As filed with the Securities and  Exchange Commission on July 7, 2003.

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**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 20-F**

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|   |   |   | REGISTRATION STATEMENT PURSUANT        TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934        OR                                        |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)      OF THE      SECURITIES EXCHANGE ACT OF 1934      For the fiscal year ended: March 31, 2003      OR  |
|   |   |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR      15(d) OF THE      SECURITIES EXCHANGE ACT OF 1934                                                     |

**Commission file number: 0-31202**

**mmO2 plc**

*(Exact name of Registrant as  specified in its charter)*

**ENGLAND AND WALES**(Jurisdiction of incorporation or organization)**Wellington Street****Slough****Berkshire****SL1 1YP****England**

(Address of principal executive offices)

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Securities registered or to be registered pursuant  to Section 12(b) of the Act:Title of each className of Each Exchange on        Which RegisteredOrdinary shares of nominal value 0.1p per      share* New York Stock Exchange American Depositary Shares, each representing      ten ordinary shares 
 
Securities registered or to    be registered pursuant to Section 12(g) of the Act:None
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:Title of each classNumber of outstanding sharesOrdinary shares of nominal value 0.1p per      share 8,670,181,627Indicate 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   No   Not applicable 
Indicate by check mark which financial statement item the registrant has elected to follow.        Item 17        Item 18  * For technical purposes        only, not including trading privileges.
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**TABLE  OF CONTENTS**
  **Page**   **Page**Introduction 3 **Item 8** Financial      Statements 97Cautionary Statement Regarding      Forward-Looking Statements 3     –  Consolidated      Statements and Other Financial Information 97         –  Significant      Changes 97**PART I**   **Item 9** The Offer      and Listing 97         –  Offer      and Listing Details 97**Item 1** Identity of      Directors, Senior Management and Advisers 4     –  Markets 98**Item 2** Offer Statistics      and Expected Timetable 4 **Item 10** Additional      Information 98**Item 3** Key Information 4     –  Memorandum      and Articles of Association 98    –  Selected      Financial Data 4     –  Material      Contracts 98    –  Risk      Factors 8     –  Exchange      Controls 100**Item 4** Information      on the Company 10     –  Taxation 100    –  History      and Development of the Company 10     –  Documents      on Display 104    –  Business      Overview 12 **Item 11** Quantitative      and Qualitative Disclosures about Market Risk 104    –  Organizational      Structure 35 **Item 12** Description      of Securities Other than Equity Securities 104    –  Property,      Plant and Equipment 35     **Item 5** Operating      and Financial Review and Prospects 36 **PART II**      –  Operating      Results 42         –  Liquidity      and Capital Resources 61 **Item 13** Defaults,      Dividend Arrearages and Delinquencies 105    –  Research      and Development, Patents and Licenses 65 **Item 14** Material      Modifications to the Rights of Security Holders and Use of Proceeds 105    –  Trend      Information 65 **Item 15** Controls      and Procedures 105**Item 6** Directors,      Senior Management and Employees 68 **Item 16** [Reserved] 105    –  Directors      and Senior Management 68   105    –  Compensation 72 **PART III**       –  Board      Practices 87        –  Employees 92 **Item 17** Financial      Statements 105    –  Share      Ownership 92 **Item 18** Financial      Statements  F-1**Item 7** Major Shareholders      and Related Party Transactions 96 **INDEX TO FINANCIAL STATEMENTS**  F-1    –  Major      Shareholders 96 **Item 19** Exhibits I    –  Related      Party Transactions 97     
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**INTRODUCTION**

On 10 May 2001, BT announced its intention to demerge our businesses. This was effected by a reorganisation, a scheme of arrangement and, on 19 November 2001, a demerger transaction. As a result of these transactions our operations have been conducted as an independent entity with key subsidiaries in the United Kingdom, Germany, the Netherlands, Ireland and the Isle of Man. In May 2002 we introduced a single customer brand, O2, and in support of that introduction each of the principal country company operating names except for Manx Telecom Limited in the Isle of Man, were changed to include the brand in their names. Accordingly, references throughout this annual report to the country operations, where appropriate, refer to the new operating company names. The sale of O2 Netherlands was completed on 3 June 2003 to Greenfield Capital Partners.

We publish our consolidated financial statements in pounds sterling. In this annual report, references to “US dollars”, “$”, “cents” or “¢” are to United States currency, references to “pounds sterling”, “£”, “pence” or “p” are to UK currency, and references to “euro” or “€” are to the currency of the European Union. Merely for convenience, this annual report contains translations of euros into pounds sterling at specified rates. These translations should not be construed as representations that the pounds sterling actually represent such euro amounts or could be converted into euro at the rate indicated or at any other rate. Details of the US dollar to pounds sterling and euro to pounds sterling exchange rates for the periods presented are set out in “Key Information – Selected Financial Data – Exchange rates” in Item 3.

**CAUTIONARY  STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**
 This annual report and financial statements contains certain forward-looking statements. We may also make written or oral forward-looking statements in:  •our periodic reports to the US Securities and Exchange Commission (SEC) on Form 6-K;  •our half-yearly reports and annual reports;  •our press releases and other written materials; and  •oral statements made by our officers, Directors or employees to third parties.
We have based these forward-looking statements on our current plans, expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us. Forward-looking statements speak only as of the date they are made.

Statements that are not historical facts, including statements about our beliefs and expectations are forward-looking statements. Words like “believe”, “anticipate”, “expect”, “intend”, “seek”, “will”, “plan”, “could”, “may”, “might”, “project”, “goal”, “target” and similar expressions often identify forward-looking statements but are not the only ways we identify these statements.

These statements may be found in “Risk Factors”, “Business Review”, “Operating and Financial Review and Prospects”, and in this annual report generally. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in the above-mentioned sections.

If any one or more of the foregoing assumptions are ultimately incorrect, our actual results may differ from our expectations based on these assumptions. Also, the sector and markets in which we operate may not grow over the next several years as expected, or at all. The failure of these markets to grow as expected may have a material adverse effect on our business, operating results and financial condition and the market price of our ordinary shares and American Depositary Shares (ADSs).

The information on our website, any website mentioned in this annual report or any website directly or indirectly linked to our or any other website mentioned in this annual report is not incorporated by reference into this annual report and you should not rely on it.

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**PART I**
**ITEM 1****IDENTITY OF DIRECTORS,        SENIOR MANAGEMENT AND ADVISERS**
Not Applicable.
**ITEM 2****OFFER STATISTICS AND        EXPECTED TIMETABLE**
Not Applicable.
**ITEM 3****KEY INFORMATION**  **A.****Selected Financial Data** **Basis of Preparation**
The selected historical consolidated  financial information has been prepared up to the date of demerger from BT plc  on a carve-out basis and in accordance with accounting principles generally  accepted in the United Kingdom. Before the demerger transaction, the mmO2  Group had not historically been a discrete legal group of companies but comprised  a combination of certain businesses previously owned by BT. The historical financial  information reflects the combinations of financial information relating to these  businesses as constituted following the reorganisation and is presented in “Financial  Statements” in Item 18.

The selected unaudited operational  information described below has been extracted without material adjustment from  the mmO2 Group’s unaudited management information and third-party  sources.

The Group’s financial statements  are prepared in accordance with accounting principles generally accepted in  the United Kingdom (UK GAAP), which differ in certain respects from generally  accepted accounting principles in the United States of America (US GAAP). A  reconciliation between UK GAAP and US GAAP has been prepared for the net loss  for the three years ended 31 March 2003, 2002 and 2001, and for the net assets  at 31 March 2003 and 2002 as required by the SEC, but not for other periods.  This reconciliation can be found in note 32 to the financial statements in Item  18.

Our net loss determined in accordance  with US GAAP was £3,671 million, £1,463 million and £3,747  million for the years ended 31 March 2003, 2002 and 2001, respectively, compared  with our net loss determined under UK GAAP of £10,148 million, £850  million and £3,533 million, respectively. The main differences affecting  the determination of net loss under US GAAP for the year ended 31 March 2003  are:
•adjustments in relation        to capitalisation of interest, net of related depreciation of £(67)        million (2002: £579 million, 2001: £344 million);  •adjustments for impairment        of goodwill, licences and fixed assets in discontinuing operations of        £482 million £5,899 million and £(25) million respectively        (2002: nil, 2001: nil);  •adjustments for goodwill        amortisation of £374 million (2002: £23 million, 2001: £19        million); and  •adjustments for deferred        taxation on US GAAP differences of £(176) million (2002: £(240)        million, 2001: £(134) million).
The most significant difference between  UK GAAP and US GAAP for the net loss for the 2003 financial year arises from  the treatment of the impairment charges in respect of our goodwill and telecommunications  licences. The difference in the impairment charges is primarily as a result  of the requirement under US GAAP to first test the carrying value of long-lived  assets using undiscounted cash flows and secondarily the difference in methodology  for calculating the impairment of goodwill. Further details of all differences  between UK GAAP and US GAAP are contained in note 32 to the financial statements  in Item 18.

 

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**Five year summary** **Selected profit and loss        account information**   **2003** **2002** **2001** **2000** **1999**          **£m** **£m** **£m** **£m** **£m** **UK        GAAP1**                **Group        turnover**  4,874  4,276  3,200  2,618  1,814        Net        operating expenses before exceptional items  (5,352) (4,982) (3,543) (2,551) (1,648)Exceptional        items  (8,300) (150) (2,821) (47) — 
 
    EBITDA2        before exceptional items  859  433  317  385  366        **Group        operating (loss)/profit**  (8,778) (856) (3,164) 20  166 Group’s        share of operating profit/(loss) of joint ventures and associates  5  8  (286) (270) (133)Provision        for loss on sale of business  (1,364) —  —  —  — Net        interest payable and similar charges  (66) (781) (669) (98) (1)       **(Loss)/profit        on ordinary activities before taxation**  (10,203) (1,629) (4,119) (348) 32 Tax        on (loss)/profit on ordinary activities  55  250  114  9  (53)       **Loss        on ordinary activities after taxation**  (10,148) (1,379) (4,005) (339) (21)Minority        interests  —  —  (4) (1) (34)       **Retained        loss for the financial year**  (10,148) (1,379) (4,009) (340) (55)       **US        GAAP**                Retained        loss for the financial year3  (3,671) (1,463) (3,747) (386)             **Selected balance sheet        information**  **2003** **2002** **2001** **2000** **1999**          **£m** **£m** **£m** **£m** **£m** **UK        GAAP1**                **Fixed        assets**                Intangible        assets  7,582  15,992  15,624  4,566  157 Tangible        assets  3,875  4,094  3,727  1,770  1,403 Investments  3  37  33  393  245        **Total        fixed assets**  11,460  20,123  19,384  6,729  1,805                  **Current        assets**  1,913  2,037  1,785  1,113  621 **Creditors:**        amounts falling due within one year  (1,572) (1,521) (8,079) (4,031) (814)**Creditors:**        amounts falling due after more than one year  (1,451) (1,403) (10,603) (1,623) (15)**Provisions        for liabilities and charges**  (284) (402) (43) (147) (157)       **Net        assets**  10,066  18,834  2,444  2,041  1,440        Equity        shareholders’ funds  10,066  18,834  2,452  2,053  1,271 Equity        minority interests  —  —  (8) (12) 169           10,066  18,834  2,444  2,041  1,440        **US        GAAP**                Equity        shareholders’ funds3  17,045  19,428  2,722  2,106                           1Represents the figures prepared        under UK GAAP which include amounts relating to notional loans pre-demerger        and interest and tax thereon as described in note 1 to the financial statements        in Item 18.2EBITDA is our earnings before        interest, tax, depreciation, amortisation and exceptional items, excluding        our share of operating profits and losses of our associates and joint        ventures. EBITDA is not a measure of financial performance under UK or        US GAAP and may not be comparable to similarly titled measures of other        companies, because EBITDA is not uniformly defined. EBITDA should not        be considered by investors as an alternative to Group operating loss or        loss on ordinary activities before taxation as an indication of operating        performance, or as an alternative to cash flow from operating activities        as an indication of cash flows. EBITDA is one of the key financial measures        used by the Group for evaluating financial performance, and is discussed        and reconciled to Group operating (loss)/profit in “Operating and        Financial Review and Prospects – Financial performance measurement”        in Item 5.3Comparative figures for        1999 are not included as these are not available.

