject to rapid and significant
changes  in  technology.  In  addition,  the  introduction  of new  products  or
technologies  may reduce  the cost or  increase  the supply of certain  services
similar to those that we provide. As a result, our competitors in the future may
be new entrants to the telecommunications industry. We cannot predict the effect
of technological  changes on our business,  such as changes relating to emerging
wireline and wireless transmission  technologies.  Technological changes and the
resulting  competition  could have a material  adverse  effect on our  business,
financial condition and results of operations.

            The telecommunications industry is a rapidly changing sector, and as
a result,  we are exposed to changes in the  depreciation  rates we use to write
down  equipment.  This risk ranges from the life of some of our equipment  being
shortened  to the  extreme  whereby a  current  technology  is deemed  obsolete,
requiring a substantial write-down.

Physical Loss Or Damage To One Of Our Major Sites Could Disrupt Our Business

            We depend on electronic equipment,  which is inherently  susceptible
to fire, smoke and water damage.  This means that a significant  incident at one
of our major sites could cause  disruption  to the  business.  Fire and security
systems  mitigate  these risks,  while business  continuity / crisis  management
plans and  insurance  should  mitigate any impact.  However,  the  withdrawal of
insurance  coverage  (for example on account of  terrorism  risks) may limit the
effectiveness of our protection mechanisms.


                                      -11-
<PAGE>
Electronic Attack From Hackers Or Computer Viruses Could Disrupt Our Business

            Although  our systems are  protected by  firewalls,  there is a risk
that the business could be disrupted by hackers or viruses gaining access to our
systems.  Our  exposure  to  liabilities  from our  customers,  particularly  on
Internet services, where case law is developing quickly, is risk managed through
contract conditions and insurance. However, the latter is limited with regard to
disruption caused by viruses or hackers.

We May Be Unable To Hire And Retain Qualified Personnel

            We  compete  with  other  telecommunications  operators  for  highly
qualified sales, marketing,  administrative,  operating and technical personnel.
Our success depends on our ability to attract,  hire and retain enough qualified
personnel,  and we cannot  ensure that we will be able to do so. In addition,  a
small number of management and operating personnel manage our business. The loss
of certain of these  individuals  could  have a material  adverse  impact on our
business, financial condition and operating results.

Onerous Contract Conditions Could Damage Our Competitiveness

            Contract  management is undertaken  using both in-house  lawyers and
external  legal  advisors.  However,  unduly onerous  contracts with  suppliers,
customers, or employees could adversely impact the business,  making achievement
of our business plan more difficult.

Failure Of Key Suppliers Could Affect Our Ability To Operate Our Business

            We are reliant on a consistent  and  effective  supply chain to meet
our  business  plan  commitments.   The  current  economic  scenario  that  both
telecommunications  equipment  suppliers  and  information  technology  software
suppliers presently face has led to the risk of:

            o     delays to new products and features from suppliers,  impacting
                  our product development programs,

            o     products  being  discontinued,  impacting  supply of  existing
                  products,

            o     deteriorating  support  quality,   affecting  operational  and
                  customer service, and

            o     higher volatility with regard to our demands on suppliers, and
                  in stock levels affected by customer returned equipment.

We May Not Be Able To Deliver Sales Expectations And Revenue Mix

            We  have   adopted  an   infrastructure-based   strategy   entailing
significant  investment  based on the  expectation of future sales and resulting
revenues and profits. Over the long term to the extent that we cannot deliver on
these  expectations,  whether  as a result  of our  failure  or as a result of a
material change in the  environment,  then the business may be unprofitable  and
returns on investment may not  materialise.  In the short term, if we are unable
to deliver on quarterly results expectations, both in terms of total revenue and
the mix between 'switched' and 'non-switched'  revenue, it could have a material
impact on our market valuation.

                                      -12-
<PAGE>

            We regularly  review revenue  expectations  as part of our reporting
processes.  Revenue  trends  and mix are  quickly  identified  and to the extent
possible, remedial action is taken. As the majority of capital investment is now
made to grow our  business,  to the  extent  that  revenues  do not  develop  as
expected, the capital investment is scaled back accordingly.

There  Are  Potential   Conflicts  Of  Interest   Related  To  Our   Controlling
Shareholders Which Could Be Resolved In A Manner Unfavorable To Us

            FMR Corp.  ("Fidelity")  and  certain  other  related  persons  (the
"Fidelity  Group")  have  voting  control of  approximately  56.0% of our issued
Ordinary Shares. As a result of the level of the Fidelity Group's ownership,  it
is able to exercise  control and purchase  additional  Ordinary  Shares  without
making a general  offer for all of our Ordinary  Shares under Rule 9 of the U.K.
Takeover Code.

            As long as the  Fidelity  Group owns,  or has voting  control of, at
least 50% of our Ordinary Shares, the terms of the relationship  agreement among
COLT and certain  members of the  Fidelity  Group  restrict us from  issuing any
Ordinary Shares or other equity  securities  (including  securities  convertible
into Ordinary Shares), subject to certain exceptions,  without the prior written
consent of Fidelity.  The concentration of stock ownership could have the effect
of delaying or  preventing  a change of control of our company or the removal of
existing  management  and may  discourage  attempts  to do so,  which  could  be
contrary to our interests. The relationship agreement, which continues in effect
so long as the  Fidelity  Group  holds at least 30% of our share  capital,  also
provides  that the Fidelity  Group will not acquire more of our Ordinary  Shares
if, as a result of doing so, less than 25% of our Ordinary  Shares would be held
by members of the public.

We Have A History Of Operating Losses And Expect These Losses To Continue

            We have  incurred  operating  losses and  negative  cash flows while
installing, developing and expanding our telecommunications network and building
our customer base. For the year ended 31 December 2002,  these operating  losses
totalled (pound)190.3 million, before exceptional items of (pound)588.2 million.

            In addition,  we had net cash outflows  from returns on  investments
and  servicing  of  finance,  capital  expenditure,   financial  investment  and
acquisitions  and  disposals of  (pound)780.8  million in 2001 and  (pound)439.3
million in 2002.  The decrease in net cash outflows was primarily as a result of
reduced  purchases of tangible fixed assets,  which decreased from  (pound)804.3
million in 2001 to (pound)412.1 million in 2002.

            We expect these operating losses and negative cash flows to continue
while we expand our  business.  We cannot  guarantee  that our  operations  will
become  profitable or that we will have positive cash flows in the future. If we
cannot  sustain  profitability  or positive cash flows,  we probably will not be
able to meet our capital  requirements  or make our required debt  payments.  If
this happens, then our Ordinary Shares will have little or no value.

                                      -13-
<PAGE>
Failure To Finance Our High  Capital  Requirements  Could  Adversely  Affect Our
Business Plan

            We may  depend on  additional  capital  to  finance  our  continuing
capital requirements.  The extent of our future capital requirements will depend
on many factors, including:

            o     the success of our business,

            o     the rate at which we expand our networks,

            o     the types of services we offer,

            o     staffing levels,

            o     acquisitions, and

            o     the growth of our customer base.

            Our capital  requirements also depend on factors beyond our control,
such as:

            o     competition,

            o     government regulations, and

            o     capital costs.

            We are currently  undertaking a cost reduction  programme,  which if
not successfully implemented will threaten the cash flow expectations within our
business plan.

            Our business  plan  involves  significant  capital  expenditures  in
addition to funding  operating and financing costs.  Capital  expenditures,  for
example, are expected to total between (pound)220 million and (pound)270 million
during 2003. Under the current business plan, current cash balances are expected
to be  sufficient  to fund us to the point  where the  company is free cash flow
positive  (net cash inflow from the total of  operating  activities,  returns on
investments  and servicing of finance and outflow from capital  expenditure  and
financial  investment).  However,  if cash  flow  expectations  on the  existing
business plan are not accurate, we could require additional funding.

            We may require additional funds, if:

            o     we enlarge the scope of our expansion plans,

            o     our plans or assumptions change or prove to be inaccurate, or

            o     we make any significant acquisitions.

            Additional   sources  of  financing  may  include   equity,   hybrid
debt/equity and debt financings or other arrangements, such as vendor financing.
We  cannot  be sure  that we will be  able to  obtain  additional  financing  on
acceptable terms when it is required.  In addition,  for as long as Fidelity and
certain  related  parties  own or have voting  control  over at least 50% of our
Ordinary Shares, we would need Fidelity's  consent to sell any additional equity
securities  under  the  relationship   agreement.  If  Fidelity's  consent  were
necessary and we were unable to obtain this consent, we would be unable to raise
additional  equity  capital.  At 2 June 2003,  Fidelity  had  voting  control of
approximately 56.0% of our Ordinary Shares.

                                      -14-
<PAGE>
            If we are unable at any time to obtain any necessary  financing,  we
may have to postpone or abandon some or all of our expansion or spending  plans.
This may limit our ability to make payments on our debt and may cause the prices
of our Ordinary Shares and American Depositary Shares ("ADSs") to fall.

Currency Fluctuations May Adversely Affect Our Results

            Our  international  operations  expose us to fluctuations in foreign
currencies, particularly the Euro, and as we expand into new markets, we will be
increasingly  exposed to such fluctuations.  A majority of our revenues,  costs,
assets and liabilities are denominated in foreign currencies,  but our financial
condition and results of operations are reported in British pounds sterling.  As
a result,  fluctuations in the value of these foreign currencies will affect our
financial and operational results.

            Some of our notes  also  expose  us to  exchange  rate  fluctuations
because payments of principal and interest will be made in U.S. dollars, British
pounds sterling and Euros,  but a substantial  part of our future cash flow used
to  service  these  payments  will be  denominated  in  Euros  and  other  local
currencies.  We may be required to maintain  financial  hedging  instruments  to
offset any  exchange  rate risk with  respect  to some of our  notes.  We do not
currently intend to use other financial  hedging  instruments to offset exchange
rate risk.

Our Substantial Level of Debt May Inhibit Future Results

            At 31  December  2002,  our  total  indebtedness  was  approximately
(pound)1,193.9  million  ($1,921.6  million),  and our capital and reserves were
(pound)955.0  million  ($1,537.1  million)  and on 31 May  2003  and  after  the
purchase  of  part  of  our  debt  our  total   indebtedness  was  approximately
(pound)1,273.9  million  ($2,088.3  million) and our capital and  reserves  were
(pound)942.6 million ($1,545.3 million).

            Our level of  indebtedness  could  affect us in  materially  adverse
ways, such as:

            o     limiting our ability to obtain  additional  financing  for our
                  capital expenditures,  acquisitions,  working capital or other
                  general requirements,

            o     requiring the dedication of a substantial  portion of our cash
                  flow from  operations  to the  payment  of  principal  of, and
                  interest on, our indebtedness, which means that this cash flow
                  will not be available to fund  capital  expenditures  or other
                  corporate purposes,

            o     limiting  our  flexibility  in planning  for, or reacting  to,
                  changes in our business,  the competitive  environment and the
                  industry,

            o     placing us at a competitive  disadvantage to competitors  with
                  less debt,

                                      -15-
<PAGE>
            o     making us more vulnerable to economic  downturns,  which could
                  weaken our ability to compete effectively and could reduce our
                  flexibility in responding to changing economic conditions, and

            o     limiting  our  ability  to  take  advantage  of  new  business
                  opportunities.

Our Ability To Make Our Debt Payments In The Future May Necessitate  Refinancing
Which May Not Be Available

            Our ability to meet our debt  obligations  will depend on whether we
can successfully  implement our strategy, as well as on financial,  competitive,
legal and technical factors, including some factors that are beyond our control.
If we are unable to  generate  sufficient  cash flows  from  operations  to meet
principal  and interest  payments on our debt,  we may have to refinance  all or
part of our debt. Cash flows from our operations may be insufficient to repay in
full at maturity  our  outstanding  notes,  and some of our notes may need to be
refinanced.  If that happens, our ability to refinance the notes will depend on,
among other things:

            o     our financial condition at the time,

            o     restrictions in agreements governing our debt, and

            o     other factors, including market conditions.

            We cannot  ensure  that any such  refinancing  would be  possible on
terms that we could  accept or that we could  obtain  additional  financing.  If
refinancing were not possible or if additional financing were not available,  we
may have to sell our assets under circumstances that might not yield the highest
prices,  or default on our debt  obligations,  including our notes,  which would
permit the holders of our notes to accelerate their maturity dates.

Our Debt Covenants Limit Our Financing Activity

            Our indentures (except for the indentures for the four series of our
senior convertible notes) contain restrictive covenants that affect, and in some
cases significantly limit or prohibit, among other things, our ability to:

            o     incur indebtedness,

            o     make prepayments of certain indebtedness,

            o     pay dividends,

            o     make investments,

            o     engage in transactions with stockholders and affiliates,

            o     issue capital stock,

                                      -16-
<PAGE>
            o     create liens,

            o     sell assets, and

            o     engage in mergers and consolidations.

            If we fail  to  comply  with  the  restrictive  covenants  in  these
indentures our obligations to repay our notes may be accelerated.

            The indentures for the four series of our senior  convertible  notes
do not contain  restrictive  covenants,  other than a limitation  on liens and a
limitation on sale-leaseback transactions.

Unavailability of Cash Flows Could Affect our Ability to Service our Debt

            Generally. We are a holding company for our subsidiaries and have no
material business  operations,  sources of income or assets other than the stock
of our subsidiaries. Because we conduct our operations through subsidiaries, our
cash flow and our  ability to meet our  obligations  under our notes,  including
payment of principal,  premium, if any, and interest, depends upon the cash flow
of our subsidiaries  and their dividends,  fees, loans and other payments to us.
Our  subsidiaries  will have no obligations to make any payments under our notes
or to make funds available to us so that we can make these payments.

            Restrictions  on  Distributions.  Some  of our  subsidiaries  may be
governed by local laws  regarding  how much they may pay in dividends or in what
situations they may pay dividends. For example, these laws may prohibit dividend
payments when net assets would fall below  subscribed  share  capital,  when the
subsidiary lacks available  profits or when the subsidiary fails to meet certain
capital  and  reserve   requirements.   In  addition,   some  of  our  financing
arrangements  also  limit  the  situations  where  our  subsidiaries  may pay us
dividends or make loans or other distributions.

            Subordination to our  Subsidiaries'  Creditors.  Our subsidiaries do
not guarantee  payment of our  obligations  under our notes.  Thus, our right to
receive the assets of any subsidiary upon its liquidation or  reorganisation  is
subordinated to the claims of the subsidiary's creditors,  except where we are a
creditor of the subsidiary. If we were a creditor of a subsidiary,  our right to
be paid back would be  subordinated  to any  indebtedness of the subsidiary that
was either:

            o     secured by a security interest in that subsidiary's assets, or

            o     senior to that subsidiary's indebtedness to us.

The Price Of Our  Securities  May Be Volatile  And You May Not Be Able to Resell
Your Shares At Or Above The Price You Paid For Them

            The market price for our  Ordinary  Shares and ADSs may vary greatly
from  time to  time,  both up and down  and you may not be able to  resell  your
shares at or above  the price you paid for them.  This may be due to a number of
factors, including:

                                      -17-
<PAGE>
            o     the depth and liquidity of the market for our Ordinary  Shares
                  and ADSs,

            o     investor  perceptions of our company  (including our financial
                  condition    and    results   of    operations)    and   other
                  telecommunications companies,

            o     competition,   regulatory   conditions   and  the   status  of
                  telecommunications liberalisation in Europe, and

            o     fluctuations in foreign exchange rates.

            In  addition,   broad  market   fluctuations  and  general  economic
conditions  may  adversely  affect the market price of our  Ordinary  Shares and
ADSs, regardless of our actual performance.

There Are A  Substantial  Number Of Shares  Eligible  For  Future  Sale Which If
Issued Could Adversely Affect The Market Price For Our Securities

            Future sales of substantial amounts of Ordinary Shares in the public
market,  or even a perception  that such sales may occur,  could have an adverse
effect on the market price for the Ordinary Shares and ADSs or on our ability to
raise capital  through a public offering of equity  securities.  At 2 June 2003,
there  were  approximately   1,507  million  Ordinary  Shares  issued  of  which
approximately  843.4 million were held by our  affiliates  and therefore are not
freely  tradeable  without   restriction  under  the  Securities  Act  of  1933.
Additional Ordinary Shares will be issued from time to time upon:

            o     the conversion of our convertible notes, and

            o     the exercise of our stock options and warrants.

We Do Not Intend To Pay Dividends

            We have never paid dividends on our Ordinary  Shares,  and we do not
expect to pay dividends in the foreseeable future.  Instead, we intend to retain
all our earnings for use in our business.  Furthermore, the terms of some of our
financing arrangements restrict us from paying dividends.

If You Hold Shares Through American  Depositary Shares, You May Have Less Access
To Information About Our Company And Less Opportunity To Exercise Your Rights As
A Shareholder

            There are risks  associated  with  holding our shares in the form of
ADSs  since we are a public  company  organised  under the laws of  England  and
Wales.  The  depositary  will  appear in our records as the holder of all shares
represented by the ADSs and your rights as a holder of ADSs will be contained in
the  deposit  agreement.  Your rights as a holder of ADSs will differ in various
ways  from a  shareholder's  rights,  and you may be  affected  in  other  ways,
including:

                                      -18-
<PAGE>

            o     you may not be able to vote if we do not ask the depositary to
                  ask for your  instructions or if you do not receive the voting
                  materials either in time to instruct the depositary or at all,

            o     you may  not be  able  to  participate  in  rights  offers  or
                  dividend alternatives if, in the discretion of the depositary,
                  after  consultation with us, it is unlawful or not feasible to
                  do so,

            o     the deposit agreement may be amended by us and the depositary,
                  or may be  terminated  by us or the  depositary,  each  within
                  thirty days notice to you and without your consent in a manner
                  that could prejudice your rights, and

            o     the deposit  agreement  limits our obligations and liabilities
                  and those of the depositary.

We Might Have Been A Passive Foreign  Investment  Company For 2002, And Might Be
One For 2003

            Based on an analysis of current law and of our  financial  position,
discussed  in more  detail  below  under  "Taxation  - U.S.  Federal  Income Tax
Consequences  - Passive  Foreign  Investment  Company," we believe that we might
have been a passive  foreign  investment  company  for U.S.  federal  income tax
purposes  for  2002,  and  that we might be such a  passive  foreign  investment
company for 2003. We do not believe we have been one for any year prior to 2002.
These are factual  determinations made separately for each calendar year, and we
cannot  guarantee that the IRS will agree with our methodology for  ascertaining
passive foreign investment company status or with our ultimate determination. In
addition,  because passive foreign investment company status is in part based on
facts on and through 31 December of each year,  it is not  possible to determine
whether we will have become a passive foreign  investment company for a calendar
year  until  after  the  close  of the  year,  when we  finalise  our  financial
information  on and through 31 December.  Also, we cannot  provide any assurance
that the applicable tax law or other relevant circumstances will not change in a
manner  which  affects  determinations  of  our  status  as  a  passive  foreign
investment company.

            If we are a passive  foreign  investment  company for a taxable year
and you hold our Ordinary Shares,  ADSs, or other of our securities  convertible
into  Ordinary  Shares or ADSs at any time during that  taxable  year,  then you
could be subject to an increased tax liability,  possibly  including an interest
charge,  under the default U.S.  federal  income tax regime for passive  foreign
investment companies.  Alternatively, you might be subject to some tax liability
if you are eligible to elect one of two alternative tax regimes.

            The three  different  tax  regimes for  passive  foreign  investment
company  shareholders  are  discussed  in more  detail  below  under the heading
"Taxation - U.S.  Federal Income Tax  Consequences - Passive Foreign  Investment
Company." They are extremely complicated and the most appropriate regime for you
is dependent on your personal tax  situation.  Accordingly,  you should  consult
your personal tax advisor as to which of the three tax regimes would be best for
you.

                                      -19-
<PAGE>

It May Be Difficult For Investors To Effect Service Of Process And Enforce Legal
Process Against Our Directors And Executive Officers Outside The United States

            We are incorporated under the laws of England and Wales, and most of
our directors  and  executive  officers and certain of the experts named in this
report are residents of the United Kingdom or other countries outside the United
States.  Substantially  all of our  assets and the  assets of such  persons  are
located  outside the United  States.  As a result,  it may not be  possible  for
investors to effect  service of process within the United States upon us or upon
such persons,  or to enforce against us or against such persons in courts inside
or outside the United States judgements of courts inside the United States based
upon the civil  liability  provisions  of United  States  securities  laws or to
enforce,  in an original action brought outside the United States,  rights based
on such provisions.

There Is A Limit To The Payments That Can Be Made In Case Of A Liquidation

            If we go into  liquidation  in England the claim of a noteholder for
amounts  owing  under our notes may be limited to the issue  price of the notes.
Any cash  interest  accruing  under our notes  for any  period  after we go into
liquidation  would not be recoverable by noteholders in a liquidation.  However,
U.K.  insolvency  law provides for any surplus  remaining  after  payment of all
other debts  provided  in a  liquidation  to be  available  for paying  interest
accrued on debts in respect of any period after the start of the liquidation.

The Loss Of Large  Customers  Or  Changes  In Their  Purchasing  Patterns  Could
Adversely Affect Our Results

            The loss of purchases from our larger  customers,  including  resale
carriers, for any reason, including downturns in the economy,  decisions by them
to cut back on staff or  services,  or loss of  confidence  arising from quality
issues,  would  undermine one of our important  competitive  strengths and could
have an adverse impact on our results. As occurred in 2001 and 2002, termination
of  contracts  for the  provision  of  wholesale  products and services to other
carriers could result in a substantial loss of revenue.

The Current Economic  Downturn May Worsen Or Last Longer Than Anticipated  Which
Could Adversely  Affect Our Results And Our Ability to Remain In Compliance With
Our Debt Covenants

            The current  downturn in the global  economy is adversely  affecting
our business. While we cannot predict the depth or duration of these effects, we
have made plans  assuming  that the  current  economic  conditions  will  remain
unchanged  and will  adversely  affect our order flow and results  through to at
least the end of 2003.  We continue to take  actions to reduce costs in light of
the downturn. However, if the downturn is more severe or longer in duration than
expected,  our financial  condition could worsen, and we could fail to remain in
compliance with our financial covenants under our debt obligations.



                                      -20-
<PAGE>
Competitive Pricing Pressures Could Reduce Our Results And Cash Flow

            In our business,  competition is based on product features,  service
quality,  reliability,  breadth of product offerings, customer relationships and
price.  We expect  the  competitive  environment  in which we  operate to remain
difficult for the  foreseeable  future.  We have a number of  competitors,  each
offering the same or similar services in geographic  regions in which we operate
some of which have greater  financial and marketing  resources than we do. Price
is a very important competitive factor in our industry. Sustained competition on
price would decrease our margins on sales and would therefore impact our results
and cash flow.

ITEM 4.     INFORMATION ON THE COMPANY

     A.     History and Development of the Company

            COLT Telecom Group plc, commercially known as COLT, was organised as
a public  limited  company  under  the laws of  England  and  Wales in 1996 as a
holding company for operations already commenced in the U.K. in 1993 and Germany
in 1996.

            We own and operate modern fibre-optic  networks in many of the major
financial and business  centres of Europe.  At 31 December  2002, we operated an
integrated  international  digital fibre optic network of  approximately  20,000
route  kilometres  (12,420 route miles)  providing  long distance  international
network  facilities,  linking 32 major  cities in 13  countries  augmented  by a
further 27 points of presence and 11 Internet solution  centres,  across Europe,
and providing service to customers in 9,238 buildings.

            We  initiated  service in London in October  1993,  in  Frankfurt in
March  1996,  in Paris in June  1997,  in Munich in August  1997,  in Hamburg in
September 1997, in Berlin in December 1997, in Zurich in June 1998, in Amsterdam
and Brussels in July 1998,  in Madrid in August 1998, in Dusseldorf in September
1998, in Stuttgart in March 1999, in Milan in April 1999, in Geneva in May 1999,
in Lyon, Vienna, Cologne and Barcelona in June 1999, in Rotterdam and Marseilles
in December 1999, in Turin in March 2000, in Hanover in May 2000, in Antwerp and
Rome in September  2000, in Stockholm in October 2000, in Birmingham  and Dublin
in December 2000, in Copenhagen  and The Hague in September  2001, in Lisbon and
Valencia in November 2001 and in Manchester in December 2001.

            Capital expenditure was (pound)412.1  million in 2002, compared with
(pound)804.3  million for 2001, a reduction of 49%, and (pound)639.0  million in
2000.  Capital  expenditure  paid  for  in  2002  also  included   approximately
(pound)125  million  in  respect  of  prior  year's  infrastructure  investment.
Importantly,   this  substantial   reduction  reflects  the  completion  of  the
infrastructure  construction  phase of the business  plan at the end of 2001. We
anticipate  further  reductions  in  capital   expenditure  during  2003  to  an
approximate level of between  (pound)220  million and (pound)270  million,  as a
result of our change of emphasis from the network build phase to exploitation of
the assets.

            Our registered  address is Beaufort  House,  15 St. Botolph  Street,
London EC3A 7QN , England and our phone number is +44 20 7863 5000.


                                      -21-
<PAGE>
   B.       Business Overview

            We are a leading  provider of high bandwidth data,  Internet,  voice
and advanced business  communications  services.  We have  constructed,  own and
operate modern, competitive local and international  telecommunications networks
that employ optical transport  technologies with dual path  architectures  being
the accepted industry standards for high quality fibre-optic  transmissions.  In
order to optimise  performance  across a range of services a mix of  synchronous
digital hierarchy ("SDH") transmission  technology,  asynchronous  transfer mode
("ATM") cell switched  technology  and Internet  protocol  ("IP")  technology is
used.  These  technologies  enable  communication  for fixed bandwidth  traffic,
traffic of variable speeds and Internet based traffic, respectively,  regardless
of the hardware, software or protocol used by our customers.

            Our  fibre  optic  local  city-networks  and our  Internet  Solution
Centres  are  inter-linked  to  form a  single  IP-based  pan-European  network.
Monitoring  and  maintenance  of each of  these  networks  is  centralised.  Our
advanced  networks,  combined with our superior  customer  service,  allow us to
provide  telecommunications-intensive  customers  with uniform,  reliable,  high
quality services which are competitive with services  provided by dominant local
public telephone operators ("PTOs") and other providers.

            Our focus is on the financial and business centres of Europe and our
customers are primarily large corporate, business and government end users, many
of whom have operations in more than one city in which we operate. Therefore, we
provide services to many of our customers in more than one city. We also provide
a range of services to other telecommunications  carriers. Our goal is to be the
most successful European provider of business communication services.

            We offer a broad range of high bandwidth data,  Internet,  voice and
advanced  telecommunications services including: (i) private wire services; (ii)
switched telephony services for directly connected  customers;  (iii) local area
network interconnect  services;  (iv) intercity network end-to-end  pan-European
connectivity  ("Euro-LAN");  (v)  video  transmission  services;  (vi)  switched
telephony services for customers  indirectly  connected to our network and (vii)
Internet access, web hosting and other value added services.

            We are able to provide, through our local access to major businesses
and high bandwidth inter-city links, the backbone  transmission  capacity needed
for  transaction  based  services on the  Internet.  We also provide value added
services including  application service provider enabling,  content distribution
and web hosting services.

            In  response  to  increasing  customer  demand  and the  significant
bandwidth  and  end-to-end  connectivity  requirements  of  current  and  future
enhanced  products and services,  we have  constructed  our Euro-LAN  inter-city
network   infrastructure  to  form  a  network  of  national  and  international
facilities linking our local  city-networks.  The Euro-LAN enables us to reach a
broader target market and to provide  unique,  end to end European  products and
services. Wavelength services, for example, provide extremely high capacity from
building to  building on the  network.  Customers  are able to rapidly  transmit
large volumes of information from end to end over a single network.

            The  construction  of  the  Euro-LAN,  linking  together  our  local
networks,  commenced during 2000 and was completed during 2002. It now comprises
approximately 15,000 route kilometres of long distance capability  inter-linking
not only our major  network  cities,  but also a further 27 cities where we have
established points-of-presence. The Euro-LAN is entirely operational now that we

                                      -22-
<PAGE>
have completed the final section in Spain between Barcelona and Valencia,  which
became  operational  during  2002.  We are also  exploring  the  possibility  of
acquiring additional transatlantic capacity.

            During 2002 we continued to grow our Digital Subscriber Line ("DSL")
business  and at the end of the  year  had  approximately  5,000  DSL  lines  in
service. DSL technology enhances local copper loops to enable high-speed digital
connections  for carrying  data. The use of DSL allows us to extend the range of
services  we can offer to large  corporate  customers,  as well as to expand the
addressable  market for services to small and medium sized companies and broaden
penetration  of  target  markets  in  cities  where  our  networks  are  already
operating.  The  deployment of DSL enables us to offer a range of voice and data
products to customers who do not have the volume of business to justify a direct
fibre optic  connection but wish,  for example,  to connect their branch offices
and  remote  locations.  Services  that are  available  over DSL  include  voice
services,  virtual private networks,  e-mail, web hosting,  security and storage
services.  Customers  are  able  to  tailor  their  own  package  from a menu of
services.  COLT  Internet  offers  high  quality,  high speed  data rates  while
providing users with the benefits of both an ATM transatlantic  backbone network
as well as our  local SDH  access  network.  We have  eleven  Internet  Solution
Centres  ("ISCs") in service,  each one  integrated  into one of our fibre optic
networks,  in:  London (2),  Frankfurt,  Paris (2),  Amsterdam,  Milan,  Madrid,
Berlin, Barcelona and Turin.

            Our ISCs offer customers a managed environment for outsourcing their
web infrastructure and other services. More significantly, they are the enabling
platforms for a range of communications  intensive products and services that we
expect will create incremental network revenue opportunities.

            Internet  Protocol Virtual Private Network  ("IPVPN")  services were
initially launched in France and Germany during 2000. We have since extended our
IPVPN  offering and have  continued  to expand our IPVPN  customer  base.  At 31
December  2002, we had 433  customers  utilising  IPVPN  services at 1,989 sites
across Europe.

            These services  simulate  private  networks while the purchaser only
actually  leases  lines to the local  operator  and the rest of the  service  is
handled on the operator's network to mimic a fully leased network. IPVPNs mirror
the speed, security and configuration flexibility of private wire networks. They
allow businesses to create  communications  networks  tailored to their specific
business  requirements,  but,  because they are "virtual" rather than hardwired,
they can be  created  quickly,  cost  effectively  and with more  potential  for
mobility and remote connection.

            Eventually,  we expect  our IPVPN  offering  to  comprise a suite of
products,  ranging from basic connectivity  through to security,  authentication
and  accreditation,  dial up access and other value added services.  In 2001, we
introduced a remote access service,  offering  customers true roaming capability
so that they can link their  users,  branches and offices with an IPVPN over our
network and Internet  facilities.  In 2002, we launched a high level  encryption
capability to strengthen remote access security.

            We intend to make continued and significant  additional  investments
in  both  advanced   telecommunications   and  Internet-related   services.  The
development of intranet services is expected to continue, providing connectivity

                                      -23-
<PAGE>
for  corporations on a local,  national and  international  scale,  establishing
Internet  points of presence  ("POPs"),  as well as creating an overlay  network
directly connecting major Internet service providers.

            During 2002, we continued to expand our service  range.  We launched
our media streaming service. This service,  directed at the corporate,  Internet
service provider and the Small to Medium Enterprise markets, allows companies to
store and deliver rich content and multimedia (video,  audio or both) across our
entire  network.  In addition,  as we own the  network,  we have a high level of
control over the quality and security of the service.

            During  2002,  we also  continued  to  expand  our  presence  in the
metropolitan  markets in Europe and, by the end of 2002,  operated  metropolitan
area  networks  in a total of 32  European  cities  across 13  countries  with a
further 27 other network cities connected by establishing  POPs, and 11 ISCs. We
may continue to widen our geographical coverage further, in selected markets, by
establishing POPs in smaller cities without building networks.

            We remain uniquely positioned across Europe with local, national and
international  fibre  infrastructure,  an extensive  hosting  footprint  and the
technology  and service  partnership  foundations  to  significantly  expand our
product and service range as we grow in 2003.

            Based in London, we currently operate networks in 32 cities: London,
Frankfurt,  Paris,  Munich,  Hamburg,  Berlin,  Stuttgart,  Dusseldorf,  Zurich,
Amsterdam,  Brussels,  Madrid, Milan, Geneva, Vienna, Lyon, Cologne,  Barcelona,
Rotterdam,  Marseilles,  Turin, Hanover,  Antwerp, Rome, Stockholm,  Birmingham,
Dublin, Copenhagen, The Hague, Lisbon, Valencia and Manchester.

North Region

            The North  Region  comprises  the  countries  of  Belgium,  Denmark,
Ireland,  The  Netherlands,  Sweden and the United Kingdom.  Our revenues in the
region reached (pound)331.5 million in 2002. The total telecommunications market
in  our  North   Region   countries  is   approximately   35.49%  of  the  total
telecommunications market of the E.U. plus Norway and Switzerland1

            At 31 December 2002 we had 11 city-networks operational:  Amsterdam,
Antwerp,  Birmingham,  Brussels,  Copenhagen,  Dublin, London,  Manchester,  The
Hague,  Rotterdam and  Stockholm.  A further 343 buildings were added during the
year,  bringing the total at 31 December 2002 to 2,730.  DSL based services were
available from 106 central  offices at the end of the year,  compared with 59 at
the end of 2001.




--------
            1  Market  data  in this  section  is  derived  from  the  "European
Information Technology  Observatory 2003" (11th edition, ISSN 0947-4862),  pages
349 and following. Please refer to the source for details.


                                      -24-
<PAGE>
Central Region

            The Central Region  comprises the countries of Austria,  Germany and
Switzerland.  Our revenues in the region reached  (pound)429.8  million in 2002.
The total  telecommunications  market in the Central Region countries  comprises
approximately  26.79% of the  telecommunications  market of the E.U. plus Norway
and Switzerland.

            At 31 December 2002, we had 11  city-networks  operational:  Berlin,
Cologne,  Dusseldorf,  Frankfurt,  Geneva, Hamburg,  Hanover, Munich, Stuttgart,
Vienna and Zurich. A further 356 buildings were added during the year,  bringing
the total at 31 December 2002 to 3,784.  DSL based  services were available from
324  central  offices  at the end of the year,  compared  with 247 at the end of
2001.

South Region

            The South Region comprises the countries of France, Italy, Portugal
and Spain.

            At 31  December  2002,  there  were  10  city-networks  operational:
Barcelona,  Lisbon,  Lyon,  Madrid,  Marseilles,  Milan,  Paris, Rome, Turin and
Valencia.  We derived (pound)265.9 million of our revenues from the South Region
in 2002.  The South Region  countries  account for  approximately  35.86% of the
total telecommunications market of the E.U. plus Norway and Switzerland.

            A further 696  buildings  were added to our network  during the year
bringing  the total at 31  December  2002 to  2,724.  DSL  based  services  were
available from 89 central offices at the end of the year compared with 45 at the
end of 2001.

New Markets

            We  intend to  expand  our  business  in our  existing  metropolitan
markets by delivering added value products and services that effectively  target
specific  customer  segments,  by continuing to leverage our local  presence and
market knowledge and our reputation for excellent  customer service and to build
our  multi-national  customer business via more focused  multi-national  account
management and our ability to offer global  connectivity via our fully owned and
managed  network.  We may expand our business in other  metropolitan  markets in
Europe, by establishing POPs rather than building  additional  networks.  We may
also take advantage of other market  opportunities in cities in Europe,  as they
become available. These opportunities may be in the form of the acquisition of a
company,  which has an  existing  licence or an  application  for a licence  and
operating rights.  Prior to entering a new market, we conduct an analysis of the
demographic, economic, competitive and telecommunications demand characteristics
of the market as well as applicable  regulations  affecting  development  in the
market.


                                      -25-
<PAGE>
Inter-city Network

            Since the  completion in 2002 of the Barcelona to Valencia  segment,
our Euro-LAN is now complete and entirely  operational.  Our Euro-LAN  joins our
local networks  across Europe and gives us a high degree of control over service
quality on a  pan-European  basis.  The  Euro-LAN  infrastructure  offers us the
opportunity  to provide  unique,  end-to-end  European  products  and  services.
Customers are able to rapidly  transmit large volumes of information from end to
end over a single  network.  In total,  we now have  approximately  20,000 route
kilometres of metropolitan and  international  network in operation  serving and
inter-linking not only our major network cities but also 27 cities where we have
established points-of-presence. These international facilities enable us to meet
customer   demand  for   significant   bandwidth  and  end-to-end   connectivity
requirements.




                                      -26-
<PAGE>
<TABLE>
<CAPTION>
Breakdown of revenues by segment

Year ended 31 December 2002

                      North Region      Central Region    South Region        Corporate                   Total
                                                                                 and
                                                                             eliminations
Turnover               (pound)'000      (pound)'000       (pound)'000        (pound)'000      (pound)'000            $'000

<S>                      <C>               <C>               <C>               <C>               <C>            <C>
Switched                  213,025           309,458           164,871           (63,971)          623,383        1,003,335
Non-switched              140,517           142,829            94,218           (27,041)          350,523          564,167
eBusiness                  15,446             8,488            29,209            (1,613)           51,530           82,937
Other                          65             1,330               485               (58)            1,822            2,933
Inter region
Revenue                   (37,543)          (32,300)          (22,840)           92,683                --               --
                        ---------         ---------         ---------         ---------         ---------        ---------
Total                     331,510           429,805           265,943                --         1,027,258        1,653,372
                        =========         =========         =========         =========         =========        =========

<CAPTION>
Year ended 31 December 2001

                      North Region      Central Region    South Region        Corporate                   Total
                                                                                 and
                                                                             eliminations
Turnover               (pound)'000      (pound)'000       (pound)'000        (pound)'000      (pound)'000            $'000

<S>                       <C>               <C>               <C>               <C>               <C>              <C>
Switched                  222,670           262,749           125,646           (78,418)          532,647          857,296
Non-switched              121,775           139,098            76,295           (13,741)          323,427          520,556
EBusiness                  11,145             8,445            25,772            (2,084)           43,278           69,656
Other (i)                     158             5,860               456              (139)            6,335           10,196
Inter region
Revenue                   (42,822)          (35,810)          (15,750)           94,382                --               --
                        ---------         ---------         ---------         ---------         ---------        ---------
Total                     312,926           380,342           212,419                --           905,687        1,457,704
                        =========         =========         =========         =========         =========        =========

<FN>
(i) Central Region "Other" includes infrastructure sales of (pound)3,829,000.
</FN>

<CAPTION>
Year ended 31 December 2000

                      North Region      Central Region    South Region        Corporate                   Total
                                                                                 and
                                                                             eliminations
Turnover               (pound)'000      (pound)'000       (pound)'000        (pound)'000      (pound)'000            $'000
<S>                       <C>               <C>               <C>               <C>               <C>              <C>

Switched                  183,282           196,891            82,469           (57,373)          405,269          652,280
Non-switched               96,588            93,564            50,898            (8,193)          232,857          374,783
Other (i)                     480            47,942               494               (65)           48,851           78,626
Inter region
Revenue                   (17,226)          (34,538)          (13,867)           65,631                --               --
                        ---------         ---------         ---------         ---------         ---------        ---------
Total                     263,124           303,859           119,994                --           686,977        1,105,689
                        =========         =========         =========         =========         =========        =========

<FN>
(i) Central Region "Other" includes infrastructure sales of (pound)46,212,000.
</FN>
</TABLE>

                                      -27-
<PAGE>

Services

            We are a leading  pan-European  provider of  business  communication
services and we operate in a single segment:  telecommunications.  The services,
which we provide,  can be broken down into two general categories:  switched and
non-switched.

            The range of  services  offered by us in any  particular  market may
vary because of the extent of  telecommunications  liberalisation  in the market
and other business considerations.

Switched Services

            Switched  services involve the transmission of voice,  data or video
to  locations  specified  by end users or  carriers.  We have the  technological
capability  to  provide a full  range of  switched  services,  including  local,
national and international calls as well as enhanced services. Switched services
include the following:

            COLT  Line.  Through  our  switching  centres  and   interconnection
arrangements with other carriers, COLT Line switched service offers customers an
economical  and flexible  way to make  telephone  calls on a local,  national or
international  basis.  COLT Line provides  several  enhanced calling features as
well as a choice of digital  or  analogue  connectivity  with  multiple  service
options.  COLT Line Enhanced provides a variety of additional  features normally
only  available  with  virtual  private  network  ("VPN") or  Centrex  services,
including desk-to-desk dialling, four-digit dialling and full network monitoring
and  maintenance.  Full customer support is provided,  with a dedicated  account
manager and customer helpdesk.

            COLT Line  DualHoming.  COLT Line DualHoming is a security  solution
offering the highest  level of security for incoming and outgoing  traffic where
more than one public  exchange  is  attached.  It is  especially  well suited to
customers with any kind of critical applications.

            COLT  Line  DistributedTraffic.  COLT Line  DistributedTraffic  is a
security  solution offering the distribution of all incoming traffic to multiple
customer  locations  using the same number  range,  including  the balancing and
overflow  management  of  incoming  traffic.  This  solution  is best  suited to
customers,  who  require  traffic  management  over  two  or  more  geographical
locations.

            COLT Line DisasterRecovery. COLT Line DisasterRecovery is a security
solution  offering  the  diversion  of traffic for a specific  number range to a
definable  destination in the case of total system failure.  The destination and
the duration of the diversion are flexible and are password protected.