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**Operating        data**  **2003** **2002** **2001**   **2003** **2002** **2001**           **O2        UK**                      **Customer        Numbers**(thousands)1           **Churn**4             Pre-pay  7,989  7,542  7,134  Pre-pay  31% 32% 24%   Post-pay  4,061  3,542  3,455  Post-pay  28% 31% 44%   Total  12,050  11,084  10,589  Blended  30% 32% 32%                       **ARPU        (£)**2           **SAC per      Connection (£)**5             Pre-pay  121  108  114  Pre-pay  25  53  63    Post-pay  503  498  485  Post-pay  177  180  184    Blended  247  231  269  Blended  79  90  87 **Data        as a percentage of service revenue**3  17.1% 11.8% n/a              **O2        Germany**                      **Customer        Numbers** (thousands)1           **Churn**4             Pre-pay  2,182  1,912  1,560  Pre-pay  16% 35% n/a6   Post-pay  2,630  1,979  1,607  Post-pay  16% 21% 16%   Total  4,812  3,891  3,167  Blended  16% 28% n/a6                       **ARPU        (£)**2, 7           **SAC per      Connection (£)**5, 7             Pre-pay  83  71  n/a6 Pre-pay  16  44  87    Post-pay  341  313  358  Post-pay  161  160  220    Blended  219  195  n/a6 Blended  107  95  142 **Data        as a percentage of service revenue3**  19.3 %  13.3 %n/a              **O2        Netherlands**                      **Customer        Numbers**(thousands)1           **Churn**4             Pre-pay  899  1,022  617  Pre-pay  28 %  27 %n/a 6   Post-pay  297  233  176  Post-pay  52 %  27 %32 %   Total  1,196  1,255  793  Blended  34% 27% n/a6                       **ARPU        (£)**2           **SAC per Connection (£)**5             Pre-pay  94  84  80  Pre-pay  26  55  88    Post-pay  471  492  469  Post-pay  133  198  138    Blended  179  163  151  Blended  88  75  99 **Data        as a percentage of service revenue3**  14.5% 8.9% n/a              **O2        Ireland**                      **Customer        Numbers** (thousands)1           **Churn**4             Pre-pay  889  824  641  Pre-pay  36% 44% n/a6   Post-pay  366  356  332  Post-pay  17% 23% n/a6   Total  1,255  1,180  973  Blended  31% 38% n/a6                       **ARPU        (£)2**           **SAC per Connection (£)**5             Pre-pay  220  197  n/a6 Pre-pay  30  44  69    Post-pay  656  622  637  Post-pay  158  202  185    Blended  351  329  n/a6 Blended  50  75  95 **Data        as a percentage of service revenue**3  15.3% 9.7% n/a              **Manx        Telecom**                      **Customer        Numbers** (thousands)1           **Churn**4             Pre-pay  38  26  13  Pre-pay  8% 11% 13%   Post-pay  21  21  19  Post-pay  14% 17% 18%   Total  59  47  32  Blended  10% 14% 16%                       **ARPU        (£)**2                         Pre-pay  115  120  115                Post-pay  556  506  506                Blended  288  317  388              **Notes on Operating Data**  1Customer Numbers –        are stated on the active base. Customers are treated as being active if        they have used the network in the preceding three months.  2Average Revenue Per User        (ARPU) – is calculated by dividing total service revenue from sales        to customers for the preceding 12 months by the weighted average number        of active customers for the same period.  3Data as a percentage of        service revenue – data revenue comprises revenue generated from the        sale of SMS, WAP and GPRS services. Comparable data for 2001 is not available.  4Churn – is calculated        by expressing the sum of disconnections for the preceding 12 months as        a percentage of the weighted average number of active customers for the        same period.  5Subscriber Acquisition Costs        (SAC) per Connection – are calculated by dividing the total costs        (total cost of handset (including handset costs, SIM costs and packaging)        less handset revenue plus commissions paid to sales channels) for the        preceding 12 months by the total number of connections over the same period.  6Comparable data not available;        registered pre-pay customer base previously reported.  7O2 Germany ARPU        and SAC – for the year ending 31 March 2001, ARPUs and SAC shown        is December 2000.

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**Exchange rates**
The table below sets forth, for the  periods indicated, information concerning the highest and lowest noon buying  rates in New York City for cable transfers in pounds sterling as certified for  customs purposes by the Federal Reserve Bank of New York expressed in US dollars  per pound sterling:
      **£1.00      = US dollars** **Month** **High** **Low** **Period      End**     January        2003  1.6482  1.5975  1.6448 February        2003  1.6480  1.5929  1.5798 March        2003  1.6129  1.5600  1.5790 April        2003  1.6000  1.5500  1.6000 May        2003  1.6484  1.5930  1.6393 June        2003  1.6840  1.6278  1.6529 
The table below sets forth the average  of the noon buying rates in New York City for cable transfers in pounds sterling  on the last full day of each full month during each of the last five years ended  31 March 2003, as certified for customs purposes by the Federal Reserve Bank  of New York expressed in US dollars per pounds sterling:
**Year        Ended 31 March** **£1.00      = US dollars**   1999  1.6526 2000  1.6085 2001  1.4737 2002  1.4320 2003  1.5541 
This annual report also contains translations  of euro amounts into pounds sterling at specified rates. Unless otherwise stated  herein, translations of euros into pounds sterling have been made at €1.4498:£1.00,  the daily setting rate on 31 March 2003, as based on mid-market data from Bloomberg.  These translations should not be construed as a representation that the euro  amounts actually represent such pound sterling amounts, as the case may be,  or could be converted into euros at the rate indicated.

The table below sets forth, for the  periods indicated, information concerning the high and low mid-market exchange  for euros expressed in euro per pound sterling as set forth on Bloomberg on  the last full day of each of the previous six months:
      **£1.00      = €** **Month** **High** **Low** **Period      end**     January        2003  1.5448  1.5054  1.5225 February        2003  1.5238  1.4547  1.4915 March        2003  1.4845  1.4487  1.4665 April        2003  1.4606  1.4297  1.4481 May        2003  1.4342  1.3797  1.4019 June        2003  1.4546  1.3890  1.4234 
The table below sets forth, for the  periods since the euro came into effect, the average rate for euros expressed  in euro per pound sterling as set forth on Bloomberg on the last full day of  each full month during each of the last four years ended 31 March 2003, in each  case rounded to the nearest ten-thousandths of a euro:
**Year        Ended 31 March** **£1.00      = €**   1999  1.4909 2000  1.6376 2001  1.6264 2002  1.6213 2003  1.5506 

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  **B.****Capitalisation and Indebtedness**
Not Applicable.
**C.****Reasons for the Offer        and Use of Proceeds**
Not Applicable.
**D.****Risk Factors** **Business risks** ***We face increasing        competition from new providers of mobile services***
We are competing increasingly with  new mobile service providers, virtual network operators and resellers of mobile  services. Failure to compete effectively could result in a decrease in our customers,  revenues and profitability.
***We face competing        technologies***
We also face competition from communications  technologies that are under development or that will be developed in the future,  including cordless technologies and private and radio-shared networks. As a  result of current trends in the telecommunications industry in Europe, such  as the rapid convergence of technologies, we expect there to be further technological  advances in the future. Failure to compete could result in a decrease in our  customers, revenues and profitability.
***The BT relationship        may not continue in the form that we would wish***
At demerger a three-year contract  was signed with BT to continue to supply us with sales and distribution services  in the UK business market. This agreement is subject to certain termination  events, including, amongst other things, failure to meet certain performance  levels and on 12 months’ notice following a change of control. We cannot  guarantee that this arrangement will be renewed after expiry of the initial  term. If the arrangement does not continue, as we would wish, in the event that  other channels were unable to address the requirement, it may have an adverse  impact on the size and quality of our corporate and small to medium enterprise  customer base, which may have a negative impact on our business and results  of operation.
***We may be unable to        execute our network sharing agreements with T-Mobile in the most favourable        commercial terms***
We have network-sharing agreements  with T-Mobile in the UK and in Germany. It is possible that commercial, legal  or regulatory barriers could prevent us from executing these agreements on the  most favourable terms, which may in turn result in additional costs or delayed  roll-out of our UMTS networks. This could have a significant effect on the profitability  of our businesses.
***We depend on a limited        number of suppliers for wireless network equipment and maintenance whose        failure to provide necessary supplies could have a negative impact on        our business***
Failure of one of our common infrastructure  suppliers would delay programmes to provide new capabilities and services across  the businesses. Handsets and network infrastructure suppliers may, among other  things, extend delivery times, raise prices and limit supply due to their own  shortages and business requirements. If these suppliers fail to deliver products  and services on a timely basis, or fail to develop and deliver to us handsets  that satisfy our customers’ demands, it may have a negative impact on our  business, financial condition and results of operations. Similarly, interruptions  in the supply of telecommunications equipment for our networks could impede  network development and expansion.
***Alleged health risks        associated with mobile telecommunications could lead to decreased usage        of our services and products, increased difficulty in obtaining transmitter        sites or potential liability***

Public concern about the actual or  perceived health risks of mobile communications could have a detrimental impact  on our business through negative customer perception of our brands, services  or products, difficulties in 

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retaining or attracting customers,  reduced usage times per customer of our mobile telecommunications services or  increased difficulty in obtaining transmitter sites. We cannot assure you that  further medical research and studies will refute a link between the radio frequency  emissions of wireless handsets and base stations and these health concerns.  Government authorities could increase regulation of wireless handsets and base  stations as a result of these health concerns or wireless companies, including  us, could be held liable for costs or damages associated with these concerns,  which could have a negative impact on our business.

In addition, regulators may reduce  the prescribed limits for exposure to electromagnetic radiation in the countries  in which we operate, which would mean that the exclusion areas around our antennas  in those countries may have to increase in some situations. In this event we  may suffer additional costs associated with repositioning our network equipment  and we may experience delays in the roll-out of our networks.
***O2 Germany        may be unable to reach critical mass in a reasonable time frame***
If O2 Germany fails to  sustain its momentum and meet its future sales forecast in terms of new customers  and increase in ARPU, this could have a significant negative impact on the profitability  of our business.
***Implementation of        a new billing and operational system***
Implementation of a new billing and  operational system will require the migration of all post-pay customers from  our existing system. Our internal support structure will need to change to implement  the new system. It is a large scale and complex transformation, which is due  to be completed by mid-2004. If the transition is not completed successfully,  this may affect operational performance.
***We may fail to roll        out Airwave on time***
A change in the planning regime, relating  to the siting of masts, may impact on our ability to deploy the network and  therefore could have an effect on our business, financial condition and results  of operation.
**Regulatory risks** ***We operate in highly        regulated markets that limit our flexibility to manage our business***
We must comply with an extensive range  of requirements that regulate and supervise the licensing, construction and  operation of our networks and the provision and pricing of our products and  services in the countries in which we operate. We must also co-operate with  agencies or other governmental authorities that regulate and supervise the allocation  of frequency spectrum and which oversee the general competitiveness of the wireless  market. Our business and results of operations could be materially adversely  affected by changes in law, regulation or government policies directed at the  wireless markets in which we operate. In particular, decisions by regulators  and competition authorities concerning the granting, amendment or renewal of  licences to us, or decisions relating to tariffs, or the effects of expansion  into new markets, or the accessibility of our network to mobile virtual network  operators, service providers or its access to third-party networks could have  a negative impact on our business and results of operations.
***An EU investigation        of roaming charges may result in a decrease in roaming revenues***
The Competition directorate of the  European Commission is conducting an inquiry in the international mobile roaming  services markets in the European Economic Area, or the EEA. The European Commission’s  initial findings raised a number of competition and market structure concerns  about the level of wholesale roaming charges and the mark-ups applied in retail  markets and also raised concerns that the structural characteristics of the  market may contribute to possible collective dominance. If, as a result of this  investigation, the European Commission fines us or regulates roaming charges,  it could have a negative impact on our business and results of operations.
***Regulation of call        termination charges may increase***
In the UK, the charges we make to  other operators for terminating calls on our network (termination charges) are  currently subject to a price reduction of 9 per cent each year after allowing  for an increase in such charges equal to the increase in the relevant year in  the UK Retail Price Index (RPI).