            COLT Connect. COLT Connect is an indirect telecommunications service
available  to  business  users  who are not  connected  to our  network,  giving
customers  an  economical   and  flexible  way  to  make  local,   national  and
international  calls. Acting as a 'broker' on behalf of the user, we can use our
bulk buying power to continually  negotiate the most competitive  prices for our
customers  without  compromising  service or quality.  This product allows us to
serve  markets  beyond  the  reach of our core  infrastructure,  enabling  us to
provide service nationally without building a national network.

                                      -28-
<PAGE>

            COLT BusinessConnect.  COLT BusinessConnect is an advanced portfolio
of intelligent  network (IN) telephone numbers.  We supply the service either to
on- or off-Net customers. This service is mainly used as a marketing instrument.

Non-Switched Services

            Non-switched  services involve a fixed communications link or "pipe"
between specific  locations.  Our non-switched  services  currently  include the
following:

            COLT Link. Through our COLT Link services, we offer customers a full
range of digital and analogue  private  wire  services,  ranging from  low-speed
voice circuits (64 kilobits per second and lower speeds) to high-speed  links of
34, 45, 155 and 622 megabits per second.  Broadcast  and multiple  link services
are also available. The resilience of the SDH network provides users with a high
level of reliability for critical applications.  These are local (within a city)
or  national  (within  a  country)  "private  wire"  services.   We  also  offer
international private wire services.

            COLT LANLink. COLT LANLink offers a high performance  connection for
geographically  distributed local area networks  ("LANs").  The communication of
data  uses  the  full  bandwidth  of  the  respective  LAN  technologies  and is
independent  of the LAN  protocols.  Thus,  COLT  LANLink  avoids the delays and
compatibility  problems of  conventional  LAN to LAN connecting  solutions (e.g.
leased  lines or  Frame  Relay).  The  COLT  LANLink  solution  facilitates  the
development  of  innovative  solutions  with high data  transfer  rates  such as
Intranets,  distributed client/server  environments,  server farms and computing
centres.  Furthermore,  COLT LANLink is particularly  adapted to real time voice
and  multimedia  transmissions.  We provide  these  services  for the three most
common  LAN  protocols  -  Ethernet,  Token  Ring  and  Fibre  Distributed  Data
Interface. Unlike some other LAN interconnection networks which limit LAN speeds
to that of the  network,  COLT  LANLink  interconnects  each  type of LAN at its
native speed.

            COLT  EuroLink.  COLT EuroLink is an end-to-end  managed SDH private
wire service that provides  international  companies operating throughout Europe
with a high quality,  cost-effective network. This service supports high volume,
secure data  links,  videoconferencing,  corporate  LAN  interconnect,  intranet
applications  and Internet  services  exclusively over our local access networks
and is  connected to our  international  SDH  backbone at several  points.  COLT
EuroLink  provides fully redundant SDH protected  services in both the local and
long-distance  sections of a customer  connection.  SDH  technology  provides an
alternative path locally and  internationally  for a customer's  services should
the normal path become  unavailable  for any reason.  This  results in very high
levels of service availability.

            COLT EuroCell.  COLT EuroCell provides transport of ATM traffic over
a Permanent  Virtual Path.  It has  different  levels of quality of service with
variants  suitable  for a number  of  applications,  including  real  time/delay
sensitive applications such as voice or video,  unconstrained delay applications
such as LAN interconnection, as well as applications with little requirement for
tight  delay  such as  e-mail or  over-night  back-up.  We offer  two  different
customer  selectable  traffic and Quality of Service  types:  CBR  (Constant Bit
Rate) and VBR-nrt  (Variable Bit Rate - non real time). We support access speeds
from 2Mbit/s to 155Mbit/s. Global connectivity can also be provided on a case by
case basis.

                                      -29-
<PAGE>

            COLT  Euroframe.  COLT  Euroframe is a Frame Relay  service for data
networking available via a user network interface ("UNI") connected by Permanent
Virtual  Circuits  ("PVC").  Two  additional  service  options are  available to
customers:  COLT  EuroFramePlus,  an enhanced  service used for  delay-sensitive
applications,  and COLTEuroFrame(2)Cell,  where the PVC can be supported through
an ATM UNI on one end and a Frame  Relay on the other.  This  service,  together
with COLT  EuroCell,  strengthens  and enhances our portfolio of high  bandwidth
pan-European  products and complements the existing  end-to-end  managed private
wire service,  COLT EuroLink. We support access speeds from 64Kbit/s to 2Mbit/s.
Global connectivity can also be provided on a case by case basis.

            COLT  Vision.  The wide  bandwidth  and high  quality of our network
enables us to support a wide range of video  applications.  COLT  Vision  allows
point-to-point  transmission  of live broadcast,  text,  video and images and is
usually  tailored to meet the specific  requirements  of  particular  end users.
Current  applications of COLT Vision include  security  monitoring and financial
news services.

            COLT Internet.  COLT Internet  offers high quality,  high speed data
rates while providing users the benefits of both an ATM  transatlantic  backbone
network as well as our local SDH access network.

            COLT  InterAccess.  COLT  InterAccess  enables high bandwidth leased
line Internet access utilising our IP Network and worldwide peering agreements.

            COLT  InterTransit.  COLT  InterTransit  offers to Internet  Service
Providers a permanent, fast and secure connectivity to the Internet. The service
connects the Internet  service  provider's  ("ISP's")  site to our high capacity
backbone  network.  It is  specifically  designed for high  wholesale  bandwidth
resellers or ISPs.

            COLT  ManagedFirewall.  COLT  ManagedFirewall is a fully managed and
dedicated  firewall  solution.  A firewall  is a set of  hardware  and  software
components used for the protection of a network from unauthorised  accesses onto
the protected  network from users of another  network.  Firewalls are located in
our rack, at the customer's  site for COLT  InterAccess  customers or at the ISC
for COLTInterHosting and COLTInterHousing customers.

            COLT  InterHousing.  COLT  InterHousing  is  a  managed  co-location
service which offers a flexible and  cost-effective  alternative  to an in-house
Internet facility.  Dedicated full and half racks are offered. COLT InterHousing
racks are located in the highly secure and 24 x 7 x 365 monitored  COLT Internet
Solution Centre.

            COLT  InterHosting.  COLT InterHosting UNIX is a managed,  dedicated
web and Internet  applications  hosting  solution for business  customers.  Such
applications could be a web site, an e-business  platform or an SAP application.
This service is located in our highly secure and 24 x 7 x 365 monitored ISC.



                                      -30-
<PAGE>
            COLT InterSuite.  COLT InterSuite is a service offering a dedicated,
secure and  private  area for  customers  to house  their  equipment.  It offers
unlimited bandwidth,  reliability,  resilience,  flexibility, total security and
privacy.  It has all the  benefits  of COLT  InterHousing,  but with  the  added
advantage of allowing the customer to design and install its own facility. It is
specially dedicated for large amounts of hosting equipment.

            COLT  Eurowavelength.  COLT  Eurowavelength  is a  service  offering
greater speed,  flexibility and more efficient  bandwidth  utilisation  allowing
carriers,  ISPs and large  corporate  customers to design and operate  their own
express  networks  ranging  from a choice of protocols to the ability to set the
level of protection.

            COLT Stream.  COLT Stream is a media streaming  service aimed at the
corporate,  ISP and SME markets that allows  companies to broadcast rich content
and multimedia (video,  audio or both) across our network. It facilitates a very
high speed transfer of content across the Internet,  enabling users,  regardless
of their location, to view the media files as if they were connected locally.

            COLT IP Corporate.  COLT IP Corporate is a virtual  private  network
service  that  allows   customers  to  access  private  data,  such  as  company
information,  across a public or shared network. IP Corporate allows this access
using a number of transport technologies, such as ATM, IPSec (a collection of IP
security  measures  which support an  authentication  process used to verify the
validity  of the  originating  address  from which data is being sent) & MPLS (a
method of speeding up IP based data communication over ATM networks).

            COLT    IPCorporateConnect.    COLT    IPCorporateConnect    is    a
connection-orientated VPN service built on proven, widely used Layer 2 transport
services,  ATM and Frame  Relay.  As such,  traffic  flows  via PVCs  (Permanent
Virtual Circuits) are fixed and known for true path  determination.  Routers are
deployed at each site  providing  feature-rich  services  that can be applied to
application demands. The result is a virtual private network service with a very
high degree of flexibility for the customer.

            COLT  DSL.  As an  alternative  to  some of the  fibre  connectivity
services  mentioned  earlier,  we also  have a  copper  based  offering  via DSL
technology  and as a  result  are able to offer  voice or data,  subject  to the
chosen DSL type.

            COLT  Consulting.  We also offer system  integration  and consulting
services for some of the more complex  solutions that our customers  expect from
us.

New Services

            We intend  to  continue  to expand  our  service  offerings  to take
advantage  of  market   opportunities  and  the  increasing  data  and  Internet
opportunities  that exist. We are continuing to develop enhanced voice, data and
Internet  services to reach new markets,  offer  additional  services to new and
existing customers and benefit from the fast expanding market for high bandwidth
applications and advanced intelligent network services. Our ability to offer new
services   will   depend  upon   regulatory   conditions   and  other   business
considerations.

Sales and Marketing

            Our  principal  method of selling  services  to  directly  connected
customers is through our internal sales force. Our directly connected  customers
consist  of end  users  and  carriers.

                                      -31-
<PAGE>
End users are businesses,  government  organisations,  ISPs and institutions who
have high-volume telecommunications requirements. Carriers are both national and
international  telecommunications  service providers.  In general, we enter into
non-exclusive  contracts  with our end user customers that typically last from a
few  months  to one year  for  switched  services  and one to  three  years  for
non-switched  services.  Interconnection  agreements with our carrier  customers
typically  either  provide for an initial term of one year,  terminable on three
months notice after the expiry of the initial period, or are ongoing, terminable
on three months notice by either party.

            Many of our  directly  connected  end user  customers  are among the
largest   financial,    media,    corporate   and   government    consumers   of
telecommunications  services. Many have multiple sites and space in multi-tenant
buildings.  These  customers  generally  require  dedicated  sales and  customer
service representatives who understand their demanding  requirements.  We market
our  services to these  customers on the basis of price,  quality,  reliability,
product  diversity and service.  We typically offer our services to end users at
prices below those  offered by the  dominant  PTOs.  In  addition,  our networks
provide  reliability  which we believe is generally  superior to the reliability
provided by the dominant PTOs.

            In addition to end users, we also target national and  international
carriers.  Since  carriers have unique needs and buying  patterns,  marketing to
carriers is conducted by account  representatives from our internal sales force.
We focus on  serving  carriers  in our  markets  with a view to  establishing  a
European  preferred  vendor  relationship.  We believe  that we can  effectively
compete to provide  products and services to carriers in the markets in which we
operate     on     the     basis     of     price,     quality,     reliability,
state-of-the-art-technology,  route  diversity,  ease of ordering  and  customer
service. We offer carrier to carrier and carrier to end user non-switched access
services and switched  access  termination  and  origination  services at prices
typically  below those of the dominant  PTOs.  We believe that as dominant  PTOs
expand into other markets,  carriers in those markets who provide service in the
dominant   PTOs'  home   markets  are  likely  to  prefer  to  use   competitive
telecommunications providers such as us for local access.

            To complement  our direct sales force,  we use  non-exclusive  sales
agents and dealers to market our switched  services,  especially  COLT  Connect.
These  sales  agents  and  dealers  primarily  target  small  and  medium  sized
businesses outside each network's core infrastructure.

            Through a separate subsidiary,  we also own a small number of retail
"call shops" in London,  which serve as agents for pre-paid  switched services.

Customer Service

            We strive to provide superior  customer service and believe that the
quality of our customer service before,  during and after installation is one of
our  competitive  advantages.  We  have  a  tailored  order  entry  and  project
management  system to track  orders  from  receipt to  installation.  During the
installation  process a dedicated  project  manager works with large accounts to
provide a single point of contact for complex  installations  across many sites.
After  installation,  our network control centre  monitors  equipment 24 hours a
day, 365 days a year, often resolving  problems before any service  interruption
occurs.

                                      -32-
<PAGE>

Network Design and Construction

            The main build  phase of our city and long  distance  network is now
complete.  Before we constructed our network in a particular market, we reviewed
the demographic, economic, competitive, regulatory and telecommunications demand
characteristics of the market. This included its location,  the concentration of
potential  business,  government  and  institutional  end  user  customers,  the
economic  prospects for the area,  available data regarding carrier and end user
switched and non-switched services demand and actual and potential competitors.

            In most cases, we have built a network to ensure that we control our
network quality in densely populated city centres. Construction and installation
services were provided by independent contractors selected through a competitive
bidding process. Our personnel provided project management  services,  including
contract negotiation and supervision of construction,  testing and certification
of all facilities.  The  construction  period of a new network varied  depending
upon such factors as the number of backbone  route metres to be  installed,  the
initial  number of  buildings  targeted  for  connection  to the network and the
general   deployment  of  the  network.   Construction   was  planned  to  allow
revenue-generating  operations to commence prior to the completion of the entire
city-network.  After installing the network backbone, expansion to other regions
of a  metropolitan  area is evaluated  based on detailed  assessments  of market
potential.  Once a building is connected to our network,  connecting  additional
tenants  requires less  investment  in  infrastructure  and therefore  generates
higher  margins.  Based upon our experience with our  operational  networks,  we
believe that a new  competitive  local network can be  commercially  operational
within six months after construction commences.

The Networks

            We use the latest  technologies and network  architecture to develop
highly reliable infrastructure for delivering high-speed, quality digital voice,
Internet,  IP, data and video  telecommunications  services. The basic transport
platform consists primarily of optical fibre, in some cases, equipped with Dense
Wave  Division   Multiplex   equipment  (DWDM).   DWDM  systems  carry  multiple
wavelengths over long distances,  without the need for intermediate regeneration
of signals at the electrical  level. It is a mechanism to increase  transmission
speeds on fibre-optic  systems by allowing  multiple  signals to be encoded into
multiple wavelengths and transmitted down the same fibre.

            This DWDM  system in turn is overlaid  with either high  capacity IP
(including ATM and Frame Relay) equipment deployed in diverse  configurations or
high  capacity SDH  equipment  deployed in rings with dual paths,  both of which
give  us the  capability  of  routing  customer  traffic  simultaneously  in two
directions, eliminating loss of service in the event of a cut cable.

            The network  consists of fibre  optic  rings  extending  to customer
locations,  with each  ring  connecting  an  average  of five to seven  customer
locations.  We extend SDH rings to each customer's premises over our fibre optic
cable and transmission facilities. We then place necessary customer-dedicated or
shared electronic  equipment at a location near or in the customer's premises to
terminate the link. The combination of IP and SDH technology allows a wide range
of customer  services to be provided with  flexibility and  reliability.  We

                                      -33-
<PAGE>
own substantially all of the fibre in our networks and the majority of the ducts
in which it is laid.  Where  fibre or ducts are not owned by us they are  leased
from the owner.

            We serve our customers from one or more nodes or hubs  strategically
positioned  throughout  our  networks.  The node  houses  the  transmission  and
switching equipment needed to interconnect  customers with each other,  carriers
and other networks.  Redundant  electronics,  with automatic switching to backup
equipment  in the event of failure,  protect  against  signal  deterioration  or
outages.  Continuous  monitoring  of system  components  focuses on  proactively
avoiding problems rather than just reacting upon failure,  and permits near real
time  reporting on the network  status to the  customer,  using web browsers for
access to these reports. Network coverage is provided 24 hours a day, 365 days a
year,  monitoring equipment and facilities and providing customer assistance and
support.  We use an internal  staff of  technicians  to both  install and repair
electronics and provide service to customers.

            We own and operate major switches in all of our operational  markets
for  switching  local,  national  and  international  calls.  We  add  switched,
dedicated and routed services to our basic fibre optic transmission  platform by
installing  sophisticated  digital  electronics  at  our  network  nodes  and at
customer  locations.  Similarly,  we  provide  router and LAN  equipment  at the
customer's premises and in our nodes to provide high-speed Internet, ATM and LAN
interconnection  services. We strive to have two major suppliers of services and
equipment.  If a supplier has the capability to provide services or equipment in
several markets,  we negotiate a master supply  agreement.  At the present time,
the  following  companies  are major  suppliers  to us:  Nortel and  Siemens for
switches, Nortel, Marconi and Lucent for transmission,  Cisco and Alcatel for IP
and ATM services and Pirelli and Corning for fibre optic cable.

            The  technology  being used in the Long  Distance  network is also a
DWDM system.  Initially, this DWDM system has been deployed with a 32-wavelength
capacity per fibre - each at 10Gbit/s  giving a capacity per fibre of 320Gbit/s.
The system may be  expanded,  in time,  to 160  wavelengths  giving each fibre a
capacity of 1.6 Tbit/s.

            The fibre to be supplied is also of the latest  technology,  being a
development of the Non Zero  Dispersion  Shifted  Fibre.  This type of fibre has
been used for long distance  networks for the past few years,  permitting longer
distances  between  repeaters and more  wavelengths  than  conventional  fibres,
resulting in improved quality and reduced cost.

            Nortel has  supplied the DWDM system for the Long  Distance  network
and Corning has supplied its LEAF(R) fibre.

            We use DSL equipment in the offices of the incumbent operators (when
permitted by 'unbundling'  regulation) to provide  multiple IP based services to
small and medium sized companies as well as utilising the incumbents'  wholesale
DSL offers where appropriate.


                                      -34-
<PAGE>
            We have  developed  an IP backbone  network to support our IPVPN and
Internet client base. This largely follows our optical networks,  which are used
as an underlying infrastructure. To support global connectivity, the IP backbone
also extends,  through  diverse  links,  to dual points of presence in New York,
where we have peering and transit arrangements to provide U.S. and rest-of-world
connectivity.

            We have deployed a number of Internet  hosting and housing  centres,
known  as  "Internet  Solution  Centres,"  or ISCs.  The  ISCs  are  large-scale
equipment  rooms.  These are constructed  with resilient  power,  networking and
managed environmental  systems. The ISCs are connected to the IP backbone within
the local country networks.

            The ISCs provide a managed environment for customers wishing to host
applications, such as web sites and e-commerce platforms.

            Currently we use Cisco equipment within our Internet backbone. Cisco
routers and  switches  are also used within the local  country  networks and the
Internet  Solutions  Centres.  Our IP network is accredited as a "Cisco  Powered
Network."

Billing and Information Systems

            We believe that effective  information  and billing  systems are key
elements for growth and success in the telecommunications industry.

            Maintaining  sophisticated and reliable billing and customer service
information  systems  that provide  billing,  accounts  receivable  and customer
support is a core capability  necessary to record and process the data generated
by a  telecommunications  service provider.  Accordingly,  we use Remedy Corp.'s
Action  Request  System  for  customer  service,  project  management  and fault
management in addition to billing systems provided by Ericsson,  and Independent
Technology Systems. We will continue to make significant  investments to upgrade
and  acquire  sophisticated  information  systems  designed to enable us to: (i)
monitor and respond to customer needs by developing new and customised services;
(ii) provide customised billing information; (iii) provide high quality customer
service; (iv) verify payables to suppliers;  (v) rapidly integrate new customers
and (vi)  improve  least-cost  routing  of traffic  on our  network.  We provide
billing in local currency, itemised call detail and electronic output for select
accounts.  While we believe that our systems are  currently  sufficient  for our
operations,  our network  intelligence,  selling and financial reporting systems
will require  enhancements and ongoing  investments to accommodate our growth. A
usage-based   billing  offering  for  hosting  and  access  customers  has  been
introduced.  This expansion of our product and service range gives customers the
flexibility to pick their Internet connectivity according to their usage profile
and  reflects  our  innovative   customer-oriented   approach  to  service.  The
introduction  of a usage  based  billing  solution  is  another  measure  of our
commitment   to   maximising   the  benefit  to  customers  of  our   continuing
infrastructure and service investment.  Customers, large and small, can select a
billing  model that most closely  matches  their actual usage  profile.  The new
system presents  customers with a choice based on usage profiles  resulting from
the customer's  connectivity  pattern. It means actual bandwidth use rather than
mere  availability  governs what the customer pays. By offering this new product
feature,  we strive to ensure that we maintain a lead in servicing  our business
Internet connectivity customers across Europe.



                                      -35-
<PAGE>
Competition

            In every region,  we compete  primarily  with the dominant  PTOs. We
also face  competition for customers'  switched traffic from a number of smaller
service providers. By region, our primary competitors are as follows:

North Region

            We compete primarily with the incumbent operators, i.e., Belgacom in
Belgium,  TDC in Denmark,  Eircom in Ireland,  KPN in The Netherlands,  Telia in
Sweden and BT in the U.K. We also face competition from a number of pan-European
operators, including MCI, Cable & Wireless, BT Ignite, Level 3 and others. There
are also some local  infrastructure  competitors,  such as Versatel and Priority
Telecom in The Netherlands,  and Versatel and Telenet in Belgium.  In Sweden and
Denmark, we also compete with Tele2. In the U.K.,  domestic  competitors include
Energis.

Central Region

            We compete primarily with the dominant PTOs, i.e.,  Telekom Austria,
Deutsche  Telekom in Germany and Swisscom in  Switzerland.  In Germany,  we also
face competition from several other operators, notably Arcor, BT Ignite, MCI and
Level 3 who have built-out  nation-wide backbone networks,  and MCI , along with
some city carriers (which are often owned or supported by local governments) who
have built local  infrastructure in selected  geographies.  Priority Telecom, in
Austria, is a local infrastructure  competitor. In Switzerland,  TDC-Sunrise and
T-Systems each has a strong domestic market position.

South Region

            The  principal  competitors  in the South  Region are the  incumbent
operators,  i.e., France Telecom in France, Telecom Italia in Italy,  Telefonica
in Spain and PT Comunicacoes/PT  Prime in Portugal.  We also face competition in
France  from  Cegetel,  LDCom and  Completel.  In Italy,  we compete  with major
national new entrants such  Wind-Infostrada,  e.Biscom and Albacom, and in Spain
with major national  players such as Retevision,  JazzTel and Uni2. In Portugal,
competition  is relatively  limited,  but we face some  competition  from CIENA,
Novis and JazzTel.

Regulatory Environment

            We  believe  we have  obtained  all  national  and local  government
authorities,  permits or licences as are required in order to be able to conduct
our business as currently contemplated, in each of the jurisdictions in which we
operate.

European Union regulatory framework

            The  current  E.U.  regulatory   framework  for   telecommunications
includes the Services  Directive/Full  Competition  Directive which provided for
full liberalisation of the telecommunications  networks and services sector on 1
January 1998, the Open Network Provision (ONP) Framework Directive,  the Revised
ONP Leased Lines Directive and the Revised ONP Voice  Telephony  Directive which
guarantee   the   provision   of  certain   services  to  end  users,   the  ONP
Interconnection  Directive which ensures interconnection and interoperability of


                                      -36-
<PAGE>
networks and services, the Licensing Directive which provides for the reasonable
availability of licences and  authorisations to new entrant  operators,  and the
Numbering Directive which mandates carrier  pre-selection and number portability
and, a Regulation  requiring  the  incumbent  fixed  network  telecommunications
operators to enable local loop unbundling. The implementation of E.U. directives
and policy is different in every E.U. Member State, but the intent and spirit of
liberalisation has now been broadly adopted.  Iceland,  Liechtenstein and Norway
are bound by the E.U.  directives  as a consequence  of their  membership of the
European  Economic  Area.  Switzerland  is  not  required  to  follow  the  E.U.
directives but has implemented a broadly  similar  national legal and regulatory
framework for telecommunications.

            The  telecommunications  regulatory regimes in each of the countries
in which we are currently operating  therefore have certain common features.  We
are not  subject  to  regulatory  constraints  on the  prices  we  charge to our
customers,  although the dominant Public Telecommunications  Operator is subject
to price controls under each national regulatory regime, which result in a price
ceiling on the market. In addition, the  telecommunications  licences granted to
us  are  subject  to  certain  conditions,   including,  in  certain  countries,
termination  in case of a change of control  and in some  cases,  for  instance,
France  and the U.K.,  in the event of a  substantial  change of  ownership  not
amounting to a change of control.  However,  in most countries,  licences can be
transferred with the consent of the regulatory authority.

            On 5 December  2000, a legally  binding  regulation was published by
the European Parliament and Council,  which mandated the implementation of local
loop  unbundling by incumbent  operators with  significant  market power as of 1
January 2001. This change allowed new entrant telecommunication companies access
to the local  switches  of  incumbent  operators  and thus the  ability to offer
access  to  customers  using  their  own  network.   This  regulation  has  been
implemented in the national  telecommunications  legislations,  and, while there
have been serious delays and  difficulties in the past, local loop unbundling is
now  available in all the E.U.  Member  States in which we operate  (although in
some countries we have chosen not to deploy it).

            On 7  March  2002,  the  E.U.  adopted  a set of  Directives,  which
constitute  a  new  European   regulatory   framework   for   telecommunications
(consisting of a Framework Directive, an Authorisations Directive, an Access and
Interconnection  Directive, a Universal Service and Users' Rights Directive, and
a Radio Spectrum Decision. A Consolidated Directive on Competition in the Market
for  Communications  Services was adopted on 16 September  2002  (together,  as
already  defined,  the "new  regulatory  package")).  A key  feature  of the new
regulatory package is that it contains a drive towards common market definitions
and common regulatory instruments to assess and address the dominance of certain
operators in  communications  markets  within the E.U., and is based on concepts
that are  identical  to those  employed  in  general  competition  law.  The new
regulatory  package also provides for increased  co-ordination of the actions of
national regulatory  authorities in the Member States, and a European Commission
veto right over certain key decisions of the national regulatory authorities.

            E.U. Member States are given until 25 July 2003 to implement the new
directives into their national law and to regulate the telecommunications sector
in  accordance  with this new legal  and  regulatory  package.  Our  freedom  to


                                      -37-
<PAGE>
determine our own end user pricing will not be affected.  The E.U. Member States
are at different  stages in their  preparation for the  implementation  of these
directives.  Some may not complete it on time.  Details of the progress  towards
implementation in our major countries is given below.

            On  11   February   2003  the   European   Commission   issued   the
Recommendation   on  Relevant  Markets  in  the   communications   sector.   The
Recommendation sets out individual markets which national regulatory authorities
in each Member  State must analyse  and,  depending on the level of  competition
within each market, to which the regulator must apply regulation.

            We do not anticipate that the  implementation of the new regime will
result in any material  adverse change to our revenues or margins.  However,  as
the process is not finalised in any Member State, it is too early to predict the
actual outcome with certainty.

North Region

            Full telecommunications  liberalisation was introduced in Belgium on
1 January 1998. We have been granted a public telecommunications network licence
in Belgium  covering  the main areas of economic  importance  and a  nation-wide
voice telephony  licence.  A draft Bill to introduce the new regulatory  package
has  been  in   intra-Government   consultation  since  February  2003.  Due  to
Parliamentary elections, the legislative process is not expected to be completed
before the Fall of 2003.

            In  Denmark,  no  licence,  authorisation,   registration  or  other
procedure  is  applicable  for  conducting   fixed  network   telecommunications
activities.  Legislation  to  implement  the new  regulatory  package  has  been
presented to  Parliament  in May 2003,  and is expected to be passed  before the
deadline of 25 July 2003.

            On 12 June 2000,  COLT Telecom Ireland Limited was granted a General
Telecommunications  Licence  which  allows it to  construct,  own and  operate a
telecommunications  network and to offer voice  telephony and other  services in
Ireland.  The  Republic of Ireland is  expected to meet the  deadline of 25 July
2003 for the implementation of the new regulatory package.

            Full   telecommunications   liberalisation  was  introduced  in  The
Netherlands  in 1997.  The current  Telecommunications  Act is dated 15 December
1998. We have registered as a provider of public telecommunications services, as
a builder or provider of a public telecommunications network and as a builder or
provider  of  leased  lines  in The  Netherlands.  In  April  2003,  a Bill  was
introduced to adopt the new regulatory package.

            In  Sweden,  we have  simply  had to  register  with the  regulatory
authority PTS to enable us to build our network and provide services.  Sweden is
expected to meet the deadline of 25 July 2003 for the  implementation of the new
regulatory package.


                                      -38-
<PAGE>
            The U.K.  Telecommunications  Act 1984 (the "U.K.  Act")  provides a
licensing  and  regulatory  framework for  telecommunications  activities in the
United Kingdom.  The Secretary of State for Trade and Industry at the Department
of Trade and Industry is  responsible  for granting  licences under the U.K. Act
and for  overseeing  telecommunications  policy,  while the Director  General of
Telecommunications  is responsible,  inter alia, for enforcing the terms of such
licences (through his office,  OFTEL).  COLT is currently  operating under a PTO
licence awarded on 9 June 1995 (as amended), which replaced an earlier licence.

            In May 2002 the U.K.  government  published  a draft  Communications
Bill which will  replace the existing  regime some time in  mid-2003.  The major
substantive  changes  will  involve  the  abolition  of OFTEL (to be replaced by
OFCOM,  a  body  with  responsibility  for  regulating  all  the  communications
industries  including,  for example, TV content, as well as  telecommunications)
and the  implementation  of the new  regulatory  package.  If the Bill is not in
force as an Act by the deadline of 25 July 2003, the U.K.  government intends to
implement  the new  regulatory  package  on an  interim  basis  by a  series  of
Statutory Instruments issued under the European Communities Act 1972.

            In  Norway  and  Finland,  we  have  registered  as  a  provider  of
telecommunications services.

Central Region

            In  Austria,  the  Telecommunications  Act (the  "TKG")  provides  a
licensing and regulatory  framework for  telecommunications  activities  since 1
January  1998.  An  independent   authority  has  been  established,   which  is
responsible   for   granting   licences   under  the  TKG  and  for   overseeing
telecommunications  policy, to survey the regulatory framework and to decide and
to settle disputes between operators and licencees.  The authority is created as
a tribunal (Telekom Control Kommission) with 3 members (one of them is a judge).
Beside the Telekom  Control  Kommission,  there exists  another  authority,  the
"Rundfunk  und  Regulierungs  GmbH"  (RTR).  RTR is the agency  for the  Telekom
Control  Kommission  and  is  also  responsible  for  the  administration  (e.g.
numbering).  The  Ministry  of  Traffic,  Innovation  and  Technology  also  has
responsibilities  concerning  telecommunications.   These  responsibilities  are
limited to "telecommunications policing" (e.g., punishment for violations of the
TKG) and drafting new acts or directives.

            COLT Telecom  Austria is  currently  operating  under a  nation-wide
concession which allows it to operate a public fixed telecommunications  network
and to offer leased lines. COLT Telecom Austria is entitled to sell Internet and
data services because of a notification to the regulatory authority.

            A revised  Telecommunications  Act was  published by the Ministry of
Transport in  September  2002,  and is expected to be  presented  to  Parliament
shortly.  The  legislation  is delayed due to  elections in October 2002 and the
establishment of a new government.

            The  German  Telecommunications  Act  of 25  July  1996  provides  a
licensing and regulatory framework for telecommunications activities in Germany.
The national  regulatory  authority is responsible for granting licences for all
types of  telecommunication  activities.  There are  separate  licences  for the
establishment  and operation of public  telecommunications  networks and for the
provision of voice telephony services.

                                      -39-
<PAGE>

            We operate our networks in Germany under a nation-wide fixed network
licence and a nation-wide voice telephony licence.

            In April 2003 the  Ministry  of  Economics  and Labour  published  a
series of legislative  instruments to facilitate  adoption of the new regulatory
package. The Parliamentary  process to enact the new law is expected to begin in
June 2003.

            Switzerland  is  not a  member  of the  E.U.,  but  liberalised  its
telecommunications  market on 1 January  1998 and has broadly  followed the E.U.
liberalisation   policies.   We  have   obtained  a   concession   covering  the
establishment  and operation of our networks and we have registered as a service
provider,  which allows the provision of voice telephony.  The concession grants
similar  rights  and  imposes  similar  obligations  as those in other  European
countries, through the individual licensing system.

            The Swiss  Telecommunication Law does not currently require Swisscom
to unbundle its local loops, but the Decree on  Telecommunications  Services (as
amended from 7 March 2003)  requires full  unbundling of the local loop together
with bitstream and shared access.  This Decree became effective on 1 April 2003.
In practice, the Decree may not be successful in enforcing local loop unbundling
because its  provisions  may be the subject of a Court appeal by Swisscom in the
absence of a mandate for unbundling derived from primary legislation.

            A complete  overhaul  of the  Telecommunication  Law is still  under
discussion in the national parliament and it is expected that it will not become
effective  before the end of 2004 / beginning of 2005.  Changes in the Decree on
Address Elements for  Telecommunication  (AEFV) became effective on 1 April 2003
with new requirements  concerning mainly Value Added Services. A new revision of
the Decree on Price  Announcements (PBV) was recently published for consultation
with 17 April 2003 as the deadline for comments.  The changes concern mainly the
price  aspects of Value Added  Services.  It is expected to become  effective in
January 2004.

South Region

            The Code des Postes et Telecommunications  was amended by the Law of
26 July  1996 to  provide  for the  immediate  and  full  liberalisation  of all
telecommunications  activities in France, with a partial exception applicable to
the provision of telephone  service for the public  between  fixed points.  This
service,  which is the equivalent of the voice  telephony  service as defined in
the E.U. regulatory  framework,  was liberalized  effective 1 January 1998. This
legislation has been complemented by decrees clarifying  detailed aspects of the
telecommunications  environment  such  as the  content  of  authorisations,  the
regulation of interconnection and the financing of universal service. The French
Regulatory  Authority for  Telecommunications  was also created by the Law of 26
July 1996. It participates with the Minister in charge of  Telecommunications in
the  preparation  of  regulations   regarding  the  rights  and  obligations  of
operators,  ensures the  compliance of operators  with  applicable  legislation,
regulations and  obligations  and clarifies the applicable  regulations in areas
such  as  interconnection,   number  portability,  technical  specifications  of
networks and terminal equipment.


                                      -40-
<PAGE>

            We are  entitled to operate a public  telecommunications  network in
all French  regions  of  economic  importance  and to  provide  voice  telephony
services on a nation-wide  basis under a combined L.33-1 and L.34-1 licence most
recently amended on 5 January 2000.

            On 1 April 2003,  the  Ministry  of  Economics  and the  Ministry of
Culture published a draft Bill to implement the new European  regulatory package
into  French  law.  After  consultation  by  interested  bodies,  including  the
telecommunications regulatory authority and the competition authority, the draft
bill will then be submitted to the Conseil d'Etat for review,  and  subsequently
introduced in Parliament.

            Full telecommunications  liberalisation was introduced in Italy on 1
January 1998,  while Spain and Portugal were granted  temporary  exemptions from
the applicability of the E.U. directives by the European  Commission,  resulting
in full market  opening in Spain on 1 December 1998 and in Portugal on 1 January
2000.

            In Italy and  Spain,  there are  multiple  categories  of  licences,
including  separate  as well as  combined  licences  for the  establishment  and
operation  of public  telecommunications  networks on the one hand,  and for the
provision of voice telephony on the other.  Consequently,  the COLT subsidiaries
in these countries have obtained multiple licences (regional network licences in
Milan, Turin and Rome,  combined licences in Madrid,  Barcelona and Valencia,  a
nation-wide  licence  for the  provision  of voice  telephony  in  Italy,  and a
nation-wide  licence for long distance  backbone  network  between the cities in
Spain). In Portugal,  we have obtained a combined  nation-wide licence, but have
only launched operations in and around Lisbon at this time.

            In Italy, the Ministry of Communications published a consultation on
the  implementation  of the  regulatory  package in November  2002. Law n.166 of
1 August 2002 "Provisions  related to  infrastructure  and transport" (art. 41)
which calls on the government to adopt, within one year, one or more legislative
decrees to transpose the directives.

            In Spain, the Council of Ministers approved a new telecommunications
law on 7 March 2003. The Parliament is expected to adopt this Bill before August
2003.