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Following a year-long investigation  of the level of termination charges, the Competition Commission recommended  that all operators be required to reduce these charges by 15 per cent before  25 July 2003. It also recommended that in the following three years each mobile  network operator in the UK should successively reduce their charges. A new EU  regulatory framework will come into effect on 25 July 2003 at which time the  price cap will fall away. On 15 May 2003, Oftel published its market review  relating to mobile wholesale voice calls terminating on individual mobile networks.  As a result of this, the Director General of Telecommunications has formed an  initial view that each mobile network operator in the UK has significant market  power in a separate market for voice call termination on its network and can  be expected to have market power for at least the next three years. The Director  General of Telecommunications modified the licences of the four mobile operators  (us, Vodafone, T-Mobile and Orange) in April 2003 to require a one-off 15 per  cent cut to be implemented by 25 July 2003. In addition the Director General  of Telecommunications has proposed that we and Vodafone should be subject to  further successive reductions in real terms which amount to an annual reduction  of 15 per cent for each of the remaining three years to 31 March 2006 (16 per  cent for T-Mobile and Orange). This broadly follows the recommendations of the  Competition Commission. The Director General of Telecommunications is seeking  comments by 24 July 2003. If these successive reductions are implemented, this  will cause an additional reduction in the revenues we receive from termination  charges over the coming years. In April, three operators – Vodafone, T-Mobile  and Orange – lodged an appeal with the High Court to have the proposals  overturned. On 27 June 2003 the High Court ruled that the Competition Commission  was entitled to make the findings and recommendations it did. The Court has  given the operators leave to appeal but it is not yet clear whether any intends  to appeal.
***We may be subject        to new regulatory obligations***
Under the new EU regulatory framework  for electronic communications, the national regulatory authorities in each member  state are required to determine if any operators have significant market power  (SMP) in particular markets identified by the European Commission. The three  mobile markets currently identified by the European Commission are: call termination  on individual networks; wholesale access and origination; and wholesale international  roaming. In addition to these three mobile markets, regulators may identify  further markets with the consent of the European Commission.

If any of our operating businesses  are found to have SMP in any of the markets reviewed, the national regulatory  authorities are required to impose regulatory obligations on us in those markets.  These obligations could include transparency; non-discrimination; accounting  separation; access; and price control and cost accounting and in exceptional  circumstances, a regulator may impose additional or alternative obligations,  with the approval of the European Commission. Depending upon the markets identified  and the obligations imposed, this could have a significant effect on the profitability  of our businesses.
***A UK competition law        investigation may result in decreased revenues, fines and liability to        third parties***
In the UK, Oftel has recently opened  a competition law investigation into the prices we and other UK network providers  charge certain retail business customers for calls to mobiles. Oftel is concerned  that the low level of these charges could be discriminatory, or represent a  margin squeeze, when compared to the wholesale prices we charge to other operators.  If Oftel ultimately finds against us then we could be required to alter our  prices, could be fined, and could be liable to third parties for damages, this  could have an effect on the profitability of our business.
**ITEM 4****INFORMATION ON THE COMPANY**  **A.****History and Development of the Company**

On 10 May 2001, BT announced its intention  to demerge our businesses. This was effected by a reorganisation, a scheme of  arrangement and, on 19 November 2001, the demerger transaction. As a result  of these transactions, our operations have been conducted as an independent  entity, mmO2, with key subsidiaries in the United Kingdom, Germany,  the Netherlands, Ireland and the Isle of Man. In September 2001, we announced  a new 

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brand, O2, for the Group. This was introduced in May 2002 and in support of that introduction each of the principal country company operating names, except for Manx Telecom Limited in the Isle of Man, were changed to include the brand in their names. Accordingly, references throughout this annual report to the country operations, where appropriate, refer to the new operating company names. On 14 April 2003, we announced that we had agreed the sale of O2 Netherlands to Greenfield Capital Partners, an independent private equity and corporate finance group with existing interests in the telecoms sector. We completed the sale on 3 June 2003.

The following is a brief summary of the development of our key businesses:

**O2 UK**

O2 UK is our main UK business and presently our most significant business in terms of its contribution to our revenues and profitability.

O2 UK was formed as a joint venture between BT and Securicor Group plc in January 1984, with BT owning 51 per cent, and prior to the demerger was called BT Cellnet. In April 1986, BT increased its stake to 60 per cent. In November 1999, BT acquired Securicor’s remaining stake in the business for £3,173 million, including expenses. The business was managed separately from the businesses of either of its former shareholders.

O2 UK provided analogue mobile telephone services from January 1985 until October 2000 and has provided GSM services since July 1994. In April 2000, O2 Third Generation Limited, now one of our subsidiaries, was awarded one of the five UMTS licences in the United Kingdom for £4.03 billion, which was paid in May 2000. In June 2000, O2 UK launched GPRS services to the UK market.

In implementing its strategy of increasing control over its distribution channels, O2 UK has made a number of significant acquisitions and investments. In May 1997, O2 UK acquired a 40 per cent shareholding in The Link Stores Limited, a UK telecommunications retail outlet, with Dixons Stores Group Limited as the principal shareholder.

BT transferred the Airwave business to us in November 2001. Airwave provides TETRA network services to certain public safety organisations in the United Kingdom. Prior to that, BT already had transferred to us its contracts to provide network services to a number of police authorities in the United Kingdom. On demerger, O2 UK also included the BT Mobile business (BT’s own mobile service provider), the BT Paging business (the United Kingdom’s leading paging network) and the BT Messaging business.

**O2 Germany**

Our German business, O2 Germany, was launched in May 1995 as a joint venture between BT and Viag AG, with BT holding a 50 per cent stake, and prior to 2002 was called Viag Interkom. BT’s stake reduced to 45 per cent when Telenor AS acquired a 10 per cent stake in April 1997. Pursuant to agreements made in August 2000 and January 2001, BT increased its stake to 55 per cent by acquiring Telenor’s 10 per cent stake for £1,032 million. In February 2001, BT acquired the remaining 45 per cent of the business from E.ON AG (formerly known as Viag AG) for £4,562 million. As part of the transactions, BT repaid loans totalling £3,615 million provided by E.ON AG and Telenor AS to O2 Germany to fund its UMTS licence acquisitions.

Initially, the business provided fixed line services only, but in May 1997 O2 Germany was awarded the fourth German GSM licence and launched GSM mobile services in October 1998. In August 2000, O2 Germany was awarded a UMTS licence in Germany. The cost of the licence was £5.16 billion, which was paid in September 2000. In January 2001, it launched its GPRS service. As a result of the reorganisation of our businesses in order to create our Group, the fixed line businesses were separated from the mobile businesses and do not form part of our Group.

**O2 Netherlands**

O2 Netherlands was founded in September 1996 as a joint venture between BT and Nederlandse Spoorwegen N.V., the Dutch railway company, with BT holding a 50 per cent stake, and prior to 2002 was called Telfort Mobiel. Initially, the business provided fixed line services only, but in February 1998 it was awarded a mobile 

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licence in the Netherlands and in October 1998 it launched its GSM mobile network operations. In July 2000, BT completed the acquisition of the remaining 50 per cent interest in the business for £1,207 million. Also in July 2000, the business was awarded one of the five UMTS licences for the Netherlands at a cost of £266 million and launched GPRS services to the business sector in July 2001. As a result of the reorganisation of our businesses in order to create our Group, the fixed line businesses were separated from the mobile businesses, and do not form part of our Group. On completion of the sale of O2 Netherlands on 3 June 2003, Greenfield Capital Partners paid us €25 million in cash for all the issued shares in O2 Netherlands.

**O2 Ireland**

Our Irish business, O2 Ireland, was formed in June 1995. BT acquired a 1 per cent interest in the issued voting share capital of O2 Ireland from IIU Nominees Ltd in January 2000. In March 2000, BT acquired a further 49.5 per cent stake through its acquisition of Esat Telecom Group plc for £1,558 million. In April 2000, BT acquired the 1,500,000 non-voting shares held by a member of O2 Ireland’s management, and in April 2001, BT increased its interest to 100 per cent by acquiring Telenor’s 49.5 per cent interest for £856 million.

O2 Ireland launched its commercial GSM services in March 1997 and launched its GPRS service in January 2002. O2 Ireland has been awarded one of the four UMTS licences offered by the Irish government.

**Manx Telecom**

In 1987, our business in the Isle of Man, Manx Telecom, was awarded a 20-year licence to operate the Isle of Man telecommunications network. The licence originally covered fixed line telephony but was expanded in 1994 to include GSM mobile services and in 1999 to include UMTS services. Manx Telecom launched Europe’s first UMTS network in December 2001, offering high-speed data and advanced business and e-commerce solutions.

**O2 Online**

O2 Online, the UK’s leading mobile internet businesses, was originally developed in 1997 as part of O2 UK in the United Kingdom, and prior to 2002 was called Genie. As of 31 March 2003, O2 Online had operations in the United Kingdom and Asia.

**Reorganisation**

As a result of the reorganisation of our businesses, the scheme of arrangement and the demerger transaction, we now own the international mobile businesses of BT described above.
**Details of Incorporation**
mmO2 plc was incorporated and registered in England and Wales as a private company limited by shares on 30 March 2001 under the UK Companies Act under the name Newgate Wireless Limited with registered number 4190833. By virtue of special resolutions dated 11 September 2001, effective on 12 September 2001, mmO2 plc was re-registered under section 43 of the UK Companies Act as a public limited company and changed its name to mmO2 plc. The principal legislation under which mmO2 operates is the UK Companies Act and the regulations made thereunder.

mmO2 plc’s registered and head office is at Wellington Street, Slough, Berkshire, SL1 1YP, England.
**B.****Business Overview**
**Introduction**

We are a leading provider of mobile communication services in Europe. As at 31 March 2003, our business served 19.37 million mobile customers in the United Kingdom, Germany, Ireland, the Netherlands and the Isle of Man. Our mobile businesses in the United Kingdom, Germany, Ireland and the Isle of Man are all wholly-owned and together they cover territories with a total population of over 147 million people. Our combined Group turnover for the year ended 31 March 2003 reached £4,874 million, up 14.0 per cent from £4,276 million for the preceding year.

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We have well-established mobile businesses in the United Kingdom and Ireland, where O2 UK and O2 Ireland each have a track record of revenue and customer growth. In these countries, we have developed a strong presence in high-value markets, such as the business market, and in the provision of mobile data services.

Our business in Germany has continued to grow significantly since its GSM mobile network was launched in October 1998 and at 31 March 2003 had over 4.8 million customers. The business has made a large investment in its network and has continued to expand its position in target markets by exploiting new and existing distribution channels and developing innovative products.

On 3 June 2003 we completed the sale of O2 Netherlands to Greenfield Capital Partners. The sale followed a comprehensive review of the highly competitive Dutch market. The Dutch market comprises five players and is highly penetrated, with two of the largest competitors holding a combined market share of approximately 70 per cent. As one of the three small players we did not have the critical mass required to deliver sufficiently attractive returns in the long term.

Our mobile businesses in the United Kingdom, Germany and Ireland have all deployed mobile packet data capabilities based on GPRS technology. GPRS offers “always-on” connectivity for mobile office services, e-commerce, banking, online billing, telemetry, entertainment, mobile internet and other mobile data services.

GPRS serves as the key transitional stage in our roll-out of UMTS services. During 1999 and 2000, we secured licences to operate UMTS mobile services in the United Kingdom, Germany and the Isle of Man. Last year we were also awarded a UMTS licence in Ireland. In addition to conventional voice and data services, UMTS will permit us to offer high-resolution video and multimedia services and significant enhancements to the mobile data services available on GPRS. Our business in the Isle of Man launched Europe’s first fully operational UMTS network in December 2001, offering a full range of high-bandwidth applications, including video telephony and advanced business and e-commerce solutions.

We continue to believe, as we did last year, that we have positioned our Group as one of the leading providers of mobile data services in Europe. We have done this in part through O2 Online, our mobile internet business, which we believe is the UK market leader in mobile portal services. The O2 Online mobile offering is designed to create value for us by attracting high-value customers, by increasing the voice and data usage of our networks and by reducing churn through high-quality content, services and applications and closer relationships with customers. We doubled our online subscriber base to more than half a million customers last year of which almost half are high value contract customers.

Since its launch, O2’s corporate e-mail on the move solution, BlackBerry2, has been enhanced to include voice capability, attachment opening, Lotus Notes capability and international roaming to 21 countries. To date, more than 23,000 devices have been sold to 650 organisations. The xda from O2 was the first truly integrated GSM/GPRS enabled PDA based on MS pocket PC 2002 phone edition and was launched in May 2002. By March 2003, more than 55,000 devices had been sold in the UK, Germany, Ireland, the Netherlands and Asia Pacific.

**Strengths**

Last year we said we believed that the following key strengths would enable our Group to enhance its position as one of the leading providers of mobile communications services in Europe:
•European footprint of cohesive wholly-owned businesses;  •established mobile businesses in the United Kingdom and Ireland;  •growing business in Germany;  •well positioned for GPRS and UMTS success in our markets;  •a leading position in mobile data in our markets; and  •track record of innovation.

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Last year we formulated a Group-wide strategy that would enable us to best leverage these strengths, this has since evolved to reflect our experiences over the year.

**Strategy**

We believe that we have made good progress in meeting the strategic objectives we set ourselves last year, but we recognise that to succeed our strategy must continue to evolve and our marketing emphasis must change to reflect the changing nature of our marketplace. Becoming an integral part of our customers’ lives by knowing what is important to them and helping them to get more out of life, is a primary aim of our strategy going forward and requires a clear understanding of the differences between different types of customer in order to provide a better overall experience to them. The experience starts when a customer walks into an O2 shop or goes online to make a purchase and continues right through the usability of a particular product or service, and on to customer care.

To achieve our aim of providing a better customer experience, we are developing a new segmentation framework to ensure that we really do understand the needs and priorities of our customers. Using this framework we plan to deliver a range of service packages to different types of customer. At the same time, we are enhancing our IT systems to improve our customer relationship management capability and help us transform our retail presence.

Our aim is that by gaining greater customer insight and focusing on improving the customer experience, we will increase customer satisfaction among higher value customers and improve our ability to attract and retain them, thereby helping to increase ARPU, reduce churn and improve operational performance.

Our goal remains to create shareholder value through above sector average growth in revenue and profitability.

The new strategic emphasis, outlined above, supports this goal and the key elements in implementing our strategy are:
•emphasise operational performance and execution;  •achieve greater integration by managing our businesses cohesively; and  •deliver leadership in data services. ***Emphasise operational performance and execution***
Operational performance and execution is still our key priority. It includes driving up financial performance by improving our customer mix, increasing customer loyalty and stimulating revenues. We aim to continue improving our cost base, including reducing unit costs in Germany by building scale. It is also critical that we improve the profitability, growth and competitiveness of our UK business.

*Improve customer mix.* At O2 UK in the financial year 2003 there was a turnaround in the previous year’s declining trend in the post-pay base. Post-pay contracts grew as a proportion of the overall customer base from 32.0 per cent in March 2002 to 33.7 per cent in March 2003. We believe this was partly due to improvements in network quality and it has contributed to an increase in blended ARPU over the same period of £16.

In Germany, Genion, our mobile services product, remains an important driver of O2 Germany’s success. Genion, which accounted for the majority of gross additions last year, sharpens our strategic focus on more profitable customers, generating higher ARPU and a considerably lower churn rate than other mobile products. Genion customers made up more than 30 per cent of our total customer base as at 31 March 2003. This has made a significant contribution to the positive trend in ARPU at O2 Germany.

In Ireland, blended SAC fell by 33 per cent in the course of the year and blended ARPU increased by 6.7 per cent, while post-pay churn rate fell by 26.1 per cent.

We set ourselves a specific operational target for the financial year to 31 March 2003 to raise ARPU in the Netherlands. We succeeded meeting this target, generating growth in blended ARPU of 9.8 per cent over the course of the year.

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*Increase customer loyalty.* Last year we reported that we had implemented a number of customer loyalty and retention measures, including targeted customer incentive initiatives and pre-contract termination “save” programmes, aimed at encouraging greater loyalty amongst our customers. At O2 UK, through successful customer relationship management initiatives, including these loyalty and retention measures, we reduced the rate of contract customer churn, which fell from 31 per cent to 28 per cent. We have also reduced contract customer churn from 21 per cent to 16 per cent in O2 Germany and 23 per cent to 17 per cent in O2 Ireland.

*Focus on cost efficiencies.* Both O2 UK and O2 Germany have participated in downsizing programmes and these have already yielded cost efficiencies. In the UK, O2 scaled back its permanent workforce during the financial year to March 2003 by some 1,400 jobs and restructured its retail stores portfolio from 320 to 196 stores. O2 Germany reduced its workforce from 3,900 to 3,400 between 2002 and 2003. We still regularly undertake benchmarking exercises and actively pursue best practice programmes to reduce our costs.

*Achieve competitive scale in Germany.* We have grown our share of the customer base in Germany, increasing subscribers by 23.7 per cent over the year to 4.8 million by the end of March 2003. We aim to continue this momentum and as we do so our primary focus will remain on building our retail business. Last year we said that in this area we would continue to expand our direct channels, including owned shops, branded partner shops and web-based channels. After identifying gaps in the distribution network, we plan in the coming year to increase the number of our direct outlets by 220 to 508 including some new O2 shops, but mainly in partnership with other retailers.
***Achieve greater integration by managing our businesses cohesively***
Our aim is to gain competitive advantage  by increasing speed of execution and reducing costs and complexity through doing  things once, where it makes sense to do so. Examples include achieving a consistent  brand experience across our businesses, building and managing a Group-wide product  set, implementing a shared vendor strategy, procuring devices on a Group-wide  basis and harmonising key elements of our IT systems. Most of the major programmes  are already in place and the priority is now therefore efficiency of execution.

*Consistent brand experience.* Since its launch in May 2002, our new brand has gained good momentum and awareness of the new brand has exceeded our own targets. We believe that having a common brand is beginning to facilitate a more cohesive marketing orientation and uniform level of service.

*Group-wide product set.* In March 2002, we put in place a single product team (Products O2) across all our country markets to drive the delivery of our single product road map addressing products and services for business customers and consumers. During the year we successfully introduced products in the following key areas with particular appeal to high-value users.

The xda from O2 has found a firm following since its launch in May 2002. By March 2003, more than 55,000 had been sold in the UK, Germany, Ireland, the Netherlands and Asia Pacific.

The BlackBerryTM was launched across all our territories. To date, more than 23,000 devices have been sold to 650 organisations.

*Shared vendor strategy*. We have consolidated our existing supply contracts for the UMTS network and replaced them with new strategic partnerships. Nortel Networks and Nokia have become the principal suppliers of our broadband mobile data networks and this will help us control capital expenditure.
***Deliver leadership in data services***
Last year we set out our aim to grow revenues from leading edge mobile technology and services and have made significant progress in achieving this over the course of the financial year to March 2003.

Data as a proportion of service revenues increased to 17.3 per cent from 11.7 per cent, underpinning our leading position in this expanding market ahead of our target of 16 per cent.

Group-wide (UK, Germany, Ireland and the Netherlands), more than 8.507 billion SMS text messages were sent, an increase of 60.1 per cent over the previous year. O2 UK customers sent half a billion text messages during the 

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month of December – the largest volume of person-to-person messages handled by a UK operator in a single month. We continue to see significant revenue potential in SMS, including person-to- person, premium and wholesale text messaging.

We also made an encouraging start to our portfolio of interactive services. From launch until 31 March 2003 we added over 200,000 Java Unique visitors and added just under 100,000 MMS Active users. We expect usage to increase throughout 2003 with the introduction of full MMS interconnection between networks and a greater choice of multimedia, colour-screen handsets.

Going forward, our aim is to help customers get more out of their lives by delivering a better data experience to them, rather than always aiming to be first-to-market with new technology. The focus will be on ensuring we have a close fit with customer requirements and expectations, easy access to and use of data services, high levels of customer training and support across all touch-points and tightly integrated services, devices and brand. A good example of this is the imminent introduction of O2 Active. This should provide customers with rapid access to mobile data services – MMS, games and music – through icons on preconfigured handsets. O2 Active quickly adapts to the individual, allowing frequently used services to be accessed more easily and rapidly.
**Operations (by country)**
The following table represents the turnover for each of our operating businesses for the three financial years ended 31 March.
  **Year ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** O2 UK  3,025  2,756  2,706 O2 Germany  1,060  875  65 O2 Netherlands  263  200  90 O2 Ireland  442  395  309 O2 Online  93  100  15 Other operations  64  54  47 Intragroup eliminations  (73) (104) (32)     **Total**  4,874  4,276  3,200       ***O2 UK*** *Operational Performance*
In the past year our focus has been  on delivering improvements in the efficiency of our operations, enhancing our  performance in our target high value sectors of the market by stimulating usage  and reducing customer churn, while securing improvements in the quality of our  network. The O2 UK management team has performed strongly in these  key areas of our business, delivering enhanced operational efficiency and improved  profitability. A major restructuring, completed during the first half of the  year, led to a 17 per cent reduction in the number of full-time employees, enhancing  our efficiency without impairing our ability to provide an improved customer  experience. Significant progress was made in improving our performance in the  post-pay, higher value sector of the market by providing a better service to  the business, professional and young adult customers who are the focus of our  marketing efforts. During the year, we turned round the previous year’s  declining trend in the share of our post-pay customer base, with post-pay contracts  growing as a proportion of the overall customer base from 32 per cent to 34  per cent. At the same time, through improved customer communication and retention  programmes, we reduced the rate of contract customer churn from 31 per cent  to 28 per cent. Our O2 Loyalty Programme won the top award in the  Marketing Direct Intelligence Awards and overall measures of customer satisfaction  continued to rise. Reflecting the higher quality of our customer base and improvements  in network performance, blended ARPU rose over the same period from £231  to £247. Key corporate customer wins included the BBC, Logica, Woolworths,  the Bank of Ireland and the Co-operative Group. Refurbished O2 retail  

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stores performed strongly, making a significant contribution to customer growth and to a reduction in SACs. Sales per store were more than twice the level of the previous year.