   C.       Organisational structure

            We are the holding company for the following  subsidiaries,  each of
which is a private  company  registered  in its country of  incorporation.  Each
subsidiary operates in its country of incorporation.
<TABLE>
<CAPTION>
                                                                 Date of                          Country of
Name                                                             Incorporation                    Incorporation
----                                                             ---------------------            ------------------------
<S>                                                             <C>                              <C>
COLT Telecom Limited (1)                                         18 October 1996                  England and Wales
COLT Telecom Europe Limited (5)                                  28 June 1996                     England and Wales
COLT Telecom Holdings Limited (5)                                6 December 1999                  England and Wales
COLT Telecommunications* (2)(4)                                  15 December 1989                 England and Wales
City of London Telecommunications Limited (1)                    16 August 1985                   England and Wales
COLT Telecom GmbH* (6)                                           17 March 1995                    Germany
COLT Telecommunications France SAS *(10)                         23 October 1995                  France
COLT Telecom U.S. Corp. (10)                                     19 November 1996                 Massachusetts USA
COLT Internet U.S. Corp. (10)                                    27 September 1999                Delaware USA
</TABLE>

                                      -41-
<PAGE>
<TABLE>
<CAPTION>
                                                                 Date of                          Country of
Name                                                             Incorporation                    Incorporation
----                                                             ---------------------            ------------------------
<S>                                                             <C>                              <C>
COLT Telecom Espana SA* (10)                                     2 January 1997                   Spain
COLT Telecom AG *(9)                                             30 July 1997                     Switzerland
COLT Telecom SA *(10)                                            16 September 1997                Belgium
COLT Telecom SpA *(10)                                           4 November 1997                  Italy
Callshop etc. Limited *(1)                                       16 October 1995                  England and Wales
COLT Netherlands Holding Limited (10)                            17 April 1988                    England and Wales
COLT Telecom BV *(7)                                             28 May 1998                      The Netherlands
COLT Telecom Holding GmbH (10)                                   9 October 1998                   Germany
COLT Telecom Austria GmbH *(10)                                  28 September 1998                Austria
COLT Telecom AB *(10)                                            11 October 1999                  Sweden
COLT Internet AB *(10)                                           5 July 2000                      Sweden
COLT Telecom Ireland Limited *(10)                               31 March 2000                    Ireland
COLT Telecom QUEST Trustees Limited (1)                          3 February 2000                  England and Wales
COLT Telecom A/S (10)                                            20 November 2000                 Denmark
COLT Telecom Pension Trustees Limited (1)                        16 November 2000                 England and Wales
COLT Telecom Finance Limited (5)                                 20 January 2002                  England and Wales
COLT Telecom Share Scheme Trustees Limited (1)                   2 February 2001                  England and Wales
COLT Telecom ENS GmbH *(6)                                       22 November 2001                 Germany
COLT Telecom A/S *(10)                                           9 January 2001                   Norway
COLTEL-Servicos de Telecomunicacoes Unipessoal Lda *(10)         17 January 2001                  Portugal
COLT eCustomer Solutions France SAS *(5)(13)                     6 October 1992                   France
Apogee Communication SAS *(11)                                   7 May 1997                       France
Asthea Ingenerie SARL *(11)                                      18 May 1998                      France
COLT Telecom Finance Euro (4)(12)                                22 April 2002                    England and Wales
COLT Telecom Finance Switzerland (4) (12)                        22 April 2002                    England and Wales
COLT Telecom Finance Denmark (4)(12)                             22 April 2002                    England and Wales
COLT Telecom Finance Sweden (4)(12)                              22 April 2002                    England and Wales
COLT Telecommunications Nominees Limited (1)                     26 March 2002                    England and Wales
COLT Telecom Finland *(10)                                       19 August 2002                   Finland

<FN>
Notes:

*     Operating Companies.
(1)   100% owned by COLT Telecom Holdings Limited.
(2)   100% owned by COLT Telecom Limited.
(3)   100% owned by COLT Telecommunications.
(4)   A company incorporated with unlimited liability.
(5)   100% owned by the company.
(6)   100% owned by COLT Telecom Holding GmbH.
(7)   100% owned by COLT Netherlands Holding Limited.
(8)   100% owned by COLT Telecommunications France SA.
(9)   74.5%  owned by COLT  Telecom  Europe  Limited  and 25.5% by COLT  Telecom
      Holding GmbH.
(10)  100% owned by COLT Telecom Europe Limited.
(11)  100% owned by COLT eCustomer Solutions France SAS.
(12)  99% owned by the company and 1% owned by COLT Telecom Holdings Limited.
(13)  Formerly Fitec SAS

</FN>
</TABLE>

                                      -42-
<PAGE>

D.   Property, Plant and Equipment

            We lease node sites,  office and Internet  space and other  facility
locations  and sales  administrative  offices  in each of the cities in which we
operate  networks.  All of the property that we occupy is on a leasehold  basis,
without major  encumbrances,  and it is all either in use or in preparation  for
use  in  our  operations,  or  it  has  been  identified  as  being  surplus  to
requirements  and the building is being  actively  marketed  either on a part or
full basis either by sub-letting or assignment of the lease, as appropriate.  We
have a 3 year  plan to reduce  the  property  that we  occupy  to  approximately
250,000  square  metres.   We  had  by  3  June  2003  achieved   reductions  of
approximately  20,000 square metres. We believe that our properties,  taken as a
whole,  are in good  operating  condition  and are suitable and adequate for our
business   operations.   At  31  December   2002,  we  leased  an  aggregate  of
approximately   321,495  square  metres,   including  the  following   principal
locations:
<TABLE>
<CAPTION>
   LOCATION                               SIZE                                   USE                                STATUS
   --------                               ----                                   ---                                ------
<S>                               <C>                                 <C>                                       <C>
4 Norton Folgate,                  3,390 square metres                 Office, Node and Storage                  Part marketed
London, England

15 Marylebone Road,                2,902 square metres                 Office, Node and Storage                  Part marketed
London, England

16-22 Gervinusstrasse,             6,328 square metres                 Office, Node and Storage                  Part sub-let
Frankfurt, Germany

Bleichstrasse 52,                  6,973 square metres                 Offices                                   Fully marketed
Frankfurt Germany

Eschersheimer Landstrasse 10,      3,638 square metres                 Office, Node and Storage                  Part surrendered
Frankfurt, Germany

Von-der-Tann-Strasse               5,125 square metres                 Office, Node and Storage                  Part marketed
11, Munich, Germany

90 Uerdinger Strausse,             3,060 square metres                 Office, Node and Storage                  Occupied
Dusseldorf, Germany

25 rue de Chazelles,               2,317 square metres                 Office, Node and Storage                  Occupied
Paris, France

12-14 van de Madeweg,              7,000 square metres                 Office, Node and Storage                  Occupied
Amsterdam, The Netherlands

Telemaco 5,                        4,250 square metres                 Office, Node and Storage                  Part marketed
Madrid, Spain

Viale Jennet 56,                   3,162 square metres                 Office, Node and Storage                  Occupied
Milan, Italy

Beaufort House,                    7,480 square metres                 Offices                                   Occupied
15 St. Botolph Street,
London, England

20/22 Wharf Road                   3,470 square metres                 Storage                                   Fully marketed
London, England

Samuel House                       185 square metres                   Node                                      Occupied
St. Albans Street Haymarket,
London, England

One Canada Square, Canary Wharf,   28 square metres                    Node                                      Occupied
Isle Of Dog,
London, England
</TABLE>

                                      -43-
<PAGE>
<TABLE>
<CAPTION>
LOCATION                           SIZE                                USE                                      STATUS
--------                           ----                                ---                                      ------
<S>                               <C>                                 <C>                                       <C>
City Forum, City Road,             2,330 square metres                 Node                                      Occupied
London, England

Drebahn 1, Deutschlandhaus,        2,048 square metres                 Office, Node and Storage                  Occupied
Hamburg, Germany

La Defense 5, Le Lafayette 2,      272 square metres                   Offices                                   Occupied
Place DesVosges, Paris, France

Uhlandstrasse 181 - 183,           1,800 square metres                 Office, Node and Storage                  Part marketed
Berlin, Germany

Rue De La Fontaine Au Roi,         6,131 square metres                 Storage                                   Fully marketed
21 Paris, France

Murtschenstrasse, 27               3,566 square metres                 Office, Node and Storage                  Occupied
Baslerpark, Baslerstrabe
25, Zurich, Switzerland

Murtschenstrasse, 27               3,444 square metres                 Office and Storage                        Fully marketed
Baslerpark, 2
Baslerstrabe 25,
Zurich, Switzerland

Rue De Planeur, 10                 3,665 square metres                 Offices, Storage                          Occupied
Brussels, Belgium

1430 Chaussee De                   1,100 square metres                 Offices                                   Occupied
Haecht, Brussels, Belgium

Rue De Notre Dames Des             1,606 square metres                 Offices                                   Fully marketed
Victoires, 46 129 Rue
Montmartre, Paris, France

Theodor Haus                       3,060 square metres                 Office, Node and Storage                  Occupied
Uerdinger Strasse, 90
Dusseldorf, Germany

Kartner Ring 12,                   2,374 square metres                 Office, Node and Storage                  Occupied
Vienna, Austria

Poplar Business Park,              485 square metres                   Offices                                   Occupied
Poplar High Street,
Aspen Way, Tower
Hamlets England

Magnusstasse 13-15,                1,612 square metres                 Office, Node and Storage                  Part marketed
Cologne, Germany

Kronenstrasse 25,                  1,750 square metres                 Office, Node and Storage                  Occupied
Stuttgart, Germany

Rue Des Teinturiers,               2,523 square metres                 Office, Node and Storage                  Occupied
9 Lyon 3eme, Lyon, France

Sovereign House,                   1,898 square metres                 Office, Node and Storage                  Occupied
1 King John Court,
London, England
</TABLE>

                                      -44-
<PAGE>
<TABLE>
<CAPTION>
LOCATION                           SIZE                                USE                                      STATUS
--------                           ----                                ---                                      ------
<S>                               <C>                                 <C>                                       <C>
Gran Via De Les Corts              1,697 square metres                 Office, Node and Storage                  Occupied
Catalanes, 8-10
Hospitalet De Llobregat,
Barcelona, Spain

Rue Wattignes, 60/62,              4,121 square metres                 Internet Solution Centre                  Part marketed
Paris, France

Rue De Montbrillant 36,            1,481 square metres                 Office, Node and Storage                  Occupied
Geneva, Switzerland

306 Hanuaer                        2,620 square metres                 Internet Solution Centre                  Occupied
Landerstrasser,
Frankfurt, Germany

63 Boulevard Bessieres,            2,941 square metres                 Internet Solution Centre                  Occupied
Paris, France

93 Avenue Du Prado,                870 square metres                   Office, Node and Storage                  Occupied
Marseille, France

Groothandelsgebouw,                2,653 square metres                 Office, Node and Storage                  Occupied
Rotterdam,
The Netherlands

Environment Park, Via              3,386 square metres                 Office, Node and Storage                  Occupied
Livorono 60, Turin, Italy

Princes Court, Wapping Lane,       5,000 square metres                 Internet Solution Centre                  Occupied
London, England

Richard-Nneutra-Gasse 10,          7,000 square metres                 Internet Solution Centre                  Fully marketed
Vienna Austria

Nooderlaan 121,                    1,727 square metres                 Office Node and Storage                   Occupied
Antwerp, Belgium

1930 Zaventem,                     6,850 square metres                 Internet Solution Centre                  Fully marketed
Brussels, Belgium

Paepsemlaan 16-16a,                1,413 square metres                 Internet Solution Centre                  Occupied
Paepsem Business Park,
Anderlecht, Belgium

1430 Chaussee de Haecht,           1,100 square metres                 Office Node and Storage                   Occupied
Brussels, Belgium

St. Stephens Street                1,645 square metres                 Office, Node and Storage                  Occupied
Central Gate, New Town
Road, Birmingham, England

126 Chapman Street,                1,472 square metres                 Storage                                   Occupied
Lehman Street, London,
England
</TABLE>


                                      -45-
<PAGE>
<TABLE>
<CAPTION>
LOCATION                           SIZE                                USE                                      STATUS
--------                           ----                                ---                                      ------
<S>                               <C>                                 <C>                                       <C>

Chase Road, Park                   8,412 square metres                 Internet Solution Centre                  Occupied
Royal, London, England

79 Cavendish Street,               3,344 square metres                 Offices                                   Fully marketed
London, England

152 Avenue du Prado,               330 square metres                   Offices                                   Occupied
Marseille, France

Cap Horn, Les Ulis,                9,130 square metres                 Internet Solution Centre                  Occupied
Cortebeouf, Paris, France

23-27 RuePierre                    11,340 square metres                Office, Node and Storage                  Occupied
Valette, Malakoff,
Paris, France

46-49 Wieberstrasse,               2,693 square metres                 Office, Node and Storage                  Occupied
Berlin, Germany

Wiebestrasse 49 Werk               7,948 square metres                 Internet Solution Centre                  Occupied
3 Berlin, Germany

Walter Klob Strasse 13,            3,687 square metres                 Office, Node and Storage                  Fully marketed
Frankfurt, Germany

4 Heriotstrasse,                   21,275 square metres                Offices                                   Part marketed
Frankfurt, Germany

Langer Kornweg 34,                 12,494 square metres                Internet Solution Centre                  Fully marketed
Kelsterbach,
Frankfurt, Germany

Schmidstrasse 12,                  2,320 square metres                 Offices                                   Occupied
Frankfurt, Germany

ABC Strasse, 19,                   1,239 square metres                 Offices                                   Fully marketed
Hamburg, Germany
</TABLE>

                                      -46-
<PAGE>
<TABLE>
<CAPTION>
LOCATION                           SIZE                                USE                                      STATUS
--------                           ----                                ---                                      ------
<S>                               <C>                                 <C>                                       <C>
Sportalle 72, 22335                5,603 square metres                 Internet Solution Centre                  Fully marketed
Hamburg, Germany

Wendenstrasse 255,                 1,800 square metres                 Office, Node and Storage                  Occupied
Hamburg, Germany

Calenberger Neustadt,              1,760 square metres                 Office, Node and Storage                  Part marketed
Sheet 1389, Hanover, Germany

26 Munchner Strasse,               2,830 square metres                 Office, Node and Storage                  Occupied
Uterfohring, Munich, Germany

11 Nawiasky Strasse,               8,108 square metres                 Internet Solution Centre                  Fully marketed
Munich, Germany

Foxes Property, Long               6,316 square metres                 Internet Solution Centre                  Fully marketed
Mile Road, Walkinstone,
Dublin, Ireland

Seagrave House, 19-20              459 square metres                   Offices                                   Fully marketed
Earlsfort Terrace,
Dublin, Ireland

East Wall Road, Docklands,         1,533 square metres                 Office, Node and Storage                  Occupied
Dublin, Ireland

Via Lancetti, Milan, Italy         6,735 square metres                 Office, Node and Storage                  Occupied

127-129 Via Simone                 4,900 square metres                 Office, Node and Storage                  Occupied
Martini, Rome, Italy

Luchtvaartstraat,                  2,275 square metres                 Internet Solution Centre                  Occupied
Amsterdam,
The Netherlands

Calle Acero 5-9,                   8,850 square metres                 Internet Solution Centre                  Part marketed
Y Motores 83-89,
Barcelona, Spain

Poligono Industrial                5,000 square metres                 Internet Solution Centre                  Occupied
Monoteras,
Madrid, Spain

Borgmester Christiansens           4,963 square metres                 Office, Node and Storage                  Occupied
Gade 55,
Copenhagen, Denmark

Oxen Mindre 33,                    1,906 square metres                 Office, Node and Storage                  Occupied
Luntmakargatan 18,
Stockholm, Sweden
</TABLE>

                                      -47-
<PAGE>
<TABLE>
<CAPTION>
LOCATION                           SIZE                                USE                                      STATUS
--------                           ----                                ---                                      ------
<S>                               <C>                                 <C>                                       <C>
Karlsrogartan 2, Solna,            10,726 square metres                 Internet Solution Centre                 Fully marketed
Stockholm, Sweden

Umbau Bardnerstrasse               7,250 square metres                 Internet Solution Centre                  Occupied
820, Zurich, Switzerland

Bouwery 71-73,                     9,148 square metres                 Internet Solution Centre                  Fully marketed
Amstelveen, Amsterdam
The Netherlands

Coriander Avenue,                  74 square metres                    Storage                                   Occupied
Clifton, Street,
London, England

Estrada Da Outorela,               2,174 square metres                 Office, Node and Storage                  Occupied
Carnaxide, Oeiras,
Lisbon, Portugal

<FN>
Fully marketed = the whole property is actively being marketed
Part marketed = only a portion of the property is actively being marketed
</FN>
</TABLE>
ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     A.     Operating Results

            The following  discussion and analysis should be read in conjunction
with  our  financial  statements  and  notes  thereto,  incorporated  herein  by
reference  from our 2002  Annual  Report.  Our  financial  statements  have been
prepared in accordance  with U.K. GAAP,  which differs in certain  respects from
U.S.  GAAP.  See  note  25 to our  financial  statements  for a  summary  of the
principal  differences  between  U.K.  GAAP and U.S.  GAAP as they relate to us.
Unless otherwise noted, all amounts are presented in British pounds sterling.

            The results for the three years ended 31 December  2002  include the
impact of exceptional transactions and provisions.  We believe that it is useful
for investors to be also provided with an analysis of the  underlying  financial
and  operating  results  of the  Company  before  the  impact of these  material
non-operational  amounts.  Therefore in the following  discussion  and analysis,
reference is made to both UK GAAP and non UK GAAP measurements.  Pursuant to the
requirements  of  Regulation  G under the  Securities  Act,  we have  provided a
reconciliation  of  non-GAAP   financial   measurements  to  the  most  directly
comparable GAAP financial measurement.  The table below lists these measurements
and starting with UK GAAP identifies the reconciling  items to arrive at the non
UK GAAP measurement.


                                      -48-
<PAGE>
<TABLE>
<CAPTION>
KEY FINANCIAL DATA                                                                2002               2001               2000
                                                                             (pound)'m          (pound)'m          (pound)'m
<S>                                                                           <C>                 <C>                 <C>
Turnover                                                                       1,027.2              905.7              687.0
Infrastructure sales
                                                                                  --                  3.8               46.2
                                                                               ---------------------------------------------
Turnover excluding infrastructure sales                                        1,027.2              901.9              640.8
                                                                               =============================================
Cost of sales                                                                  1,451.9              941.7              566.9
Exceptional items                                                                526.3              135.8               --
Costs associated with infrastructure sales                                        --                  2.4               27.2
                                                                               ---------------------------------------------
Cost of sales before exceptional items and costs
associated with infrastructure sales                                             925.6              803.5              539.7
                                                                               =============================================
Interconnection and network costs                                                731.9              704.9              478.2
Exceptional items                                                                 18.3               62.4               --
Costs associated with infrastructure sales                                          --                2.4               27.2
                                                                               ---------------------------------------------
Interconnection and network costs before exceptional
items and costs associated with infrastructure sales                             713.6              640.1              451.0
                                                                               =============================================
Network depreciation                                                             720.0              236.8               88.7
Exceptional items                                                                508.0               73.4               --
                                                                               ---------------------------------------------
Network depreciation before exceptional items                                    212.0              163.4               88.7
                                                                               =============================================
Gross profit (loss)                                                             (424.7)             (36.0)             120.1
Margin on infrastructure sales                                                      --               (1.4)             (19.0)
Exceptional interconnect and network costs                                        18.3               62.4               --
Exceptional network depreciation                                                 508.0               73.4               --
                                                                               ---------------------------------------------
Gross profit before margin on infrastructure sales
and excluding exceptional cost of sales                                          101.6               98.4              101.1
                                                                               =============================================
Operating expenses                                                               353.9              323.9              205.0
Exceptional items                                                                 61.9               39.8               --
                                                                               ---------------------------------------------
Operating expenses before exceptional items                                      292.0              284.1              205.0
                                                                               =============================================
Selling, general and administration costs                                        261.1              265.0              181.7
Exceptional items                                                                 19.0               27.9               --
                                                                               ---------------------------------------------
Selling, general and administration costs before
exceptional items                                                                242.1              237.1              181.7
                                                                               =============================================
Other depreciation and amortisation                                               92.9               59.0               23.3
Exceptional items                                                                 43.0               12.0               --
                                                                               ---------------------------------------------
Other depreciation and amortisation before
exceptional items                                                                 49.9               47.0               23.3
                                                                               =============================================
Loss for period                                                                 (718.3)            (360.4)            (116.9)
Gross profit on infrastructure sales                                                --               (1.4)             (19.0)
Exceptional interconnect and network cost of sales                                18.3               62.4               --
Exceptional network depreciation                                                 508.0               73.4               --
Exceptional selling general and administration costs                              19.0               27.9               --
Exceptional other depreciation and amortisation                                   43.0               12.0               --
Exceptional other (income) expense                                              (106.1)             (56.0)              --
                                                                               ---------------------------------------------
Loss for period before margin on infrastructure sales
and exceptional items                                                           (236.1)            (242.1)            (135.9)
                                                                               =============================================
</TABLE>

                                      -49-
<PAGE>
            We are a leading  provider  of high  bandwidth  data,  Internet  and
advanced telecommunications services to business and government customers across
Europe.  We operate  fibre-optic  networks in the major  financial  and business
centres of Europe with each of our local  city-networks  and  Internet  Solution
Centres inter-linked to form a single IP-based pan-European network.

            At  31  December  2002,  we  operated   approximately  20,000  route
kilometres (12,420 route miles) of integrated  international digital fibre optic
network, providing long distance international service to customers,  linking 32
major cities in 13 countries augmented by a further 27 points of presence and 11
Internet  solution  centres across Europe to customers in 9,238  buildings.  Our
revenues for the year ended 31 December 2002 were  approximately  (pound)1,027.2
million.

            Revenue in 2002 was (pound)1,027.2  million, an increase of 13.4% on
2001.   Excluding   infrastructure   sales  made  in  2001,  as  there  were  no
infrastructure  sales in 2002,  the revenue  increase was 13.9% . While the slow
down in economic  growth across Europe has impacted the level of demand from our
customers,  particularly  those within the wholesale  sector, we have still been
able to grow our overall  revenues by attracting new customers,  introducing new
services and developing our level of business with existing customers. The gross
loss for 2002 was (pound)424.7  million, up (pound)388.7  million from the gross
loss reported in 2001. The increase in the loss was caused by an increase in the
cost of sales associated with exceptional items.

            Operating  expenses  increased from (pound)323.9  million in 2001 to
(pound)353.9  million in 2002.  Operating expenses before exceptional costs also
increased from (pound)284.1 million in 2001 to (pound)292.0 million in 2002, but
reduced as percentage of turnover before infrastructure sales from 31.5% in 2001
to 28.4% in 2002.

            The loss for 2002 was (pound)718.3  million and included exceptional
items  of  (pound)482.2   million.   The  loss  before   exceptional  items  and
infrastructure  sales of (pound)236.1  million was down (pound)6.0  million from
the corresponding level in 2001.

            Capital expenditure on network,  services and systems infrastructure
totalled  (pound)412.1  million in 2002, a reduction of 49%.  Importantly,  this
reduction is a result of  completion  of the  infrastructure  build phase of the
business plan at the end of 2001. Capital  expenditure paid for in 2002 included
approximately  (pound)125  million  in  respect  of prior  years  infrastructure
investment.

            At 31 December  2002,  we had balances of cash and liquid  resources
totalling (pound)934.9 million. We also took advantage of the volatile financial
markets in 2002 to purchase  (pound)198.9  million for our notes for (pound)97.2
million.  We will  continue to monitor  the trading  levels of our notes and may
take advantage of other such opportunities to enhance  shareholder value if they
present themselves.

            Reflecting the current economic  environment it is prudent to ensure
that  our  asset  base  remains  aligned  with  the  realities  of  the  market.
Accordingly,  we have  written down the book value of certain  assets  including
parts of the  network,  equipment  and  electronics  and  selected  IT  software
developments and goodwill.  This action has resulted in an exceptional charge in
our 2002 results of (pound)551.0  million. We also announced a further reduction
in staff  levels of up to 800 people and the  combined  provisions  recorded  in
2002, including the provision related to the staff reduction of 500 announced in
the 2001 Annual  Report,  amounted to  (pound)37.3  million,  which we expect to
utilise  this  year.  Following  completion  of the  infrastructure  build,  and
alignment of resources to the harvesting of the opportunities  made available by
the  pan-European  network,   significant  operational  efficiencies  have  been
identified and are being implemented.

                                      -50-
<PAGE>
            We are a holding company for our  subsidiaries  and have no material
business  operations,  sources  of income or assets  other than the stock of our
subsidiaries. We currently conduct our operations through 38 direct and indirect
wholly-owned  subsidiaries.  All of our obligations under our outstanding senior
notes described in note 15 to our financial statements are our own, not those of
our subsidiaries.  Because we conduct our operations through  subsidiaries,  our
cash flow and our  ability to meet our  obligations  under the notes,  including
payment of principal,  premium, if any, and interest, depends upon the cash flow
of our subsidiaries and their dividends,  fees, loans, and other payments to us.
Our subsidiaries  have no obligations to make any payments under the notes or to
make funds available to us so that we can make payments.

            Some of our  subsidiaries  are governed by local laws  regarding how
much they may pay in dividends or in what situations they may pay dividends. For
example,  these laws may prohibit  dividend  payments when net assets fall below
subscribed share capital, when the subsidiary lacks available profit or when the
subsidiary fails to meet certain capital and reserve requirements.  In addition,
some  of  our  financing  arrangements  also  limit  the  situations  where  our
subsidiaries may pay us dividends or make loans or other distributions.

            Our subsidiaries  have not guaranteed our payment  obligations under
the notes.  Thus,  our right to receive  the assets of any  subsidiary  upon its
liquidation or  reorganisation is subordinated to the claims of the subsidiary's
creditors,  except  where  we are a  creditor  of the  subsidiary.  If we were a
creditor of a subsidiary, our right to be paid back would be subordinated to any
indebtedness of the subsidiary that was either:

      o     secured by a security interest in that subsidiary's assets, or

      o     senior to that subsidiary's indebtedness to us.

            Our  telecommunications   services  are  broadly  grouped  into  two
categories, switched and non-switched, and include high bandwidth data, Internet
and  voice  services.  Internet  services  include a range of  Internet  access,
transit,  hosting,  as well as additional ISC related services  enabling content
distribution   and  other  value  added   services.   We  currently  offer  both
non-switched  and switched  services in all the markets in which we operate.  In
future  markets,  we expect we will  continue to  introduce  both  switched  and
non-switched  services  to the extent  that  regulatory  conditions  permit.  In
addition,  we offer DSL based services encompassing a range of high speed access
techniques.  Internet  services  offer  corporate  end users and other ISPs high
quality, high speed data rates while providing users the benefits of both an ATM
transatlantic  backbone  network  as well as our local SDH access  network.  The
following is a brief description of our services:

Switched services

            Through  switching centres in each city, we offer our customers high
quality local, national and international switched  telecommunications  services
to the extent  permitted by regulation in each country.  In each of our markets,
we offer a full range of switched services. Customers include end users directly
connected  to our  network,  telecommunications  carriers  and end users,  which
connect to our  network  indirectly  through the  network of the  national  PTO.
Switched  service  revenue  is  based  on  customer  minutes  of use as  well as
destination of calls.  Most customers  utilise our network as one of two or more
potential  service  providers  and  typically  have the  ability to  increase or
decrease their use of our services at little or no cost. We compete based on our
ability to offer the best value in terms of quality and price to customers  that
desire reliable, high quality and cost effective services.  Pricing for switched
services has decreased as competition  has increased,  and we believe this trend
will continue for the foreseeable future. Price reductions will reduce our gross
margins if costs do not decrease at the same rate.

                                      -51-
<PAGE>

Non-switched services

            We offer a full range of  non-switched  services  including  private
wire,  VPN,  LAN  interconnection,  video and  Internet  services.  Non-switched
revenue is based on monthly  rates for specific  services and does not generally
vary with usage  levels.  Customer  contracts  generally  have one or three-year
terms and, upon expiration,  are either renegotiated or automatically  converted
to  month-to-month  arrangements.  Pricing  is  based on a  number  of  factors,
including  bandwidth,  distance  and  charges by the  dominant  local  provider,
usually the national PTO, for comparable services. Although we are often not the
only service provider to our customers,  we have been able to increase our share
of a customer's  non-switched services through service quality,  flexibility and
the ability to quickly respond to customer  requests.  Once service is initiated
with  a  particular  customer,  we  seek  to  expand  non-switched  services  by
increasing  the number of  services  installed  and the  bandwidth  of  services
provided.  In  addition,  we will  seek to  offer  non-switched  customers  more
services including switched services as regulatory conditions permit.

            We offer a portfolio of Internet  products  including high bandwidth
leased line  Internet  access  utilising our IP network and  world-wide  peering
agreements.  We also  provide a  permanent  connection  for the  delivery  of IP
traffic for customers reselling  bandwidth.  A co-located server housing service
that provides  secure rack space enabling  customers to locate their own servers
and  telecommunications  equipment in secure  sites with a dedicated  high-speed
Ethernet  connection  to  our  Internet  backbone  is  available.  Supplementary
value-added products and services,  including managed access routers,  firewalls
and content filtering are also offered.

Segmental organisation

            We operate in a single business segment,  telecommunications  and in
geographical areas as discussed below. Country activities and local business are
managed by local management teams. These local management teams are co-ordinated
through a regional and functional organisational structure.

            In 2001,  we reported our  segments as UK,  Germany,  France,  South
Region and North Region,  which reflected our management  structure at the time.
In February  2002,  we announced a new  organisational  structure  consisting of
three  geographic  regions  (North,  South  and  Central)  and two  pan-European
businesses, European Network Services and eBusiness. During 2002, a decision was
made to integrate eBusiness into each country operation.  However, we do monitor
eBusiness  revenue  separately.

            Our organisational  structure is now based on geographic regions and
we consider our reportable segments to be North, South and Central.  Prior years
have been restated on that basis. We define our geographic regions as follows:

         Region                    Countries comprising the region
         ------                    -------------------------------

         North Region              Belgium, Denmark, Ireland, The Netherlands,
                                   Sweden and the United Kingdom

                                      -52-
<PAGE>

         South Region              France, Italy, Portugal and Spain

         Central Region            Austria, Germany and Switzerland

Network operations

            The costs associated with the initial  installation and expansion of
our existing networks,  including development,  installation and early operating
expenses, have been, and in any new markets would be expected to be, significant
and result in negative cash flow. Capital expenditures on network,  services and
systems infrastructure totalled (pound)412.1 million in 2002 a reduction of 49%.
Importantly,  this   reduction  is  as  a  result  of  the   completion  of  the
infrastructure  build  phase of the  business  plan.  With this phase  complete,
future capital  investment  will not only more closely mirror revenue growth but
is  expected  to  decline  in both  absolute  terms and as a percent  of revenue
growth. Capital expenditure paid for in 2002 included  approximately  (pound)125
million in respect of prior years infrastructure investment.

Critical Accounting Policies

            Our  consolidated  financial  statements  are prepared in accordance
with U.K. GAAP, which require us to make estimates and  assumptions.  We believe
that of our significant  accounting  policies,  which are described in Note 1 to
our consolidated financial statements  incorporated herein by reference from our
2002 Annual Report,  the following are important to our financial  condition and
results  and  involved  a higher  degree of  judgment  and  complexity,  and are
therefore considered critical. In the consolidated financial statements, we also
provide a  reconciliation  of our net loss and net equity from the reported U.K.
GAAP, to U.S. GAAP.

Revenue Recognition

            Under UK GAAP,  revenue for switched  services,  which are generally
billed in arrears,  and for non-switch and other  services,  which are generally
billed in advance,  are  recognised  when  services are  provided.  Installation
revenue  associated  with these services is recognised in the month in which the
installation takes place and in management's  estimation is proportionate to the
attributable  direct costs.  Under U.S.  GAAP, in accordance  with S.E.C.  Staff
Accounting  Bulletin  101  "Revenue   Recognition",   installation  revenue  and
attributable direct costs are deferred and recognised over the expected customer
relationship  period which is estimated based upon our historical  experience of
customer  retention  patterns.  This requires us to assess the period management
believes the customer is expected to maintain a service  contract with us, which
may exceed the contract term.

            Revenue  recognised is adjusted to reflect  changes in  management's
estimates for provisions required for possible billing or service credits.

            Under UK GAAP, revenue  attributable to infrastructure  sales in the
form of indefeasible  rights of use agreements  ("IRUs")  resulting from sale of
inventory  held  for  future  sale is  recognised  at the time of  delivery  and
acceptance  by the  customer.  Under  U.S.  GAAP,  these  sales are  treated  as
operating  leases with the asset  retained  on our balance  sheet and the income
deferred  over the length of the IRU term.  The  revenue  recognised  in 2001 is
disclosed in note 2 to the consolidated financial statements incorporated herein
by reference from the 2002 Annual Report.  There were no infrastructure sales in
2002,  hence the  adjustment  reflects  the  recognition  of revenue  previously
deferred.

                                      -53-
<PAGE>

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.

            When  telephony  traffic  is carried  by other  operators,  we incur
interconnect  costs. Some interconnect  costs are subject to regulation by local
regulatory authorities in the countries in which we operate. A determination may
give rise to amendments,  most often in the form of reductions,  to interconnect
costs relating to prior periods.

            We review our  interconnect  costs on a regular basis and adjust the
rate at which  these  costs  are  charged  in the  profit  and loss  account  in
accordance  with  the  estimated  interconnect  costs  for the  current  period.
Amendments to costs  relating to prior  periods are made in the current  period,
but only when recovery or payment of these amounts is reasonably certain.

Receivables

            We  perform  ongoing  reviews  of  the  bad  debt  risk  within  our
receivables and make provisions to reflect our views of the financial  condition
of our customers and their ability to pay in full for amounts owing for services
provided.  Such  reviews,  particularly  in the  current  environment  of slower
economic growth in Europe and turbulence in the  telecommunications  sector, are
difficult and the financial  condition of certain customers may be worse than is
perceived by management, resulting in the need for additional provisions.

Tangible fixed assets

            Under U.K.  GAAP,  tangible  fixed assets are recorded at historical
cost. Network infrastructure and equipment comprises assets purchased and built,
at cost, together with capitalised labour,  directly attributable to the cost of
construction.  Under U.S. GAAP, the interest cost incurred  during the period of
construction of the network infrastructure is capitalised as part of the cost of
the assets.

            The annual depreciation charge is sensitive to the estimated service
lives  allocated to each asset type.  We regularly  review these asset lives and
change them when it is considered  necessary to reflect our current estimates of
their  remaining lives in light of changes in technology,  the actual  condition
and expected utilisation of the assets concerned.

Impairment

            Under U.K.  GAAP,  tangible and  intangible  assets are reviewed for
impairment  whenever events or changes in  circumstances  indicate that carrying
amounts may not be recoverable. Goodwill is also reviewed for impairment at the


                                      -54-
<PAGE>
end of the  first  financial  year  after  acquisition.  An  impairment  loss is
recognised  to the  extent  that the  carrying  amount of an asset  exceeds  its
recoverable  amount,  being the  higher  of its value in use and net  realisable
value.

            The impairment  charge taken in 2002 was computed in accordance with
our accounting policy and the requirements of FRS 11 'Impairment of Fixed Assets
and  Goodwill'.  The carrying  amounts of the relevant  assets were  compared to
recoverable  amounts represented by the present value of the cash flows expected
to arise from their use, using a discount rate of 13.7%.

            Under U.S. GAAP, FAS 144  'Accounting for the impairment or disposal
of long-lived assets' requires  long-lived assets to be evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
a long-lived  asset is not  recoverable.  On a regular basis,  the  undiscounted
estimated  future net cash flows  associated  with the asset are compared to the
assets  carrying  amount to determine if an  impairment  has  occurred.  If such
assets are deemed impaired,  an impairment loss equal to the amount by which the
carrying  amount exceeds the fair value of the assets is  recognised.  If quoted
market  prices for the assets are not  available,  the fair value is  calculated
using the present value of estimated expected future net cash flows.

            Under U.S.  GAAP,  FAS 142  'Goodwill and other  intangible  assets'
requires that goodwill and intangible assets with indefinite useful lives not be
amortised but should be tested for impairment annually. This impairment test has
been included in the review detailed above.

            Considerable  management judgment is necessary in the preparation of
the forecasted cash flows.  While the calculation of the discounted  future cash
flows projected to arise from the use of assets is based upon  management's best
estimates of such cash flows and the required  discount rate, these estimates do
contain an amount of  uncertainty.  Management's  estimates may change over time
and  actual  results  may  differ  from  those  estimates  due to the  economic,
technological and competitive environment in which we operate.

            Resulting  from such a review,  we  recorded  for the year  ended 31
December  2002 an  impairment  provision  of  (pound)551.0  million  for certain
long-lived assets.

Deferred tax

            In accordance  with U.K.  GAAP,  from time to time we must report an
item of income, deduction,  gain, or loss for financial accounting purposes in a
financial  period prior to the financial period in which we must report the same
item  for tax  accounting  purposes.  When we  recognise  income  for  financial
accounting  purposes  before we do for tax purposes,  then U.K. GAAP rules state
that we should accrue, as a liability, our estimate of the tax to be paid in the
future, using the average tax rates that are expected to apply in the periods in
which the timing  differences are expected to reverse (based on the tax laws and
rates in effect at the  balance  sheet  date).  Similarly,  when we  recognise a
deduction  or a loss for  financial  accounting  purposes  before we can for tax
purposes,  we should accrue, as an asset, our estimate of the future tax benefit
we will  receive  where it is more  likely  than not that there will be suitable
taxable  profits in the future from which the asset can be recovered.  We do not
discount these estimated  assets or liabilities.  See Note 8 to our consolidated
financial  statements  from our  2002  Annual  Report,  incorporated  herein  by
reference, for disclosure of the amount of our deferred tax asset.


                                      -55-
<PAGE>

            Under U.S.  GAAP  rules,  we  account  for  deferred  tax assets and
liabilities on temporary differences between income for financial accounting and
tax purposes,  and we reduce the value of deferred tax assets (that is, deferred
tax  benefits)  to the amount that we consider  likely to be recovered on future
tax returns.

Provisions

            Our  provisions  are  established  based on our best estimate of the
amounts  necessary  to settle  existing  obligations  or  commitments  as of the
balance sheet date.

            In  2001,  we  made   provision  for  future  rents,   services  and
re-instatement  costs  associated with certain ISCs being closed or "mothballed"
and excess  leased  space.  Management  must  estimate the  financial  impact of
sustaining  contractual  commitments,  unutilised  facilities,  exiting  certain
activities,  sublease  arrangements  and  disposal and  contractual  termination
costs. The estimate for the provision required is inherently  judgmental and may
change based upon actual  experience of future void periods and costs associated
with  dilapidation  and costs of  re-instatement  during  the course of the void
period and at the  conclusion  of the lease  terms.  At 31 December  2002,  such
provisions amounted to (pound)59.3 million.

            In February 2002, we announced an operational  effectiveness  review
programme to reduce staff levels by approximately  500. On 27 September 2002, we
announced a pan-European  organisational  restructuring following the completion
of the  construction  of our core network  infrastructure,  which is expected to
result in the reduction of our workforce by 800  additional  employees  over the
following twelve months.

            Exceptional charges, amounting to (pound)37.3 million for the twelve
months ended 31 December  2002,  represent the provisions in respect of the cost
of these programmes and are expected to be utilised during 2003.

Year Ended 31 December 2002 compared to Year Ended 31 December 2001

Turnover

           Turnover   increased   from   (pound)905.7   million   in   2001  to
(pound)1,027.2 million in 2002, an increase of 13.4%.  Excluding  infrastructure
sales in 2001 the revenue increase was 13.9%. There were no infrastructure sales
in 2002.  While the slowdown in economic  growth  across Europe has impacted the
level of demand from our  customers,  particularly  those  within the  wholesale
sector,  we have been able to grow overall revenues by attracting new customers,
introducing  new services and  developing  the level of business  with  existing
customers.  Turnover from switched services increased from (pound)532.6  million
in 2001 to (pound)623.4  million in 2002.  Growth in switched revenue reflects a
change in mix towards  higher  revenue  per minute  business.  Switched  minutes
decreased  from 20.2 billion in 2001 to 20.0 billion in 2002.  Average  switched
revenue per minute increased by 18% in 2002,  compared to 2001. Carrier revenues
represented  34% of total  switched  revenue in 2002  compared with 36% in 2001.
Turnover from non-switched services, increased from (pound)366.7 million in 2001
to  (pound)402.1  million  in 2002.  Growth in  non-switched  and other  revenue
reflects  continuing  growth in demand for  local,  national  and  international


                                      -56-
<PAGE>
bandwidth  from both  corporate and  wholesale  customers,  partially  offset by
circuit cancellations from selected carriers exiting the market or rationalising
their  networks.  Increased  turnover also reflects  growth in Internet  related
services including  hosting,  the introduction of new services including IP-VPN,
expansion into new markets and the inclusion of the Fitec results  following its
acquisition  in July 2001.  At 31 December  2002 we had over 20 million  private
wire voice  grade  equivalents  in service,  an  increase of 33%  compared to 31
December  2001 and 2,774 racks  installed,  an  increase  of 25%  compared to 31
December 2001.  Non-switched  turnover from retail customers  represented 72% of
total  non-switched  turnover in 2002 compared  with 62% in 2001.  Turnover from
other activities was (pound)1.8  million in 2002 and (pound)6.3 million in 2001.
Turnover  from  other  activities  in  2001  included   (pound)3.8   million  of
infrastructure sales. There were no infrastructure sales during 2002.

North Region

            At 31 December 2002 we had 11 city-networks operational:  Amsterdam,
Antwerp,  Birmingham,  Brussels,  Copenhagen,  Dublin, London,  Manchester,  The
Hague,  Rotterdam  and  Stockholm,  which  was  unchanged  from  the  number  of
city-networks  at the end of  2001.  Turnover  increased  by 6% to  (pound)331.5
million compared to 2001. Growth in turnover  reflected our expanded  geographic
reach,  expanded  product  range as well as our  success in  extending  sales to
existing and new customers.

            343  buildings  were added during the year  bringing the total at 31
December 2002 to 2,730.  Switched  minutes  carried during the year decreased by
29.4% to  5,457  million  compared  to 7,733  million  in 2001 as a result  of a
reduction  in low priced  switched  minute  business.  Private  wire voice grade
equivalents at the end of the year totalled 8.749 million,  an increase of 45.5%
over the position at the end of 2001. There were 966 racks in service at the end
of the year compared to 651 racks at the end of 2001  reflecting  the continuing
growth in demand.  DSL based services were available from 106 central offices at
the end of the year compared  with 59 at the end of 2001,  also an indication of
greater demand.

            During the year we were  chosen as a primary  contractor  to provide
service to Transport for London. This is a minimum (pound)15 million transaction
and the partnership will have a term of at least five years. We also won a major
contract to provide high bandwidth services to the Belgian government as part of
its e-government  project, and NASDAQ Europe placed a major IPVPN order covering
30 sites in 6 countries.

            Among other significant new customers were Cadbury  Schweppes,  RTE,
the Irish national television service, Oracle, Siemens and Rabobank.

            In The  Netherlands  we were selected by the Dutch  government to be
one of its four  providers of web hosting  activities  and in Germany we won new
business  with the Federal  Bureau of  Statistics  and the Humboldt  University,
Berlin.  We were also  successful in gaining a major contract for IPVPN services
with SWIFT, the supplier of secure messaging  services to the financial industry
and we also provided an IPVPN solution for SwapsWire, creating the world's first
IP-based electronic dealing network for the OTC derivatives market.

Central Region

            At 31  December  2002,  there  were  11  city-networks  operational:
Berlin,  Cologne,  Dusseldorf,  Frankfurt,  Geneva,  Hamburg,  Hanover,  Munich,
Stuttgart,   Vienna  and  Zurich  which  was   unchanged   from  the  number  of
city-networks  at the end of 2001.  Turnover  increased  by 13% to  (pound)429.8
million compared to 2001. Growth in turnover  reflected our expanded  geographic
reach,  expanded  product  range as well as our  success in  extending  sales to
existing and new customers.

                                      -57-
<PAGE>

            356  buildings  were added during the year  bringing the total at 31
December to 3,784.  Switched minutes carried during the year, increased by 23.0%
to 11,029  million  compared to 8,977 million in 2001.  Private wire voice grade
equivalents at the end of the year totalled 8.541 million,  an increase of 18.1%
over the position at the end of 2001. There were 726 racks in service at the end
of the year  compared to 712 racks at the end of 2001.  DSL based  services were
available  from 324 central  offices at the end of the year compared with 247 at
the end of 2001.  The growth was due to our success in  increasing  sales to new
and existing  customers,  as well as introducing  new products and expanding our
geographic reach.

            During  the  year we  sold  network  services  to  Universal  Music,
Bloomberg,  and  Deutsche  Bank,  the  United  Nations  International  Fund  for
Agricultural  Development and Switzerland's air traffic control  administration,
Skyguide.  A major  customer  success for  eBusiness was a new order for hosting
services worth over (euro)1 million per year from the Berlin Stock Exchange.  We
also secured The Federal  Bureau of Statistics in Germany as a customer and were
successful  in  obtaining  a contract  for the  provision  of a 140 site  IPVPN,
awarded by HVB Info, a subsidiary of Hypovereinsbank, the second largest bank in
Germany.

South Region

            At 31  December  2002,  there  were  10  city-networks  operational:
Barcelona,  Lisbon,  Lyon,  Madrid,  Marseilles,  Milan,  Paris, Rome, Turin and
Valencia,  which was unchanged  from the number of  city-networks  at the end of
2001. Turnover increased by 25% for the year to (pound)265.9 million compared to
2002.  Growth in turnover  reflected  our expanded  geographic  reach,  expanded
product  range  as well as  success  in  extending  sales  to  existing  and new
customers.

            696  buildings  were added during the year  bringing the total at 31
December to 2,724.  For reasons already stated,  Switched minutes carried during
the year, increased by 0.48% to 3,554 million compared to 3,538 million in 2001.
Private  wire voice  grade  equivalents  at the end of the year  totalled  3.133
million,  an increase of 51.6% over the position at the end of 2001.  There were
1,082  racks in service at the end of the year  compared to 849 racks at the end
of 2001. DSL based services were available from 89 central offices at the end of
the year compared with 45 at the end of 2001.  The growth was due to our success
in increasing  sales to new and existing  customers,  as well as introducing new
products and expanding our geographic reach.