Our customer management capability programme – including the introduction of interactive knowledge databases for customer care advisors, new order processing and an upgraded billing system – began to deliver benefits. We continued to invest cost-effectively in our existing GSM (or 2G) infrastructure. Network quality also continued to improve, leading to a further fall in the rate of dropped calls on our network. We are now achieving levels equal to the best in the industry. Last year O2 UK consolidated its leadership in data services. Data grew as a proportion of service revenues from 11.8 per cent to 17.1 per cent of the total and SMS messages sent grew to a record-breaking and market-leading 5.8 billion. The launch of the xda from O2 – a fully integrated mobile phone and PDA and the first pan-O2 product – has been well-received, accounting for 59 per cent of the voice enabled PDA market in the UK, according to the latest figures from Context, and attracting numerous awards and accolades from national and trade press. Our BlackBerryTM “always on” e-mail solution for business customers also continued to enjoy success, as did the TreoTM organiser. We launched the new generation of MMS during the year. We expect that MMS, with its media rich content, combining text, pictures and voice, will be a source of growth in the future. The issue of interoperability between UK networks, a potential obstacle to the diffusion of MMS, was overcome and agreements are now in place with other UK network operators.

Our sponsorship of Big Brother, the reality TV programme, was the industry’s largest ever mobile data initiative in terms of volume and revenue and generated over 10 million text messages carried across the O2 network during the third series. O2 became both the official club sponsor and exclusive mobile communications partner to Arsenal. O2 also continued to sponsor England rugby, providing a range of interactive and exclusive services. Our efforts in this area won independent recognition. O2 won the Marketing Initiative of the Year award for Big Brother 3 and Arsenal Interactive Partnerships at the Utility Week Awards.

On 4 June 2003 Tesco and O2UK announced the creation of a new 50:50 joint venture, Tesco Mobile. The new company will sell exclusively Tesco branded mobile services in Tesco stores across the UK, using O2’s technology and network, and is expected to grow towards two million customers.
*Market Dynamics*
The number of competitors in the UK market has risen from four to five with the launch of 3 in March 2003. In current market conditions, which are close to saturation, we regard this number of operators as challenging.
*Looking Ahead*
Our focus continues to be on attracting and retaining high-value customers and on driving strong top line revenue growth from data and MMS applications rather than through increased subscriber numbers. At the same time we can do more on cost efficiency. Both avenues should lead to improved profitability.
***O2 Germany*** *Operational Performance*
Important programmes were carried out last year to streamline operations and accelerate revenue growth. To reduce costs and improve efficiency we took steps to optimise site rentals, restructure our sales channel mix and reduce headcount by the equivalent of 500 full time employees. More customer retention packages were introduced, supported by a win-back team to re-attract customers, which contributed to the substantial reduction in blended churn from 28 per cent to 16 per cent. We also launched segmented product offerings using customer-insight technologies based on our Customer Relationship Management capability. After identifying gaps in the distribution network, we plan to increase the number of our direct outlets, including some new O2 shops but mainly in partnership with other retailers.

Genion, our unique mobile services  product, remains the major driver of O2 Germany’s success. Genion,  which accounted for the majority of gross additions last year, underlines our  strategic focus on more profitable customers, generating higher ARPU and a considerably  lower churn rate than other mobile products. Thanks to its advanced technology,  Genion is able to offer innovative services in combination with reduced tariffs  close to 

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those for fixed-line products in a geographical area chosen by the customer, usually near the home or workplace. No other operator in Germany can offer this service. Genion customers at the end of March 2003 accounted for more than 60 per cent of our post-paid customer base and more than 30 per cent of our total customer base. Genion also propelled us to further success in the German business market. We won Caritas Stuttgart, Voith Turbo and Thuringer Energie as clients. In data services overall O2 Germany had a very successful year.

We established ourselves as market leaders in data, in terms of revenue share, driving data up to over 19 per cent of our service revenues. SMS services were the main source of growth in data revenues, boosted by both person-to-person and premium SMS services such as TV-voting, games, logos and ring-tones. Our portfolio of premium services, including the launch of SMS Chat, developed further and we acquired more internet portal access customers. O2 launched MMS in Germany in November 2002 and was the first mobile operator in the German market to offer MMS interconnection to every other mobile network. Future growth in MMS is expected to lead to further increases in the proportion of data service revenues and ARPU.

There was a significant increase in the number of GPRS active users and, during the year, the xda from O2 was launched. We won Bertelsmann, Gruner and Jahr and Berliner Verlag as customers for the BlackBerry2 device. In partnership with m.able, we created a mobile sales data solution for mobilesteps, an IT and telecoms sales company. At the CeBIT Conference in March 2003, we presented further mobile services in games, music, messaging, information and business. This year we plan to introduce a Wireless LAN offering as a complementary service to high-speed wireless networks such as 3G, especially for business customers. We plan to introduct 3G services in Germany from late 2003. By this time, enough handsets should be available to meet market demand. O2 has secured a deal with T-Mobile to utilise its 3G network from the outset. Mobile Number Portability was introduced in November. O2 was the most successful operator in the market, winning the largest number of customers from other operators.
*Market Dynamics*
As penetration reached 69 per cent (63 per cent in March 2002) and moved towards saturation levels, the German mobile market continued to grow but more slowly than in recent years. About 4.3 million new customers were acquired during the financial year, taking total connections to 60 million mobile connections at the end of March 2003. We continue to believe that the German wireless market is one of the most attractive in Europe. There is, however, a limit to the number of operators that it can support. During the year the number of 3G network operators reduced from six to four – T-Mobile, Vodafone D2, E-Plus and O2 Germany – as two of the original six operators awarded 3G licences in 2000 – MobilCom and Quam – abandoned plans to enter the market.
*Looking Ahead*
Last year our focus was on improving the cost and revenue basis of the company. In the coming 12 months our priority will be to assess our core processes to see how we can adapt them to best serve our customers. We intend to launch a range of further services such as multi-card Wireless LAN, Loyalty/Customer Reward Systems and also the start of our 3G solutions and a comprehensive portfolio of mobile data products. Future growth potential for Genion remains good. Our overall objective is to continue to grow our market share in Germany by one percentage point per annum – focused on post-pay customers, the business and wholesale sectors.
***O2 Netherlands***
We completed the sale of O2 Netherlands to Greenfield Capital Partners on 3 June 2003.
*Operational Performance*
O2 Netherlands generated  good financial results and secured significant improvements in operational efficiency  and in the quality of service offered to customers by providing compelling new  products, better network quality and a high level of service delivery. We set  ourselves a specific operational target for the past financial year to raise  ARPU. We succeeded in meeting this target, generating underlying growth in ARPU  of over five per cent over the course of the year. This partly reflected the  strategic focus last year on the higher-usage, post-pay customer whose numbers  increased by 27 per cent. At the same time, the company launched a number of  targeted 

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campaigns to persuade new and existing customers to adopt its new data products and services. O2 Netherlands was at the forefront in its response to calls for transparency in mobile phone call tariffs. In September 2002, it took the unique step of abolishing handset subsidies in the retail sales channel, replacing them with a new SIM-only subscription with clearer, lower tariffs. This innovative marketing initiative received a positive response from both the media and the market.

The O2 portal became the most popular website for mobile communications in the Netherlands, guiding existing customers through the portfolio of products and services and fulfilling an important function as a sales channel by attracting new subscriptions. In the business market, based on customer feedback, O2 Netherlands introduced flat-rate tariffs and product innovations. The xda from O2 saw good initial sales and the BlackBerryTM GPRS terminal enjoyed an encouraging take-up and found a following not just in the business market. During the Dutch general election campaign in November 2002 the BlackBerryTM was used as a tool by the largest political party, CDA, helping to keep candidates and campaign workers in touch with each other and with the campaign headquarters.

O2 Netherlands secured significant improvements in network quality last year through additional investment, including investment in E-GSM – an extra frequency with the aim of further optimising the network’s range indoors. Key corporate customer wins during the year included IBM, Siemens, Cap Gemini, Ericsson, Europol, Ernst & Young and Clifford Chance. O2 also signed a major affinity deal with the Dutch international airline KLM, targeted at members of its frequent flyer loyalty programme. To maximise the use of the network the company continued to strengthen its partnerships with third party telecoms providers. debitel Nederland BV and Tele2 began to offer full voice and data services over the O2 network during the year. At the same time the operational management of the network was transferred to Ericsson. SMS continued to be the main driver of growth in data, while MMS was launched in October 2002.
*Market Dynamics*
The Dutch market comprises five players and is highly penetrated, with two of the largest competitors holding a combined market share of approximately 70 per cent.
*Looking Ahead*
We shall continue to invest in the build-out of the Airwave network until its completion by the end of 2005. We shall also address the expanding range of opportunities for winning potential Airwave customers among the emergency services and public safety organisations at a time when there is heightened concern about national security and terrorist attacks.
***O2 Ireland*** *Operational Performance*
Our management team’s continued focus on customer satisfaction and operating excellence was recognised in a number of industry awards and commendations last year. In April 2003, O2 Ireland was named Telecoms Company of the Year at the ICT Expo Awards. Our portal website (www.O2.ie) won Ireland’s leading technology award, the Golden Spider Award, for the second year running. The award recognises the most innovative use of mobile data through the development of services and products. Delivering high levels of customer satisfaction requires top quality products and top quality people as well. At the Irish Institute of Training and Development Awards 2002, O2 Ireland picked up two awards for the “*Best Training Programme*” and the “*Best e-learning*” in the large business sector. O2 Ireland won the “*FAS Excellence through People*” award 2002 and the “*ECDL Corporate Section Award*” for promotion and delivery of *Equalskills 2002*. At the seventh Annual Irish Call Centre Awards, O2 Ireland was short-listed for the “*Best Training Programme*” Award. The growth in data service was driven mainly through increased SMS usage and take up of GPRS services. We made good progress in sales of the BlackBerryTM device, exceeding our targets with the aid of extensive advertising and direct sales incentives. In the corporate market, we gained a number of important new customers including the Cantrell and Cochrane Group and the Richmond Group.

We continued to expand the range of  O2 Ireland’s on-line services and these now include games, MTV  ringtones, bill view on line, Chat, WebSMS, and multimedia messaging. A major  success was our operation of the website 

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for RTE’s highly popular “You’re a Star” talent show, sponsored by O2 Ireland. Viewers cast their votes via premium text messaging using O2’s SMS Broker service, now called Mobile Marketing. On the final night of the show more than 850,000 SMS votes were cast using our Mobile Marketing service. O2 Ireland launched Ireland’s first public Wireless Local Area Network service, *wireless zone*, in early February 2003. *wireless zone* enables business people on the move to connect to the Internet at broadband speeds (25 – 30 times the speed of a dial-up modem) within 12 specific public locations, or ‘hotspots,’ nationwide. Representing a €1.9 million investment by O2 Ireland and using the inherent capability of the company’s core nationwide data network, *wireless zone* is available to both O2 and non-O2 customers.

Our distribution strategy continues to be a cornerstone of our success. In May 2002, we announced the formation of a new retail company, O2 Retail, and the consolidation and full integration of O2 Ireland’s four existing retail operations under the O2 Retail banner. This removed duplication of stores, reduced overhead costs and enabled us to bring a common, focused retail approach. We have continued to expand our network in a cost-efficient manner and in a way that is as unobtrusive as possible to local communities. We continued to upgrade a number of sites, which delivered improved network quality and capacity at a lower network cost. O2 Ireland is a company that is committed to investing in and playing a part in the development of local communities around the country. We are active in a wide range of activities that are integral to Irish life.
*Market Dynamics*
The number of competitors in the Irish mobile market is set to increase from January 2004 with the introduction of 3 (Hutchison Telecom). As part of the 3G licence process, O2 Ireland and Vodafone Ireland were awarded B licences while 3 was awarded the only A licence. The main differences in the licences are price and coverage and rollout requirements. The fee for the A licence is €50 million, while the fee for the B licence is €114 million. The B licence, while more expensive, carries less aggressive roll-out and coverage requirements. Meteor, the third 2G operator in the Irish market did not apply for a licence.
*Looking Ahead*
The focus for O2 Ireland over the coming year will be on further understanding the needs of our customers and satisfying those needs as efficiently as possible. ARPU in the Irish mobile phone market continues to be above the European average due to the high levels of both voice and non-voice usage. O2 Ireland will continue to look at ways of maximising value from existing voice services and a growing stream of value added, non-voice services. Any new investment in the existing 2G network will continue to be justified on a financial pay-back basis and where possible will be shared with the roll-out of our 3G network where our investment will be demand-driven.
***Manx Telecom*** *Operational Performance*
Manx Telecom has been at the forefront of introducing new telecommunications technology and services. The Isle of Man has had the benefit of broadband ADSL services over fixed lines since March 2000, when Manx Telecom launched these services ahead of the UK. ADSL services are now available to around 80 per cent of the island’s population and the number of connections continues to rise steadily. In December 2001, Manx Telecom became the first operator in Europe to launch a fully operational 3G mobile network. Manx Telecom’s 3G network supports location-based services, video telephony, online gaming and video surveillance, as well as voice calls and high speed Internet access.

Manx Telecom’s 3G project has  been a key demonstration of O2’s mobile data leadership  and is providing an invaluable practical learning experience to other O2  businesses as they plan the implementation of 3G services in their own territories.  In May 2002, we transported a 3G base station to Dublin to conduct a live demonstration  in support of O2 Ireland’s successful bid for a 3G licence.  Since its launch we have offered a 3G trial service to over 100 interested parties.  We have also announced Europe’s first 3G tariffs and have tested a wide  variety of applications across the new high-speed network. As one of a very  small number of operators around the world who can demonstrate 3G, Manx Telecom  has attracted over 1,200 visitors, including politicians and print and  broadcast media from around the world, wishing to see the ground-breaking service  at first hand. At the Manx 

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International Rally in August 2002,  3G connectivity at each of the checkpoints around the course meant that driver  information, times and results were for the first time simultaneously available  all over the course via a web-based application. We are pleased that the mobile  industry has recognised our achievements. We have won awards from Mobile News  – Technology Innovation Award – and*Tarifica Billing Magazine*  – Globe Award for Excellence in Mediation. In November 2002, Manx Telecom’s  3G services also gained Highly Commended at the eBTA Awards, hosted by Charteris  and the Institute of Directors, in the category “Most Innovative Project”.
*Market          Dynamics*
Manx Telecom is the only provider  of mobile telephony in the Isle of Man.
*Looking Ahead*
Discussions are currently underway  with the Isle of Man Government over the terms of the renewal of our licence  ahead of the expiry date of the current licence in 2006. We have demonstrated  our commitment to ensuring that we deliver the best possible service to our  customers by achieving an overall satisfaction rating of over 98 per cent  across the whole of the Manx Telecom portfolio. We have also invested £7.5  million during the year to upgrade and enhance the existing network and to deliver  new services.
***O2 Online*** *Operational Performance*
Between 2001 and 2003 O2  Online grew rapidly, underlining O2’s position as the clear  UK market leader in mobile portal services. We doubled our online subscriber  base to more than half a million customers, of which almost half are high-value  contract customers. Customers for our premium rate services, such as ring tones  and pre-paid alerts, have consistently recorded some of the highest ARPU levels  within mmO2. The use of WAP services through our mobile portal demonstrated  strong growth as customers embraced mobile Internet messaging, games, sport  and news/information via their mobile handset. Our online portal, O2.co.uk,  was named as “Best Site Makeover” by silicon.com.
*Interactive Services*
O2 Online has had a  key role in developing the interactive mobile services that are used increasingly  to communicate media-related content in recent, innovative marketing campaigns.  Interactive techniques include text voting, gaming quizzes, ringtones, icons  and news alerts together with the facility to text comments to TV and radio  programmes. During the year, in response to the increasing demand for these  applications, O2 Online developed Mobile Interactive Services –  a new capability that provides co-branded and own brand mobile text based services  across the media, sport, consumer goods and finance sectors. We developed further  our sponsorship agreements with Arsenal and the England rugby team to provide  interactive services to fans. We also used our skills to run the official websites  for high profile interactive television programmes including Channel 4’s  *Big Brother 3*, the BBC’s *Fame Academy* and RTE’s *You’re  a Star*. *Big Brother 3* generated in excess of 10 million premium  rate text messages during the nine week programme – making it the most  successful premium rate mobile data event to date in Europe. Third party customers  included Granada, for *Popstars – the Rivals*, ITV for *I’m  a Celebrity, Get Me Out of Here*, Masterfoods, RAC and the Capital Radio  Group.
*Market Dynamics*
Our principal competitors are the  mobile internet portals of other network operators such as Vizzavi, Zed and  Orange, fixed internet portals such as iTouch and Mviva. We believe that our  strongest competition will be from other mobile portals.
*Looking Ahead*
In the coming year, O2  Online will continue to target high-value customers with competitive and appealing  voice and mobile data services. We will be offering a specialist online business  shop to enable business customers to take advantage of specialist/tailored online  tariffs, online care and online billing. It is just one way in which we will  seek to improve our customers’ interface with us, making it easier for  them to access content and applications that will enhance their lives.

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***Airwave***
Last year we continued to invest  heavily in the roll-out of Airwave, our digital radio system for public safety  and emergency organisations, delivering the service to our tenth police force.  Over the next 12 months more than 20 further police forces, including the  Metropolitan Police, are due to go live. We invested £163 million in our  network development last year and capital spending in the 2004 financial year  will also be significant. Under the terms of a £2.9 billion, 19-year contract  with the Home Office, Airwave will be the sole supplier of core mobile radio  services to all 53 police forces in England, Scotland and Wales. The Airwave  network is currently used by forces in Lancashire, Greater Manchester, North  Yorkshire, West Mercia, Northumbria, Suffolk, Leicestershire, Cambridgeshire,  Derbyshire and Humberside.

Opportunities for Airwave are not  restricted to police forces. Airwave is also currently used by the British Transport  Police, the Lancashire Fire Brigade, the Shropshire Fire Brigade, Hereford and  Worcester NHS Ambulance Trust and the Ministry of Defence police. The UK Government  has recently invited tenders for the implementation of nationwide communications  systems for the country’s Fire and Ambulance services. Airwave has submitted  competitive bids for both procurements. Airwave is a sophisticated, fully encrypted  digital radio system, which cannot be scanned or monitored by outsiders. Scheduled  for completion by the end of 2005, the Airwave network will allow the police  to communicate seamlessly and securely throughout England, Scotland and Wales.  Airwave’s multi-functional handsets, combining a digital radio and mobile  phone, will also in future operate as data terminals – enabling officers  in the field to access local and national databases, such as the Police National  Computer and driving licence information. As well as making a significant contribution  to the fight against crime, the system promotes officer safety, partly because  it has better radio coverage and call clarity, but also because of its emergency  button feature, which enables officers to summon immediate assistance.

The Airwave network is based on  the open European standard for digital TETRA. In addition to almost 100 per  cent geographical coverage, capacity will be available on Airwave whenever and  wherever a public safety user needs it – a vital feature in emergencies.  Voice quality is very clear and there is a facility for encryption, which means  that third parties cannot listen in, allowing the police, for example, to keep  one step ahead of criminals. Airwave will also provide a common platform for  public safety organisations, giving them true interoperability and comprehensive  geographical coverage. Lack of communication at major emergencies and disasters  has been highlighted as a significant factor in hampering the effective co-ordination  of rescue efforts by the emergency services. With Airwave, police officers from  different forces can talk to one another or to officers from other emergency  services who can, in turn, communicate directly with one another.
*What Airwave can do          for the police:*
Officers in Lancashire and West  Mercia using Airwave have caught burglars carrying analogue radio scanners.  The criminals had been expecting to monitor the whereabouts of police officers  but have been prevented from doing so by Airwave’s encryption. The call  clarity provided by Airwave has also been an advantage to officers in Suffolk  and North Yorkshire who were previously hampered by East Coast Interference,  which sometimes put them in contact with Dutch taxi drivers and North Sea trawlers.

Michael Craik, Deputy Chief Constable  Northumbria Police has this to say about Airwave:

“Feedback on the new features  and functionality of the Airwave service from all the Area Commands where it  is live has been extremely positive – the extra coverage and voice quality  has received special mention from officers”.
*What Airwave can do          for Fire Brigades:*
The Airwave solution for Fire Brigades  would be based on an existing and fully rolled-out network, providing exceptionally  clear speech quality to control room staff and fire crews. We want to work actively  with other market leaders to develop world-class voice and data solutions for  the Fire Brigades, in line with their modernisation agendas. While network reliability  is vital, O2 Airwave considers that the overall dependability of  the end-to-end solution is paramount. An example of just such a solution is  the interim five-year Airwave contract 

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for the Shropshire Fire and Rescue  Service. It includes the provision and management of Airwave voice facilities,  a comprehensive mobile data solution together with mobile radio terminals.

Ian Kerr, Chief Fire Officer of  Shropshire Fire and Rescue Service, says: “Following the Airwave trials  with the police, we were keen to share the benefits of using the same technology.  With improved access to risk data, Airwave will enhance the level of safety  we can give our fire fighters”. And Lancashire Fire and Rescue Service  (LFRS) says: “The Airwave service has provided LFRS with a wide area network  that gives exceptional clarity of voice together with a technology that offers  further development opportunities for LFRS”.
*What Airwave can do          for ambulance services:*
Airwave has shown itself in the  field to be a secure and reliable mechanism for transmitting ambulance data.  Patient data, including ElectroCardioGraph and vital signs, has been carried  across the Airwave network. At the same time Airwave has enabled the intelligent  mobilisation of ambulances, helping the service to meet targets for ambulance  response times, supported by status messaging and vehicle tracking.

Airwave has also been chosen as  an interim solution, pending the outcome of the national procurement, for Hereford  and Worcester NHS Ambulance Trust. Brian Chambers, Director of Clinical Services,  Hereford and Worcester NHS Ambulance Trust, says: “We are working in partnership  with Airwave to provide reliable mobile data communications for the 21st century”.

Our commitment to almost 100 per  cent national coverage for the emergency services means that the roll-out of  our network will take us into areas that are challenging from a planning point  of view. These include national parks, other areas of natural beauty as well  as major cities. Airwave, although not an official signatory to the mobile phone  industry’s Ten Commitments on mast siting, does apply those principles  in its own consultation procedures with local communities over network development.
***Products O2***
mmO2 is committed to  delivering data leadership, and Products O2 develops the mobile data  capability and services to help it achieve this goal.

The Company continues to demonstrate  strong performance in this field – and exceeded its 2003 financial year  target of 16 per cent of revenues from data, reaching 17.3 per cent across the  Group.
*Messaging*
mmO2 retained its position  as the “home of text”, with another record breaking year. Group-wide,  more than 8.5 billion text messages were sent by our customers, up 60 per  cent on the previous year, and well over half of O2 customers now  use text messaging. In the UK, O2 maintained its number one position,  while both O2 Germany and O2 Ireland recorded strong growth  in text messaging, with Ireland consistently achieving amongst the highest SMS  usage levels in Europe.