            During the year we added Group Exane and Pernod Ricard Europe as new
customers and in France we signed a master agreement with La Banque Federale des
Banques Populaires which offers the potential to provide IPVPN services to 2,200
branches.  Among other  significant new business for eBusiness was the Jean Paul
Gaultier  organisation.  We also  entered  into new  contracts  with  the  local
government authority of Issy les Moulineaux, Europcar, a car rental company, and
McCann-Erikson, a media company. An important new customer for our range of very
high  bandwidth  services,  including  SDH links from  155Mb/s  to  2.5Gb/s  and
Ethernet  links  from 10 Mb/s up to 1 Gb/s,  was  Atos  Origin,  an IT  services
provider.  The football  club FC Barcelona  also became a new customer  with a 3
year contract to provide  their hosting  services,  including  media  streaming.
Banco de Portugal also became a customer, and we continued to achieve success in
the government sector with an important new contract with the French Ministry of
Agriculture for video streaming services.

                                      -58-
<PAGE>

Cost of Sales

            Cost  of  sales  increased  from  (pound)941.7  million  in  2001 to
(pound)1,451.9 million in 2002 as a result primarily of an exceptional charge of
(pound)526.3 million taken against costs associated with the workforce reduction
announced in September 2002 and the impairment  provision take to write down the
book value of fixed assets.

            Cost of sales,  before  exceptional  items and costs associated with
infrastructure   sales,   increased  from   (pound)803.5   million  in  2001  to
(pound)925.6  million in 2002,  an  increase of  (pound)122.1  million or 15.2%.
Interconnection  and network costs, before exceptional items and excluding costs
associated with  infrastructure  sales,  increased from (pound)640.1  million in
2001 to (pound)713.6 million in 2002. The increase was primarily attributable to
higher interconnection  charges resulting from higher switch revenue,  increased
network costs  associated with the  introduction  of additional  services on our
inter-city  network  and  the  inclusion  of the  Fitec  results  following  its
acquisition in July 2001.

            Network   depreciation   increased  by  (pound)483.2   million  from
(pound)236.8  million  in 2001 to  (pound)720.0  million  in  2002.  Exceptional
depreciation  accounted for (pound)434.6 million of this increase.  The increase
in network  depreciation before exceptional items, from (pound)163.4  million in
2001 to  (pound)212.0  million  in 2002,  was  attributable  to the  significant
capital  expenditure  during  2001  related to the  building  of the network and
further  investment  in fixed assets in 2002 to support the growth in demand for
existing services and new service developments in existing markets.

            The current nature of the telecommunications  market has also led us
to re-evaluate  the value of our assets.  Accordingly,  we have written down the
book value of certain  assets,  including  parts of our network,  equipment  and
electronics and information  technology  software assets. In 2002, an impairment
charge of  (pound)508.0  million  was  recognised  relating to the write down of
certain parts of the network, equipment and electronics.  Exceptional charges of
(pound)18.3  million associated with the announced staff reductions was recorded
in 2002. In 2001, an impairment  charge of  (pound)73.4  million was  recognised
relating to the  "mothballing" of Internet  Solution Centres ("ISC") and further
charges of  (pound)62.4  million  were  recorded  relating  to the write down of
inventory held for sale and provisions  against  mothballed ISC rental and other
obligations.

                                      -59-
<PAGE>
Operating Expenses

            During 2002, we repositioned our organisational  structure,  systems
and people to reflect the current  nature of the  telecommunications  market and
the completion of our network.  The organisation has been changed from one which
was  appropriate as we entered new geographic  markets and built out our network
infrastructure  to one that is more suited to  harvesting  that  infrastructure,
developing  our portfolio of advanced  services;  extending our global reach and
growing profitable market share.

            As part  of  that  process,  we  reviewed  our  cost  structure  and
identified a number of areas where efficiency  could be improved.  From our peak
staffing  levels of  approximately  5,700  people,  including  355 temporary and
contract workers,  we reduced our staffing level such that at the end of 2002 we
had 4,855 employees,  including 171 temporary and contract workers. We expect to
further reduce our staffing level to approximately  4,300 during 2003.  Overall,
the full year savings which we anticipate to realise  during 2004 as a result of
our review of our cost structure is approximately (pound)60 million.

            Operating  expenses  increased from (pound)323.9  million in 2001 to
(pound)353.9  million in 2002, primarily resulting from an exceptional charge of
(pound)61.9 million incurred in connection with our employee reduction programme
and a further write down of the book value of fixed assets.  Operating expenses,
before  exceptional  items,  increased  from  (pound)284.1  million  in  2001 to
(pound)292.0 million in 2002, an increase of (pound)7.9 million or 3%.

            Selling,  general and administrative  expenses (SG&A) decreased from
(pound)265.0  million  in 2001 to  (pound)261.1  million  in 2002.  SG&A  before
exceptional items,  increased from (pound)237.1  million in 2001 to (pound)242.1
million  in  2002,   but  decreased  as  a  proportion  of  turnover   excluding
infrastructure sales from 26.3% in 2001 to 23.6% in 2002.

            Other  depreciation  and  amortisation,  increased from  (pound)59.0
million in 2001 to (pound)92.9 million in 2002. In 2002, an impairment charge of
(pound)43.0  million was recognised  compared with (pound)12.0  million in 2001.
Other depreciation and amortisation,  before  exceptional items,  increased from
(pound)47.0 million in 2001 to (pound)49.9 million in 2002.

            In 2002, an impairment charge of (pound)43.0  million was recognised
relating to the write down in net book value of leasehold improvements in excess
leased  space,  selected  IT software  developments  and  goodwill.  Exceptional
charges of (pound)18.9  million  associated with the announced staff  reductions
were also recorded in 2002. In 2001 an impairment charge of (pound)12.0  million
was  recorded  relating  to the  write  down  in net  book  value  of  leasehold
improvements in excess leased space and a further charge of (pound)27.9  million
was recognised  relating to provisions against future rents in the excess leased
space.

Interest receivable, interest payable and similar charges

            Interest  receivable  decreased from (pound)60.7  million in 2001 to
(pound)38.1  million  in 2002  due to  decreased  average  balances  of cash and
investments in liquid resources and lower rates of return.

            Interest  payable and similar charges were  (pound)112.0  million in
2001 compared with  (pound)96.3  million in 2002. The decrease was due primarily
to reduced debt levels  reflecting the purchase of  (pound)198.9  million of our
outstanding  notes  during  2002.  In  2001,  (pound)143.5  million  of debt was
purchased.

                                      -60-
<PAGE>
            Interest  payable and similar charges in 2002 included:  (pound)36.1
million of interest and accretion on convertible  debt;  (pound)57.5  million of
interest  and  accretion  on  non-convertible  debt and  (pound)2.7  million  of
interest, bank commitment fees and unwinding of discounts on provisions.

Amounts written off investment in own shares

            In 2002 we recognised a charge of (pound)0.4 million relating to the
revaluation of shares held in a trust for certain  compensations  plans compared
to a charge in 2001 of (pound)2.8 million.

Gain on purchase of debt

            We recorded a gain of  (pound)101.7  million during 2002 as a result
of the  purchase  of a number  of our  notes by COLT  Telecom  Finance  Limited,
compared to a gain in 2001 of (pound)58.8 million.

Exchange gain (loss)

            In 2002, we had exchange gains of (pound)12.4 million, compared with
losses of (pound)5.2  million in 2001. These gains and losses were due primarily
to movements in the British pound  relative to the U.S.  dollar on cash and debt
balances  denominated in U.S. dollars. In 2002, an exceptional  exchange gain of
(pound)4.8  million  was  recognised  on the  cancellation  of  financial  hedge
instruments  after  cancellation of a bank facility whose terms required hedging
of foreign currency risk.

Loss for period

            For the twelve months ended 31 December  2001 and 31 December  2002,
we  generated  losses  on  ordinary  activities  of  (pound)360.4   million  and
(pound)718.3  million,   respectively,   and  therefore  did  not  incur  a  tax
obligation.  The  increase  of  (pound)357.9  million in the level of losses was
accounted for by the increase in exceptional items from (pound)119.7  million in
2001 to (pound)482.2 million in 2002.

            Losses  on  ordinary  activities  in the  North,  Central  and South
regions for the twelve months ended 31 December 2002 were (pound)296.6  million,
(pound)146.4 million and (pound)242.2 million, respectively,  compared to losses
of  (pound)131.3   million,   (pound)201.9   million  and  (pound)82.6  million,
respectively,  for the twelve  months  ended 31 December  2001.  The  underlying
business  performance  improved  across all regions  during 2002,  however,  all
regions incurred  exceptional charges during the period. As discussed below, the
magnitude of those exceptional charges resulted in increased losses in the North
and South regions as compared to 2001.

            The level of exceptional charges incurred within each region for the
twelve  months ended 31 December  2002 was  (pound)258.0  million,  (pound)123.6
million  and  (pound)175.3  million for the North,  Central  and South  regions,
respectively,   compared  to  (pound)61.0  million,   (pound)108.1  million  and
(pound)2.8 million,  respectively, for the twelve months ended 31 December 2001.
The Central  region had a margin on  infrastructure  sales in 2001 of (pound)1.4
million and there were no infrastructure  sales in 2002. Write downs of the book
value of certain of our assets,  including  parts of our network,  equipment and
electronics,  selected  information  technology  software  assets and  goodwill,
together  with costs  relating to our  workforce  reduction,  accounted  for the
increase in exceptional charges.

            Losses  before  exceptional  charges  and  excluding  the  margin on
infrastructure  sales  for  the  twelve  months  ended  31  December  2002  were
(pound)38.6 million,  (pound)22.8 million and (pound)66.9 million for the North,
Central  and South  regions,  respectively,  compared  to  (pound)70.3  million,
(pound)95.2 million and (pound)79.8 million, respectively, for the twelve months
ended 31 December 2001. Improved financial  performance in the regions accounted
for the decreased loss before exceptional charges.


                                      -61-
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Year Ended 31 December 2001 compared to Year Ended 31 December 2000

Turnover

            Turnover,    excluding    infrastructure   sales,   increased   from
(pound)640.8  million in 2000 to  (pound)901.9  million in 2001,  an increase of
(pound)261.1 million or 41%. Turnover including infrastructure sales in 2000 and
2001 was (pound)687.0 million and (pound)905.7 million,  respectively.  In 2001,
72% of turnover excluding  infrastructure  sales, was generated outside the U.K.
compared with 65% during 2000. Increased turnover was driven by continued demand
for our services from existing and new customers,  new service introductions and
the expansion of our addressable  market.  However,  the rate of growth has been
affected by the slowdown in economic growth across Europe  generally and reduced
demand in the wholesale bandwidth market.

            Turnover from switched services increased from (pound)405.3  million
in 2000 to (pound)532.6 million in 2001. Growth in switched revenue reflected an
increase in the number of markets in which we  provided  switched  services  and
growth in switched  minutes  from 15.8  billion in 2000 to 20.2 billion in 2001.
Average switched  revenue per minute  increased by 2% in 2001,  compared to 2000
primarily  as a result  of  changes  in  product  mix  somewhat  offset by price
declines.  Carrier  revenues  represented 36% of total switched  revenue in 2001
compared  with 37% in 2000.  Turnover  from  non-switched  and  other  services,
excluding  infrastructure sales,  increased from (pound)235.5 million in 2000 to
(pound)369.2  million in 2001. Growth in non-switched and other revenue reflects
continuing growth in demand for local, national and international bandwidth from
both   corporate  and   wholesale   customers,   partially   offset  by  circuit
cancellations  from selected carriers exiting the market or rationalising  their
networks.  Increased  turnover also reflects growth in Internet related services
including hosting, the introduction of new services including IP-VPN,  expansion
into  new  markets  and  the  inclusion  of  the  Fitec  results  following  its
acquisition  in July 2001.  At 31 December  2001 we had over 15 million  private
wire voice  grade  equivalents  in service,  an  increase of 80%  compared to 31
December  2000 and 2,212 racks  installed,  an  increase  of 95%  compared to 31
December  2000.  Turnover  from  non-switched  and  other  services,   excluding
infrastructure  sales,  represented  41% of total turnover in 2001 compared with
37% in 2000.  Including  infrastructure  sales,  turnover from  non-switched and
other  services  increased  from  (pound)281.7  million in 2000 to  (pound)373.0
million in 2001.

North Region

            At 31 December 2001, we had 11 city-networks operational: Amsterdam,
Antwerp,  Birmingham,  Brussels,  Copenhagen,  Dublin, London,  Manchester,  The
Hague, Rotterdam and Stockholm,  compared to 8 city-networks at the end of 2000.
Turnover  increased by 19% to (pound)312.9  million compared to 2000.  Growth in
turnover reflected our expanded geographic reach, expanded product range as well
as our success in extending sales to existing and new customers.

            438 buildings  were added during the year,  bringing the total at 31
December 2001 to 2,387. Switched minutes carried during the year increased by 9%
to 7,733  million  compared to 7,088  million in 2000.  Private wire voice grade
equivalents at the end of the year totalled 6.0 million, an increase of 87% over
the position at the end of 2000.  Local  network route  kilometres  increased to
1,359 and there were 651 racks in service at the end of the year compared to 871
route  kilometres  and 407  racks at the end of 2000.  DSL based  services  were
available from 59 central offices at the end of the year compared with 12 at the
end of 2000.

                                      -62-
<PAGE>

            The regional  customer base  continued to grow, as did business with
existing  customers.  ABN AMRO,  Bull,  the Antwerp Port  Authority  and DAT, an
airline  company were new  customers  of a range of voice,  high  bandwidth  and
intelligent  network  services in Belgium.  In The  Netherlands  we expanded the
services  provided to McDonalds,  a fast food chain. New customers  included Van
Doome, a law firm which is now using our IP-VPN,  managed  router,  firewall and
voice services and Optiver, a derivatives  trader. One of our first customers in
Copenhagen was NetDoktor, a medical services portal, for whom we are providing a
range of hosting and Internet solution services.

Central Region

            At 31 December 2001 there were 11 city-networks operational: Berlin,
Cologne,  Dusseldorf,  Frankfurt,  Geneva, Hamburg,  Hanover, Munich, Stuttgart,
Vienna and Zurich,  compared to 11  city-networks  at the end of 2000.  Turnover
increased by 25% to (pound)380.3  million  compared to 2000.  Growth in turnover
reflected our expanded  geographic reach,  expanded product range as well as our
success in extending  sales to existing  and new  customers.  Turnover  included
infrastructure  sales in 2001 of (pound)3.8 million which had associated cost of
sales of (pound)2.4  million compared with  infrastructure  sales of (pound)46.2
million which had associated cost of sales of (pound)27.2 million in 2000. These
infrastructure  sales took the form of 20-year  indefeasible  rights-of-use over
parts of our  network  in  Germany.  These  transactions  are  characterised  as
outright sales under U.K. GAAP, whereas under U.S. GAAP, these sales are treated
as 20-year operating leases.

            783  buildings  were added during the year  bringing the total at 31
December 2001 to 3,428.  Switched minutes carried during the year,  increased by
55% to 8,977million  compared to 5,788 million in 2000. Private wire voice grade
equivalents at the end of the year totalled 7.2 million, an increase of 70% over
the position at the end of 2000.  Local  network route  kilometres  increased to
1,778 and there  were 712 racks in service  at the end of the year  compared  to
1,375 route kilometres and 324 racks at the end of 2000. DSL based services were
available  from 247 central  offices at the end of the year  compared with 79 at
the end of 2000.

            In Austria,  new customers for high bandwidth  services included the
Technical  University  of Vienna  and  among new  Internet  access  and  hosting
customers was ex-it, a provider of on-line financial solutions.  Significant new
customers in Germany  included the  Bundesbank,  the Federal  Bureau for Foreign
Affairs,  Berlin Police Headquarters,  the City of Hamburg and the University of
Munich.  In Switzerland we signed a major  contract to provide  Crossair's  data
services. We gained significant new business with Geneva Airport and Citibank.

South Region

            At 31  December  2001,  there  were  10  city-networks  operational:
Barcelona,  Lisbon,  Lyon,  Madrid,  Marseilles,  Milan,  Paris, Rome, Turin and
Valencia,  compared to 8 city-networks at the end of 2000. Turnover for the year
increased by 77.0% to (pound)212.4  million compared to 2000. Growth in turnover
reflected our expanded  geographic reach,  expanded product range as well as its
success in extending sales to existing and new customers.

                                      -63-
<PAGE>

            817  buildings  were  added  during  2001  bringing  the total at 31
December to 2,028.  Switched minutes carried during the year increased by 23% to
3,537  million,  compared  to 2,882  million in 2000.  Private  wire voice grade
equivalents  at the end of the year  totalled 2.1  million,  an increase of 127%
over the position at the end of 2000. Local network route  kilometres  increased
to 1,320 and there were 850 racks in service at the end of the year  compared to
819 route  kilometres  and 407 racks at the end of 2000. DSL based services were
available from 45 central offices at the end of the year compared with 20 at the
end of 2000.

            In France,  significant new customers for hosting services  included
Canon Communication & Image, a camera  manufacturer.  TF1, a television channel,
extended its business with us by outsourcing  the hosting of its  staracademy.fr
web site. Other new customers  included  Marseilles Airport and CEGEDIM Group, a
leader in the  provision  of  technologies  and  services  dealing  with medical
information. IP-VPN demand was strong with 60 new customers signed for 175 sites
in the fourth quarter.  In Italy new customers included  Europcar,  a car rental
company,  Pininafaria,  a car design and  styling  specialist,  and ICE, a state
institute for foreign trade.

Cost of Sales

            Cost  of  sales  increased  from  (pound)566.9  million  in  2000 to
(pound)941.7  million in 2001 as a result primarily of an exceptional  charge of
(pound)135.8  million.  In 2001, an impairment charge of (pound)73.4 million was
recognised  relating to the closing or `mothballing' of Internet Solution Centre
capacity and writing down certain equipment and electronics.  Additional charges
of (pound)28.8  million and (pound)33.6 million were also recognised relating to
the  write  down of  ducts  on the  German  section  of our  inter-city  network
allocated  for sale to other  carriers  and  provisions  against  future  rents,
services and reinstatement costs in the Internet Solution Centres, respectively.

            Cost  of  sales,   before  exceptional  items  and  excluding  costs
associated with  infrastructure  sales,  increased from (pound)539.7  million in
2000 to  (pound)803.5  million in 2001, an increase of  (pound)263.8  million or
49%.  Interconnection  and network costs, before exceptional items and excluding
costs associated with infrastructure sales,  increased from (pound)451.0 million
in 2000 to (pound)640.1 million in 2001. The increase was primarily attributable
to interconnection payments associated with the 28% increase in switched minutes
in the year, as well as  additional  network  operating  costs related to growth
achieved in the 27 city-networks  and 10 ISCs in service at 31 December 2000 and
the new  networks  and ISCs  brought  into  service  during  2001.  In addition,
operating  costs  attributable  to  the  expansion  of  our  inter-city  network
contributed to the increases in interconnection and network costs.

            Network  depreciation  increased from (pound)88.7 million in 2000 to
(pound)236.8  million in 2001. The increase of (pound)148.1  million included an
exceptional  charge  of  (pound)73.4  million.   Network  depreciation,   before
exceptional  items,  increased from (pound)88.7  million in 2000 to (pound)163.4
million in 2001. This increase was  attributable to further  investment in fixed
assets to support the growth in demand for services, new service developments in
existing  markets,  including  hosting  services,  expansion  of the  inter-city
network and entry into new markets.

                                      -64-
<PAGE>

            In 2001, following a review of the future discounted cash flows from
the ISCs and based on current and  expected  market  conditions,  an  impairment
charge  of  (pound)73.4  million  was  recognised  relating  to the  closing  or
`mothballing'  of ISC  capacity and the writing  down of certain  equipment  and
electronics.  Associated  with the  decision to  mothball  ISCs,  provisions  of
(pound)33.6  million were made for future  rents,  services  and  re-instatement
costs.  In  addition,   given  the  depressed   market  for   telecommunications
infrastructure  assets,  a charge of  (pound)28.8  million  was also  recognised
relating  to the write  down of ducts on the German  section  of our  inter-city
network  allocated for sale to other carriers  ("Inventory held for future sale"
on the Balance Sheet).

Operating Expenses

            Operating  expenses  increased from (pound)205.0  million in 2000 to
(pound)323.9  million in 2001. In 2001, following a comparison of net book value
with fair value,  based on expected  discounted future cash flows, an impairment
charge of (pound)12.0 million was recognised relating to leasehold  improvements
in excess  leased space and  selected IT software  developments.  An  additional
charge of (pound)27.9 million was also recognised relating to provisions against
future rents, services and reinstatement costs in the excess leased space.

            Operating  expenses,   before  exceptional  items,   increased  from
(pound)205.0  million in 2000 to  (pound)284.1  million in 2001,  an increase of
(pound)79.1 million or 39%.

            SG&A  expenses  increased  from  (pound)181.7  million  in  2000  to
(pound)265.0  million in 2001,  and  decreased as a proportion  of turnover from
26.4% in 2000 to 26.3% in 2001. SG&A expenses before exceptional items increased
from 181.7  million  in 2000 to 237.1  million  in 2001 and as a  proportion  of
turnover  before  infrastructure  sales decreased from 28.4% in 2000 to 26.3% in
2001.  The  increase  in the  pre-exceptional  cost level was  primarily  due to
increased personnel, office space, marketing and information technology expenses
associated with the expansion of our customer base, new services development and
expansion into new markets.

            Other  depreciation  and  amortisation,  before  exceptional  items,
increased from (pound)23.3  million in 2000 to (pound)47.0  million in 2001. The
increase was due mainly to depreciation  on increased  investment in information
technology,  customer  service  and  support  systems  and office  equipment  in
existing and new markets.

Interest receivable, interest payable and similar charges

            Interest  receivable  decreased from (pound)80.5  million in 2000 to
(pound)60.7  million  in 2001  due to  decreased  average  balances  of cash and
investments in liquid resources and lower rates of return.

            Interest  payable and similar charges were  (pound)104.8  million in
2000 compared with (pound)112.0  million in 2001. The increase was due primarily
to  increased  average  debt levels  reflecting  the issuance of senior notes in
April 2000 partially  offset by the purchase and  cancellation of  approximately
(pound)143 million of our outstanding notes during the third quarter of 2001.

            Interest  payable and similar charges in 2001 included:  (pound)43.3
million of interest and accretion on convertible  debt;  (pound)67.7  million of
interest  and  accretion  on  non-convertible  debt and  (pound)1.0  million  of
interest and bank commitment fees.

                                      -65-
<PAGE>
Amounts written off investment in own shares

            In 2001, we recognised a charge of  (pound)2.8  million  relating to
the revaluation of shares held in a trust for certain compensations plans.

Gain on purchase of debt

            We  recorded  a gain  of  (pound)58.8  million  as a  result  of the
purchase of a number of our notes by COLT  Telecom  Finance  Limited  during the
third quarter of 2001. These notes have been cancelled.

Exchange gain (loss)

            In 2001, we had exchange losses of (pound)5.2 million, compared with
losses of  (pound)7.7  million  in 2000.  These  losses  were due  primarily  to
movements  in the British  pound  relative  to the U.S.  dollar on cash and debt
balances denominated in U.S. dollars.

Loss for Period

            For the twelve months ended 31 December  2000 and 31 December  2001,
we  generated  losses  on  ordinary  activities  of  (pound)116.9   million  and
(pound)360.4  million,   respectively,   and  therefore  did  not  incur  a  tax
obligation.  Losses  before  exceptional  items  and  excluding  the  margin  on
infrastructure  sales were (pound)135.9 million in 2000 and (pound)242.1 million
in 2001.

            Losses  on  ordinary  activities  for the  twelve  months  ended  31
December 2001 in the North, Central and South regions were (pound)131.3 million,
(pound)201.9 million and (pound)82.6 million,  respectively,  compared to losses
of   (pound)69.4   million,   (pound)52.0   million  and   (pound)49.8   million
respectively,  for the twelve months ended 31 December 2000. The increase in the
losses are  accounted  for by the  exceptional  charges  incurred  in the twelve
months  ended  31  December  2001,  lower  infrastructure  sales in 2001 and the
increase in the volume of activities in the development of the business.

            The  level  of   exceptional   charges  was   (pound)61.0   million,
(pound)108.1  million and  (pound)2.8  million for the North,  Central and South
regions,  respectively.  The Central region also had a margin on  infrastructure
sales of (pound)1.4 million in 2001 and (pound)19.0  million in 2000. There were
no exceptional  charges incurred in the twelve months ended 31 December 2000. In
2001, the Company  recognised an aggregate  exceptional  charge of  (pound)175.6
million.  This charge reflects a provision of (pound)85.3  million for the write
down of the book value of certain assets,  including  Internet  Solution Centres
capacity,  equipment  and  electronics,  selected IT software  developments  and
leasehold  improvements in excess leased space, a charge of (pound)28.8 million,
reflecting  the write down of inventory  held for future  sale,  and a charge of
(pound)61.5  million,  reflecting  reserves  against future rents,  services and
reinstatement costs in the Internet Solution Centres and excess leased space.

            Losses  before  exceptional  charges and  margins on  infrastructure
sales for the twelve  months ended 31 December  2001 were  (pound)70.3  million,
(pound)95.2  million and  (pound)79.8  million for the North,  Central and South
regions,  respectively,  compared to losses of (pound)69.4 million,  (pound)71.0
million and (pound)49.8  million,  respectively,  for the twelve months ended 31
December  2000.  The  increase in losses  reflects the increase in the volume of
activities in the development of the business in each of the regions.

New Accounting Standards

            A number of new US accounting  standards were issued during 2001 and
2002 that will have a potential effect on our consolidated financial statements.
The  detail  and the  potential  effect  of our  adoption  of  those  accounting
standards  are  discussed  in  Section  f of note 25 of our 2002  Annual  Report
entitled "Other disclosures."

Transactions with affiliates

            In December 1996, we entered into a Relationship  Agreement with FMR
Corp., COLT Inc.,  Fidelity  Investors Limited  Partnership,  FIL Bank and Trust
Company Limited and Fidelity International Limited (the "Contracting  Parties").
In  general,  the  Relationship  Agreement  will  continue  in effect  while the

                                      -66-
<PAGE>
Contracting  Parties or their affiliates hold at least 30% of our share capital.
The  Relationship  Agreement  contains  certain  undertakings by the Contracting
Parties,    including   undertakings   relating   to   voting   for   directors,
non-competition,  arms length  dealings and  acquisition of additional  Ordinary
Shares.

            Both  Fidelity  Capital  Associates  Inc.  ("FCA")  (a wholly  owned
subsidiary of FMR Corp.) and COLT have entered into separate 10 year  agreements
with each  other to  provide  to the other  certain  consultancy  services.  The
consultancy  services we have agreed to provide to FCA include,  regulatory  and
economic  advice,  assistance in applying for licences and advice on FCA network
construction  (outside Europe). We are entitled to fees for services rendered at
prevailing  market  rates for such  services  which will only be provided if not
detrimental  to the business or operations of the Company,  as determined by our
independent  directors.  FCA's  consultancy  services to us include on an as and
when needed basis,  assistance in  establishing  and  maintaining  the Company's
relationships  with  banks  and  other  financial  institutions,  providing  tax
planning advice and financial and strategic planning. FCA is entitled to fees at
the then prevailing market rates for such services. Both of the above agreements
are terminable for material breach.  No services were provided by us or to us in
2002.

            The  U.K.  pension  scheme  is  administered  by  Fidelity  Pensions
Management,  a subsidiary of Fidelity  Investments  Management Limited, a wholly
owned  subsidiary  of  Fidelity  International  Limited.  The fees for the above
services for the year ended 31 December 2002 were  approximately  (pound)170,000
(2001:(pound) 88,000 2000: (pound)83,000 ).

            Pursuant to a contract with us, certain FMR Corp.  ("FMR") employees
provide  consulting and other services to us at agreed rates. The fees for these
services for the year ended 31 December 2002 were approximately (pound)1,377,000
(2001:   (pound)110,000,   2000:   (pound)295,000)   for   FMR   employees   and
(pound)300,000 for Fidelity  International Limited employees.  FMR also provided
additional  compensation and benefits to these employees  related to services to
the  Company.  For the year ended 31  December  2002 these  totalled  (pound)Nil
(2001:(pound)58,000, 2000:(pound)658,000).

     B.     Liquidity and Capital Resources

            The costs associated with the initial  installation and expansion of
our networks,  and services,  including  development,  installation  and initial
operating  expenses,  have resulted in negative cash flows.  Capital expenditure
was  reduced in 2002 and is expected to reduce  further in 2003.  Negative  cash
flows are expected to continue in each of our markets until an adequate customer
base and related revenue stream have been established. In 2002, net cash inflows
from operations were  (pound)139.3  million,  compared with net cash inflows for
the equivalent period in 2001 of (pound)39.7 million. Changes to cash flows from
operations  include the effect of the timing of stage billings and payments with
the  telecommunications  operators  associated  with  the  construction  of  our
inter-city network. Net cash outflows from returns on investments,  servicing of
finances,  capital  expenditure,  and from financial investment and acquisitions
and  disposals  decreased  from  (pound)780.8  million  in 2001 to  (pound)439.3
million in 2002.  The decrease in net cash outflows was primarily as a result of
reduced  purchases of tangible fixed assets,  which decreased from  (pound)804.3
million in 2001 to  (pound)412.1  million in 2002. We also took advantage of the
volatile financial markets in 2002 to purchase (pound)198.9 million of our notes
for  (pound)97.2   million  during  the  year  compared  with  the  purchase  of
(pound)143.5  million  of our notes for  (pound)84.7  million  in 2001.  We will
continue to monitor the trading  levels of our notes and may take  advantage  of
other  such   opportunities  to  enhance   shareholder  value  if  they  present
themselves.

            In 2001,  proceeds  of  (pound)498.9  million  were  raised from our
placement  of  Ordinary  Shares.  Balances  of cash and  investments  in  liquid
resources  at 31 December  2002  totalled  (pound)934.9  million  compared  with
(pound)1,304.5 million at 31 December 2001.

                                      -67-
<PAGE>
           A portion of direct  labour  and other  compensation  related  costs
attributable to the  development,  installation and expansion of our networks is
capitalised and depreciated in network  depreciation  cost of sales. In addition
to capital expenditures, we incurred direct operating costs upon commencement of
the installation  phase of a network for such items as salaries and office rent.
These  expenditures  and costs are incurred in advance of receiving any revenue.
The exact  amounts and timing of these  expenditures  and costs are subject to a
variety of  factors,  which may vary  significantly  by  geographic  market.  As
network usage rises, we incur increased sales and marketing expenses  (including
sales commissions), administrative costs and local taxes. Right-of-way costs are
also incurred in order to construct our network or connect  buildings.  Although
our revenues have  increased  substantially,  our expenses  associated  with the
expansion and  development  of our local  telecommunications  networks have also
increased.  The  most  significant  portion  of cost  of  sales  is the  cost of
interconnecting to other carriers.  The cost of interconnecting is determined on
an operator by operator basis. Our operating losses increased with the continued
expansion of our networks and a high level of fixed costs and capital investment
was required to build the network and add customers.  However,  after a customer
base is  established,  incremental  revenues are added with  minimal  additional
expense, providing significant contributions to operating results.

            As we have now  completed  the build phase of our business  plan, we
believe that we are well positioned with the assets, products,  services, people
and  financial   resources  to  achieve  the  scale   required  to  achieve  the
profitability necessary in an infrastructure based business such as ours.

            We operate a centralised  treasury function,  the prime objective of
which  is  to  manage   both  our  working   capital  and  capital   expenditure
requirements.  In addition to liquidity risks, the principal  financial risks to
which we are exposed arise from  volatility in foreign  currency  exchange rates
and  interest  rates.  Our Board  regularly  reviews  these  risks and  approves
associated risk management policies, including treasury strategy.

            Transactions denominated in foreign currencies are translated at the
rate prevailing at the time of the transaction.  Monetary assets and liabilities
are  translated at the period end rate.  Exchange  differences  arising from the
retranslation of the opening net assets of foreign subsidiaries,  denominated in
foreign currencies, and any related loans, together with the differences between
profit and loss  accounts  translated  at average  rates and rates ruling at the
period end are taken directly to reserves.

            Translation  differences on  intra-group  currency loans and foreign
currency  borrowings  to the extent that they are used to finance or hedge group
equity  investments  in  foreign  enterprises  are taken  directly  to  reserves
together  with the exchange  differences  on the  carrying  value of the related
investments.

            Forward exchange  contracts are deemed hedges only where they relate
to actual foreign currency assets and liabilities or commitments which have been
identified  and where they involve the same, or similar,  currency as the hedged
transaction and reduce the risk to our operations  arising from foreign currency
exchange  movements.  Gains and losses on forward  exchange  contracts deemed as
hedges are deferred and  included in the value of the related  foreign  currency
transaction. We do not use any other derivative instruments.

            All other  exchange  differences  are taken to the  profit  and loss
account.

                                      -68-
<PAGE>

            We believe that current assets,  together with internally  generated
funds,  will provide  sufficient  funds for us to expand our business as planned
and to fund our  operating  losses.  There can be no guarantee  that we will not
require  significant  additional funds.  Sources of financing may include equity
and debt financings and other financing  arrangements  such as vendor financing.
There  can be no  assurance  that  additional  financing  arrangements  will  be
available,  or if available,  that they can be concluded on terms  acceptable to
us. Failure to obtain any such financing would result in delay or abandonment of
some or all of our  development  and expansion plans which could have a material
adverse effect on our ability to service our debt.

Bond buy back

            During the twelve months ended 31 December 2002 we made purchases in
aggregate  of  (pound)198.9   million  (2001:   (pound)143.5   million)  of  our
outstanding  convertible and  non-convertible  notes for cash  consideration  of
(pound)97.2 million (2001: (pound)84.7 million).  Exceptional gains arising from
the purchases were (pound)101.7  million (2001:  (pound)58.8  million).  We were
able to take  advantage  of the volatile  financial  markets in 2002 to purchase
some of our notes at  favourable  rates,  and we will  continue  to monitor  the
trading levels of our notes and may take  advantage of other such  opportunities
to enhance shareholder value if they present themselves.

            See note 15 to our financial  statements  for a summary of the terms
of our debt obligations.

Creditors - Amounts falling due after more than one year.

<TABLE>
<CAPTION>

                                                                          At 31 December
                                                      ------------------------------------------------------
                                                             2001                  2002                 2001
                                                      (pound)'000           (pound)'000                $'000

<S>                                                     <C>                   <C>                  <C>
Repayable between two and three years
   Senior convertible notes                                   --                98,283               158,186
Repayable between three and four years
   Senior convertible notes                               91,867               321,057               516,742
   Senior discount notes                                      --               142,408               229,206
Repayable between four and five years
   Senior convertible notes                              337,403               220,489               354,877
   Senior discount notes                                 201,936                    --                    --
   Senior notes                                               --                79,861               128,536
Repayable in more than five years
   Senior convertible notes                              228,147                    --                    --
   Senior notes                                          458,672               331,801               534,034
                                                       ---------             ---------             ---------
                                                       1,318,025             1,193,899             1,921,581
                                                       ---------             ---------             ---------
</TABLE>

Contractual obligations

            The following table summarises the Company's  long-term  commitments
as at 31 December 2002, including commitments pursuant to debt agreements, lease
obligations and other long terms contracts.

                                      -69-
<PAGE>
<TABLE>
<CAPTION>

                                                                                     Payment due by period
                                                (000)       Total            Less than         1-3             4-5       More than 5
                                                                              1 year          years           years         Years
                                                          --------------------------------------------------------------------------
<S>                                                       <C>                <C>            <C>             <C>             <C>
Long-term debt                                             1,193,899              --         561,748         300,350         331,801
Capital lease obligations                                      2,553             482             814             279             978
Operating leases                                             331,085          71,155          86,261          46,956         126,713
                                                          --------------------------------------------------------------------------
Total Contractual Cash                                     1,527,537          71,637         648,823         347,585         459,492
Obligations                                               --------------------------------------------------------------------------


The Company had a Bank
Facility of up to  (pound)75,000,000
which it cancelled in June 2002
No amounts had been drawn under the
facility


Other commercial commitments
Guarantees provided by banks                                      --              --              --              --              --
Standby repurchase obligations                                    --              --              --              --              --
Other commercial commitments                                  47,832          47,832              --              --              --
                                                          --------------------------------------------------------------------------
                                                              47,832          47,832              --              --              --
                                                          --------------------------------------------------------------------------
</TABLE>
     C.     Research and Development, Patents and Licences, etc.

            We do not engage in significant research and development activities.

     D.     Trend information

Telecommunications Market

            Whilst we have  continued  to grow and  increase  our  margins,  the
economy has  continued to slow and the growth in  telecommunications  demand has
remained sluggish,  negatively affecting our own growth rate. Throughout Europe,
as the economic  conditions have continued to deteriorate,  we have seen more of
our customers, suppliers and competitors withdraw from the market or consolidate
activities.  We have  experienced  the continued  loss of high margin  bandwidth
revenue from carriers  exiting the market or  rationalising  their networks as a
result of continued economic pressure.  These factors made 2002 a difficult year
and there are no signs that the market will improve in 2003. We have taken steps
in the light of these trends to ensure that our asset base remains  aligned with
the realities of the market by recognising  an impairment  charge of (pound)551m
this year.

            We do not underestimate  the challenges facing us in 2003.  However,
we have  benefited  and expect  further to benefit  from the growth in bandwidth
intensive  applications  and the trend to outsourcing  of customer  networks and
operating environments.  Prices in the telecommunications services industry have
been  declining  and are  expected to continue to decline.  We believe that such
declines have been  beneficial  insofar as they have assisted in the stimulation
of  demand.  Unit costs of the  technology  we use to provide  and  support  our
services  have also been  declining  and are  expected to continue to do so. For
further discussion of significant  recent trends in our financial  condition and
results of operations,  please see Item 5.A "Operating and Financial  Review and
Prospects--Operating  Results"  and 5.B  "Operating  and  Financial  Review  and
Prospects--Liquidity and Capital Resources."

                                      -70-
<PAGE>
Foreign Currency Exchange Rates

            We  trade  in the  local  currencies  of the  countries  in which we
operate,  which  are  predominantly  Euros.  Although  fluctuations  in  foreign
exchange  rates do not affect  our  ability  to trade in those  countries,  such
fluctuations do affect our results.

            In 2002, we had exchange gains of (pound)17.2 million. In 1999, 2000
and 2001, we had exchange losses of (pound)2.5 million,  (pound)7.7 million, and
(pound)5.2 million,  respectively.  These gains and losses were due primarily to
movements in the British pound relative to the U.S. dollar on cash,  investments
in liquid resources and debt balances denominated in U.S. dollars.

ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     A.     Directors and Senior Management

            Barry R. J. Bateman (57) is Vice Chairman of Fidelity  International
Limited,  having served as President of Fidelity International Limited from 1991
until  2001.  Mr.  Bateman  joined  Fidelity  in 1981,  initially  as  Marketing
Director.  From 1989 to 1991,  he was Managing  Director of Fidelity  Investment
Management Ltd. and from 1986 to 1989 he served as Managing Director of Fidelity
Investment  Services Ltd. Prior to joining  Fidelity,  Mr. Bateman was Marketing
Director at Datastream from 1975 until 1981 and prior to this served as Research
Director  at Hoare  Govett  Ltd.  from 1972 until 1975.  Mr.  Bateman  served as
Chairman  of AUTIF  from 1991  until 1993 and is  currently  a  Director  of the
Investment Management Association. He was appointed to the Board of Directors of
COLT on 27 September 1996 becoming the non-executive Chairman on 1 January 2003.

            Steven P.  Akin (57) was  appointed  President  and Chief  Executive
Officer of COLT on 25 July 2002. He served as President of Fidelity Capital, the
emerging business development arm of Fidelity Investments,  between January 1999
and July 2002 and as a member of Fidelity 's Operating  Committee.  From 1997 to
1999, he was President of Fidelity Investments Systems Company in which position
he served as Chief  Information  Officer  responsible  for computer  operations,
global telecommunications networks and enterprise-wide  applications support and
development.  Prior to joining Fidelity in 1992, as President of Fidelity Retail
Investor  Services,  Mr. Akin was  President  of Sprint Long  Distance  Consumer
Services  Group.  He also served as Senior Vice  President of National  Customer
Operations of Sprint.  In 1987, Mr. Akin was Chief Operations  Officer at United
Telephone Company Midwest Group. Previously, Mr. Akin served as Chief Operations
Officer  at  United  Telephone  of  Indiana.  He was  appointed  to the Board of
Directors of COLT on 23 July 2002.

                                      -71-
<PAGE>

            Paul W.  Chisholm  (54)  served as our  President  from 1995 and our
Chief Executive  Officer from 1996, until January 2001 when he resigned from his
executive  position.  He was appointed to our Board of Directors on 22 September
1996. He served as the first Managing Director of COLT  Telecommunications  from
its  inception in 1992 until 1995.  From 1988 until 1992,  he was the first Vice
President and General Manager of Teleport  Communications  Boston,  Inc., one of
the first  competitive  access  providers in the U.S. From 1985 until 1988,  Mr.
Chisholm  was the Vice  President-Telecommunications  of Shawmut Bank in Boston.
From 1974 until 1985,  he was  employed in various  management  positions at New
England Telephone & Telegraph Co. and AT&T Corp. He served as the first Chairman
of the Other Licensed  Operators Group, a regulatory  reform group in the United
Kingdom  from 1993 to 1995.  Mr.  Chisholm is also a  non-executive  director of
Sycamore Networks Inc. and Netifice Communications Inc.