Taking peer-to-peer text to the  next stage, mmO2 is also leading the market in the provision of innovative  premium text messaging services, including ring-tones, text alerts, votes, sports  information and picture messaging. The Company has recorded strong usage of  such services particularly in regard to its interactive partnerships with Arsenal  Football Club and “reality TV” programme Big Brother in the UK.
*Mobile Data Applications*
Building on its success in text  messaging and mobile Internet services, and its ability to attract and retain  high-value customers, O2 has launched number of mobile data applications  during the year that are proving appealing to high value-users:
•mmO2’s          Java games service, the O2 Games Arcade, is proving highly          popular amongst the high value “youth” target audience. The          service is constantly made more appealing by the addition of new games          – to date more than 60 have been added to the arcade.
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•the Group launched          its picture messaging service, O2 Media Messaging, in October          2002, enabling customers to send and receive multimedia messages –          incorporating pictures, sound and text – using specially enabled          handsets. mmO2 led the market towards “interconnect”          between networks and was the first to announce such agreements in the          UK and Germany – enabling customers to share multimedia messages          with their friends, family and colleagues on other networks. mmO2          has seen encouraging usage of its picture messaging service since launch          and expects this to grow further as penetration of suitable devices          within the market increases.  •O2 has recently          announced trials of video and the world’s first “music over          mobile” services using existing mobile data networks. Video services          being trialled include the ability to create and send 10-second video          clips, and to browse, select and download video clips including regularly          updated news, sport, weather and entertainment. Once selected, the clip          will be “streamed” or downloaded direct to the mobile handset.          The O2 music service enables customers to select, retrieve          and store the latest chart hits via their GPRS-enabled mobile handset          onto a specially designed “digital music player” – and          start listening in around 12 seconds.  *Business O2*
Continues to provide leading mobile  data solutions for businesses. Uptake of the corporate e-mail on the move solution  – BlackBerryTM – continues with more than 23,000 devices  now sold across the Group. O2 achieved clear leadership in this market,  accounting for more than 65 per cent of the total BlackBerryTM devices  sold in Europe during the year. Enhancements over the last 12 months include  voice capability, attachment opening, Lotus Notes capability and extensive international  roaming. The Group has recently announced it is to trial a BlackBerryTM  solution for the SME market.

The xda from O2 –  the world’s first truly integrated colour PDA and GPRS mobile handset,  combining touch screen PDA functionality with advanced mobile phone capability  – was launched in May 2002. Sales continue to show steady growth –  to date more than 55,000 devices have been sold in the UK, Germany, Ireland,  the Netherlands and Asia Pacific. As well as winning excellent reviews, xda  users are using its functionality to the full and are consistently amongst mmO2’s  heaviest data users.

Driven by these developments, use  of mmO2’s medium speed mobile data (GPRS) networks recorded  significant growth to more than half a million active users across the Group.
*Looking Ahead*
Our focus for the year ahead is  to leverage our leadership position in text messaging to deliver further growth  in the uptake of mobile data services. We plan to stimulate sustained and active  usage through the delivery of compelling services that are easy to use and appeal  to our target audiences – within both the high-value consumer and business  markets. We intend to drive penetration of data enabled devices across our territories  and remain committed to achieving our stated target of 25 per cent of service  revenues from data by the end of 2004.
**Regulation**
We conduct most of our business  in the United Kingdom, Germany, Ireland and the Isle of Man. We are therefore  subject to national regulation in each of those countries as well as European  Union-wide regulation. The following summary describes those regulations in  force, which are material to our key business activities in the countries in  which we principally operate. Due to the sale of O2 Netherlands,  this summary does not describe regulation in the Netherlands.
***Regulation in the          EU***
European Union, or EU, legislation  has a direct impact on how we are regulated in each of the countries in which  we principally operate.

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*A new regulatory framework*
On 14 February 2002, the European  Communities adopted four Directives relating to electronic communications. These  set out the new EU regulatory framework for electronic communications, which  must be implemented in EU member states by 25 July 2003. The key features of  the new regime are described below.
*Removal of the requirement          to hold a license*
Under the new framework, telecommunications  operators will no longer require a licence to run their telecommunications network.  The new regime envisages a system of general “authorisation” –  a scheme of general conditions applying to all providers of electronic communications  networks and services.
*Significant market          power*
In addition operators will be obliged  to comply with specific conditions, where they have significant market power  or SMP in a particular market. SMP, for these purposes, has been aligned to  the competition law concept of dominance, which essentially means an ability  to act independently of customers, suppliers and competitors. Market shares  above 40 per cent usually raise concerns as to dominance.

National regulators will decide  whether operators have SMP in any relevant market (either alone or jointly)  by means of a market review. The markets to be reviewed by national regulators  in this way have already been identified in a European Commission Recommendation,  although national regulators may add to these in certain circumstances. The  three mobile markets, which have been identified by the European Commission,  are: access and call origination on public mobile telephone networks, voice  call termination on individual mobile networks and the wholesale national market  for international roaming on public mobile networks.

Where an operator is found to have  SMP on any market, the regulator must impose an SMP condition on it. The SMP  condition may require the operator to comply with one or more of the following  obligations: transparency; non-discrimination; accounting separation; access;  and price control and cost accounting. In exceptional circumstances, a regulator  may impose additional or alternative obligations, but these have to be approved  by the European Commission.

As national regulators have not  yet completed their market reviews, they have not yet decided whether we have  SMP on any markets in any member states in which we operate and, if so, which  SMP conditions should be imposed on us. The new regulatory framework and, in  particular, the outcomes of the market reviews, and any designation of SMP,  may materially affect the nature of regulation to which we are subject and may  affect the services we offer or may wish to offer in the future.
*Other regulation in          the EU*
EU law restricts the collection,  use and processing of personal data and guarantees individuals certain rights,  including the right of access to personal data, the right to have inaccurate  data rectified and a right of recourse in the event of unlawful processing.  Individuals also have the right to withhold permission to use their data for  direct marketing.

EU rules also regulate electronic  commerce, or e-commerce, service providers and provide for harmonised rules  on the conclusion of contracts by electronic means.
*EU competition law*
We are also subject to the general  competition law of the EU and, in particular, Articles 81 and 82 of the EC Treaty,  which prohibit anti-competitive agreements or concerted practices and the abuse  of a dominant position respectively where there is an appreciable effect on  EU member states.

EU competition law is enforced    by the European Commission, which can impose fines of up to 10 per cent of    a group’s worldwide annual turnover for breaches of Article 81 or 82.    Companies which breach EU competition law may also be sued in national courts    by third parties which suffer loss as a result of the breach. As of 1 May 2004,    as part of EU Competition law procedural reform, there will be joint enforcement    of the rules 

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governing restrictive practices    by the European Commission, the national competition authorities and the national    courts.

The European Commission is currently    conducting an inquiry into competition in the market for mobile roaming services    in the European Economic Area, or the EEA. The investigation is continuing    and no conclusions have yet been reached. If the European Commission finds    that there have been infringements of Articles 81 and/or 82, it could fine    infringing operators. Action could also ultimately be taken to force certain    operators to reduce their wholesale and retail charges for roaming or to change    the way in which such charges are set or regulated.
*Infrastructure sharing          and national roaming*
We have entered into 3G infrastructure-sharing    and national roaming agreements with T-Mobile in the UK and Germany, to which    Article 81 of the EC Treaty may apply. The agreements were formally notified    to the European Commission for clearance or exemption. The European Commission    approved the UK arrangements on 30 April 2003.
***Regulation in the          United Kingdom*** *Implementation of the          EU regulatory framework*
The new EU regulatory framework    for electronic communications is due to be implemented into UK law by the    Communications Act (or alternatively by statutory instrument) by 25 July 2003.    Under the Communications Act, responsibility for the regulation of electronic    communications networks and services will lie with the Office of Communications    (OFCOM), which will replace the Office of Telecommunications (OFTEL), the    Radiocommunications Agency, the Independent Television Commission, the Broadcasting    Standards Commission and the Radio Authority.
*Market reviews*
In preparation for implementation    of the new regulatory framework, OFTEL is currently conducting market reviews    of two of the three mobile markets identified in the Commission’s Recommendation    (access and origination, and call termination). The consultation document    for OFTEL’s access and origination market review was published on 11    April 2003, and proposes that mobile operators should not be designated as    having SMP. If this position is confirmed, among other things, this would    entail the lifting of the requirements to meet requests for interconnection    and not to show undue preference or discrimination in the supply of wholesale    services provided over public mobile networks (i.e. services sold and purchased    by communications providers rather than end-users). On 15 May 2003 Oftel published    its market review relating to mobile wholesale voice calls terminating on    individual mobile networks. As a result of this, the Director General of Telecommunications    has formed an initial view that each mobile network operator in the UK has    significant market power in a separate market for voice call termination on    its network and can be expected to have market power for at least the next    three years. It is proposed by the Director that in addition to a one off    15 per cent cut to be implemented by 25 July 2003 by all four mobile    operators (us, Vodafone, T-Mobile and Orange), we and Vodafone should be subject    to further successive reductions in real terms which amount to an annual reduction    of 15 per cent for each of the remaining three years to 31 March 2006 (16    per cent for T-Mobile and Orange). This broadly follows the recommendations    of the Competition Commission. The Director is seeking comments by 24 July    2003. If these successive reductions are implemented, this will cause an additional    reduction in the revenues we receive from termination charges over the coming    years.
*Telecommunications          licenses*
When the new regulatory framework    is implemented, the requirement to hold a licence to run a telecommunications    network will be removed. Until that date, the running of a mobile telecommunications    network will continue to require a licence under the Telecommunications Act    1984. We hold licences under that Act to operate a mobile telecommunications    network, for the provision of radio paging services and for providing the    Airwave service to emergency services.

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*Frequency licenses*
The operation of a mobile telecommunications    network also requires a frequency licence under the Wireless Telegraphy Acts    and this obligation will continue under the new EU regulatory framework. We    have such licences for the frequencies necessary to run our GSM network and    also hold one of five Wireless Telegraphy Acts licences for UMTS spectrum.    Our licence for UMTS spectrum obliges us to roll-out our third generation    network so that it covers 80 per cent of the UK population by 31 December    2007.

We also hold Wireless Telegraphy    Acts licences in relation to our allocation of radio spectrum and the use    of stations and equipment involved in the provision of our mobile telecommunications    services, our paging services and our Airwave services.
*National roaming*
We have reached agreement with Hutchison    3G to permit them to use our second generation network to originate and terminate    calls to and from its subscribers whilst it builds its own UMTS network.
*Network access and          interconnection*
Under the current regulatory regime,    we (and Vodafone) must provide interconnection on non-discriminatory and transparent    terms. In the new regime all operators of a public electronic communications    network (whether or not they have SMP) will have the right and the obligation    to negotiate interconnection with each other. In addition, “access”    obligations can be imposed on operators found to have SMP following a market    review. The Communications Bill also provides for access related obligations    to be imposed on non-SMP operators to secure “efficiency, sustainable    competition and the greatest possible benefit to end-users”.
*Call Protection*
We have entered into an agreement    with T-Mobile in relation to infrastructure sharing and seamless national    roaming in the UK. This agreement is subject to competition rules and was    formally notified to the European Commission for clearance or exemption. The    European Commission approved the UK arrangements on 30 April 2003.
*GSM gateways*
The Radiocommunications Agency is    currently investigating GSM gateways (devices fitted to a phone network that    monitor calls from fixed telephones to mobile phones which automatically select    the cheapest tariff for the call). Third parties have complained that action    should be taken to permit the use of these devices for business customers.    The Radiocommunications Agency is expected to report on this issue later this    year.
*Planning, health, and          environmental measures*
In May 2000, the Independent Expert    Group on Mobile Phones, under the Chairmanship of Sir William Stewart, published    its report, known as the Stewart Report, into mobile phones and health. In    a document published by the Department of Health on the same day the Government    accepted many of the recommendations of the Stewart Report. The Department    of Health also published guidelines in December 2000 recommending that the    widespread use of mobile phones by children under the age of 16 should be    discouraged for non-essential calls. We, together with the other mobile operators    in the United Kingdom, have committed ourselves to addressing these various    community concerns and have given ten commitments to that end.
*Data protection*
We are subject to data protection    and privacy rules that limit the way in which we can process and use our customers’    personal data. In particular, we can only use this data for marketing purposes    if we have the consent of our customer to do so.
*Competition Act 1998*
We are subject to UK competition    law which is set out in the Competition Act 1998. This mirrors the provisions    of EU competition law, prohibiting anti-competitive agreements or concerted    practices and the abuse of a dominant position in the UK.