            James.  C. Curvey (67) is a Director and Vice Chairman of FMR Corp.
He was  appointed to our Board of  Directors on 27 September  1996 and served as
non-executive  Chairman  between May 1999 and December  2002.  Mr. Curvey joined
Fidelity  Investments in June 1982, as Vice President,  Human Resources,  became
Senior Vice  President  for  Administration  in January  1983 and  President  of
Fidelity  Capital in December 1986. He served as Chief Operating  Officer of FMR
from May 1997 until September 1998 and as President and Chief Operating  Officer
of FMR Corp.  from  September  1998 until July 2000.  Prior to joining  Fidelity
Investments,  Mr. Curvey was Vice President, Human Resources for Chase Manhattan
Corp. in New York.  Before  joining Chase  Manhattan  Corp. in 1976,  Mr. Curvey
served for six years as Director of Personnel for the  Department of Housing and
Urban  Development in  Washington,  D.C. Mr. Curvey is a Director of Geerlings &
Wade, a wine distribution company.

            Timothy T. Hilton (50) is President of Fidelity  Broadband Group. He
joined Fidelity in 1996 as Senior Vice President of Fidelity  Capital,  became a
Managing  Director and served as  President  of Fidelity  Capital from June 1997
until July 1999 and served as President of Fidelity  Ventures  from January 1999
until April 2000.  Prior to joining Fidelity Mr. Hilton was a senior partner and
member of the management and executive  committees of the Boston based corporate
law firm of Sullivan & Worcester LLP. He was appointed to our Board of Directors
on 26 May 1999.

            H.F. van den Hoven (79) served as Chairman of the Supervisory  Board
of ABN AMRO Bank from 1984 to 1994 and as Chairman of Unilever N.V. from 1976 to
1984. He was  appointed to our Board of Directors on 27 September  1996. He is a
member of the supervisory board of Hunter Douglas and is a director for a number
of funds in the Fidelity Group of International Funds.

            Robert Hawley (66) was Chief  Executive of British  Energy plc until
1997 and until 1995 he was Chief  Executive  of Nuclear  Electric  plc.  He is a
non-executive  director of RockTron plc,  Rutland  Trust plc and Creative  Value
Networks(CNV)  Ltd.  Dr.  Hawley is advisor to HSBC  Investment  Bank plc and is
registered  with the  Securities and Futures  Authority.  He was the Chairman of
Taylor  Woodrow  plc until the middle of May of 2003,  and was  Chairman  of the
Engineering  Council and the Particle Physics and Astronomy Research Council and
the CBI/UK Korea Economic Co-operation Council. He was appointed to our Board of
Directors on 21 August 1998.

                                      -72-
<PAGE>

            Vincenzo  Damiani  (63)  was,  until  August  2002,  Corporate  Vice
President,  EDS  Corporation and a member of the EDS Executive Board for Europe,
Middle East and Africa with specific responsibility for the Mediterranean Region
and Chairman of the Board of EDS Italy.  Before joining EDS in 1997,  Mr.Damiani
spent 29 years at IBM  where he held  several  management  positions,  including
President of Marketing and Services of IBM Europe,  Middle East and Africa.  Mr.
Damiani was also a member of the Executive  European Committee and member of the
Board of IBM Europe. In 1993 Mr. Damiani was appointed  Corporate Vice President
and  President  of Digital  Equipment  Europe.  Mr.  Damiani is a  non-executive
Director  of Banca di Roma,  and is a member  of its  Executive  Committee.  Mr.
Damiani is also a non  executive  director of Augeo Holding BV. He was appointed
to the Board of Directors of COLT on 23 July 2002.

            Mark A. Jenkins (45) was appointed as our Director of Legal Services
and Company  Secretary in May 1998 and to our Board of Directors on 23 May 2002.
Prior to joining  us he was Group  Company  Secretary  and Head of Legal of Peek
plc. From 1987 until 1992 he was Company Secretary of SKF (UK) Limited, the U.K.
operations of AB SKF, a Swedish multinational rolling bearing manufacturer,  and
between  1985  and  1987 he was  Group  Company  Secretary's  Assistant  at M.K.
Electric Group plc. From 1981 until 1985, he practised at the Bar.

            Hans  Eggerstedt  (64) is a former  Finance  Director  of  Unilever,
having  retired from that  position in 1999.  Prior to being  appointed  Finance
Director he held a range of management  positions with Unilever and is currently
a member of the Supervisory Board of Unilever  Deutschland.  He is also a member
of the Advisory  Council of the ING Group, a member of the Supervisory  Board of
Rodamco Europe and has  non-executive  directorships  with Jeronimo  Martins and
bolero.net. He was appointed to the Board of Directors of COLT on 2 June 2003.

            Lakh  Jemmett (43) joined us as Regional  Director in 1997.  Between
1989 and his  joining  us he worked for Sprint  International  and  subsequently
GlobalOne in various  capacities  including that of Chief Executive  Officer and
Operations  and  Engineering  Director of GlobalOne UK. From 1982 until 1989, he
worked  in a  number  of  marketing  and  technical  positions  for  both BT and
Commercial Cable Telecom.

            Andrew J. K.  Steward (45) was our Acting  Chief  Financial  Officer
between  June  2002  and up to and  including  31  December  2002,  whereupon  a
permanent Chief Financial  Officer took over the role with effect from 1 January
2003. Mr. Steward joined us on assignment  from Fidelity  International  Limited
(one of our  major  shareholders)  where he was,  and  remains  Chief  Financial
Officer,  returning  there,  once his  assignment  with us concluded in December
2002.  The purpose of the assignment  was to undertake the  responsibilities  of
Chief  Financial  Officer after the  resignation of our previous Chief Financial
Officer and before the appointment of a permanent successor.

            Marina M. Wyatt (39) joined us in November 2002 taking over as Chief
Financial Officer from 1 January 2003. Immediately before she joined us, she had
been  Group  Financial  Director  of Psion  plc since  1996.  She  joined  Psion
originally as Group Financial  Controller in 1994. She is a Chartered Accountant
and worked for Arthur  Andersen  LLP in London and in the U.S.  between 1985 and
1994. She is a Non-Executive Director of Blackwell Publishing Ltd.

                                      -73-
<PAGE>

           Christopher  J. Woodman (41) joined us as Managing  Director,  Human
Resources,  in January 2003 on assignment from Fidelity  International  Limited.
Following an early career at Ford Motor Company,  London  Docklands  Development
Corporation  and  Cleanaway,  a joint venture  subsidiary of  GKN/Brambles,  Mr.
Woodman  joined  Fidelity  International  Limited  in  1995 as  Human  Resources
Manager.  In  1997,  he was  appointed  as  Human  Resources  Director  for  the
Investment   and   Institutional    business   organisations   within   Fidelity
International  Limited.  From 2000  through to the end of 2002,  he undertook an
assignment with Fidelity Management and Research Company in Boston, MA, as Human
Resources Director for the Equity Research and Equity Trading organisations.  On
his return to the U.K. he was  appointed as acting  Executive  Director of Human
Resources for Fidelity International Limited before taking up his current duties
with us.

            J. William Freeze (48) joined COLT in July 2002 as Regional Director
for the  North  Region.  Prior  to  joining  us,  he held the  position  of Vice
President-Northern Europe for Dell after which he was Chief Operating Officer of
KPNQwest   between   August   2001   and  May   2002.   The   majority   of  his
telecommunications career was spent with AT&T Corp. in the U.S., where he served
in various sales, marketing, product management and operations positions, before
leaving the United States in 1996,  to become the Chief  Operating  Officer  of
AT&T-Unisource.

            Kenneth C. Starkey (47) joined us as Chief Network  Officer in 2002,
becoming Chief Operations  Officer in May 2003 when he took over  responsibility
for the IT function in addition to Network &  Operations.  Prior to joining COLT
he held  the  position  of  Executive  Vice  President,  Telecommunications  for
Fidelity  Investments  from  1998 to  2002.  From  1987 to 1998 he held  various
positions with Bear Stearns & Co., including Managing Director of Telecom. Early
in his career he was with Executone of New York and MCI Communications Corp.

            Graham  N. F.  Hanson  (51)  joined  us in 1999 as  Group  Director,
Corporate  Development,  with  responsibility  for our business  strategy.  From
1996-1999,  he was  President  and CEO of GN Comtext  Ltd.,  a global  messaging
company.  Prior to this he spent a year with Arthur Anderson LLP, as Director of
European Telecommunications, developing their strategy for professional services
support to the telecommunications industry. Additionally, he spent 11 years with
BT, holding a number of positions,  both within the U.K. and  internationally in
various  marketing  and  product   management,   business  planning  and  market
development roles, including responsibility for their Payphone business.

            Ronald C. Duff (54) joined us in January 2003 as Managing  Director,
Corporate  Services  with  responsibility  for  all  internal  service  delivery
including procurement,  travel, real estate, security,  health and safety. Prior
to this  position he was  Managing  Director of Fidelity  Broadband  Group,  the
telecommunications venture capital division of Fidelity Investments. Before this
he was president of  Fidelity's  Corporate  Real Estate  group,  the real estate
division of Fidelity Investments.  Before joining Fidelity in 1994, Mr. Duff was
senior vice  president  of corporate  real estate at Bank of America.  Before he
joined Bank of America in 1983, he managed a variety of facilities  functions as


                                      -74-
<PAGE>
well as  Security  and  Telecommunications  at Trilogy  Systems  Corporation  in
Cupertino,  California.  He began his career at Amdahl Corporation in Sunnyvale,
California.

           Paul I. David (42) joined us in June 2000 to lead our  Internet  and
Hosting  business in the UK, becoming our Director of Marketing  responsible for
implementing our product and service  strategy,  in 2002. Prior to this he spent
19 years with Cable and Wireless  initially  specialising in  telecommunications
pricing.  He then had various  marketing  and product  development  positions at
Cable & Wireless and Mercury,  their UK division and in Hong Kong with Hong Kong
Telecom,  a company  majority-owned  by Cable &  Wireless,  where he  eventually
became General Manager for Corporate  Markets.  In 1997 he became Vice President
of Intranet and  Internet  Solutions of Omnes a joint  venture  between  Cable &
Wireless and Schlumberger,  in the USA. In 1999, Mr. David moved back to Cable &
Wireless  in  the  UK  as   Customer   Development   Director   for  its  global
Multi-National Customers division.


                                      -75-
<PAGE>
     B.     Compensation

            The total aggregate  remuneration  (including pension contributions)
paid or accrued  by us to (or for the  benefit  of) the  members of the Board of
Directors and the executive  officers (who are not  directors)  taken as a group
(23   persons)   during  the   financial   year  ended  31  December   2002  was
(pound)6,027,921. The  aggregate  compensation  paid or  accrued  by us to all
Directors  and  executive  officers  as a  group  during  such  period  included
(pound)1,715,987 in bonuses.
<TABLE>
<CAPTION>
                                               Travel                   PPP/Blue                            Other
       Name                Salary/Fee        Allowance       Bonus       Cross      Pension     Housing    Benefits        Total
==================================================================================================================================
<S>                          <C>                 <C>           <C>     <C>            <C>          <C>         <C>         <C>
Paul Chisholm                 30,000              0             0       9,798          0            0           0           39,798
Werner Klatten *1                  0              0             0           0          0            0           0                0

Catherine Biner Bradley*2     20,877              0             0           0          0            0           0           20,877

H. F. Van Den Hoven*          30,000              0             0           0          0            0           0           30,000
Robert Hawley*                30,000              0             0           0          0            0           0           30,000
Timothy T. Hilton*                 0              0             0           0          0            0           0                0
James Curvey*                      0              0             0           0          0            0           0                0
Barry  Bateman*                    0              0             0           0          0            0           0                0

Vincenzo Damiani*             13,316              0             0           0          0            0           0           13,316

Lawrence  Ingeneri3          216,125              0       252,831       3,763     30,529            0      30,342          533,590
Mark Jenkins                  58,140              0        33,841         673      8,140            0           0          100,794
Horst Enzelmuller4           143,570              0       188,173       1,956        962            0     410,167          744,828
Claude Olier5                141,801          9,750       211,781           0      8,290            0     317,602          689,224
Jonathan Watts6              117,850          2,666       144,000         722     20,664            0     180,465          466,367
Peter  Manning7              322,500              0             0       1,719     46,800            0     915,200        1,286,219
Lakh Jemmett                 125,500            410        76,500       1,116     17,430            0           0          220,956
Hugh  Wilson8                 85,256         25,666        45,000         884     29,167            0     151,666          337,639
Steven Robertson9            151,146            346             0         918     20,527            0           0          172,937
Steve Akin                   103,495              0       269,235           0     14,931       37,382           0          425,043
Kenneth Starkey               82,812              0       159,085           0          0            0      15,743          257,640
J. William Freeze             96,107              0       162,371       4,320        983            0       3,059          266,840
Marina Wyatt                  36,607              0       100,000           0        114            0           0          136,721
Graham Hanson                152,900            424        73,170       1,116     27,522            0           0          255,132
                           -------------------------------------------------------------------------------------------------------
TOTAL                      1,958,002         39,262     1,715,987      26,985    226,059       37,382    2,024,244       6,027,921
                           =======================================================================================================

<FN>
*   The outside directors do not receive any retirement benefits.
1.  Mr. Klatten resigned on 15 January 2002.
2.  Ms. Biner Bradley resigned on 23 May 2002.
3.  Mr. Ingeneri resigned on 30 June 2002.
4.  Mr. Enzelmuller resigned on 30 September 2002.
5.  Mr. Olier resigned on 31 March 2003.
6.  Mr. Watts resigned on 31 October 2002.
7.  Mr. Manning resigned on 25 July 2002.
8.  Mr. Wilson resigned on 31 October 2002.
9. Mr. Robertson resigned on 18 October 2002.
</FN>
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Number of Share
                               Options                                                           Usual
                      01-Jan-02  Granted Exercised  Lapsed  1-Apr-03 Date of  Market  Option     Date from
                                                                     Exercise Value   Exercise   Which                     Usual
                                                                                      Price per  Exer-                     Expiry
                                                                                      Share      cisable                   Date
<S>                  <C>           <C>     <C>      <C>    <C>                       <C>        <C>                       <C>
Paul W. Chisholm      5,100,000                             5,100,000                  0.6875    17 Dec 97 to 17 Dec 01    17 Dec 06

                        400,000                               400,000                  1.7000    15 Dec 98 to 15 Dec 02    15 Dec 07
------------------------------------------------------------------------------------------------------------------------------------
                      5,500,000                             5,500,000
------------------------------------------------------------------------------------------------------------------------------------
Werner E. Klatten 1      85,000                      85,000       Nil                 12.7440    14 Aug 00 to 14 Aug 04    14 Aug 09
------------------------------------------------------------------------------------------------------------------------------------
                         85,000                      85,000       Nil
------------------------------------------------------------------------------------------------------------------------------------
H. F. van den Hoven 8    48,000                                48,000                            17 Dec 96 to 17 Dec 00    17 Dec 06
(KBE)                                                                                  0.6875    for 1st 16,000 exercised
                                                                                       1.6590    for 2nd 16,000 exercised
                                                                                       8.5000    for 3rd 16,000 exercised
                                                                                      29.0000    for 4th 16,000 exercised
                                                                                      14.8600    for 5th 16,000 exercised
------------------------------------------------------------------------------------------------------------------------------------
                         48,000                                48,000
------------------------------------------------------------------------------------------------------------------------------------
Catherine Biner          48,000                                48,000                           17 Dec 96 to 17 Dec 00    17 Dec 06
Bradley 8                                                                              0.6875   for 1st 16,000 exercised
                                                                                       1.6590   for 2nd 16,000 exercised
                                                                                       8.5000   for 3rd 16,000 exercised
                                                                                      29.0000   for 4th 16,000 exercised
                                                                                      14.8600   for 5th 16,000 exercised
------------------------------------------------------------------------------------------------------------------------------------
                         48,000                                48,000
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
                                      -76-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Number of Share
                               Options                                                           Usual
                      01-Jan-02  Granted Exercised  Lapsed  1-Apr-03 Date of  Market  Option     Date from
                                                                     Exercise Value   Exercise   Which                     Usual
                                                                                      Price per  Exer-                     Expiry
                                                                                      Share      cisable                   Date
<S>                  <C>           <C>     <C>      <C>    <C>                       <C>        <C>                       <C>
Robert Hawley (CBE)      68,060                                68,060                  7.4940    25 Nov 99 to 25 Nov 03    25 Nov 08
------------------------------------------------------------------------------------------------------------------------------------
                         68,060                                68,060
------------------------------------------------------------------------------------------------------------------------------------
Peter D. Manning 7      850,000                     850,000       Nil                 10.9340    04 Apr 00 to 04 Apr 04    04 Apr 09
                        166,492                     166,492       Nil                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                        400,000                     400,000       Nil                 20.0550    27 Feb 02 to 27 Feb 06    27 Feb 11
                        750,000                     750,000       Nil                 26.7400    27 Feb 02 to 27 Feb 06    27 Feb 11
                                 1,000,000          500,000   500,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                      2,166,492  1,000,000        2,666,492   500,000
------------------------------------------------------------------------------------------------------------------------------------
Timothy T. Hilton           Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
                            Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
James C. Curvey             Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
                            Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
Barry R.J. Bateman          Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
                            Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
Lawrence M. Ingeneri7 2,050,000                             2,050,000                  0.6875    17 Dec 97 to 17 Dec 01    17 Dec 06
                        400,000                               400,000                  1.7000    15 Dec 98 to 15 Dec 02    15 Dec 07
                        120,926                     100,926    20,000                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                                   300,000          300,000       Nil                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                      2,570,926    300,000          400,926 2,470,000
------------------------------------------------------------------------------------------------------------------------------------
Mark Jenkins 3,4        160,000                               160,000                  6.6000    4 Aug 99 to 4 Aug 03       4 Aug 08
                          5,055                       5,055       Nil                 13.3700    27 Feb 06 (cliff vest)    27 Feb 11
                         20,000                                20,000                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                                    20,000                     20,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
                                    20,000                     20,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                        185,055     40,000            5,055   220,000
------------------------------------------------------------------------------------------------------------------------------------
Steven P. Akin              Nil    500,000                    500,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                                   500,000                    500,000
------------------------------------------------------------------------------------------------------------------------------------
Vincenzo Damiani            Nil     40,000                     40,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                                    40,000                     40,000
------------------------------------------------------------------------------------------------------------------------------------
E.Jonathan Watts 4,5    369,780                     369,780       Nil                  2.7425    23 Feb 99 to 23 Feb 03    23 Feb 08
                         12,035                      12,035       Nil                 13.3700    27 Feb 04 to 27 Feb 06    27 Feb 11
                        100,000                     100,000       Nil                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
------------------------------------------------------------------------------------------------------------------------------------
                        481,815                     481,815       Nil
------------------------------------------------------------------------------------------------------------------------------------
Hugh R.Wilson 4,5        19,200                      19,200       Nil                  0.6875    17 Dec 97 to 17 Dec 01    17 Dec 06
                         32,000                      32,000       Nil                  0.9563     6 Aug 98 to 6 Aug 02     06 Aug 07
                         40,000                      40,000       Nil                 11.3000     5 Mar 00 to 5 Mar 04     05 Mar 09
                          6,441                       6,441       Nil                 13.3700    27 Feb 04 to 27 Feb 06    27 Feb 11
                         75,000                      75,000       Nil                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
------------------------------------------------------------------------------------------------------------------------------------
                        172,641                     172,641       Nil
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      -77-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Number of Share
                               Options                                                           Usual
                      01-Jan-02  Granted Exercised  Lapsed  1-Apr-03 Date of  Market  Option     Date from
                                                                     Exercise Value   Exercise   Which                     Usual
                                                                                      Price per  Exer-                     Expiry
                                                                                      Share      cisable                   Date
<S>                  <C>           <C>     <C>      <C>    <C>                       <C>        <C>                       <C>
Horst Enzelmuller 6     780,000                               780,000                  0.6875    17 Dec 97 to 17 Dec 01    17 Dec 06
                        100,000                               100,000                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                                 300,000                      300,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                        880,000  300,000                    1,180,000
------------------------------------------------------------------------------------------------------------------------------------
Claude Olier 6          850,000                               850,000                  0.6875    17 Dec 97 to 17 Dec 01    17 Dec 06
                        100,000                      60,000    40,000                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                        250,000                     200,000    50,000                  8.4370    15 May 02 to 15 May 06    15 May 11
                        250,000                     200,000    50,000                 12.6555    15 May 02 to 15 May 06    15 May 11
                        250,000                     200,000    50,000                 16.8740    15 May 02 to 15 May 06    15 May 11
                                 400,000            320,000    80,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                      1,700,000  400,000            980,000 1,120,000
------------------------------------------------------------------------------------------------------------------------------------
Lakh Jemmett            594,000                               594,000                  1.7000    15 Dec 98 to 15 Dec 02    15 Dec 97
                          8,565                                 8,565                 13.3700    27 Feb 04 to 27 Feb 06    27 Feb 11
                         75,000                                75,000                 13.3700    27 Feb 02 to 27 Feb 06    27 Feb 11
                                 200,000                      200,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                        677,565  200,000                      877,565
------------------------------------------------------------------------------------------------------------------------------------
Steven Robertson 5      250,000                     250,000       Nil                 21.0000    12 Nov 00 to 12 Nov 04    12 Nov 09
                         15,000                      15,000       Nil                 13.3700    27 Feb 06 (cliff vest)    27 Feb 11
                         75,000                      75,000       Nil                  8.4370    15 May 02 to 15 May 06    15 May 11
                         25,000                      25,000       Nil                  7.1000     8 Jun 02 to 8 Jun 06      8 Jun 11
                                 400,000            400,000       Nil                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
------------------------------------------------------------------------------------------------------------------------------------
                        365,000  400,000            765,000       Nil
------------------------------------------------------------------------------------------------------------------------------------
Ronald Duff                 Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
                            Nil                                   Nil
------------------------------------------------------------------------------------------------------------------------------------
J. William Freeze           Nil  400,000                      400,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                            Nil  400,000                      400,000
------------------------------------------------------------------------------------------------------------------------------------
Kenneth Starkey             Nil  250,000                      250,000                  0.5042     6 Aug 03 to 6 Aug 07     06 Aug 12
------------------------------------------------------------------------------------------------------------------------------------
                                 250,000                      250,000
------------------------------------------------------------------------------------------------------------------------------------

Graham Hanson           125,000                               125,000                 24.3940     7 Dec 00 to 7 Dec 04     07 Dec 09
                         15,000                                15,000                 13.3700    27 Feb 06 (cliff vest)    27 Feb 11
                         30,000                                30,000                  7.1000     8 Jun 02 to 8 Jun 06     08 Jun 11
                                  20,000                       20,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
                                  20,000                       20,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                        170,000   40,000                      210,000
------------------------------------------------------------------------------------------------------------------------------------
Paul David               40,000                                40,000                 19.1570    11 Aug 01 to 11 Aug 05    11 Aug 10
                         40,000                                40,000                 19.4840    10 Nov 01 to 10 Nov 05    10 Nov 10
                         40,000                                40,000                  7.1000     8 Jun 02 to 8 Jun 06     8 Jun 11
                                  20,000                       20,000                  0.4125    26 Feb 03 to 26 Feb 07    26 Feb 12
                                  25,000                       25,000                  0.4800    29 Jul 03 to 29 Jul 07    29 Jul 12
------------------------------------------------------------------------------------------------------------------------------------
                        120,000   45,000                      165,000
------------------------------------------------------------------------------------------------------------------------------------
Marina Wyatt                Nil  400,000                      400,000                   0.4359   21 Nov 03 to 21 Nov 07    21 Nov 12
------------------------------------------------------------------------------------------------------------------------------------
                            Nil  400,000                      400,000
------------------------------------------------------------------------------------------------------------------------------------
Christopher Woodman         Nil  200,000                      200,000                   0.4067    3 Mar 04 to 3 Mar 08     3 Mar 13
------------------------------------------------------------------------------------------------------------------------------------
                            Nil  200,000                      200,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1. Mr. Klatten resigned as a director on 15 January 2002, and therefore,  all of
his options have subsequently lapsed.
2. Ms. Biner Bradley  resigned as a director on 23 May 2003, and therefore,  all
of her options have subsequently lapsed.
3. Mr. Jenkins was appointed director on 23 May 2002.

                                      -78-
<PAGE>

4. Messrs  Jenkins,  Watts and Wilson  originally  held deferred  bonus options,
which subsequently lapsed.
5. Mr. Robertson resigned on 18 October 2002 and Messrs. Watts & Wilson resigned
on 31 October 2002 and consequently  their options lapsed.
6. Mr.  Olier  resigned on 31 March 2003 but retains the ability to exercise any
vested  options  until 31  December  2004  and Mr.  Enzelmuller  resigned  on 30
September  2002 but retains the ability to exercise any vested  options until 31
December 2004.
7.  Messrs.  Ingeneri  and Manning  resigned as directors on 30 June 2002 and 25
July 2002  respectively.  Of the Options over shares granted to Mr. Ingeneri all
of those  that had  vested by 31  December  2002,  amounting  to an option  over
2,050,000 shares at the exercise price of (pound)0.6875,  an option over 400,000
shares at the exercise  price of  (pound)1.700  and an option over 20,000 at the
exercise  price of  (pound)13.370,  will  remain  capable of  exercise  until 31
December  2003 at which time all those  options over shares not  exercised  will
lapse.  All other  options over shares have  lapsed.  Of the options over shares
granted to Mr.  Manning an option over 500,000  shares at the exercise  price of
(pound)0.4125, will vest on 26 February 2003 and may be exercised at any time up
until 31  December  2005,  at which  time all  those  options  over  shares  not
exercised will lapse. All other options over shares have lapsed.
8. Each of Mr. van den Hoven and Ms. Biner Bradley have been granted  options to
subscribe  for  80,000  Ordinary  Shares,  16,000  of which  vested  and  became
exercisable  upon the closing of the  Company's  initial  public  offering on 17
December  1996 and  additional  amounts  of  16,000  each,  vested,  and  became
exercisable on 17 December 1997, 1998, 1999 and 2000. The exercise price for the
initial 16,000 options over shares is (pound)0.6875  per share and the price for
the second,  third,  fourth and fifth 16,000 options over shares is (pound)1.659
per share,  (pound)8.50 per share  (pound)29.00  per share and  (pound)14.86 per
share,  respectively.  Both  Mr.  van den  Hoven  and  Ms.  Biner  Bradley  have
previously  exercised those options over shares that vested in December 1996 and
December 1997.  Ms. Biner Bradley having  resigned as a director on 23 May 2002,
her options over shares have lapsed, to the extent they were not exercised by 23
May 2003.

<TABLE>
<CAPTION>
Directors' and Officers Savings-Related Share Options

Name                             Date             Date            Date      Granted        Exercised       Lapsed     Outstanding(1)
                             of grant       of vesting   of expiration
<S>                          <C>              <C>           <C>            <C>                  <C>       <C>             <C>

Peter Manning                 Dec-01           Mar-05        Aug-05          4,703               --        4,703               --
Lawrence Ingeneri             Dec-01           Mar-05        Aug-05          4,703               --        4,703               --
Mark Jenkins                  Dec-01           Mar-05        Aug-05          4,703               --        4,703               --
                              Dec-02           Mar-06        Aug-06         18,000               --           --           18,000
Paul Chisholm                     --               --            --             --               --           --               --
Catherine Biner Bradley           --               --            --             --               --           --               --
H.F. van den Hoven                --               --            --             --               --           --               --
Robert Hawley (CBE)               --               --            --             --               --           --               --
Werner Klatten                    --               --            --             --               --           --               --
Timothy Hilton                    --               --            --             --               --           --               --
James C. Curvey                   --               --            --             --               --           --               --
Barry R.J. Bateman                --               --            --             --               --           --               --
Claude Olier                      --               --            --             --               --           --               --
Steve Akin                        --               --            --             --               --           --               --
Vincenzo Damiani                  --               --            --             --               --           --               --
Ronald Duff                       --               --            --             --               --           --               --
Hugh Wilson                   Dec-01           Mar-05        Aug-05          4,703               --        4,703               --
E. Jonathan Watts                 --               --            --             --               --           --               --
Horst Enzelmuller                 --               --            --             --               --           --               --
Lakh Jemmet                   Dec-01           Mar-05        Aug-05          4,703               --           --            4,703
Steven Robertson                  --               --            --             --               --           --               --
William Freeze                    --               --            --             --               --           --               --
Christopher Woodman               --               --            --             --               --           --               --
Marina Wyatt                  Dec-02           Mar-06        Aug-06         18,000               --           --           18,000
Paul David                    Dec-01           Mar-05        Aug-05          4,703               --        4,703               --
Graham Hanson                     --               --            --             --               --           --               --

<FN>
(1) As at 2 June 2003.
</FN>
</TABLE>


                                      -79-
<PAGE>
     C.     Board Practices

Directors' Service Agreements

            Messrs.  van den Hoven,  Hilton,  Chisholm,  Hawley and Damiani have
service contracts with us in which there is no minimum term and no express right
to compensation for the termination of such  agreement(s).  Messrs.  Bateman and
Curvey  have no  specific  service  contracts  in  respect  of their  office  of
directors of the Board.  Messrs.  Bateman,  Curvey and Hilton do not receive any
remuneration for their services to the Company.  Of the fees paid to Messrs. van
den Hoven,  Chisholm,  Hawley and Damiani under the terms of their  appointment,
50% is paid in shares of the Company.

            None of our directors has a notice period of greater than one year,
or receives  retirement benefit.  The non-executive  directors are not appointed
for specified terms. The Board will review on a regular basis (and not less than
every three years) whether a  non-executive  director should continue in office.
Each non-executive  director's  appointment may be terminated by us at any time.
Mr.  Jenkins  was  appointed  a  director  on 23 May 2002 and has an  employment
relationship with us under which if such arrangement is terminated by us for any
reason other than for cause, we will make a severance  payment equal to 3 months
salary.

            Mr.  Akin was  appointed  as a director on 23 July 2002 and he is an
employee  of FMR  Corp.  His  services  are  provided  to us on the  terms  of a
secondment  agreement dated 31 July 2002 which provides for a secondment  period
of up to three  years with no  express  rights to  compensation  from us for the
termination of such agreement.

            For  further  information  regarding  the  period of  service of our
directors, please see Item 6.A. "Directors and Senior Management."

            Compensation  for senior executive  officers  comprises base salary,
annual bonus, pension contributions, benefits and participation in our share and
share option plans.  Base salary is not normally reviewed  annually,  but senior
executive  officers'  bonuses  (to the extent  that any are paid)  account for a
considerable amount of total consideration, reflecting their performance and the
contribution  they make to our success.  Pension  contributions  are  determined
based on employee age and years of service and benefits include, as appropriate,
car allowances,  housing  benefits,  private health  insurance and other similar
benefits.

            The  Board,  which  meets not less than four  times  each  year,  is
primarily responsible for our strategy and approval of budgets,  acquisition and
divestment  policy.  Certain  matters may be delegated  from time to time to the
Sub-Committee of the Board.

            The Board has established four committees as follows:

            The  Sub-Committee  of  the  Board:   comprising   Messrs.   Bateman
(Chairman),  Akin and any other  director,  as  appropriate.  The  Sub-Committee
oversees the management of our business and affairs of the Company  generally in
accordance with the authority delegated by the Board from time to time.

            The  Audit  Committee:   comprising  exclusively  the  non-executive
directors  Messrs.  van den Hoven  (Chairman),  Hawley  and  Damiani.  The Audit
Committee  examines the process of internal control including the scope and work
of internal audit and financial reporting,  accounts and interim statements.  It
also reviews the  independence,  scope,  quality and cost  effectiveness  of the
external  audit and provides a forum  through  which both  internal and external
auditors  report to the  Board.  The Audit  Committee  meets not less than three
times in each year and reports to the Board.  The directors are  responsible for
our system of internal  control and for  reviewing its  effectiveness  while the
role of management is to implement Board policies on risk and control. The Audit

                                      -80-
<PAGE>
Committee,  in  addition to its review of the scope and results of the audit and
the activities of the external and internal  auditors,  has as part of its terms
of reference  the  responsibility  for  overseeing  internal  control  including
operational  and  financial  controls,  business  ethics,  risk  management  and
compliance.

            The Nominating  Committee:  comprising Messrs.  Chisholm (Chairman),
Bateman,  Curvey and Hawley. The Nominating  Committee  nominates  directors for
appointment  to stand for  election  to the Board.  The  Chairman  will  propose
candidates (although other directors may also do so) and the Committee will meet
to ensure the  suitability of the candidate and will then put a formal  proposal
to the Board.  Before the nomination is formally made each director will have an
opportunity to meet the candidate.

            The Compensation  Committee:  comprising Messrs Bateman  (Chairman),
Curvey   and   Damiani.   The   Compensation   Committee   examines   and  makes
recommendations  with regard to the compensation of our executive  directors and
is  responsible  for  approving  the grant of options and shares  under the COLT
Telecom Group Share Plan, the COLT Performance  Share Plan and the COLT Deferred
Bonus Plan.  The  Compensation  Committee is  responsible  for ensuring that the
remuneration  packages of the executive  directors are  appropriate  to attract,
retain and motivate individuals of the calibre and quality required by us.

            The Articles of  Association  require that all directors  retire and
submit themselves for re-election each year.

            The business address of the Directors is c/o COLT Telecom Group plc,
Beaufort House, 15 St. Botolph's House, London, EC3A 7QN, England.

     D.     Employees

            At 31 December  1999, we employed  2,494  employees,  at 31 December
2000 we  employed  4,012  employees  and at 31 December  2001 we employed  5,345
employees.

            At 31 December  2002, we employed  4,684  employees  none of whom is
represented  by a union or  covered by a  collective  bargaining  agreement.  We
believe that our relationship with our employees is good. In connection with the
construction  and  maintenance  of our  networks  and the  conduct  of our other
business operations, we use third party contractors, some of whose employees may
be represented by unions or collective bargaining agreements.

            Headcount at 31 December 2002 by geographic region was:

                        North Region(1):                            1,365
                        Central Region(2):                          1,447
                        South Region(3):                              916
                        EBusiness:                                    481
                        ENS:                                          242
                        Group/other:                                  233
                        ------------                                  ---
                        Total:                                      4,684

(1)  The North Region comprises the countries of Belgium,  Denmark, Ireland, The
     Netherlands, Sweden and the United Kingdom.
(2)  The  Central  Region  comprises  the  countries  of  Austria,  Germany  and
     Switzerland.
(3)  The South Region  comprises  the countries of France,  Italy,  Portugal and
     Spain.

                                      -81-
<PAGE>
     E.     Share Ownership

            On 7 November  1996,  we  established  the Share  Option  Plan1 (the
"Option Plan") for the issuance to employees of the Group and consultants to the
Group of options to purchase  our  Ordinary  Shares.  At 2 June 2003  options to
subscribe for our Ordinary Shares under the Option Plan were as follows:
<TABLE>
<CAPTION>
Date of      Exercise         Dates of           Date of                 Number of Ordinary Shares under option
grant        price            vesting            expiration   Granted          Exercised          Lapsed            Outstanding
-----        -------------    ----------------   ----------   ----------       ----------         ---------         -----------
<S>          <C>             <C>               <C>           <C>                <C>              <C>               <C>
Dec 96       (pound)0.6880    Dec 97 to Dec 01   Dec 06       25,824,000         9,947636         6,025,964         9,850,400
Jan 97       (pound)0.7790    Jan 98 to Jan 02   Jan 07          396,000          178,400           149,600            68,000
Apr 97       (pound)0.7060    Apr 98 to Apr 02   Apr 07        1,280,000          665,400           377,600           237,000
Aug 97       (pound)0.9560    Aug 98 to Aug 02   Aug 07        2,488,000          722,000           759,600         1,006,400
Nov 97       (pound)1.2850    Nov 98 to Nov 02   Nov 07        3,196,000        1,418,362           881,981           895,657
Dec 97       (pound)1.7000    Dec 98 to Dec 02   Dec 07        4,204,000        1,104,400           528,800         2,570,800
Feb 98       (pound)2.7380    Feb 99 to Feb 03   Feb 08          140,000           56,000            73,044            10,956
Feb 98       (pound)2.7430    Feb 99 to Feb 03   Feb 08          900,000          530,220           369,780                --
May 98       (pound)4.7560    May 99 to May 03   May 08          830,000          207,750           136,000           486,250
Aug 98       (pound)6.6000    Aug 99 to Aug 03   Aug 08        2,906,000          591,544         1,398,256           916,200
Nov 98       (pound)7.4940    Nov 99 to Nov 03   Nov 08        1,408,075          113,215           969,167           325,693
Dec 98       (pound)7.8770    Dec 99 to Dec 03   Dec 08          100,000               --           100,000                --
Mar 99       (pound)11.300    Mar 00 to Mar 04   Mar 09          990,000          122,500           505,346           362,154
Apr 99       (pound)10.934    Apr 00 to Apr 04   Apr 09        1,000,000          150,000           850,000                --
May 99       (pound)12.254    May 00 to May 04   May 09          585,000           58,000           240,000           287,000
Aug 99       (pound)12.744    Aug 00 to Aug 04   Aug 09          930,000           15,000           619,292           295,708
Nov 99       (pound)21.000    Nov 00 to Nov 04   Nov 09          800,500               --           517,644           282,856
Dec 99       (pound)24.394    Dec 00 to Dec 04   Dec 09          740,000               --           166,271           573,729
Feb 00       (pound)36.177    Feb 01 to Feb 05   Feb 10          745,000               --           375,000           370,000
May 00       (pound)22.610    May 01 to May 05   May 10          792,500               --           310,000           482,500
Jun 00       (pound)26.660    Jun 01 to Jun 05   Jun 10          846,000               --           298,875           547,125
Aug 00       (pound)19.157    Aug 01 to Aug 05   Aug 10        1,181,500               --           499,802           681,698
Aug 00       (pound)17.727    Aug 01 to Aug 05   Aug 10          317,500               --           126,250           191,250
Nov 00       (pound)19.484    Nov 01 to Nov 05   Nov 10          800,000               --           250,000           550,000
Dec 00       (pound)15.184    Dec 01 to Dec 05   Dec 10          757,441               --           247,900           509,541
Feb 01       (pound)13.370    Feb 02 to Feb 06   Feb 11        2,401,040               --         1,141,749         1,259,291
Feb 01       (pound)20.055    Feb 02 to Feb 06   Feb 11          400,000               --           400,000                --
Feb 01       (pound)26.740    Feb 02 to Feb 06   Feb 11          750,000               --           750,000                --
May 01       (pound) 8.437    May 02 to May 06   May 11          866,500               --           469,890           396,610
May 01       (pound)12.656    May 02 to May 06   May 11          250,000               --           200,000            50,000
May 01       (pound)16.874    May 02 to May 06   May 11          250,000               --           200,000            50,000
Jun 01       (pound) 7.100    Jun 02 to Jun 06   Jun 11        2,688,750               --           857,500         1,831,250
Aug 01       (pound)3.2170    Aug 02 to Aug 06   Aug 11        1,464,500               --           450,340         1,014,160
Nov 01       (pound)1.7240    Nov 02 to Nov 06   Nov 11          231,000               --             3,000           228,000
Dec 01       (pound)1.5610    Dec 02 to Dec 06   Dec 11        1,410,500               --           177,500         1,233,000
Feb 02       (pound)0.4125    Feb 03 to Feb 07   Feb 12        4,688,500            2,000         1,896,000         2,792,500
May 02       (pound)0.4475    May 03 to May 07   May 12           72,500               --            50,000            22,500
Jul 02       (pound)0.4800    Jul 03 to Jul 07   Jul 12        5,602,300               --           379,720         5,222,580
Aug 02       (pound)0.5042    Aug 03 to Aug 07   Aug 12          250,000               --                --           250,000
Oct 02       (pound)0.3234    Oct 03 to Oct 07   Oct 12          250,000               --           180,000            70,000
Nov 02       (pound)0.4359    Nov 03 to Nov 07   Nov 12          400,000               --                --           400,000
Mar 03       (pound)0.4067    Mar 04 to Mar 08   Mar 13          200,000               --                --           200,000
Apr 03       (pound)0.4550    Apr 04 to Apr 08   Apr 13           32,500               --                --            32,500
May 03       (pound)0.4675    May 04 to May 08   May 13          150,000               --                --           150,000
May 03       (pound)0.4925    May 04 to May 08   May 13           50,000               --                --            50,000

                                                              76,565,606       15,882,427        23,931,871        36,751,308
<FN>
----------
 1    Also known as the COLT Telecom Group Share Plan.
</FN>
</TABLE>
                                      -82-
<PAGE>
            In addition to options  granted  under the Option  Plan,  options to
subscribe for 80,000  Ordinary  Shares were granted to each of Ms. Biner Bradley
and Mr.  van den Hoven,  16,000 of which  vested on the  closing of our  initial
public offering,  16,000 of which vested on each of 17 December 1997, 1998, 1999
and 2000. The exercise  price for the initial  16,000 options is  (pound)0.6875;
the exercise  price for the 16,000 options  vesting on 17 December  1997,  1998,
1999 and 2000 is (pound)1.65875,  (pound)8.50, (pound)29.00 and (pound)14.86 per
share respectively.  Mr. van den Hoven exercised 16,000 options with an exercise
price of (pound)0.6875 and 16,000 with an exercise price of (pound)1.65875 on 13
August 1999 and 5 June 2000, respectively. On 8 December 2000, Ms. Biner Bradley
exercised 16,000 options with an exercise price of (pound)0.6875 and 16,000 with
an  exercise  price  of  (pound)1.65875.  These  Options  are  included  in  the
Directors' and Officers' Share Options table above.  For additional  information
relating  to  the  Option  Plan,  please  refer  to  our  financial  statements,
incorporated herein by reference from our 2002 Annual Report. On 23 May 2002 Ms.
Biner Bradley  ceased to be a director of the Company and her remaining  options
lapsed on 23 May 2003.

Save as You Earn Purchase  Plan.  The COLT Save as You Earn Purchase  Plan2 (the
"SAYE Scheme") was approved by our  shareholders  on 17 June 1997. It is open to
all of our U.K.  employees  and our  participating  subsidiaries  subject to the
power of the Board to  impose a minimum  qualification  period,  which  must not
exceed  five years (and in the case of any  director,  who is required to devote
not less than 25 hours a week to his duties).  We have  established a Qualifying
Employee Share  Ownership  Trust  ("QUEST") to deliver the shares to U.K. option
holders at the time of exercise in the most  efficient  manner.  At 1 June 2003,
outstanding  options to subscribe for our Ordinary  Shares under the SAYE Scheme
were as follows:
<TABLE>
<CAPTION>
Date of Grant       Option Price       Date of Vesting  Options        Exercised      Lapsed        Outstanding
-------------       ------------       ---------------  ----------     ---------      -------       -----------
<S>               <C>                 <C>              <C>            <C>           <C>            <C>

19 Dec. 1997       (pound)   1.19      1 Mar. 2001       2,289,244     1,919,819        369,425             --
18 Dec. 1998       (pound)   6.01      1 Mar. 2002         592,929            --        592,929             --
17 Dec. 1999       (pound) 16.656      1 Mar. 2003         441,124            --        426,652         14,472
15 Dec. 2000       (pound) 11.784      1 Mar. 2004         804,128            --        766,933         37,195
28 Dec. 2001       (pound)  1.615      1 Mar. 2005       6,986,000            --      5,473,625      1,512,375
18 Dec. 2002       (pound)   0.40      1 Mar. 2006      18,409,635            --        203,860     18,205,775
                                                        ----------     ---------      ---------     ----------
                                                        29,523,060     1,919,819      7,833,424     19,769,817
</TABLE>

-------
2     Also known as the Savings-Related Share Option Plan.


                                      -83-
<PAGE>

            Of the  options  outstanding  under the SAYE  Scheme on 1 June 2003,
40,703 were held by our officers and directors.

            For additional information relating to the SAYE Scheme, please refer
to our  financial  statements,  incorporated  herein by reference  from our 2002
Annual Report.

Performance  Share Plan.  The  Performance  Share Plan was  established in 2000.
Awards under the  Performance  Share Plan are granted  according to an objective
performance  target set against  demanding  Company,  financial  and  individual
targets by the Compensation  Committee at the time of grant. Vesting of any such
grant only occurs if the long term performance criteria are achieved.  No awards
have been made under the plan to any director, officer or employee other than an
award of 20,194 shares made to Mr.  Manning in February  2001.  When Mr. Manning
subsequently  resigned  as a director of the  Company,  this award of shares has
lapsed. At 31 December 2002, none of these shares had vested and none other than
as  detailed  above had lapsed.  If awards are made in the future,  they will be
made to our Executive Directors or other key executives.  It is anticipated that
any new grants  would have a vesting  period of five years and a maximum  annual
vesting  of  shares  having  a  value  equal  to   approximately   100%  of  the
participant's  basic salary,  but the actual amount will depend upon  seniority.
Participants  in the  Performance  Share Plan will  continue  to be  entitled to
receive grants of options under the COLT Telecom Group Share Plan.

Deferred  Bonus Plan.  The Deferred  Bonus Plan was  established  in 2000. It is
intended that selected senior  employees will be entitled to receive an award of
shares representing a proportion (initially expected to be 50%) of the amount of
their annual cash bonus.
<TABLE>
<CAPTION>
Date of Grant             Price           Date of Vesting        No. of Shares       Lapsed      Outstanding
-------------             -----           ---------------        -------------       ------      -----------

<C>               <C>                        <C>                   <C>              <C>           <C>
27 Feb. 2001       (pound)13.370              Feb 04                24,182           7,319         16,863
</TABLE>

            Of the share  awards  outstanding  under this plan 1,685 are held by
our officers and directors.

            Participants may also be invited to defer all or a proportion of the
annual  cash  bonuses  which they would  otherwise  have  expected  to  receive.
Individuals  who do so will be entitled to receive an additional  matching award
in the form of an option to acquire  additional shares with a market value equal
to twice the amount of the deferred  bonus.  These awards are made in accordance
with the terms of the Option Plan.  Receipt of the matching award may be subject
to the achievement of performance  targets.  Awards will vest after a period set
by the Compensation Committee, which is expected normally to be three years.

                                      -84-
<PAGE>

            Of the  options  outstanding  under  this  plan  8,565  are  held by
officers and directors and are included in the  Directors'  and Officers'  Share
Options table above.

            The interests of Directors and Officers in our Ordinary  Shares (all
of which are beneficial interests) at 1 April 2003 are shown below:


            Paul Chisholm                  4,670,582
            Barry Bateman                         --
            James Curvey                          --
            H. F. van den Hoven               70,086
            Robert Hawley                     49,423
            Timothy Hilton                    46,080
            Mark Jenkins(1)                    2,522
            Lakh Jemmett                     272,138
            Steven Akin                           --
            Vincenzo Damiani                  29,834
            Ronald Duff                           --
            J. William Freeze                     --
            Stefan Pattberg                       --
            Graham Hanson                         --
            Paul David                            --
            Marina M. Wyatt                       --
            Christopher Woodman                   --


--------------------------------------------------------------------------------
(1) The number of shares  listed for Mr.  Jenkins  includes  1,685 bonus  shares
awarded under the terms of the Deferred  Bonus Plan, and although such shares do
not vest until  February 2004, Mr. Jenkins is deemed to have an interest in them
for purposes of this  disclosure.  All interests  reflected above represent less
than 1% of the Ordinary Shares outstanding.  For additional information on share
ownership plans, please refer our financial  statements,  incorporated herein by
reference from our 2002 Annual Report.

                                      -85-
<PAGE>

ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A.     Major Shareholders

            The following  table sets forth certain  information  at 2 June 2003
with respect to the beneficial  ownership of our Ordinary  Shares by each person
or entity known by us to beneficially own more than 5% of the outstanding  share
capital:

                                                         Ordinary Shares
                                                     ----------------------
        Shareholder                                  Number             %
        -----------                                  ------            ----
        FMR Corp. (1)
        82 Devonshire Street                          449,697,514      29.8
        Boston, Massachusetts 02109

        Fidelity Investors Limited Partnership(2)
        82 Devonshire Street                          313,073,111      20.8
        Boston, Massachusetts 02109

        Amvescap plc (3)                              178,071,972      11.8
        30, Finsbury Square
        London, EC2A 1AG
        England

        Fidelity International Limited (4)             80,634,479      5.3
        Pembroke Hall
        42 Crow Lane
        Pembroke
        Bermuda HM-19
--------------------
(1)   FMR Corp.'s holding is through (a) the 203,163,521 Ordinary Shares held by
      Colt,  Inc.  which is an indirect  wholly owned  subsidiary  of FMR Corp.,
      which is therefore also interested in the Company's  Ordinary Shares,  (b)
      94,467,409  Ordinary  Shares owned  beneficially  by The COLT,  Inc.  2002
      Annuity Trust,  86,613,815 Ordinary Shares owned beneficially by The Colt,
      Inc. 2001 Annuity Trust and 2,321,627  Ordinary Shares owned  beneficially
      by The Colt, Inc. 2001 Charitable Trust (together, the "COLT Trusts"). The
      Trustee of the COLT Trusts is a  wholly-owned  subsidiary of FMR Corp, (c)
      Strategic Advisers, Inc., a wholly-owed subsidiary of FMR Corp., which has
      sole voting power of  59,787,569  Ordinary  Shares  beneficially  owned by
      three charitable  foundations managed by Strategic Advisers,  Inc., Edward
      C.  Johnson  Fund  (9,715,293   Ordinary  Shares),   Fidelity   Foundation
      (9,810,218 Ordinary Shares), and Fidelity Non-Profit Management Foundation
      (42,940,431  Ordinary  Shares),  and (d)  665,200  Ordinary  Shares  owned
      beneficially by the COLT Incentive  Shares Plan Trust, of which Colt, Inc.
      is the joint trustee.

(2)   Fidelity Investors Limited Partnership is a Delaware limited partnership.

(3)   Amvescap PlC is a fund manager whose interest is a non-beneficial interest
      held either directly or through its subsidiary companies.

(4)   Fidelity International Limited, a Bermuda company, is related to FMR Corp.


                                      -86-
<PAGE>
            Between 30 September 1999 and 25 August,  2000, we issued 11,026,827
Ordinary Shares,  credited as fully paid upon the exercise of conversion  rights
attaching  to  our  2%  Senior   Convertible   Notes  due  2005  denominated  in
deutschmarks.

            On 6 April 2000, we issued 1,536,686  Ordinary  Shares,  credited as
fully paid upon the  exercise of  conversion  rights  attaching to our 2% Senior
Convertible Notes due March 2006 denominated in Euros.

            As a result of an increase in our issued share capital due primarily
to the  exercise  of  employee  share  options  and  the  exercise  of  warrants
associated  with our 12% Senior  Discount  Notes due 2006,  a  reduction  in the
interest  in shares of FMR Corp,  and its  related  entities  to 49.9985% of our
issued share capital, resulted during the year. Since that time Fidelity related
entities have sold further shares reducing FMR Corp's interest to  approximately
48.5% of the issued share capital.

            On 14 March 2001, Fidelity Investors Partnership Limited disposed of
4,137,050  Ordinary  Shares  and  Fidelity  International  Limited  disposed  of
1,157,327 Ordinary Shares.

            On 10 December 2001, we completed the sale of  241,827,007  Ordinary
Shares  at an issue  price of 0.62p to FMR  Corp.  (which  included  the sale of
173,813,695  Ordinary  Shares at an issue price of 0.62p to COLT,  Inc.  and the
sale of 48,759,510  Ordinary Shares at an issue price of 0.62p to The COLT, Inc.
2001  Annuity  Trust.)  for  the  purchase  price  of  approximately(pound)150.0
million.

            On 10 December  2001, we completed  the sale of 42,787,125  Ordinary
Shares at an issue  price of 0.62p to  Fidelity  International  Limited  for the
purchase price of approximately (pound)26.5 million.

            On 10 December  2001 we completed the sale of  192,822,500  Ordinary
Shares of 2.5p each at an issue  price of 0.62p to  Fidelity  Investors  Limited
Partnership for the purchase price of approximately (pound)119.5 million.

            As a result of the sale of these shares to the Fidelity  Group on 10
December  2001 they  gained an  interest of  approximately  54% in our  ordinary
issued share capital.

            On 31 January,  the 2002 COLT,  Inc. 2002 Annuity Trust  acquired an
interest in 120,000,000 Ordinary Shares from COLT, Inc.

            We  have  a  relationship  agreement  with  certain  members  of the
Fidelity Group which provides,  among other things, that as long as the Fidelity
Group owns, or has voting  control of, at least 50% of our Ordinary  Shares,  we
are  restricted  from  issuing any Ordinary  Shares or other  equity  securities
(including  securities  convertible  into Ordinary  Shares),  subject to certain
exceptions,  without  the prior  written  consent  of  Fidelity.  Other  than as
provided in the  relationship  agreement,  no shareholder has any special voting
rights.

                                      -87-
<PAGE>
     B.     Related Party Transactions

            Please refer to that  portion of Section A of Item 5 "Operating  and
Financial  Review and Prospects"  entitled  "Transactions  with  affiliates" and
Section A of Item 7 "Major Shareholders."

ITEM 8.     FINANCIAL INFORMATION

Financial Statements

            The Financial Statements are set forth in Item 18.

ITEM 9.     THE OFFER AND LISTING

     A.     Offer and Listing Details

            Our Ordinary  Shares are traded on the London Stock Exchange and our
ADSs, each representing four of our Ordinary Shares, are included for trading in
the Nasdaq National Market System ("Nasdaq"). The ADSs are evidenced by American
Depositary Receipts ("ADRs") issued by The Bank of New York, as Depositary under
a Deposit  Agreement,  dated 17  December  1996,  as amended,  among  COLT,  the
Depositary and the holders from time to time of the ADRs.

            The  tables  below set  forth,  for the  periods  indicated  (i) the
reported  high and low  sales  prices  for  Ordinary  Shares  based on the Daily
Official  List of the London Stock  Exchange and (ii) the reported  high and low
sales prices of the ADSs on Nasdaq.

              The London Stock Exchange                    Nasdaq
              -------------------------            -----------------------
                 (Pounds per Share)                (U.S. Dollars per ADS)
             High                 Low                High             Low
             ----                 ---                ----             ---
1998         9.57                1.54               65.50            10.47
1999        31.84                8.96              210.88            60.06
2000        40.73               12.10              266.88            62.75
2001        19.21                0.62              113.00             3.57
2002         1.33                0.28                8.00             1.63




                                      -88-
<PAGE>
<TABLE>
<CAPTION>

                           The London Stock Exchange                    Nasdaq
                           -------------------------            -----------------------
                              (Pounds per Share)                (U.S. Dollars per ADS)
                          High                 Low                High             Low
                          ----                 ---                ----             ---
<S>                      <C>                  <C>               <C>              <C>
2001
First Quarter             19.21                7.35              113.00           39.94
Second Quarter            10.17                6.28               61.10           24.58
Third Quarter              5.10                0.73               29.06            4.36
Fourth Quarter             1.92                0.62               11.04            3.57

2002
First Quarter              1.33                0.37                8.00            2.06
Second Quarter             0.53                0.32                3.20            1.90
Third Quarter              0.62                0.35                4.10            2.20
Fourth Quarter             0.54                0.28                3.08            1.63

2003
First Quarter              0.46                0.34                2.95            2.03
Second Quarter             0.66                0.32                4.99            2.00
(to 31 May)

<CAPTION>

                           The London Stock Exchange                    Nasdaq
                           -------------------------            -----------------------
                              (Pounds per Share)                (U.S. Dollars per ADS)
                          High                 Low                High             Low
                          ----                 ---                ----             ---
<S>                      <C>                  <C>               <C>              <C>
December, 2002             0.45                0.38                3.04            2.37
January, 2003              0.46                0.35                2.95            2.30
February, 2003             0.42                0.37                2.65            2.41
March, 2003                0.40                0.34                2.61            2.16
April, 2003                0.32                0.47                3.02            2.00
May, 2003                  0.66                0.43                4.54            2.75
</TABLE>

            At 2 June  2003,  23,985,140  Ordinary  Shares  and ADRs  evidencing
5,805,956 ADSs (representing  23,223,824 Ordinary Shares) were held of record in
the U.S. These Ordinary  Shares and ADRs, were held by 11 and 35 record holders,
respectively,  and represented 1.59% of, and evidenced ADSs  representing  1.54%
of, respectively, the total number of Ordinary Shares outstanding. Since certain
of these Ordinary  Shares and ADRs were held by brokers or other  nominees,  the
number of record holders in the U.S. may not be  representative of the number of
beneficial holders or of where the beneficial holders are resident.

                                      -89-
<PAGE>

            In 1996, we issued 314,000 units,  consisting of 12% Senior Discount
Notes due 2006 and warrants to purchase Ordinary Shares. Both the Discount Notes
and the  Warrants  are listed on the London  Stock  Exchange  although we do not
believe any active  trading  market exists for either the Discount  Notes or the
Warrants.  Accordingly,  no price information is provided for the Discount Notes
or Warrants.

            We issued (pound)50,000,000 principal amount of 10.125% Senior Notes
due November 2007 ("Sterling Senior Notes"),  DM150,000,000  principal amount of
8.875% Senior Notes due November 2007 ("DM 8.875% Senior Notes"),  DM600,000,000
principal  amount of 2% Senior  Convertible  Notes due August  2005 ("DM  Senior
Convertible Notes"),  DM600,000,000  principal amount of 7.625% Senior Notes due
July 2008 ("DM 7.625% Senior Notes"),  (euro)295,000,000  principal amount of 2%
Senior  Convertible  Notes due March 2006 ("Senior  Convertible  Notes due March
2006"),  (euro)368,000,000  principal amount of 2% Senior  Convertible Notes due
December 2006 ("Senior Convertible Notes due December 2006"),  (euro)320,000,000
principal amount of 7.625% Senior Notes due December 2009 ("(euro)7.625%  Senior
Notes") and  (euro)402,500,000  principal amount of 2% Senior  Convertible Notes
due April 2007 ("Senior Convertible Notes due 2007") (the Sterling Senior Notes,
DM 8.875% Senior Notes,  DM Senior  Convertible  Notes,  DM 7.625% Senior Notes,
Senior  Convertible Notes due March 2006, Senior  Convertible Notes due December
2006,  (euro)7.625%  Senior Notes and the Senior  Convertible Notes due 2007 are
collectively  referred to as the "Senior Notes"). The Senior Notes are listed on
the London Stock  Exchange  although we do not believe any active trading market
exists for the Senior Notes.  Accordingly,  no price information is provided for
the Senior Notes.

     B.     Plan of Distribution

            Not Applicable.

     C.     Markets

            See subsection A entitled "Offer and Listing Details," above.

ITEM 10.    ADDITIONAL INFORMATION

     A.     Share Capital

            Not Applicable.

     B.     Memorandum and Articles of Association

            We are registered with the Registrar for Companies for England and
Wales under Company No. 3232904.

Object and Purposes

            Our principal  objects are to carry on business as a public  limited
company  and to carry on any  trade or  business  whatsoever.  We have  multiple
business  objectives  and  purposes and is  authorised  to do such things as the
board may consider to further the  Company's  interests,  all as provided in its
Memorandum of Association at clause 4.

                                      -90-
<PAGE>

Directors

(A)   Subject to the  provisions of the  Companies  Acts and of paragraph (J) of
      article 94 of the  Articles  of  Association,  no  director or proposed or
      intending  director shall be disqualified  by his office from  contracting
      with the Company,  either with regard to his tenure of any office or place
      of profit or as vendor,  purchaser  or in any other manner  whatever,  nor
      shall any  contract  in which any  director  is in any way  interested  be
      liable to be  avoided,  nor shall any  director  who is so  interested  be
      liable to account  to the  Company or the  members  for any  remuneration,
      profit or other benefit realised by the contract by reason of the director
      holding that office or of the fiduciary relationship thereby established.

      Save as otherwise  provided by these  articles,  a director shall not vote
      on, or be counted  in the quorum in  relation  to, any  resolution  of the
      board in respect of any contract in which he has an interest  which (taken
      together  with any  interest of any person  connected  with him) is to his
      knowledge a material  interest  and, if he shall do so, his vote shall not
      be counted,  but this prohibition  shall not apply to any resolution where
      that  material  interest  arises  only  from one or more of the  following
      matters:

      (i)   the giving to him of any guarantee, indemnity or security in respect
            of  money  lent or  obligations  undertaken  by him or by any  other
            person at the request of or for the benefit of the Company or any of
            its subsidiary undertakings,

      (ii)  the giving to a third party of any guarantee,  indemnity or security
            in  respect  of a debt or  obligation  of the  Company or any of its
            subsidiary   undertakings   for  which  he   himself   has   assumed
            responsibility in whole or in part under a guarantee or indemnity or
            by the giving of security,

      (iii) where the Company or any of its subsidiary  undertakings is offering
            securities  in which  offer the  director  is or may be  entitled to
            participate  as a holder of  securities  or in the  underwriting  or
            sub-underwriting of which the director is to participate,

      (iv)  any contract in which he is  interested by virtue of his interest in
            shares or debentures or other securities of the Company or by reason
            of any other interest in or through the Company,

      (v)   any contract  concerning  any other  company (not being a company in
            which  the  director  owns  one per  cent or  more)  in  which he is
            interested   directly   or   indirectly   whether  as  an   officer,
            shareholder, creditor or otherwise howsoever,

      (vi)  any contract concerning the adoption, modification or operation of a
            pension fund or retirement death or disability benefits scheme which
            relates both to directors  and employees of the Company or of any of
            its subsidiary  undertakings  and does not provide in respect of any
            director as such any  privilege  or  advantage  not  accorded to the
            employees to which the fund or scheme relates,

                                      -91-
<PAGE>

      (vii) any  contract  for the benefit of employees of the Company or of any
            of its subsidiary  undertakings under which he benefits in a similar
            manner to the employees and which does not accord to any director as
            such any  privilege  or advantage  not accorded to the  employees to
            whom the contract relates, and

      (viii)any  contract for the  purchase or  maintenance  for any director or
            directors of insurance against any liability.

      A company  shall be deemed to be one in which a director owns one per cent
      or more if and so long as (but only if and so long as) he, taken  together
      with any person  connected with him, is to his knowledge  (either directly
      or indirectly) the holder of or beneficially interested in one per cent or
      more of any class of the equity  share  capital of that  company or of the
      voting  rights  available to members of that  company.  For the purpose of
      this paragraph of this article there shall be disregarded  any shares held
      by the  director  or any such person as bare or  custodian  trustee and in
      which he has no beneficial  interest,  any shares  comprised in a trust in
      which his, or any such person's,  interest is in reversion or remainder if
      and so long as some other  person is entitled to receive the income of the
      trust and any shares comprised in an authorised unit trust scheme in which
      he, or any such person, is interested only as a unit holder.

      Where  a  company  in  which  a  director  owns  one  per  cent or more is
      materially  interested in a contract,  he also shall be deemed  materially
      interested in that contract.

      If any  question  shall  arise  at any  meeting  of  the  board  as to the
      materiality of the interest of a director  (other than the chairman of the
      meeting) or as to the entitlement of any director (other than the chairman
      of the  meeting)  to vote or be counted in the quorum and the  question is
      not resolved by his voluntarily  agreeing to abstain from voting or not to
      be counted in the quorum,  the question  shall be referred to the chairman
      of the meeting and his ruling in relation to the director  concerned shall
      be conclusive  except in a case where the nature or extent of his interest
      (so far as it is known to him) has not been fairly disclosed to the board.
      If any question shall arise in respect of the chairman of the meeting, the
      question  shall be decided by a resolution of the board (for which purpose
      the  chairman  shall be  counted  in the  quorum but shall not vote on the
      matter) and the resolution shall be conclusive  except in a case where the
      nature or extent of the interest of the chairman (so far as it is known to
      him) has not been fairly disclosed to the board.

      A  director  who to his  knowledge  is in any  way,  whether  directly  or
      indirectly,  interested  in a contract  with the Company shall declare the
      nature of his  interest at the meeting of the board at which the  question
      of entering  into the  contract is first taken into  consideration,  if he
      knows his interest then exists,  or in any other case at the first meeting
      of the board  after he knows that he is or has become so  interested.  For
      the purposes of this article,  a general notice to the board by a director
      to the effect that (a) he is a member of a  specified  company or firm and
      is to be regarded as interested  in any contract  which may after the date
      of the  notice  be  made  with  that  company  or  firm or (b) he is to be
      regarded as  interested  in any  contract  which may after the date of

                                      -92-
<PAGE>

      the  notice be made with a  specified  person who is  connected  with him,
      shall be deemed to be a  sufficient  declaration  of  interest  under this
      article in relation  to any such  contract;  provided  that no such notice
      shall be effective  unless either it is given at a meeting of the board or
      the director  takes  reasonable  steps to secure that it is brought up and
      read at the next board meeting after it is given.

      References  in  this  article  to a  contract  include  references  to any
      proposed  contract and to any  transaction or  arrangement  whether or not
      constituting a contract.

(B)   A director  shall not vote on or be counted in the quorum in  relation  to
      any  resolution  of the  board  concerning  his  own  appointment,  or the
      settlement  or  variation  of the  terms  or the  termination  of his  own
      appointment,  as the  holder of any  office  or place of  profit  with the
      Company or any other company in which the Company is interested but, where
      proposals  are under  consideration  concerning  the  appointment,  or the
      settlement  or  variation  of  the  terms  or  the   termination   of  the
      appointment,  of two or more directors to offices or places of profit with
      the  Company or any other  company in which the Company is  interested,  a
      separate  resolution  may be put in relation to each  director and in that
      case each of the  directors  concerned  shall be  entitled  to vote and be
      counted in the quorum in respect of each resolution unless it concerns his
      own  appointment  or the  settlement  or  variation  of the  terms  or the
      termination of his own appointment or the appointment of another  director
      to an office or place of profit  with a company  in which the  Company  is
      interested  and the  director  seeking to vote or be counted in the quorum
      owns one per cent or more of it.

(C)   The board may  exercise  all the powers of the Company to borrow money and
      to mortgage  or charge all or any part of the  undertaking,  property  and
      assets  (present  and future) and  uncalled  capital of the Company and to
      issue debentures and other  securities,  whether outright or as collateral
      security for any debt,  liability or  obligation  of the Company or of any
      third party.

(D)   No person shall be disqualified  from being  appointed a director,  and no
      director  shall be required to vacate that  office,  by reason only of the
      fact that he has  attained  the age of seventy  years or any other age nor
      shall it be  necessary  by  reason  of his age to give  special  notice or
      comply with any other special formality in connection with his appointment
      or election.  Where the board convenes any general  meeting of the company
      at which (to the  knowledge of the board) a director  will be proposed for
      appointment  or  reappointment  who at the date for which the  meeting  is
      convened will have  attained the age of seventy  years or more,  the board
      shall give notice of his age in years in the notice  convening the meeting
      or in any document accompanying the notice, but the accidental omission to
      do so  shall  not  invalidate  any  proceedings,  or  any  appointment  or
      reappointment  of that director,  at that meeting.  At each Annual General
      Meeting  of COLT until the Annual  General  Meeting in 2001,  as nearly as
      possible,  one  third of the  directors  will  retire by  rotation  and be
      eligible for  re-election.  At the Annual  General  Meeting in 2002 and at
      each annual general meeting  thereafter,  all directors will retire and be
      eligible for re-election.

(E)   No shareholding qualification for directors shall be required.

                                      -93-
<PAGE>

Shares

            COLT's  authorised share capital consists of 2,075,000,000  Ordinary
Shares.

Ordinary Shares

            Voting  Rights.  Subject  to  any  special  rights  or  restrictions
(including  disenfranchisement)  as to voting  attached by or in accordance with
the Articles to any class of shares,  every  shareholder  present in person at a
general  meeting  shall  have one vote on a show of  hands  and on a poll  every
shareholder  present  in person or by proxy  shall  have one vote for each share
held.

            An annual general meeting of shareholders must be held once in every
year  (within a period of not more than 15 months  after the holding of the last
preceding  annual  general  meeting).  The Board of  Directors  may  convene  an
extraordinary  general meeting of shareholders  whenever they think fit. General
meetings may be held at such time and place as may be determined by the Board of
Directors.  An annual general  meeting may be convened on at least 21 clear days
written notice to shareholders  entitled to receive notice.  Most  extraordinary
general  meetings may be convened on at least 14 clear days written notice,  but
extraordinary  general meetings at which it is proposed to pass certain types of
special  resolutions  must be convened on at least 21 clear days written notice.
Except as otherwise provided by the Articles, two shareholders present in person
or by proxy and  entitled to vote shall  constitute a quorum for all purposes at
general meetings.

            Voting at any general meeting is by a show of hands unless a poll is
properly  demanded.  A poll may be demanded by (i) the  chairman of the meeting,
(ii) not less than five shareholders  present in person or by proxy and entitled
to vote, (iii) any shareholder or shareholders present in person or by proxy and
representing in the aggregate not less than one-tenth of the total voting rights
of all  shareholders  having the right to attend and to vote at such  meeting or
(iv) any shareholder or  shareholders  present in person or by proxy and holding
shares in COLT  conferring  a right to attend and to vote at the  meeting  being
shares  on  which an  aggregate  sum has  been  paid up  equal to not less  than
one-tenth  of the total sum paid up on all the  shares  conferring  that  right.
Where a poll is not demanded,  the  interests of  beneficial  owners of Ordinary
Shares who hold  through a nominee may not be  reflected in votes cast on a show
of hands if such  nominee  does not attend the meeting or  receives  conflicting
voting  instructions  from  different  beneficial  owners  for  whom it holds as
nominee.  Since under English law voting rights are only conferred on registered
holders of shares,  a person holding through a nominee may not directly demand a
poll. COLT's listing arrangements with the Nasdaq National Market require that a
poll be taken with  respect to any  proposed  action on which the holders of the
American  Depositary  Receipts (ADRs) have not instructed the depositary to vote
the same way.

            Unless  otherwise  required by law or the  Articles of  Association,
voting in a general meeting is by ordinary  resolution.  An ordinary  resolution
(e.g.,  a resolution  for the election of  directors,  the approval of financial
statements,  the declaration of a final  dividend,  the appointment of auditors,
the  increase of  authorised  share  capital or the grant of  authority to allot
shares) requires the affirmative vote of a majority of the shareholders entitled


                                      -94-
<PAGE>
to vote  and  present  in  person,  in the case of a vote by show of  hands,  or
present in person or by proxy and holding  shares  conferring in the aggregate a
majority of the votes actually cast on the ordinary resolution, in the case of a
vote by poll. A special  resolution (e.g., a resolution  amending the Memorandum
of Association or Articles of Association,  changing the name of COLT or waiving
the  statutory  pre-emptive  rights)  or  an  extraordinary   resolution  (e.g.,
modifying  the rights of any class of shares at a meeting of the holders of such
class or  relating  to  certain  matters  concerning  the  liquidation  of COLT)
requires the affirmative vote of not less than three-fourths of the shareholders
entitled to vote and present in person,  in the case of a vote by show of hands,
or present in person or by proxy and holding shares  conferring in the aggregate
at least three-fourths of the votes actually cast on the resolution, in the case
of a vote by poll. In the case of a tied vote,  whether on a show of hands or on
a poll, the chairman of the meeting is entitled to cast a deciding vote.

            Dividends.  COLT  may by  ordinary  resolution  of the  shareholders
declare  dividends but no such dividend  shall exceed the amount  recommended by
the  directors.  If and so far as in the opinion of the  directors the financial
position of COLT justifies  such  payments,  the directors may also from time to
time pay interim  dividends  of such amounts and on such dates and in respect to
such  periods as they think fit.  Subject to the extent that rights  attached to
any shares or the terms of issue thereof provide otherwise,  all dividends shall
(as regards shares not fully paid  throughout the period in respect of which the
dividend is paid) be apportioned and paid proportionately to the amounts paid up
during any portion of the period in respect of which the  dividend  is paid.  No
amount paid up on a share in advance of calls shall be treated as paid up on the
share.

            No dividend shall be paid  otherwise  than out of profits  available
for distribution  under the provisions of the Companies Act 1985. No dividend or
other  moneys  payable on or in respect of a share shall bear  interest  against
COLT.  Any  dividend  unclaimed  after a period of twelve years from the date on
which such  dividend was  declared or became due for payment  shall be forfeited
and shall  revert to COLT.  Dividends  may be declared or paid in any  currency.
Sanctions imposed, in accordance with the Articles of Association,  upon certain
shareholders  may include the  withholding  of payment of all or any part of any
dividends in specified circumstances.

            Distribution  of Assets.  Upon the winding up of COLT, the remaining
assets  available  for  distribution  will be paid to the  holders  of  Ordinary
Shares.

            If COLT commences liquidation, the liquidator may, with the sanction
of a special  resolution  of COLT and any other  sanction  required by law:  (i)
divide amongst the  shareholders  in kind the whole or any part of the assets of
COLT  (whether  they shall consist of property of the same kind or not) and, for
that  purpose,  set such values as he deems fair upon any property to be divided
and determine how the division shall be carried out between the  shareholders or
different  classes  of  shareholders;  or (ii) vest the whole or any part of the
assets in trustees upon such trusts for the benefit of the contributories as the
liquidator shall think fit; but no shareholder  shall be compelled to accept any
shares or other assets in respect of which there is any liability.

            Issues of Shares.  Subject  to the  Companies  Act 1985 and  without
prejudice  to any  special  rights  previously  conferred  on the holders of any
issued shares or class of shares, any share in COLT may be issued with such


                                      -95-
<PAGE>
preferred,  deferred or other special rights,  or subject to such  restrictions,
whether as regards  dividends,  return of capital,  voting or  otherwise,  as an
ordinary  resolution of a general meeting of shareholders  may from time to time
determine  (or,  in the  absence  of any  such  determination,  as the  Board of
Directors may  determine).  Subject to the  provisions of the Companies Act 1985
and the rights  conferred  on the  holders of  existing  shares,  COLT may issue
redeemable shares.

            Subject to the  provisions  of the  Companies  Act 1985  relating to
authority,  pre-emptive  rights and otherwise  and of any  resolution of COLT in
general  meeting,  all unissued shares shall be at the disposal of the directors
and they may allot (with or without  conferring a right of renunciation),  grant
options over or otherwise dispose of them to such persons,  at such times and on
such terms as they think proper.

            Transfer of Shares.  The Ordinary Shares are eligible for trading in
CREST,  a paperless  settlement  system  enabling  securities to be evidenced in
uncertificated  form and  transferred  otherwise  than by a written  instrument,
which  was  introduced  in the  United  Kingdom  in July  1996.  Any  holder  of
certificated  shares may transfer all or any of his shares by an  instrument  of
transfer in any usual or in any other form which the directors may approve.  The
instrument  of  transfer  of a share  shall be  executed  by or on behalf of the
transferor  and (except in the case of fully paid shares) by or on behalf of the
transferee. The directors may in their absolute discretion and without assigning
any reason  therefor  refuse to register any transfer of shares (not being fully
paid  shares),  provided  that when any such shares are admitted to the Official
List of the London  Stock  Exchange,  such  discretion  may not be  exercised to
prevent  dealings in such shares from taking place on an open and proper  basis.
The  directors may also refuse to register any transfer  (whether  fully paid or
not) to more  than  four  persons  jointly.  The  directors  may also  refuse to
register a transfer of certificated  shares unless the instrument of transfer is
both (i) in  respect  of only one  class of  share,  and (ii)  lodged  with COLT
accompanied by the relevant share  certificate(s) and such other evidence as the
directors  may  reasonably  require to show the right of the  transferor to make
such transfer.  Pursuant to the Articles of Association,  the Board of Directors
may decline to register a transfer of COLT's shares if a restriction  notice has
been  served on the  shareholder  unless the  transfer  is shown to the Board of
Directors  to be pursuant to an arm's length sale (as defined in the Articles of
Association).  Where the  Ordinary  Shares are held in  uncertificated  form the
directors  may refuse to register the transfer  only if such  transfer is not in
accordance with the  regulations  relating to CREST or the transfer is in favour
of more than four transferees.

Variation of Rights

            Subject to the  provisions of the Companies  Acts, all or any of the
rights  for the time  being  attached  to any class of shares for the time being
issued may from time to time  (whether  or not the company is being wound up) be
varied  either  with the  consent  in  writing  of the  holders of not less than
three-fourths  in nominal  value of the issued  shares of that class or with the
sanction of an extraordinary  resolution passed at a separate general meeting of
the holders of those shares.  All the provisions of these articles as to general
meetings of the Company shall with any necessary modifications apply to any such
separate general meeting,  but so that the necessary quorum shall be a person or
persons  holding or  representing  by proxy not less than  one-third  in nominal
value of the issued shares of the class, (but so that at any adjourned meeting


                                      -96-
<PAGE>

of the holders one holder present in person or by proxy  (whatever the number of
shares held by him) shall be a quorum), that every holder of shares of the class
shall be entitled on a poll to one vote for every share of the class held by him
and that any  holder of shares  of the class  present  in person or by proxy may
demand a poll.

General Meetings and Extraordinary General Meetings

            Any  general  meeting of the  Company  other than an annual  general
meeting  shall be called  an  extraordinary  general  meeting.  The board  shall
convene and the Company shall hold general  meetings as annual general  meetings
in accordance with the  requirements of the Companies Act. The board may convene
an extraordinary general meeting whenever it thinks fit.


            Two members present in person or by proxy and entitled to vote shall
constitute a quorum for all purposes, save as otherwise provided by the Articles
of  Association.  If a quorum  is not  present  within  five  minutes  after the
commencement time of the meeting,  the meeting will be adjourned to another day,
being not less than three and not more than  twenty  eight days  later.  At that
reconvened meeting,  one member present in person or by proxy shall constitute a
quorum.

            The board may direct  that  persons  wishing  to attend any  general
meeting  should  submit  to such  searches  or other  security  arrangements  or
restrictions as the board shall consider  appropriate in the  circumstances  and
shall be entitled in its absolute  discretion  to, or to  authorise  some one or
more persons who shall include a director,  the secretary or the chairman of the
meeting to, refuse entry to, or to eject from,  such general  meeting any person
who fails to submit to such  searches or to otherwise  comply with such security
arrangements or restrictions.

Limitations on Rights to own Shares

            Shareholders  with registered  addresses  outside the United Kingdom
are not  entitled  to receive  notices  from COLT unless they have given COLT an
address within the United Kingdom at which such notices may be served. There are
no  limitations  in the  Articles  of  Association  on the  rights of non United
Kingdom  citizens or residents to hold or exercise voting rights attached to the
Ordinary Shares.

Change in Control

            None.

Notification of Shareholding

            There are no provisions in the Memorandum of Association or Articles
of  Association  governing  the  ownership  threshold  above  which  shareholder
ownership must be disclosed.

                                      -97-
<PAGE>

Electronic Communications with Shareholders.

            Certain  shareholder   documents,   which  the  Companies  Act  1985
previously required a company to transmit to its members in writing, may be sent
(where the shareholder  concerned has expressly agreed) to an electronic address
nominated by the shareholder for that purpose.  We may also post  communications
on our website  where they will be accessible by  shareholders  and,  subject to
various  safeguards,  receive  proxies  electronically.  The  procedures are not
mandatory - they enable the Company and those of its shareholders who wish to do
so to  communicate  electronically  only if both  the  Company  and  shareholder
concerned  expressly  agree.  Members will not be obliged to receive  electronic
communications if they do not wish to do so.

Differences from law in host country

            With respect to the items  discussed  above,  applicable U.K. law is
not  materially  different  from  applicable  U.S.  law,  except  that  the U.S.
threshold for shareholder  ownership disclosure is 5% whereas the U.K. threshold
for shareholder ownership disclosure is 3%.

Changes in Capital

            The  provisions in the  Memorandum  and Articles of  Association  in
respect of changes in the Company's  capital are no more stringent than required
by  English  law.  Thus,  the  Company  may  by  ordinary  resolution  increase,
consolidate,  consolidate and then divide,  sub-divide its shares or any of them
(subject to the Companies  Acts), or cancel any shares which, at the date of the
resolution, have not been taken or agreed to be taken by any person. The Company
may,  subject  to the  Companies  Act,  by special  resolution  reduce its share
capital,  any capital redemption reserve, any share premium account or any other
undistributable reserve.

     C.     Material Contracts

            We have not entered  into any material  contracts  other than in the
ordinary course of business in the past two years.

     D.     Exchange Controls

            There are currently no U.K. foreign exchange control restrictions on
remittances of dividends on Ordinary Shares or on the conduct of our operations.

            Under English Law persons who are neither residents nor nationals of
the U.K. may freely hold,  vote and transfer their  Ordinary  Shares in the same
manner as U.K. residents or nationals.

     E.     Taxation

General

            In this section we summarise U.K. tax  consequences and U.S. federal
income tax consequences to U.S.  holders,  as defined below, of the acquisition,



                                      -98-
<PAGE>
ownership and disposition of senior notes,  units,  discount notes,  convertible
notes,  warrants,  Ordinary Shares and Ordinary Shares  represented by ADSs, or,
collectively, the "instruments." This summary is not a comprehensive description
of all of the  tax  consequences  that  may be  relevant  to  holders  of  these
instruments,  and you should  consult  your  professional  advisor as to the tax
consequences of the  acquisition,  ownership and disposition of the instruments.
In  particular,  the summary  does not  address  your tax  treatment  if you are
subject to special tax rules under income tax law, for example, if you are

      o     a bank,  life insurance  company,  regulated  investment  company or
            other financial institution,

      o     a broker or dealer in securities or foreign currency,

      o     a person that has a functional currency other than the U.S. dollar,

      o     a person who acquires an instrument in connection with employment or
            other performance of services,

      o     a person subject to alternative minimum tax,

      o     a  person  who owns an  instrument  as part of a  straddle,  hedging
            transaction,  conversion transaction,  constructive sale transaction
            or constructive ownership transaction,

      o     a tax-exempt entity, or

      o     an expatriate of the United States.

If you  hold 10% or more in  voting  power  or  value  of our  Ordinary  Shares,
including  through  ownership  of  outstanding  ADSs,  you could be  subject  to
additional rules for shareholders of controlled foreign  corporations that we do
not discuss in this summary.

            In addition,  the following  summary of U.K. tax  consequences  does
not, except where specifically discussed, address the tax consequences to you if
you are a U.S. holder

      o     that is  resident,  or,  in the  case of an  individual,  ordinarily
            resident, in the U.K. for U.K. tax purposes,

      o     whose holding of any  instruments  is  effectively  connected with a
            permanent  establishment  in the U.K.  through  which  you  carry on
            business  activities  or,  if you  are an  individual  who  performs
            independent  personal  services,  with a fixed base  situated in the
            U.K., or

      o     that is a  corporation  which,  alone or  together  with one or more
            associated corporations, directly or indirectly controls 10% or more
            of COLT.

            For purposes of this summary, a U.S. holder is

      o     a citizen or  resident  of the  United  States,  including  an alien
            individual who is a lawful  permanent  resident of the United States
            or meets the substantial  presence residency test under U.S. federal
            income tax laws,

                                      -99-
<PAGE>

      o     a corporation,  partnership or other entity treated as a corporation
            or partnership for U.S. federal income tax purposes, that is created
            or organised in or under the laws of the United  States,  any of its
            states or the District of  Columbia,  unless  otherwise  provided by
            Treasury regulations,

      o     an estate  the income of which is  subject  to U.S.  federal  income
            taxation regardless of its source,

      o     a trust if a court  within  the  United  States is able to  exercise
            primary  supervision over the administration of the trust and one or
            more  United  States  persons  have the  authority  to  control  all
            substantial  decisions of the trust, or electing trusts in existence
            on August 20, 1996 to the extent  provided in Treasury  regulations,
            or

      o     any person  otherwise  subject to U.S.  federal  income tax on a net
            income basis in respect of any of the instruments,

and if your status as a U.S. holder is not overridden pursuant to the provisions
of an applicable tax treaty.

            This summary  applies only to U.S.  holders who hold  instruments as
capital assets,  which  generally are assets held for investment  rather than as
inventory or as property used in a trade or business. In addition,  except where
specifically  discussed,  this  summary  applies to you only if you  purchased a
unit,  senior note,  discount note, or convertible  note pursuant to its initial
offering at the applicable issue price described below. Further, with respect to
the  discount  notes  and  convertible  notes,  except  where we make  reference
specifically   to  the  book-entry   interests  or  the  definitive   registered
securities,  this summary  applies to both forms of  ownership.  This summary is
based upon:

      o     current  U.K. law and current  U.S.  federal  income tax law and the
            practices of the U.K. Inland Revenue and the U.S.  Internal  Revenue
            Service,  and is  subject  to  subsequent  changes to those laws and
            practices, which could have retroactive effect,

      o     to the extent it is still applicable,  the 1975 U.S.-U.K. tax treaty
            relating to income taxes (the "1975 Treaty")

      o     the New Income Tax Convention (as defined below), and

      o     the U.S.-U.K.  tax treaty  relating to estate and gift taxes that is
            currently in effect.

            The  following  summary  does not  address the tax  consequences  to
holders of  instruments  under  state,  local or other (e.g.,  non-U.S.  federal
income, non-U.K.) tax laws.

            U.S.  holders  of ADSs will be  treated  as  owners of the  Ordinary
Shares  underlying the ADSs  evidenced by ADRs.  Accordingly,  unless  otherwise
noted, the U.S.  federal income and U.K. tax consequences  discussed below apply
commensurately to U.S. holders of ADSs and Ordinary Shares.

                                     -100-
<PAGE>

            For purposes of discussing  the tax  consequences  of investments in
notes,  we  refer to the  (euro)  senior  convertible  notes  and the DM  senior
convertible  notes  together as  convertible  notes.  In this summary the senior
notes are a separate category of notes that do not have a conversion feature.

            Holders of instruments should note that the U.S. and the U.K. signed
a new version of the Income Tax  Convention on 24 July 2001 (the "New Income Tax
Convention")  which entered into force on 31 March 2003. For U.K. taxes withheld
at source, the New Income Tax Convention is effective from 1 May 2003.

            Holders of  instruments  should  also note that any person who is or
would have been  entitled  to greater  benefits  under the 1975 Treaty than that
person is under the New Income Tax  Convention  may elect to have the provisions
of the 1975 Treaty  apply in their  entirety  for a period of 12 months from the
date on which the New Income Tax Convention otherwise would have effect. Holders
of Instruments are advised to consult their own tax advisers with respect to the
overall  tax   implications  of  the  New  Income  Tax   Convention,   including
specifically the implications of making the above mentioned election.

U.K. Tax Consequences

            We are resident in the U.K. for U.K. tax  purposes.  The  statements
regarding U.K. tax  consequences  set forth below relate only to the position of
persons who are the absolute  beneficial  owners of the relevant  notes,  units,
warrants or shares and may not apply to some classes of holders, such as dealers
in securities.

            If you are considering the acquisition,  ownership or disposition of
the instruments, you should consult your own tax advisor concerning the U.K. tax
consequences in light of your particular situation.

Taxation of the Senior Notes, the Convertible Notes and the Discount Notes

            Payment on the Notes.  Provided the senior  notes,  the  convertible
notes and the discount notes continue to be listed on the London Stock Exchange,
or some other stock exchange recognised by the U.K. Inland Revenue,  payments of
interest to you may be made without  withholding  or deduction  for U.K.  income
tax.

            In other cases,  interest will generally be paid after  deduction of
U.K.  income  tax  at  the  lower  rate,  currently  20%.  If  you  reside  in a
jurisdiction other than the U.K., you may be entitled to a refund of all or part
of any tax  withheld  or to make a claim  for  interest  on your  senior  notes,
convertible notes and discount notes to be paid without, or subject to a reduced
rate of,  deduction or  withholding  under the  provisions of an applicable  tax
treaty.  A refund  of all or part of any tax  withheld  may  also be  available,
depending on your individual circumstances, if you are a Commonwealth citizen or
otherwise entitled to a U.K. personal allowance.

            You will not  generally  be  assessed  for  U.K.  income  tax on the
discount or interest  on the note.  If you are,  you may be able to make a claim
under an  appropriate  tax treaty for an exemption  from, or a reduction of, any
U.K. tax liability that would otherwise arise.

                                     -101-
<PAGE>

            Original  Issue  Discount.  You will be paid original issue discount
without withholding for U.K. income tax.

            Sale or Disposal,  including Conversion or Redemption.  You will not
be  liable  for U.K.  tax on  gains  realised  on the  sale or  other  disposal,
including conversion or redemption, of your notes.

Taxation of the Warrants

            You will not be liable for U.K.  tax on the  exercise,  disposal  or
abandonment of your warrants.

Taxation of Ordinary Shares or ADSs

            Taxation  of  Dividends.  We  do  not  currently  anticipate  paying
dividends within the foreseeable future.

            There  is no  U.K.  withholding  tax  on  dividends.  A  shareholder
resident  for U.K.  tax  purposes in the United  Kingdom who receives a dividend
from us may generally  claim a tax credit in an amount equal to one-ninth of the
dividend.  The 1975 Treaty,  if it is still applicable by virtue of any election
made under the New Income Tax  Convention,  provides  for you to claim a similar
tax  credit,  but also  provides  for a deduction  to be withheld  from it of an
amount equal to 15% of the  aggregate  of the  dividend  and of the credit;  the
deduction so withheld accordingly eliminates your tax credit claim.

            Under the New  Income Tax  Convention,  U.S.  Holders  are no longer
entitled  to a payment  in  respect of any U.K.  tax  credit  received,  nor are
dividends subject to a notional U.K. withholding tax.

            Disposition  of the Ordinary  Shares or ADSs. You will not be liable
for U.K. tax on gains  realised on the sale or other  disposal of your  Ordinary
Shares or ADSs.

Inheritance and Gift Taxes

            If you are an  individual  domiciled in the U.S. for the purposes of
the  U.S.-U.K.  estate tax treaty and you are not a national of the U.K. for the
purposes of the U.S.-U.K.  estate tax treaty,  you will generally not be subject
to U.K.  inheritance  tax in respect of the  instruments on your death or upon a
gift of any of the instruments  during your lifetime provided that you have paid
any applicable U.S. federal gift or estate tax liability. If you have placed any
instruments  you  acquired  in a  trust  when  you  were  a U.S.  holder,  those
instruments  will  generally not be subject to U.K.  inheritance  tax if, at the
time you placed them in a trust, you were domiciled in the U.S. and you were not
a U.K.  national.  In the  exceptional  case  where  you  are  subject  to  U.K.
inheritance  tax and U.S.  federal gift or estate tax with respect to any of the
instruments  you hold or previously  acquired,  the U.S.-U.K.  estate tax treaty
generally  provides  that the tax you pay in the U.K.  may be  credited  against
federal  tax you pay in the U.S.  and  federal  tax you pay in the  U.S.  may be
credited  against tax you pay in the U.K. based on priority rules set out in the
U.S.-U.K. estate tax treaty.

                                     -102-
<PAGE>

Stamp Duty and Stamp Duty Reserve Tax

            No U.K.  stamp  duty or stamp  duty  reserve  tax is  payable on the
issue,  transfer,  conversion or  redemption  of your senior notes,  convertible
notes or discount notes, or on the issue of warrants.

            There will  generally  be a liability to stamp duty on a transfer of
warrants, or Ordinary Shares acquired upon exercise of the warrants, at the rate
of 0.5  percent  of the  amount  or value  of the  consideration  given  for the
transfer,  rounded up to the nearest  (pound)5  where  necessary.  Stamp duty is
normally a liability of the purchaser.

            There will also  generally  be a liability to stamp duty reserve tax
on an  agreement  to transfer  your  warrants,  or Ordinary  Shares  acquired on
exercise of the  warrants,  at the rate of 0.5 percent of the amount or value of
the agreed  consideration.  However,  the stamp duty  reserve tax  liability  is
cancelled,  and the tax will be refunded if already  paid,  if the  agreement is
completed by a duly stamped  instrument of transfer within six years of the date
on which the agreement was made, or, if the agreement was conditional,  the date
on which the condition is satisfied.

            You may be  charged  stamp  duty or stamp  duty  reserve  tax at the
higher  rate of 1.5 percent of the amount or value of the  consideration,  or in
some  circumstances,  the value of the Ordinary Shares  transferred or issued to
you,  your  nominee,  or your agent,  if you are a person  whose  business is or
includes  the  provision of  clearance  services or the  issuance of  depositary
receipts.  If your business is or includes  clearance  services,  you may elect,
with the U.K. Inland Revenue's approval in some circumstances,  to be subject to
stamp duty  reserve tax at the normal rate on  transactions  within the service,
instead of at the  higher  rate,  on the issue or  transfer  of shares  into the
clearance service.

Deposit Agreement

            No stamp duty  reserve tax is  chargeable  on an  agreement  for the
transfer  of an ADR or  beneficial  ownership  of an ADR;  and no stamp  duty is
payable  on  the  acquisition  or  transfer  of an  ADS  evidenced  by an ADR or
beneficial  ownership of an ADR,  provided  that any  instrument  of transfer or
written agreement to transfer is not executed in or brought into the U.K.

U.S. Federal Income Tax Consequences

            The following  summary is based upon the U.S.  Internal Revenue Code
of 1986, as amended,  applicable Treasury  regulations  promulgated and proposed
under the Internal Revenue Code,  judicial authority and current  administrative
rulings  and  practices.  All of these are  subject  to  change,  possibly  with
retroactive effect, or different interpretations.  We have not sought any ruling
from the Internal  Revenue  Service with respect to any matter  described in the
following  summary,  and we cannot provide any assurance that the IRS or a court
will agree with the statements we make in this summary.

            For purposes of this summary,  the spot rate generally  means a rate
that  reflects  a fair  market  rate of  exchange  available  to the  public for
currency  under a spot  contract in a free market and  involving  representative


                                     -103-
<PAGE>

amounts.  A spot  contract  is a contract to buy or sell a currency on or before
two business days following the date of the execution of the contract. If a spot
rate  cannot  be  demonstrated  in this  manner,  the IRS has the  authority  to
determine the spot rate.

Taxation of COLT

            In general,  we will be subject to U.S.  federal  income tax only to
the extent we have  income  which has its source in the U.S.  or is  effectively
connected  with a U.S.  trade or  business.  We  anticipate  that we will derive
substantially all of our income from foreign sources and that none of our income
will be  effectively  connected  with a U.S.  trade or business,  except for the
modest  amounts  of  income  from our two U.S.  subsidiaries.  In  addition,  we
anticipate  that any U.S.  source  investment  income we  derive  will come from
investments  the  interest  on which  will be exempt  from U.S.  federal  income
taxation.  In sum,  we should be  subject  to little or no U.S.  federal  income
taxation.

The Units

            Each unit is  comprised of one  discount  note and one warrant.  For
U.S. federal income tax purposes, the issue price of a unit is allocated between
the discount note and warrant components based on the relative fair market value
of each component to the fair market value of both components  taken together as
a unit.  Under the  original  issue  discount  regulations  provided by the U.S.
Treasury,  the  issue  price of the unit is equal to the  offering  price to the
public,  not including any bond house,  broker or similar person or organisation
acting in the capacity of an  underwriter,  placement  agent or  wholesaler,  at
which a substantial  number of the units is sold. Based on this method,  we have
determined that each discount note was originally  issued with an issue price of
$540.67 per $1,000 principal amount at maturity, and each warrant was originally
issued  with an  issue  price  of  $18.08.  This  allocation  reflects  our best
judgement as to the relative  values of the  components  at the time of original
issuance,  but we  cannot  assure  you  that  the IRS  will  not  challenge  our
allocation.  If the IRS  successfully  challenges  our  allocation  of the issue
price,  then the amount of OID accrual,  as explained  below,  and the amount of
gain or loss on the taxable  disposition  of your  discount  notes or  warrants,
would be different from that resulting under our allocation.

            Our determination of the issue price allocation between the discount
notes and warrants is binding on you, unless you disclose the use of a different
issue price allocation on the applicable form attached to your timely filed U.S.
federal income tax return for the taxable year that includes your acquisition of
the  unit.  If you  acquire a unit at a price  different  from that on which our
allocation is based,  you may be treated as having  acquired your discount notes
for an amount  greater or lesser than the amount we  allocated  to the  discount
notes, thereby resulting in acquisition premium or market discount, as explained
below.  If you  intend  to use an  issue  price  allocation  different  from our
allocation, you should consult your tax advisor as to the consequences.

            One consequence of allocating  issue price to the warrant portion of
a unit is that the  issue  price of the  discount  note is lower  than the issue
price of the unit. As a result, even though the discount notes have by their own
terms already accreted discount to reach their fully accreted principal amount,

                                     -104-
<PAGE>

for U.S.  federal  income  tax  purposes  there is  still  additional  OID to be
accrued,  as  described  below,  so that U.S.  holders  of  discount  notes will
generally  continue  to accrue OID in excess of cash  payments  on the  discount
notes until maturity or earlier redemption.

Taxation of the Senior Notes, the Discount Notes and the Convertible Notes

            Interest  on the  Senior  Notes.  If you use the  accrual  method of
accounting for U.S. federal income tax purposes,  you generally will be required
to include  interest in income as the interest  accrues on the senior notes.  If
instead  you use the cash basis  method of  accounting,  you  generally  will be
required to include interest in income when you receive interest payments on the
senior  notes.  This  interest  generally is treated as foreign  source  passive
income or financial services income for U.S. foreign tax credit purposes.  Based
upon applicable Treasury regulations, the senior notes are not treated as having
been issued with OID, as explained below.

            If you are a cash  basis  holder,  the amount  you are  required  to
include in income  upon  receipt of a payment on your  senior  notes is the U.S.
dollar value of the amount paid, determined on the basis of the spot rate on the
date you  receive  the  payment,  regardless  of whether  the payment is in fact
converted into U.S. dollars.  You will not recognise  exchange gain or loss upon
receipt of the interest payment.

            Unless  you have  made a spot  rate  convention  election  described
below,  if you are required to accrue  interest income on a senior note prior to
receipt,  then you will be required to include in income for each  taxable  year
the U.S.  dollar  value of the  interest  that has  accrued  during  that  year,
determined by translating  the accrued  interest at the average rate of exchange
for the period, or partial period if the period spans two taxable years,  during
which the  interest  has  accrued.  The average rate of exchange for an interest
accrual period is the simple average of the exchange rates for each business day
of that  period,  or some other  average  that you have  reasonably  derived and
consistently  applied.  Upon receipt of an interest payment in foreign currency,
you will  recognise  ordinary gain or loss in an amount equal to the  difference
between the U.S. dollar value of the foreign currency you receive, determined on
the basis of the spot rate on the date you  receive  the  payment,  and the U.S.
dollar value of the interest income that you have previously  included in income
with  respect to that  interest  payment.  Generally,  this gain or loss will be
treated as ordinary income or loss and will not be treated as interest income or
expense, except as any IRS administrative pronouncements provide otherwise.

            You may make a spot rate  convention  election to translate  accrued
interest  into  U.S.  dollars  at the spot  rate on the  last day of an  accrual
period, or, in the case of an accrual period that spans two taxable years and is
thus  treated as two partial  periods,  at the spot rates on the last day of the
taxable  year and on the last day of the accrual  period.  Additionally,  if you
receive a payment of interest  within five  business days of the last day of the
accrual period, you may instead translate the accrued interest into U.S. dollars
at the  spot  rate on the day of  receipt.  If you make a spot  rate  convention
election,  then you must apply it consistently to all debt instruments from year
to year, and you cannot change the election  without the consent of the IRS. You
should consult your tax advisor regarding this election.

                                     -105-
<PAGE>

            Interest  on the  Discount  Notes  and  Convertible  Notes.  For the
reasons  discussed below, the discount notes and convertible notes are deemed to
have been issued with original issue discount (OID) for U.S.  federal income tax
purposes.  Accordingly,  if you hold a discount note or convertible  note, then,
regardless of whether you are a cash or accrual basis taxpayer, you are required
to include in income in each  taxable  year,  in advance of your receipt of cash
payments on the discount  notes or convertible  notes,  that portion of the OID,
computed on a constant interest rate basis, attributable to each day of the year
during which you held the discount  notes or convertible  notes.  The amounts of
OID are  determined in the foreign  currency in which the notes are  denominated
and are then  translated  into U.S.  dollars.  The OID  generally  is treated as
foreign source passive income or financial  services income for U.S. foreign tax
credit purposes.

            The amount of OID with respect to each discount note and convertible
note is equal to the excess of its stated  redemption price at maturity over its
issue price. The issue price for a discount note is the amount of the unit issue
price that we  allocated to the  discount  note or another  issue price that you
determined in the manner discussed above. The issue price for a convertible note
is equal to the  offering  price to the public,  not  including  any bond house,
broker  or  similar  person  or  organisation  acting  in  the  capacity  of  an
underwriter, placement agent or wholesaler, at which a substantial number of the
convertible  notes is sold,  which in the  case of the  July  1998  offering  of
convertible notes was 1,000DM,  and in each of the March 1999, December 1999 and
March 2000 offerings was (euro)1,000.

            The stated  redemption  price at maturity of each  discount note and
convertible  note includes all payments to be made in respect of the note, other
than  payments  of  qualified  stated  interest.  Qualified  stated  interest is
interest that is unconditionally payable in cash or property,  except additional
debt of the  debtor,  at least  annually  at a single  fixed  rate.  Because  no
interest  was paid on the  discount  notes  prior to  2002,  none of the  stated
interest  actually paid on the discount notes will constitute  qualified  stated
interest unless the discount notes are deemed reissued for purposes of computing
OID. Your discount  notes are deemed  reissued if we exercise our  unconditional
option to make payments on the discount notes under an  alternative  schedule or
schedules.  So, in the  absence of a deemed  reissuance,  the stated  redemption
price at  maturity  of a  discount  note  equals  the sum of all  cash  payments
required to be made on the discount  note,  including  both principal and stated
interest.  By  contrast,  convertible  notes pay  interest  annually at a stated
percentage  of the issue  price,  followed  by a receipt of a  redemption  price
higher than the issue price. The convertible notes' stated interest  constitutes
qualified  stated interest,  and thus their stated  redemption price at maturity
consists only of the redemption price.

            Taxation of OID. If you hold a debt  instrument  issued with OID, in
each taxable year you are required to include in gross income for federal income
tax purposes an amount equal to the sum of the daily portions of the OID for all
days during the taxable  year on which you hold the debt  instrument,  including
the purchase date but excluding the disposition  date. The daily portions of OID
required to be included in your gross income in a taxable year are determined on
a constant interest rate basis by allocating to each day during the taxable year
on which you hold the debt  instrument a pro rata portion of the OID on the debt
instrument  which is  attributable  to the  accrual  period in which that day is
included.  The  amount  of the OID on your  discount  note or  convertible  note
attributable to each accrual period is the product of its adjusted issue price

                                     -106-
<PAGE>

at the beginning of the accrual period multiplied by its yield to maturity, less
any qualified  stated interest for that accrual period.  Your discount note's or
convertible  note's yield to maturity is that discount rate which,  when used in
computing the present value of all principal and stated interest  payments to be
made on a discount  note or  convertible  note,  produces an amount equal to its
issue price.  The adjusted issue price of your discount note or convertible note
at the  beginning  of an accrual  period is its issue  price plus the  aggregate
amount of OID that  accrued in all prior  accrual  periods,  determined  without
regard to the rules  described  below  concerning  acquisition  premium and bond
premium,  less any cash payments you receive on the discount note or convertible
note other than qualified stated interest.

            Unless you have made a spot rate  convention  election,  you will be
required to include in gross income for each taxable year the U.S.  dollar value
of the OID that has accrued  during that year,  determined  by  translating  the
accrued OID at the average rate of exchange for the period  during which the OID
has  accrued,  or partial  period if the OID  accrual  period  spans two taxable
years.  The average rate of exchange for an accrual period is the simple average
of the exchange rates for each business day of the period, or some other average
that you have reasonably  derived and  consistently  applied.  Upon receipt of a
payment of OID in a foreign currency,  you will recognise  ordinary gain or loss
in an  amount  equal to the  difference  between  the U.S.  dollar  value of the
foreign  currency you received,  determined on the basis of the spot rate on the
date the payment is received, and the U.S. dollar value of the OID that you have
previously included in income with respect to the payment.  Generally, this gain
or loss will be  treated as  ordinary  income or loss and will not be treated as
interest  income or  expense,  except as any IRS  administrative  pronouncements
provide otherwise.

            If you have  made a spot  rate  convention  election,  then you must
translate OID into U.S.  dollars at the spot rate on the last day of the accrual
period for the OID. In the case of an accrual period that straddles the last day
of your  taxable  year and is thus  treated  as two  partial  periods,  you must
translate  OID  into  U.S.  dollars  at the  spot  rates on the last day of your
taxable  year and on the last day of the accrual  period.  Additionally,  if you
receive  a  payment  of OID  within  five  business  days of the last day of the
accrual period,  you may instead translate the OID into U.S. dollars at the spot
rate on the day of receipt.

            Options Which Affect the Discount Notes' Yield to Maturity.  We have
unconditional  options that, if exercised,  would cause payments on the discount
notes to be made  under an  alternative  payment  schedule  or  schedules.  As a
result,  we are deemed to exercise or not exercise  these  options in the manner
and in the  combinations  that  minimise  the yield to maturity on the  discount
notes.  For  purposes  of  choosing  among  these  alternate  calculations,  the
alternate  yields to maturity on the discount  note are  determined by using any
date on which the discount note may be redeemed or  repurchased  as the maturity
date and the  applicable  amount  payable on that date as the  principal  amount
payable at maturity.

            If the  exercise  of an  option  actually  occurs  or does not occur
contrary to the baseline assumption described in the preceding paragraph,  then,
except to the extent that a portion of your  discount note is repaid as a result
of the change in  circumstances,  the yield to maturity of your discount note is
redetermined,  solely for purposes of computing  the accrual of OID, by treating
your discount note as reissued on the date of the change in circumstances for an
amount equal to the discount note's adjusted issue price on that date.

                                     -107-
<PAGE>

            Election to Treat all Interest as OID. If you hold a discount  note,
a  convertible  note or a  senior  note,  then you may be  eligible  to elect to
include in gross income for U.S.  federal  income tax purposes all interest that
accrues  on the  discount  note,  the  convertible  note or the  senior  note by
accruing  daily  portions  of  interest  on a  constant  interest  rate basis as
described  above.  For purposes of the election,  interest  includes  stated and
unstated interest,  acquisition  discount,  OID, de minimis OID, market discount
and de minimis market  discount,  as adjusted by any amortisable bond premium or
acquisition  premium. If you make this election in respect of a discount note, a
convertible note or a senior note with market discount or bond premium, you will
be deemed to have made an  election  to  currently  include  market  discount in
income or to amortise bond premium,  as the case may be. You should consult your
tax advisor regarding this election.

            Acquisition  Premium.  If you acquire a discount note or convertible
note and  immediately  after  acquisition  your  income  tax  basis in the note,
usually your purchase price for the note exclusive of any amounts paid allocable
to prior accrued qualified stated interest,

      o     exceeds the discount  note's or  convertible  note's  adjusted issue
            price, but

      o     is less  than or equal  to the sum of all  amounts  that  are  still
            payable  on  the  discount  note  or  convertible   note  after  the
            acquisition date, other than any qualified stated interest,

then the excess over  adjusted  issue price is  acquisition  premium.  The daily
portion of the OID that you are required to include in income will be reduced by
an amount equal to the OID  multiplied  by the  fraction  obtained by taking the
acquisition  premium  and  dividing  it by the  amount  of OID  for  the  period
remaining  after your  purchase to the  maturity  date of the  discount  note or
convertible note. As with the OID itself,  the amount of acquisition  premium is
determined in the foreign currency in which the note is denominated.

            Market  Discount.  Generally,  the market  discount rules  discussed
below will not apply to the senior notes,  discount notes or  convertible  notes
that you  acquire in an  original  issuance  of these  notes.  However,  you can
acquire a note at market  discount if you acquire a note and  immediately  after
acquisition  your income tax basis in the note,  usually your purchase price for
the note  exclusive of any amounts paid  allocable  to prior  accrued  qualified
stated interest,

      o     is less than its stated  principal  amount,  in the case of a senior
            note, or

      o     is less than its revised issue price,  as defined below, in the case
            of a convertible note or a discount note.

For federal  income tax purposes  you will not be treated as having  purchased a
note with  market  discount  if the amount of market  discount is less than a de
minimis threshold amount.

            The  revised  issue  price of a discount  note or  convertible  note
generally  equals  the sum of its  issue  price,  plus the  total  amount of OID
includible  in the gross  income of all holders for periods  before you acquired
the discount note or convertible  note,  without regard to any reduction in that
income resulting from acquisition premium or amortisable bond premium, and minus
any cash  payments  on the note in those  periods  other than  qualified  stated
interest.

                                     -108-
<PAGE>

            Under the  market  discount  rules,  you must  treat any gain on the
sale,  exchange,  redemption,  or other  taxable  disposition  of a senior note,
discount note or convertible  note, or any appreciation in a note in the case of
a nontaxable  disposition  such as a gift, as ordinary income to the extent that
market  discount  has accrued on the note.  You are also  generally  required to
defer,  until the  maturity  of the note or  earlier  taxable  disposition,  the
deduction  of all or a  portion  of the  interest  expense  on any  indebtedness
incurred or  continued to purchase or carry the senior  note,  discount  note or
convertible note. The senior notes, the discount notes and the convertible notes
provide that they may be redeemed, in whole or in part, before maturity. If some
or all of the senior notes, discount notes or convertible notes are redeemed and
you have acquired those notes with market discount, then you will be required to
treat the principal  payment as ordinary  income to the extent of accrued market
discount on all of your senior notes, discount notes or convertible notes.

            Any market  discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of the note, unless you
elect to accrue the market discount on a constant interest rate method.  You may
also elect to include  market  discount in income  currently  as it accrues,  on
either a ratable or constant  interest  rate method,  and your basis in the note
will increase by the amounts included in your income. If you make this election,
the rules described above regarding ordinary income on dispositions and deferral
of interest  deductions will not apply.  This current inclusion  election,  once
made,  applies to all market  discount  obligations  you acquire on or after the
first day of the first taxable year to which the election  applies,  and you may
not revoke the election  without the consent of the IRS. You should consult your
tax advisor regarding these market discount elections.

            In the case of a debt instrument denominated in a foreign currency -
for example,  the senior notes and the  convertible  notes - market  discount is
computed  in the  applicable  foreign  currency.  If you  do not  elect  current
inclusion of market  discount,  accrued market  discount is translated into U.S.
dollars at the spot rate on the date of payment or disposition.  No part of this
accrued  market  discount  is treated  as  exchange  gain or loss.  If you elect
current  inclusion of market discount,  the amount of market discount  currently
includible  in income for a taxable year is the U.S.  dollar value of the market
discount that has accrued during the year, determined by translating the accrued
market  discount at the  average  rate of  exchange  for the  accrual  period or
periods,  including,  if applicable,  the two partial  periods in the case of an
accrual period that straddles your taxable year. Accordingly, you will recognise
exchange  gain or loss with respect to this accrued  market  discount  under the
same  rules  that  apply to accrued  interest  you  receive on a senior  note or
convertible  note if you are on the  accrual  basis or to OID you  receive  on a
discount note or convertible note.

            Amortisable  Bond  Premium.   If  you  acquire  a  senior  note  and
immediately  after  acquisition your income tax basis in the note,  usually your
purchase  price for the note  exclusive of any amounts  paid  allocable to prior
accrued qualified stated interest, exceeds its stated principal amount, then you
will be  considered  to have  acquired  the senior note with bond  premium in an
amount  equal to that  excess.  Similarly,  if you  acquire a discount  note and
immediately  after  acquisition your income tax basis in the note,  usually your
purchase  price for the note  exclusive of any amounts  paid  allocable to prior


                                     -109-
<PAGE>
accrued  qualified stated interest,  is greater than its stated redemption price
at maturity, then you will be considered to have acquired the discount note with
bond premium in an amount equal to that excess.  However,  because your discount
notes will never pay any qualified  stated  interest unless deemed reissued with
qualified  stated  interest  payments,  as  discussed  above,  it is  unlikely a
discount note would ever be acquired with bond premium.  You generally may elect
to amortise bond premium over the remaining  term of the senior note or discount
note on a constant  interest rate method,  and the amount  amortised in any year
will be treated as a reduction  of your  interest  income from the note for that
year. If the bond premium  amortisation would be lower if calculated based on an
earlier  optional  redemption  date and price  than the  amount of  amortisation
calculated  through that date based on the note's  maturity  date and its stated
principal  amount,  then you must  calculate  the  amount and timing of the bond
premium  amortisation  deductions assuming that the senior note or discount note
will be redeemed on that earlier date at the optional  redemption price. You may
generally  recalculate  your bond  premium  amortisation  amount and schedule of
deductions  to the extent your note is not  actually  redeemed  on the  optional
redemption date. If you elect to amortise bond premium, you must reduce your tax
basis in the related  senior note or discount  note by the  aggregate  amount of
bond premium amortised.  If you do not elect to amortise bond premium,  then the
bond  premium on your note will  decrease the gain or increase the loss that you
otherwise recognise on a disposition of that note. Any election to amortise bond
premium  applies  to all debt  obligations,  other  than  debt  obligations  the
interest  on  which  is  excludable  from  gross  income,  that  you hold at the
beginning of the first  taxable year to which the election  applies and that you
thereafter  acquire.  You may not revoke an election to  amortise  bond  premium
without  the  consent  of the IRS.  You  should  consult  with your tax  advisor
regarding this election.

            The amortisable bond premium rules also apply to your acquisition of
a convertible  note, but only after first  determining the amount of your income
tax basis that is amortisable under these rules. For these purposes, your income
tax basis in your convertible note immediately after  acquisition,  usually your
purchase  price for the note  exclusive of any amounts  paid  allocable to prior
accrued qualified stated interest,  is reduced by any value attributable to your
option to convert  the note into  Ordinary  Shares of COLT.  If your  income tax
basis in the note as  adjusted  is still  greater  than the  convertible  note's
stated redemption price at maturity,  then the excess over the stated redemption
price at  maturity,  if you so elect,  is  subject  to the rules  governing  the
deduction of amortisable bond premium as described above.

            With respect to a discount note or convertible  note, if you acquire
the note with amortisable bond premium, then you are not required to include any
amounts of OID in income with respect to the note  because  there is no discount
between your cost basis and the note's stated redemption price at maturity.

            With respect to your senior notes,  discount  notes and  convertible
notes,  amortisable bond premium is calculated in the currency in which the note
is  denominated.  The  amortisation  deduction  calculated  reduces the interest
income  received  so that the net  amount  of  interest  less  the  amortisation
deduction in the applicable  foreign currency is the amount translated into U.S.
dollars and reported in your gross income.  You will recognise  ordinary gain or
loss in an amount equal to the difference  between the U.S.  dollar value of

                                     -110-
<PAGE>

the  amortisation  deduction at the time of the  deduction  and the U.S.  dollar
value of that  portion of the bond premium upon  acquisition  of the note.  This
gain or loss generally will not be treated as interest income or expense, except
as any IRS administrative  pronouncements  provide otherwise.  Each reduction of
your interest  income by  amortisable  bond premium also reduces your income tax
basis in the note by the U.S.  dollar value of that portion of amortisable  bond
premium as of your acquisition of the note.

            Additional  Amounts.  If you receive  any  additional  amounts  with
respect  to your  senior  notes,  discount  notes or  convertible  notes,  those
payments  will be taxed as  ordinary  income in  accordance  with your method of
accounting.  U.K.  withholding  tax, if any,  imposed on payments you receive on
your senior notes, discount notes or convertible notes will generally be treated
as foreign tax eligible for credit  against  your U.S.  federal  income tax. For
foreign tax credit purposes,  additional  amounts should generally be treated as
foreign  source  passive  income,  or,  in the case of some  holders,  financial
services income.

            Disposition.  In general,  you will  recognise gain or loss upon the
sale,  exchange,  redemption  or other taxable  disposition  of a senior note, a
discount  note,  or a  convertible  note equal to your  amount  realised  in the
disposition  less  your  adjusted  income  tax basis in the  note.  Your  amount
realised is the amount of cash and the fair market  value of property  received,
or the U.S.  dollar value at the spot rate on the date of the disposition of the
amount  realised in foreign  currency,  less any amount  attributable to accrued
qualified  stated  interest,  which  will be taxed  as  interest  in the  manner
described  above.  Your  adjusted  income tax basis in a note will  generally be
equal to:

      o     your  purchase  price for the note  exclusive  of any  amounts  paid
            allocable to prior accrued qualified stated interest,

      o     plus any  amounts  of OID  that you  include  in your  gross  income
            through the day preceding the day of disposition,

      o     plus the  accrual  of  market  discount,  if any,  that you elect to
            include in gross income on a current basis,

      o     minus the amount of any cash  payments you receive on the note other
            than qualified stated interest and

      o     minus any reductions in income tax basis related to amortisable bond
            premium if you elect to deduct it on a current basis.

If you hold a senior note, a discount note or a convertible  note purchased with
foreign  currency,  your  adjusted  income  tax  basis  will  be  determined  by
translating  the purchase  price,  excluding  any amounts paid for prior accrued
qualified stated interest, at the spot rate on the date of purchase.

            Gain or loss recognised upon the sale, exchange, redemption or other
taxable  disposition of a senior note,  discount note, or convertible  note will
generally  be capital  gain or loss.  The gain or loss will be ordinary  and not
capital to the extent of any gain or loss  attributable  to changes in  exchange
rates, described in the next paragraph,  and any gain attributable to any market


                                     -111-
<PAGE>
discount. If you are an individual, then your net capital gain will generally be
subject to U.S. federal income tax at a maximum rate of 20% if you have held the
senior note,  discount note or  convertible  note more than one year on the date
you sell or dispose of the note.  This  maximum  rate of 20% has been reduced to
15% for gains properly  taken into account during the period  beginning on 6 May
2003 and ending with the end of your taxable year that begins in 2008.  Ordinary
or capital gain will generally be treated as U.S. source income for U.S. foreign
tax credit purposes. You should consult your tax advisor regarding the source of
loss recognised on the sale,  exchange,  redemption or other taxable disposition
of a note.

            Gain or loss that you realise on the sale,  exchange,  redemption or
other taxable  disposition of a senior note,  discount note or convertible  note
attributable  to changes in exchange rates will be treated as ordinary income or
loss and generally  will not be treated as interest  income or expense except as
any IRS administrative  pronouncements provide otherwise. However, this ordinary
gain or loss is only  included in gross  income to the extent of your total gain
or loss on the sale, exchange, redemption or other taxable disposition.

            Your income tax basis in purchased  foreign currency  generally will
be its U.S.  dollar value at the spot rate on the date of purchase.  Your income
tax basis in foreign currency received on the sale,  exchange or retirement of a
senior note,  discount note or convertible  note will be the foreign  currency's
U.S. dollar value at the spot rate at the time the foreign currency is received.
The  amount  of gain or loss you will  recognise  on a sale,  exchange  or other
disposition  of foreign  currency  will be equal to the  difference  between the
number of U.S. dollars  received,  the U.S. dollar value at the spot rate of the
foreign  currency  received,  or the fair  market  value in U.S.  dollars of the
property received, as the case may be, and your income tax basis in the disposed
of foreign currency.  Accordingly,  if you purchase a senior note, discount note
or convertible note with foreign currency, you will recognise gain or loss in an
amount equal to the  difference,  if any,  between your tax basis in the foreign
currency and the U.S.  dollar value at the spot rate of the foreign  currency on
the date of purchase of the note. Generally,  this exchange gain or loss will be
ordinary  income or loss and will not be treated as interest  income or expense,
except as any IRS administrative pronouncements provide otherwise.

            Conversion of Convertible Notes in Exchange for Ordinary Shares. You
generally  will not  recognise  any income,  gain or loss upon  conversion  of a
convertible note into Ordinary Shares except:

      o     to the  extent  the  Ordinary  Shares  you  receive  are  considered
            attributable to interest and OID accrued but not previously included
            in  income,  in which  case the value of those  shares is taxable as
            interest and OID, respectively, in the manner described above,

      o     to the  extent of any  accrued  market  discount  which you have not
            previously included in income, if you have elected to include market
            discount in gross income on a current basis,

      o     with  respect to cash,  if any, you received in lieu of a fractional
            share of the Ordinary Shares, and

                                     -112-
<PAGE>

      o     with respect to foreign  currency gain or loss you realised upon the
            conversion, as described below.

Your income tax basis in the Ordinary  Shares that you receive on the conversion
of your  convertible  note generally will be the same as your adjusted tax basis
in the convertible  note just prior to the time of conversion,  increased by any
qualified  stated interest and OID you have accrued but not previously  included
in income  upon  conversion  to the extent the  Ordinary  Shares you receive are
considered  attributable  to that  accrued  interest  and OID,  increased by any
accrued market discount  includible in income due to conversion,  reduced by any
basis  allocable  to a  fractional  share  interest,  and  adjusted to take into
account  the  amount of any  foreign  currency  gain or loss  realised  upon the
conversion as described  below.  Except to the extent of Ordinary Shares treated
as  received  in respect  of  accrued  qualified  stated  interest  you have not
previously  included in income,  your holding period for the Ordinary Shares you
receive  on  conversion  will  generally  include  the  holding  period  of  the
convertible note converted.

            Any cash you  receive in lieu of  fractional  Ordinary  Shares  upon
conversion will be treated as a payment in exchange for the fractional  Ordinary
Shares. Accordingly,  your receipt of cash in lieu of fractional Ordinary Shares
generally  will  result in  capital  gain or loss,  measured  by the  difference
between  the  cash you  receive  for the  fractional  Ordinary  Shares  and your
adjusted tax basis  attributable  to the fractional  Ordinary  Shares.  Any gain
would be  ordinary  and not  capital  gain to the extent of any  accrued  market
discount on the notes that you had not previously included in income.

            Upon the conversion of a convertible note into Ordinary Shares,  you
will  recognise  foreign  currency  gain or loss in respect  of the  convertible
note's  principal  amount  and any  interest,  OID or market  discount  that you
accrued and included in income but have not yet received, but only to the extent
of the total gain or loss realised on the  conversion of the  convertible  note.
This foreign currency gain or loss will generally be ordinary income or loss and
will generally not be treated as interest  income or expense,  except as any IRS
administrative pronouncements provide otherwise.

            If you acquired a  convertible  note at a market  discount,  did not
elect to include that market  discount in gross income on a current  basis,  and
have elected to convert the  convertible  note into  Ordinary  Shares,  then the
amount of accrued market discount at the time of conversion is not includible in
your  income upon  conversion,  but is  transferred  as a tax  attribute  to the
Ordinary Shares you receive,  except to the extent of any gain on disposition of
a fractional  share that you report as attributable to accrued market  discount.
Any gain upon the subsequent  disposition of Ordinary Shares or ADSs you receive
as a result  of the  conversion  would be  ordinary  gain to the  extent  of the
accrued market discount transferred to your Ordinary Shares.

            Passive  Foreign  Investment  Company  Status.  If we  were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would  apply to holders of  convertible  notes.  These  special  rules are
discussed below.

                                     -113-
<PAGE>

Tax Treatment of Warrants

            Sale or  Redemption.  You will  recognise  gain or loss on a sale or
other  taxable  disposition  of a warrant in an amount  equal to the  difference
between the amount  realised and your income tax basis in the warrant,  which we
computed to be equal to $18.08 per warrant for  warrants  purchased  at original
issue. A sale or other taxable disposition of a warrant will result in a capital
gain or loss,  and this capital  gain or loss will be long-term  capital gain or
loss if you  have  held  the  warrant  for  more  than  one  year at the time of
disposition. If you are an individual, any long-term capital gain will generally
be subject to U.S.  federal  income tax at a maximum  rate of 20% (15% for gains
properly taken into account during the period beginning on 6 May 2003 and ending
with the end of your taxable year that begins in 2008). Gain on disposition of a
warrant will generally be treated as U.S. source income. You should consult your
tax  advisor  regarding  the source of loss  recognised  on the sale,  exchange,
redemption or other taxable disposition of a warrant.

            Exercise.  You will not  recognise  gain or loss on the  purchase of
Ordinary  Shares or ADSs for cash upon exercise of your  warrant,  except to the
extent you receive cash in lieu of fractional  shares less allocable  basis from
the warrant.  Your  adjusted  initial  basis of the Ordinary  Shares or ADSs you
acquire will be equal to your adjusted  basis of the warrant you exercised  plus
the  exercise  price,  less basis  allocable  to any cash you receive in lieu of
fractional  shares.  Your  holding  period  in the  Ordinary  Shares or ADSs you
acquire upon the  exercise of a warrant  will not include the holding  period of
that warrant.

            Lapse.  If you do not exercise  your warrant and allow it to expire,
the  warrant  will be deemed to have been sold or  exchanged  on the  expiration
date. As a result,  you will recognise a capital loss equal to your tax basis in
the  warrant.  That  capital loss will be long-term if you have held the warrant
for more than one year at the time of the expiration of the warrant.

            Passive  Foreign  Investment  Company  Status.  If we  were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would apply to holders of  warrants.  These  special  rules are  discussed
below.

Tax Treatment of Ordinary Shares or ADSs

            Distributions.  Distributions  you receive  from us with  respect to
your Ordinary  Shares or ADSs,  including any related  withheld tax by the U.K.,
will  constitute  dividends for U.S.  federal  income tax purposes to the extent
paid out of our current or  accumulated  earnings and profits as determined  for
U.S. federal income tax purposes.  To the extent that a distribution exceeds our
available  earnings  and profits,  it will be treated as a nontaxable  return of
capital to the extent of your adjusted tax basis in the Ordinary  Shares or ADSs
and thereafter as capital gain.  Dividends you receive generally will be treated
as  foreign   source   dividend   income  and  will  not  be  eligible  for  the
dividends-received   deduction  allowed  to  corporate  shareholders  under  the
Internal Revenue Code.

            For a temporary  period  beginning  with taxable years  beginning in
2003 and ending with taxable years beginning  after 31 December 2008,  qualified
dividend  income will generally be subject to a maximum U.S.  federal income tax
rate of 15%.  Because  our ADSs trade on  NASDAQ,  any  dividends  we pay to you


                                     -114-
<PAGE>

during that period should generally constitute qualified dividend income to you,
unless we are or become a foreign  personal holding company or a passive foreign
investment company, which are circumstances described below.

            The  amount of any  distribution  we make to you will equal the fair
market value in U.S.  dollars of the British  pounds  sterling or other  foreign
currency or other  property  you  receive,  including  the amount of any related
withheld tax, on the date of distribution,  which, in the case of a distribution
paid in British pounds  sterling or other foreign  currency will be based on the
exchange rate on the date of your receipt, or, in the case of the ADSs, the date
of receipt by the  Depositary.  For U.S.  federal income tax purposes,  you will
have a basis in any  British  pounds  sterling  or other  foreign  currency  you
receive equal to the dollar value of that  currency on the date of payment.  Any
gain or loss that you recognise  upon a subsequent  disposition of these British
pounds  sterling or other foreign  currency will generally be ordinary income or
loss.

            The 15% U.K.  withholding  tax will  generally  be treated  for U.S.
federal income tax purposes as a foreign tax that you may claim as a foreign tax
credit against your U.S.  federal  income tax liability,  subject to limitations
generally applicable to foreign tax credits. For example,  dividends distributed
by us will  generally be  categorised  as passive income or, in the case of some
holders,  as financial  services  income,  for  purposes of computing  allowable
foreign tax credits for U.S.  federal income tax purposes.  In general,  you may
not claim a foreign tax credit with respect to a category of income in excess of
the U.S.  federal income tax otherwise  payable with respect to that category of
income.  For purposes of this  determination you would be required to adjust the
amount of any qualified  dividend income we pay to you, while such dividends are
subject  to the 15%  maximum  tax  rate  described  above,  to  account  for the
difference between the 15% maximum tax rate and ordinary U.S. federal income tax
rates.  You may carry back any excess  foreign  taxes to the two  preceding  tax
years and then carry any remaining  excess foreign taxes forward five subsequent
tax years to reduce  your U.S.  federal  income tax  payable  on foreign  source
income in the same  category  that is not  otherwise  offset  by a  foreign  tax
credit. The consequences of the separate  limitation  calculation will depend on
the nature and  sources of your  income  and the  deductions  allocable  to that
income.  You should  consult with your tax advisor  regarding the use of foreign
tax credits.

            In lieu of claiming a credit, you may claim all foreign tax that you
paid during a particular taxable year as an itemised deduction. A deduction does
not reduce your U.S.  federal income tax on a dollar for dollar basis like a tax
credit.  The  deduction,  however,  is not subject to the  category  limitations
described above regarding foreign tax credits.

            Sale or Other Taxable  Disposition of Ordinary  Shares or ADSs. Upon
the sale,  exchange or other taxable disposition of an Ordinary Share or an ADS,
you will  recognise  gain or loss for U.S.  federal  income tax  purposes  in an
amount  equal to the  difference  between the fair market  value of property you
receive in exchange for the Ordinary Share or ADS and your adjusted tax basis in
the Ordinary Share or ADS.  Except to the extent of any accrued market  discount
in  respect of an  Ordinary  Share or ADS  accounted  for upon  conversion  of a
convertible  note, this gain or loss will be a capital gain or loss, and will be
long-term  capital gain or loss if you held the  Ordinary  Share or ADS for more
than one  year.  If you are an  individual,  the  long-term  capital  gain  will


                                     -115-
<PAGE>

generally  be subject to U.S.  federal  income tax at a maximum rate of 20% (15%
for gains properly taken into account during the period  beginning on 6 May 2003
and ending with the end of your  taxable  year that begins in 2008).  Under most
circumstances,  the gain or loss from the sale or exchange of Ordinary Shares or
ADSs will be treated as U.S.  source income or loss for U.S.  foreign tax credit
purposes.

            The surrender of ADSs in exchange for Ordinary  Shares will not be a
taxable event for U.S.  federal income tax purposes.  Accordingly,  you will not
recognise any gain or loss upon that surrender and exchange.

            Passive  Foreign  Investment  Company  Status.  If we  were or are a
passive foreign investment company for U.S. federal income tax purposes, special
rules would apply to holders of Ordinary Shares or ADSs. These special rules are
discussed below.

Constructive Distributions

            Section  305 of the  Internal  Revenue  Code  generally  treats as a
taxable distribution actual or constructive  distributions of stock with respect
to stock,  and for this purpose  stock  includes  warrants to purchase  stock or
convertible  securities.  If you hold a convertible note,  Treasury  regulations
will generally treat you as having received a constructive distribution when the
conversion price of the notes is adjusted to reflect taxable  distributions with
respect to the class of stock into which the notes are  convertible.  Similarly,
you may be treated as receiving a taxable constructive distribution with respect
to a warrant as a result of an adjustment in the exercise price of your warrant,
or in the number of shares of Ordinary Shares or ADSs  purchasable upon exercise
of that warrant. In addition,  our failure to adjust fully the conversion prices
of convertible notes or warrants,  or the shares  purchasable by those warrants,
to reflect  distributions of stock with respect to Ordinary Shares and ADSs, may
give rise to a deemed taxable stock distribution of Ordinary Shares and ADSs. In
sum,  an  adjustment  or lack of  adjustment  in the  conversion  prices  of the
convertible  notes  or  warrants  may  give  rise  to  a  deemed  taxable  stock
distribution  in respect of either the  convertible  notes,  the  warrants,  the
Ordinary Shares or the ADSs.

Foreign Personal Holding Company

            We  believe  that  neither  we nor any of our  subsidiaries  will be
classified as a foreign  personal  holding company under U.S. federal income tax
laws. If we or one of our subsidiaries  were so classified,  you generally would
be  required  to include in income as a  dividend  each year your  proportionate
share of our or our subsidiary's  undistributed foreign personal holding company
income.  We or one of our subsidiaries  will be classified as a foreign personal
holding company if:

      o     Ordinary  Shares  or ADSs  representing  more  than 50% of the total
            voting power of all classes of our stock  entitled to vote,  or more
            than 50% of the total value of our stock,

      o     is owned, directly or indirectly,  by five or fewer U.S. citizens or
            residents,  taking into account  applicable  constructive  ownership
            rules, and

                                     -116-
<PAGE>

      o     at least 60% of our gross  income or the gross  income of one of our
            subsidiaries consists of foreign personal holding company income.

Foreign personal holding company income generally includes dividends,  interest,
rents,  royalties and gains from the sale of stocks,  securities or commodities.
We  believe  that  we  and  our   subsidiaries  may  meet  the  above  ownership
requirement,  but that we will fail the above income requirement for the reasons
discussed  in  more  detail  below.  Accordingly,  we  expect  that  we and  our
subsidiaries  will not be treated as foreign personal holding companies for U.S.
federal income tax purposes.

            Our  principal  subsidiaries  and  affiliates  that  are  conducting
business  operations in the U.K.,  Germany,  France,  Austria,  the Netherlands,
Sweden,  Norway,  Ireland,  Portugal and Finland, as well as intervening holding
companies,  are classified as branches for U.S. federal income tax purposes.  We
will  thus  be  treated  for  U.S.  federal  income  tax  purposes  as  directly
recognising  100%  of the  income  of  these  principal  U.K.,  German,  French,
Austrian,  Dutch, Swedish,  Norwegian,  Irish,  Portuguese and Finnish operating
entities,  which we believe  has  consisted  and will  predominantly  consist of
active business  income.  Accordingly,  we believe that we will fail to meet the
foreign  personal  holding  company  income  requirement,  and so we will not be
treated  as a foreign  personal  holding  company  for U.S.  federal  income tax
purposes.

            Our  subsidiaries  that are classified as branches for U.S.  federal
income tax  purposes  are not  classified  as  corporations  and hence cannot be
foreign personal holding companies.  As to each of our subsidiaries which is not
classified  as a branch  but  rather is  classified  as a  corporation  for U.S.
federal income tax purposes,  we believe that each of these subsidiaries has not
met the foreign personal holding company income requirement described above, and
that each of these  subsidiaries  will not meet that  requirement in the future.
However,  we cannot  provide  any  assurance  that  applicable  tax law or other
relevant  circumstances  will not change in a manner which adversely affects the
determination of foreign personal holding company status.

Passive Foreign Investment Company

Summary

            Special U.S. federal income tax rules apply to U.S. holders that own
shares of a passive foreign investment  company,  commonly known by its acronym,
PFIC.  We believe  that we might have been a PFIC for 2002,  and that there is a
possibility  that we may be  classified as a PFIC for 2003. We do not believe we
were a PFIC for any period prior to 2002. If we are  classified as a PFIC,  U.S.
holders of our Ordinary Shares, ADSs, warrants and convertible notes at any time
during the  taxable  year could be subject to  additional  taxes and an interest
charge.  This adverse  consequence of becoming a PFIC could be reduced  provided
U.S.  holders elect one of two alternative tax regimes as described below and we
agree to provide the required  financial  information.  However,  holders of our
warrants  and  convertible  notes are limited in their  ability to elect the two
alternative tax regimes.

                                     -117-
<PAGE>

            The PFIC rules are  particularly  complex  and we  suggest  that you
consult  your  tax  advisor   regarding  the  PFIC  rules  and  their  U.S.  tax
consequences  to holders of Ordinary  Shares,  ADSs,  warrants  and  convertible
notes.

Discussion

            We will be  considered  a PFIC for any taxable  year in which 75% or
more of our  gross  income  is  passive  income  or in which  50% or more of the
average  value of our  assets is  attributable  to what are  considered  passive
assets.  Passive income generally  consists of interest,  dividends,  rents, and
royalties. Passive assets are assets that produce passive income or that we hold
for the production of passive  income.  The asset test is applied by determining
the  percentage  of  passive  assets  for each  quarter of our tax year and then
averaging those  percentages.  Our tax year is the calendar year. While the U.S.
holder   ultimately  makes  the   determination   concerning  our  PFIC  status,
legislative  history to the PFIC rules indicates that determining whether we are
a PFIC under the asset test can  generally  be done by assuming the value of our
assets  equals the  market  capitalisation  of our equity  plus the value of our
liabilities. However, there are no regulations or other guidance from the IRS on
the subject, and we cannot provide any assurance that the IRS will not challenge
this method.

            We believe  we are at risk of being a PFIC in 2002 and 2003  because
the average  percentage of our passive assets (cash and short-term  investments)
might have  equalled or exceeded (and might equal or exceed) 50% of the value of
all of our assets.  If we use the general method  described  above and value our
traded debt at its market  price,  we believe the average  percentage of passive
assets would have  exceeded 50% and therefore we would have been a PFIC for 2002
and that we might be a PFIC for 2003.  However,  if we use the book value of our
traded  debt  instead of its market  price,  we believe we would not have been a
PFIC for 2002, and probably would not be one for 2003. It might be proper to use
the book  value of our traded  debt  because  the value of our common  stock has
arguably been reduced by the book value and not market value of our liabilities,
and because the  legislative  history that describes the general method does not
indicate  whether  or not to use  book  value  or  market  price  of any  traded
liabilities.

            Whether  or not  we  have  been  or  will  be a  PFIC  is a  factual
determination that must be made separately for each calendar year, and we cannot
guarantee that the IRS will agree with our  methodology  for  ascertaining  PFIC
status or with our ultimate  determination.  In  addition,  the  calculation  to
determine  whether we are  classified  as a PFIC for the calendar year cannot be
made until after the close of the year,  when the financial  information for the
year ended December 31 has been finalised. Also, we cannot provide any assurance
that the applicable tax law or other relevant circumstances will not change in a
manner which affects our PFIC status determinations.

            If we are a PFIC,  then one or more of our  subsidiaries  could also
become a PFIC if the  subsidiary  is treated as a corporation  for U.S.  federal
income tax purposes,  rather than as an entity  disregarded from its sole owner,
and the subsidiary itself meets either the income or asset test for PFIC status.
We believe that none of our current  subsidiaries is a PFIC and that none of the
subsidiaries we establish in the future will be PFICs.  However, if that were

                                     -118-
<PAGE>

to change, additional, special rules would apply, and we would attempt to inform
you which of our subsidiaries has in our estimation become a PFIC.

            If we are a PFIC for a taxable  year,  then each of the  direct  and
certain  indirect  shareholders  holding our Ordinary Shares or ADSs at any time
during  that  taxable  year  could be  subject to an  increased  tax  liability,
possibly including an interest charge, under the default U.S. federal income tax
regime for PFICs.  Alternatively,  you might  avoid  some of the  increased  tax
liability if you elect to be treated under one of two  alternative  elective tax
regimes.  These three different tax regimes for PFIC  shareholders are discussed
in more detail below.

            Under the PFIC rules,  holders of our warrants and convertible notes
are treated as holders of options to  purchase  Ordinary  Shares or ADSs.  Under
proposed   Treasury   regulations,   the  default  tax  regime   governing  PFIC
shareholders  applies to holders of options to acquire our  Ordinary  Shares and
ADSs  with  respect  to  dispositions  of  options  to  purchase  stock,  and to
dispositions of stock acquired upon exercise of an option.  Treasury regulations
deny option holders the ability to use the elective  Qualified Electing Fund tax
regime  discussed below, and it is not clear to what extent option holders could
make use of the elective mark to market tax regime  discussed below. If you hold
our warrants or convertible notes, you should consult your tax advisor about the
consequences  of holding our warrants or convertible  notes if we become a PFIC.
The following discussion focuses on the consequences for holders of our Ordinary
Shares and ADSs that did not acquire  these  interests by exercise of a warrant,
convertible note, or other option.

            Default  Tax  Regime.  If we are a PFIC and you do not  elect out of
being taxed under the default tax regime,  then you will be subject to a special
tax  calculation  if you sell or  dispose of your  Ordinary  Shares or ADSs at a
gain.

            Under the default regime's  special tax  calculation,  you must take
your gain and prorate it over every day of your holding  period for the disposed
Ordinary  Shares or ADSs.  Then you must sum up the daily  portions  of prorated
gain for each of your taxable years during the holding period. Amounts allocated
to the year of  disposition  and to years  prior to the  first  year in which we
became  a PFIC  would  then be  taxed  as  ordinary  income  in the year of your
disposition. For amounts allocated to years prior to the year of disposition and
during or after the year we first  became a PFIC,  the gain would not be taxable
as income received in the year of disposition. Instead, you would be required to
apply the highest  ordinary  income tax rate possibly  applicable to you in that
earlier year to the amount of gain  allocated  to that year,  and then you would
accrue  interest  on that tax amount as if it were an item of unpaid  income tax
from that prior year. You would then add the tax and interest  charge for all of
the  affected,  earlier  years  to the rest of your  income  tax for the year of
disposition.  The interest  charge relates to a debt to pay U.S.  federal income
tax, so if you are not a  corporation,  your interest  expense would be personal
interest expense, and not deductible for U.S. federal income tax purposes.  This
special  tax regime  also  applies to  distributions  you  receive  from us with
respect to Ordinary Shares or ADSs that exceed a formula threshold  amount,  but
we do not discuss  those rules in any detail here because at this time we do not
anticipate making any such distributions.

                                     -119-
<PAGE>

            If we become a PFIC,  then under the default tax regime you would be
required  to  continue  to treat us as a PFIC  even if in a later tax year we no
longer met the asset or income test that originally made us a PFIC. To terminate
the  effect of the  default  tax  regime  if we cease to be a PFIC,  it would be
necessary for you to elect to recognise gain as of the last day of the last year
in which we were still a PFIC.

            Through statute and proposed regulations, "disposition" with respect
to stock of a PFIC has been  defined  under the  default  tax  regime to include
transactions  that are normally not income or gain  recognition  events for U.S.
federal income tax purposes.  One rule is that a pledge of your Ordinary  Shares
or ADSs as collateral  for a loan is considered a disposition  for the amount of
the loan.  The rules and  exceptions  to these PFIC rules are  complex,  and you
would have to consult your tax advisor as to whether you have effected a taxable
deemed disposition of our Ordinary Shares or ADSs if we become a PFIC and you do
not make either election discussed below.

            Qualified  Electing Fund Election.  If we are a PFIC,  then with our
cooperation  you can elect,  generally with your timely filed income tax return,
to treat your  investment  in our Ordinary  Shares or ADSs as an investment in a
qualified  electing  fund,  commonly  referred to as a QEF, for the year of your
election and for all subsequent years. Under a QEF election you must for each of
your taxable years report as gross income your pro rata share of our net capital
gain (which is the excess of net long-term  capital gain over any net short-term
capital loss), but not more than our earnings and profits,  for our taxable year
that ends within or with your taxable year. If our earnings and profits for that
taxable year exceed net capital gain,  you must also report as gross income your
pro rata share of earnings  and profits for the year less any net capital  gain.
You would report any net capital gain as long-term capital gain and any earnings
and profits in excess of net capital gain as ordinary income.  If we do not have
earnings and profits in a given year we are a PFIC, a U.S. holder who has made a
timely QEF election would not be required to include any amount in income. If it
appears  that we will be  classified  as a PFIC  for the  year,  we  will,  upon
request,  provide the annual  information  statement  and provide  access to and
copies of our  financial  records in order to  establish  that we have  properly
calculated  your pro rata shares of ordinary  earnings  and net capital  gain in
accordance with U.S. federal income tax principles. You would generally increase
your income tax basis in your Ordinary Shares or ADSs by the amounts required to
be  included in income  under the QEF  election.  A QEF  election  would  remain
effective even if we ceased to be a PFIC and then became a PFIC again in a later
tax year, although the QEF inclusion rules would not apply for any year in which
we were not a PFIC. Once you make a QEF election you can revoke it only with the
consent of the IRS.

            In conjunction  with your QEF election,  you can also elect to defer
payment  of your  resulting  marginal  federal  income  tax on the excess of the
amounts  you  must  include  in  income   pursuant  to  the  election  over  the
distributions,  if any, you receive.  You generally must make this election on a
timely  filed  U.S.  federal  income  tax  return  for the year in  which  these
conditions apply. In addition,  there are certain situations where your election
with respect to a deferred tax would generally be terminated.

            If you made a timely QEF  election  with respect to either the first
year in which you  acquired  our  Ordinary  Shares or ADSs or the first  year in
which we became a PFIC,  then the default tax regime for PFICs  discussed  above
would not apply to a  disposition  of your  Ordinary  Shares or ADSs. If for any


                                     -120-
<PAGE>

portion of your holding  period we were a PFIC but your QEF election was not yet
effective, then the default regime would still apply to any dispositions, and to
any  distributions,  all as discussed  above.  In  addition,  you would still be
required  to treat us as a PFIC in years  for  which we were not  otherwise  too
passive  under the PFIC income and asset  tests,  whereas a QEF  election  would
otherwise allow you to treat us as a non-PFIC for years in which we did not meet
those  tests.  If you make a QEF  election  for a taxable  year which is not the
first year of your holding period and we became a PFIC before the year for which
you make this election,  then to avoid the default tax regime in the future, you
generally  must  report any gain you have in  Ordinary  Shares or ADSs under the
default tax regime as if you sold them for their fair market  value on the first
day of the first year in which your QEF election becomes effective.

            Mark  to  Market  Election.  An  alternative  to  the  QEF  election
discussed   above  is  an  election  to  recognise   gain  and,   under  limited
circumstances,  loss as if you had disposed of your  Ordinary  Shares or ADSs on
the last  day of each  taxable  year.  You can make  this  election  only if our
Ordinary  Shares  and  ADSs  are  considered  marketable  stock,  which is stock
regularly  traded on a national  securities  exchange in the United States or in
any other  exchange  which has rules and  standards to prevent  manipulation  of
stock prices so that the quoted prices for our Ordinary Shares or ADSs represent
a legitimate  and sound fair market value.  We believe that our Ordinary  Shares
and  ADSs  regularly  trade  on such  markets  so  that  they  would  constitute
marketable stock,  although we cannot guarantee that the IRS will agree with our
determination.

            Under the mark to market  election,  you would  compare the value of
your  Ordinary  Shares or ADSs at the end of your tax year to your  adjusted tax
basis in the Ordinary  Shares or ADSs. If the fair market value  exceeds  basis,
you must include the excess as ordinary  income on your U.S.  federal income tax
return for that year, regardless of whether you received any distributions on or
disposed of your Ordinary  Shares or ADSs. In addition,  if you actually sell or
otherwise dispose of your stock during the year, any gain you realise is taxable
as ordinary  income.  "Disposition"  for this  purpose  might  include a gift, a
transfer by reason of death, or a pledge of the Ordinary Shares or ADSs, and you
should  consult your tax advisor about whether you have disposed of our Ordinary
Shares or ADSs for this purpose.  If your tax basis exceeds the value,  then you
can report that loss as an ordinary loss on your federal income tax return,  but
limited to any  cumulative  mark to market  gains (net of allowed mark to market
losses) reported in prior tax years under this election.  Your tax basis in your
Ordinary  Shares or ADSs is  increased by the amount of gain you must report and
reduced by losses allowed under this  election.  Special rules apply if you were
to recognise  gain or loss on Ordinary  Shares or ADSs you own  indirectly or if
you became a U.S.  holder in the year in which you make the election.  Your gain
or loss allowed would be sourced as domestic or foreign  source income as if you
had  actually  sold your  Ordinary  Shares  or ADSs.  By  electing  to mark your
Ordinary Shares or ADSs to market, you would avoid being taxed under the default
tax regime for PFICs upon an actual  disposition of the Ordinary  Shares or ADSs
or for any distributions received on them, except as discussed below.

            You would make the mark to market  election  with your U.S.  federal
income tax  return  for the first  year you desire it to apply to your  Ordinary
Shares or ADSs.  The election would apply to that year and to all  subsequent

                                     -121-
<PAGE>

tax years  while you hold our  Ordinary  Shares or ADSs until the earlier of the
year in which our Ordinary  Shares and ADSs cease to be marketable  stock or for
which you request to revoke the election, which requires the consent of the IRS.
Special  rules apply if you make this  election  for a tax year which is not the
first year of your holding period.

Backup Withholding and Information Reporting

            If you hold a senior note, unit,  discount note,  convertible  note,
warrant,  Ordinary Share or ADS, you may be subject to information reporting and
backup  withholding  of U.S.  federal  income tax,  currently at a 28% rate with
respect to cash  payments in respect of OID,  interest,  dividends  or the gross
proceeds  from  dispositions.  However,  you  will  not  be  subject  to  backup
withholding if you properly execute, under penalties of perjury, an IRS Form W-9
or a  substantially  similar  form in which you provide  your  correct  taxpayer
identification number,  certify that it is correct,  certify that you are a U.S.
person,  and  certify  as to one of the  following  conditions:  (1) you are not
subject to backup  withholding  because  you are a  corporation  or come  within
another  enumerated  exempt category,  (2) you have not been notified by the IRS
that you are subject to backup withholding, or (3) you have been notified by the
IRS that you are no longer subject to backup withholding.

            If you do not provide your correct taxpayer identification number on
the  IRS  Form  W-9 or a  substantially  similar  form,  you may be  subject  to
penalties imposed by the IRS. Unless you have established on a properly executed
IRS Form W-9 or a substantially  similar form that you are a corporation or come
within  another  enumerated  exempt  category,  interest,  dividends  and  other
payments paid to you during the taxable year, and the amount of tax withheld, if
any, will be reported to you and to the IRS.

            Amounts  withheld  under backup  withholding  are  generally  not an
additional tax and may be refunded or credited  against your U.S. federal income
tax  liability,  provided you furnish the required  information  to the IRS. You
should be exempt  from  backup  withholding  with  respect to cash  payments  in
respect of OID,  interest,  dividends or the gross proceeds from the disposition
of any instruments you hold if, for example,  you are a corporation or financial
institution.  You should consult your tax advisor as to your  qualification  for
exemption  from  backup   withholding  and  the  procedure  for  obtaining  that
exemption.

     F.     Dividends And Paying Agents

            Not Applicable.

     G.     Statement By Experts

            Not Applicable.

     H.     Documents on Display

            We are subject to the  informational  reporting  requirements of the
Securities  Exchange Act of 1934 and file reports and other information with the
Securities  and  Exchange  Commission.  You may  examine  the  reports and other
information  filed by us, without  charge,  at the public  reference  facilities

                                     -122-
<PAGE>

maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also receive copies of these  materials by mail from the SEC's Public  Reference
Branch at 450 Fifth Street, N.W., Washington,  D.C., 20549. For more information
on the public reference rooms, call the SEC at 1-800-SEC-0330 or visit their web
site at www.sec.gov.

     I.     Subsidiary Information

            Not Applicable.


ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            We operate a centralised  treasury function,  the prime objective of
which  is  to  manage   both  our  working   capital  and  capital   expenditure
requirements.  In addition to liquidity risks, the principal  financial risks to
which we are exposed arise from  volatility in foreign  currency  exchange rates
and  interest  rates.  Our Board  regularly  reviews  these  risks and  approves
associated risk management policies, including treasury strategy.

Liquidity Risk

            We have  financed our  operations  through a mixture of issued share
capital and long term  convertible and  non-convertible  debt. The proceeds from
these issues are placed on short term deposit prior to being invested in the our
operating companies to fund operations and expansion.  During 2002, we cancelled
our (pound)75  million bank facility.  In addition to the financial  instruments
issued  to  finance  our  operations  and  expansion,  we hold  other  financial
instruments  in the normal course of business such as  instruments  representing
trade debt and trade credit.

             Other than as discussed  below,  we do not use, and have no current
intention to use, any other derivative financial instruments.

Foreign currency risk

             We  are  exposed  to  fluctuations  in  foreign  currencies  as our
revenues,  costs, assets and liabilities are, for the most part,  denominated in
local currencies. To manage this exposure, our strategy is to raise financing in
a combination of British pounds and Euro  denominated  instruments to the extent
possible in proportion  to its existing net  investment  and  committed  capital
expenditure in those currencies,  offsetting  currency  differences arising with
similarly denominated borrowings.

             In addition to the financing raised in British pounds and Euros, we
hold U.S. dollars as a result of issuing shares and senior discount notes in the
United States. We remain exposed to currency fluctuations between British pounds
and the U.S.  dollar on relative  balances of outstanding  senior discount notes
and U.S. dollar denominated cash and liquid resources.

            Under our bank  facility  agreement,  we were  required  to maintain
financial  hedging  instruments  to offset  exchange  rate risk with  respect to
payments  required on U.S. dollar  denominated  senior discount notes during the


                                     -123-
<PAGE>

term of the facility. The financial hedge instruments were disposed of following
cancellation  of this facility.  From time to time, we have entered into forward
contracts  to  purchase  foreign  currencies  to fund a portion  of our  capital
expenditure  in those  currencies.  At 31 December  2002, no such contracts were
outstanding.

Interest rate risk

             We have managed risks associated with fluctuating interest rates by
raising debt at fixed rates.  Furthermore,  by raising some debt as  convertible
debt,  interest  exposure  on debt is  further  reduced.  While  fixed rate debt
removes the cash flow risks  associated  with  changing  interest  rates it does
expose us to a level of market risk if rates alter significantly. As interest is
earned on cash deposits and liquid resources 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 instruments which potentially subject us to concentration
of  credit  risk  consist  principally  of  accounts  receivable  and  cash  and
investments in liquid resources. Management believes the concentration of credit
risk associated with accounts  receivable is minimised due to distribution  over
many customers and different  industries and risks  associated with our cash are
mitigated by the fact that these amounts are placed in what management  believes
to be high quality financial institutions. We have not experienced any losses to
date on our deposited cash.

Sensitivity Analysis

            As a result of the procedures we have  implemented to manage foreign
currency exchange and interest rate risk as described above, a 10% change in the
value  of  British  pounds  relative  to  other   currencies  would  lead  to  a
corresponding  change  in the fair  value of its  foreign  currency  denominated
financial  instruments  of  approximately  (pound)3.0  million.  A 10% change in
interest rates across all maturities would lead to a corresponding change in our
earnings of  approximately  (pound)6.4  million  based on the  interest  bearing
assets and liabilities held during 2002.

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

            Not applicable.

                                     PART II

ITEM 13.    DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES

            Not applicable.

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
            PROCEEDS

            Not applicable.

                                     -124-
<PAGE>

ITEM 15.    CONTROLS AND PROCEDURES

            a)  Within  the 90  days  prior  to the  date of  this  report,  our
management  carried  out an  evaluation,  under  the  supervision  and  with the
participation  of our President and Chief Executive  Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls and procedures  pursuant to Exchange Act Rule 13a-14 and 15d-14.  Based
upon that  evaluation,  our  President  and Chief  Executive  Officer  and Chief
Financial  Officer  concluded  that our  disclosure  controls and procedures are
effective  in  timely  alerting  them to  material  information  required  to be
included in our periodic SEC filings.

            b) There have been no significant  changes in our internal  controls
or in other factors that could  significantly  affect those  controls  since our
evaluation of these  controls,  including any corrective  actions with regard to
significant deficiencies and material weaknesses.

ITEM 16.    RESERVED

            Not applicable.

                                    PART III

ITEM 17.    FINANCIAL STATEMENTS

            We have responded to Item 18 in lieu of responding to this Item.




                                     -125-
<PAGE>




FINANCIAL STATEMENTS

ITEM 18.       Financial Statements


                                                                        2002
                                                                   Annual Report

                                                                         Pages
Incorporated by reference from the 2002 Annual Report
   Group Profit and Loss Account for the years ended 31 December
      2000, 31 December 2001 and 31 December 2002                          47
   Group Balance Sheet at 31 December 2001, and 31 December
      2002                                                                 49
   Group Cash Flow Statement for the years ended 31 December
      2000, 31 December 2001 and 31 December 2002                          50
   Group  Statement of Total  Recognised  Gains and Losses for the
      years ended 31 December  2000,  31 December 2001 and 31
      December 2002                                                        48
   Group Reconciliation of Changes in Equity Shareholders' Funds
      for the years ended 31 December 2000, 31 December 2001
         and 31 December 2002                                              48
   Notes to Financial Statements                                        51 to 84

      The Financial  Statements listed in the above index, which are included in
the 2002 Annual  Report of COLT Telecom  Group plc, are hereby  incorporated  by
reference.  With the  exception of the pages listed in the above index (a subset
of which are also  incorporated  by reference in Items 5 and 6 of this  Report),
the 2002 Annual Report is not deemed filed as part of this Report.



                                     -126-
<PAGE>
<TABLE>
<CAPTION>
Financial Statements Schedules



                                   Schedule II - Valuation and Qualifying Accounts
                                           (thousands of pounds sterling)


                                       Balance at         Charged to                                  Balance at
                                       beginning of       costs and                                   end of
Description                            period             expenses            Deduction (a)           period
-------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>                <C>                     <C>
Year 2002
Allowance for doubtful debts           (pound)22,884      (pound)22,464      (pound)(1,465)           (pound)43,883

Year 2001
Allowance for
Doubtful debts                         (pound)11,558      (pound)12,222      (pound)  (896)           (pound)22,884

Year 2000
Allowances for doubtful debts          (pound) 7,654      (pound) 4,774      (pound)  (870)           (pound)11,558

Year 2002
Deferred tax
valuation allowance                   (pound)206,528     (pound)167,071                 --           (pound)373,599

Year 2001
Deferred tax
valuation allowance                   (pound)101,514     (pound)105,014                 --           (pound)206,528

Year 2000
Deferred tax
valuation allowance                    (pound)55,444      (pound)46,070                 --           (pound)101,514

<FN>
(a) Amounts written off as uncollectable, net of recoveries
</FN>
</TABLE>

                                                       -127-
<PAGE>



ITEM 19.     EXHIBITS

Exhibit
Number   Exhibit
-------  -------

1.1      Memorandum of Association (Incorporated by reference to the Exhibits to
         the  Company's  Annual  Report on Form 20-F (No.  0-28970) for the year
         ended December 31, 1996.)

1.2      Articles of Association, as amended  (Filed herewith.)

2.1      Indenture,  dated December 17, 1996,  relating to Senior Discount Notes
         due 2006,  including the Form of 1996 Discount  Note  (Incorporated  by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1996.)

2.2      Indenture, dated November 26, 1997, relating to the(pound)50,000,000 10
         1/8% Senior Notes including the Form of Note (Incorporated by reference
         to the  Exhibits  to the  Company's  Annual  Report  on Form  20-F (No.
         0-28970) for the year ended December 31, 1997.)

2.3      Indenture,  dated November 26, 1997,  relating to the  DM150,000,000  8
         7/8% Senior Notes including the Form of Note (Incorporated by reference
         to the  Exhibits  to the  Company's  Annual  Report  on Form  20-F (No.
         0-28970) for the year ended December 31, 1997.)

2.4      Indenture,  dated July 28, 1998,  relating to the DM600,000,000  7.625%
         Senior Notes including the Form of Note  (Incorporated  by reference to
         the Exhibits to the Company's Annual Report on Form 20-F (No.  0-28970)
         for the year ended December 31, 1998.)

2.5      Indenture,  dated  August 6, 1998,  relating  to the  DM600,000,000  2%
         Senior  Convertible  Notes including the Form of Note  (Incorporated by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1998.)

2.6      Indenture,  dated  March 29,  2003,  relating  to  the(euro)295,000,000
         Senior  Convertible  Notes including the Form of Note  (Incorporated by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1998.)

2.7      Indenture, dated December 16, 1999, relating to the(euro)368,000,000 2%
         Senior  Convertible  Notes including the Form of Note  (Incorporated by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1999.)

2.8      Indenture   relating  to   the(euro)320,000,000   7.625%  Senior  Notes
         including the Form of Note  (Incorporated  by reference to the Exhibits
         to the Company's Annual Report on Form 20-F (No.  0-28970) for the year
         ended December 31, 1999.)

2.9      Indenture,  dated April 3, 1999,  relating to  the(euro)402,500,000  2%
         Senior  Convertible  Notes including the Form of Note  (Incorporated by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1999.)

2.10     Deposit  Agreement,  dated  December 17,  1996,  relating to the Senior
         Discount Notes due 2006  (Incorporated  by reference to the Exhibits to
         the  Company's  Annual  Report on Form 20-F (No.  0-28970) for the year
         ended December 31, 1996.)

                                     -128-
<PAGE>

Exhibit
Number   Exhibit
-------  -------

2.11     Deposit Agreement, dated November 26, 1997, relating to the 10 1/8% and
         8 7/8% Senior Notes  (Incorporated  by reference to the Exhibits to the
         Company's  Annual Report on Form 20-F (No.  0-28970) for the year ended
         December 31, 1997.)

2.12     Deposit Agreement,  dated December 17, 1996, including Form of American
         Depository  Receipt  (Incorporated  by reference to the Exhibits to the
         Company's  Annual Report on Form 20-F (No.  0-28970) for the year ended
         December 31, 1996.)

2.13     Deposit Agreement,  dated July 28, 1998,  relating to the DM600,000,000
         7.625% Senior Notes  (Incorporated  by reference to the Exhibits to the
         Company's  Annual Report on Form 20-F (No.  0-28970) for the year ended
         December 31, 1998.)

2.14     Deposit Agreement,  dated July 28, 1993,  relating to the DM600,000,000
         2% Senior Convertible Notes  (Incorporated by reference to the Exhibits
         to the Company's Annual Report on Form 20-F (No.  0-28970) for the year
         ended December 31, 1998.)

2.15     Deposit    Agreement,    dated    March   29,    2003,    relating   to
         the(euro)295,000,000   Senior   Convertible   Notes   (Incorporated  by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1998.)

2.16     Deposit   Agreement,    dated   December   16,   1999,    relating   to
         the(euro)368,000,000  2%  Senior  Convertible  Notes  (Incorporated  by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1999.)

2.17     Deposit Agreement relating to the(euro)320,000,000  7.625% Senior Notes
         (Incorporated  by  reference to the  Exhibits to the  Company's  Annual
         Report on Form 20-F  (No.  0-28970)  for the year  ended  December  31,
         1999.)

2.18     Deposit    Agreement,    dated    April   13,    2000,    relating   to
         the(euro)402,500,000  2%  Senior  Convertible  Notes  (Incorporated  by
         reference to the Exhibits to the  Company's  Annual Report on Form 20-F
         (No. 0-28970) for the year ended December 31, 1999.)

4.1      Registration  Rights  Agreement,  dated as of December 12, 2001, by and
         among  COLT  Telecom  Group  plc  and  the   Investors   named  therein
         (Incorporated  by  reference to the  Exhibits to the  Company's  Annual
         Report on Form 20-F  (No.  0-28970)  for the year  ended  December  31,
         2001.)

                                     -129-
<PAGE>

Exhibit
Number   Exhibit
-------  -------

4.2      The COLT Performance Share Plan*  (Filed herewith.)

4.3      The COLT Deferred Bonus Plan* (Filed herewith.)

8.1      List of Subsidiaries (Filed herewith.)

12.1     Consent of PricewaterhouseCoopers LLP (Filed herewith.)

12.2     Report of PricewaterhouseCoopers LLP (Filed herewith.)

12.3     COLT's 2002 Annual Report  (Incorporated  by reference to the Company's
         Report  of  Foreign  Issuer on Form 6-K filed  June 20,  2003,  to the
         limited extent set forth in Items 5, 6 and 18.)

12.4     Certification  of President and Chief Executive  Officer pursuant to 18
         U.S.C.  Section  1350,  as  adopted  pursuant  to  Section  906  of the
         Sarbanes-Oxley Act of 2002 (Furnished herewith.)

12.5     Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section
         1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley  Act of
         2002 (Furnished herewith.)


*  Compensatory plan or arrangement applicable to management and/or employees.


                                     -130-
<PAGE>



                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  12 of  the  Securities
Exchange  Act  1934,  the  Registrant   certifies  that  it  meets  all  of  the
requirements  for filing on Form 20-F and has duly caused this annual  report to
be signed on its behalf by the undersigned thereunto duly authorised.

                                              COLT Telecom Group plc
                                                         (Registrant)


Dated: 27 June 2003                           By:   /s/ MARK A.  JENKINS
                                                    Mark A.  Jenkins
                                                    Legal Services Director




                                     -131-
<PAGE>
                                 CERTIFICATIONS

I, Steven P. Akin, certify that:

1.       I have  reviewed  this annual report on Form 20-F of COLT Telecom Group
         plc;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       Designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       Presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         a)       All  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date:    25 June 2003

                                          /s/ Steven P. Akin
                                          Steven P. Akin
                                          President and Chief Executive Officer


                                     -132-
<PAGE>
                                 CERTIFICATIONS

I, Marina M. Wyatt, certify that:

1.       I have  reviewed  this annual report on Form 20-F of COLT Telecom Group
         plc;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       Designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       Presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         a)       All  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date:    27 June 2003

                                            /s/ Marina M. Wyatt
                                            Marina M. Wyatt
                                            Chief Financial Officer


                                     -133-