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The Competition Act is enforced    by the Director General of Fair Trading, and (where “commercial activities    connected with telecommunications” are concerned) the Director General    of Telecommunications. Once the Communications Act comes into force, the latter’s    responsibility will pass to OFCOM.

As under EU law, companies which    breach UK competition law can be fined. They can also be sued for damages    by third parties who suffer loss as a result of the breach.

On 16 May 2003, the Director General    of Telecommunications opened investigation into us, Vodafone, Orange and T-Mobile    under the Competition Act 1998. The investigation focuses on whether the prices    we charge certain retail business customers for calls to mobiles could be    discriminatory, or represent a margin squeeze, when compared to the wholesale    prices charged to other operators. If the Director General of Telecommunications    ultimately finds against us then we could be required to alter our prices,    could be fined, and could be liable to third parties for damages.
*Interception of Communication*
The Regulation of Investigatory    powers Act 2000 (RIPA) regulates the use of a range of investigatory powers    by a variety of public authorities and updates the law on interception of    communications. A Code of Practice has been issued by the Home Office, which    provides guidance on the procedures that can be followed before interception    of communications can take under the RIPA. However, on 11 March 2003 the Government    published revised plans on how public bodies should access information records    under the RIPA as well as how data should be retained by communications service    providers under the Anti-Terrorism Crime and Security Act 2001. Among the    proposals is a safeguard where access to certain types of information (such    as itemised telephone call records) is granted only after prior approval by    a judicial independent third party. Consultation is ongoing.
***Regulation in Germany*** *Implementation of the          EU regulatory framework*
Until the new framework has been    implemented, the German Telecommunications Act will continue to govern the    award of licences for the conduct of certain telecommunications activities    and the allocation of frequencies. The German telecommunications regulator    (RegTP), supported by other government bodies, has powers under the German    Telecommunications Act to regulate these matters.

The German Ministry for Economy    and Employment has published first drafts for a new Telecommunications Act    to incorporate the new EU regulatory framework into German law, but the new    Telecommunications Act is not expected to be in force before 1 January 2004.
*Market reviews*
RegTP has not yet commenced any    market reviews under the new regulatory framework. It is expected that the    market reviews will follow shortly after the new Telecommunications Act comes    into force around 1 January 2004.
*Telecommunications          and frequency licenses*
We currently hold the necessary    licences with nationwide coverage which, together with our frequency licences,    authorise us to run mobile telecommunications operations in Germany. As in    other EU member states, the requirement to hold a licence to run a telecommunications    network will be removed on implementation of the new EU regulatory framework.

We were awarded one of four GSM    licences in May 1997 by the Federal Ministry of Post and Telecommunications.    Our GSM licence is valid until 31 December 2016. Under our GSM licence, frequencies    will be allocated to us upon request up to a specified maximum amount.

We hold one of six licences awarded    for use of UMTS spectrum. This licence is valid until 31 December 2020. RegTP    may revoke our licences in certain circumstances, including breaches of the    obligations in our licences or under the German Telecommunications Act.

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Our UMTS licence obliges us to roll-out    our third generation network so that it covers at least 25 per cent of the    population by the end of 2003 and 50 per cent of the population by the end    of 2005.
*National roaming*
The anti-trust authorities in Germany    have indicated that national roaming agreements may infringe competition laws,    but that in the case of O2 Germany’s agreement with T-Mobile,    this is unlikely to be the case at least until 2004 as it considers O2    Germany to be a new entrant at least until this date.
*Infrastructure sharing*
On 5 June 2001, RegTP announced    that it would interpret licence conditions to permit network co-operation    and infrastructure sharing. The infrastructure we will be able to share in    Germany includes radio base stations as well as antennas. Infrastructure sharing    agreements remain subject to national or European competition rules.

We have entered into an agreement    with T-Mobile in relation to 3G infrastructure sharing and national roaming    in Germany. This is subject to competition rules and was formally notified    to the European Commission for clearance or exemption. We expect a decision    from the Commission in relation to this agreement later this year.
*Network access and          interconnection*
Under the existing regulatory regime,    RegTP may determine the terms on which interconnection is provided if operators    are unable to reach commercial agreement between themselves in a reasonable    timeframe. None of the mobile network operators is yet obliged to grant another    carrier interconnection to its network on non-discriminatory or cost-oriented    terms.
*Price regulation*
We are not currently subject to    price regulation and we will not be subject to price regulation under the    new German Telecommunications Act or new EU regulatory framework unless we    are designated as having SMP in any market.
*Number portability          and carrier selection*
Telecommunications carriers are    obliged, by virtue of the German Telecommunications Act, to provide number    portability.

Telecommunications carriers are    also under an obligation under the German Telecommunications Act to offer    carrier “preselection” which may be overridden by a carrier selection    prefix each time a call is made, also referred to as call-by-call.
*Service providers*
Other mobile telecommunications    operators are required to allow service providers to market their GSM services.    There is, however, no such requirement in our GSM licence. As a consequence,    we market our own services exclusively. A claim has been filed against us    with the civil courts by the service provider Debitel, stating that we have    a statutory obligation under the Telecommunications Customer Protection Ordinance    to permit service providers to market our GSM services. If Debitel succeeds    in its claim before the civil courts, we will be obliged to grant them, and    subsequently other service providers, the ability to market our services.    Our UMTS licence obliges us to permit service providers to market our UMTS    services once they become available.
*Data protection*
We are subject to data protection    regulations in Germany and we believe that we are in compliance with these    regulations. We are currently dealing with the Federal Data Protection Office    on certain matters that were raised by an audit.
*Planning, health and          environmental measures*
In order to address public concerns    about any alleged health and environmental risks of increased electromagnetic    emissions from our infrastructure, we have collaborated with the other mobile    and UMTS operators in Germany in establishing an information sharing body.    We, in common with other 

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telecommunications infrastructure    providers in Germany, rely on rights of way to allow us to install and maintain    our infrastructure. The constitutionality of these rights of way is disputed.    All holders of telecommunications licences have automatic rights of way over    public land. In so far as private landowners are concerned, our rights of    way are more limited.
*Competition law*
We are subject to German competition    law, which is set out in the act governing restraints of competition. This    legislation is broadly similar to EU competition law and prohibits anti-competitive    agreements and concerted practices and the abuse of a dominant position. Both    RegTP and the Federal Cartel Office both regulate competition in Germany.    The Federal Cartel Office has in the past refrained from initiating proceedings    where RegTP is dealing with a case.
***Regulation in Ireland*** *Implementation of the          EU regulatory framework*
The new EU regulatory framework    will be implemented into Irish law by statutory instrument. The Department    of Communications, Marine and Natural Resources have now completed a public    consultation on the draft statutory instruments and the Department expect    the adopted Regulations to be brought into force prior to 25 July 2003.

Until then, the operation of mobile    telecommunications networks and the provision of mobile telephony services    in Ireland continues to be regulated under the Postal and Telecommunications    Services Act 1983 (as amended), or Irish Postal and Telecommunications Act,    and the Wireless Telegraphy Act 1926 (as amended), or Irish Wireless Telegraphy    Act.

On 1 December 2002, under the Communications    Regulation Act 2002 (the Act), a new regulatory body was established for the    regulation of the communications sector in Ireland. This new three-person    regulatory body, known as the Commission for Communications Regulation (ComReg)    replaces the Office of the Director of Telecommunications Regulation (ODTR).
*Market reviews*
In preparation for the implementation    of the new EU regulatory framework, ComReg is currently collecting data to    carry out market analysis of the communications sector including mobile operators.    The data collection process concluded on 14 April 2003 and a consultation    document outlining its findings will be issued in the next few months with    a decision expected in September 2003.
*Telecommunications          Licences*
We have been granted licences necessary    to provide mobile telecommunications services and systems in Ireland. The    term of our current mobile telecommunications licences are 15 years from commencement,    which for GSM 900 band is 16 May 1996, and in respect of services provided    in the GSM 1800 band is 1 January 2000. As in other EU member states, the    requirement to hold a licence to run a telecommunications network will be    removed under the new EU regulatory framework.
*Frequency Licences*
In addition to mobile telecommunications    licences, we hold Irish Wireless Telegraphy Act licences that permit us to    use apparatus and radio spectrum in the operation of our mobile telecommunications    networks. Our Irish Wireless Telegraphy Act licence is renewed annually.

We also hold from time to time a    large number of radio link licences granted by the DTR which authorise the    use of mobile telegraphy apparatus for the purpose of establishing radio links    between transmission stations we operate. These radio link licences are renewed    regularly.

On 2 October 2002, we were awarded    a UMTS licence as a result of the comparative process (“beauty contest”)    run by ComReg to award such licences. Our licence includes minimum requirements    of 33 per cent demographic 

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coverage to be fulfilled by the    end of June 2006 and 53 per cent demographic coverage to be fulfilled by the    end of June 2008. The total licence fee is €114 million phased over 15    years.

As a precondition to entering the    UMTS licensing process, we have committed to the provision of national roaming    facilities for five years on our network for new entrant UMTS licensees who    meet minimum roll-out requirements. Pursuant to this obligation, we are in    detailed discussions with Hutchison 3G (Ireland) Limited in respect of the    potential implementation of 2G national roaming between our networks.
*Network access and          interconnection*
Under the existing regulatory regime,    we and Vodafone have been designated as having SMP in the mobile telephony    market and the national market for interconnection in Ireland. Accordingly,    we are obliged to adhere to principles of non-discrimination and transparency    in relation to interconnection offered to third parties and may not unreasonably    refuse access to our network. These obligations will be reviewed on implementation    of the new regulatory framework.
*Accounting Separation*
ComReg is currently consulting on    the possible imposition of an accounting separation obligation on SMP mobile    operators, namely O2 Ireland and Vodafone. A response on that consultation    process was expected in January 2003 but has yet to be issued by ComReg.
*Number portability*
The three mobile operators have    agreed with ComReg to introduce full mobile number portability in July 2003.
*Indirect access*
In July 2000, the DTR published    a paper entitled “The Regulatory Framework for Access in the Mobile Market”,    or the Access Paper, which sets out views on the regulatory issues associated    with indirect access provision. According to ComReg, mobile operators with    SMP in the mobile market (currently Vodafone and us) are obliged to negotiate    interconnection with “qualifying operators”. In addition, mobile    operators that have been designated as having SMP in the national market for    interconnection (currently Vodafone and us) must provide interconnection on    a cost-oriented basis. ComReg has indicated that it may consider undertaking    further consultation on carrier preselection for mobile networks.
*Data protection*
We are subject to data protection    regulations in Ireland. The EU Directive relating to data protection is expected    to be transposed into EU law around October 2003. This will impose stricter    conditions on the collection, use and processing of personal data by us. It    will also impose notification obligations on us.
*Competition Act 2002*
In addition to EU competition law,    we are also subject to Irish competition law which is set out in the Competition    Act 2002 (this Act replaces the previous Competition Acts of 1991 and 1996).    This legislation is modelled on EU competition law. It prohibits anti-competitive    agreements and arrangements and the abuse of a dominant position, which affect    trade in any goods or services in Ireland or in a substantial part of Ireland.
***Regulation in the          Isle of Man***
The Isle of Man is a self-governing    Crown Dependency with its own parliament and is not part of the United Kingdom    or the EU. Accordingly, Manx legislation and regulations predominantly govern    our operations in the Isle of Man.
*Telecommunications          Licences*
Our principal licence relating to    our fixed network operations in the Isle of Man, or the Fixed Licence, was    issued on 27 June 1986 and came into force on 1 January 1987. It continues    in force until 31 December 2006. Our principal licence relating to our mobile    network operations in the Isle of Man, or the Mobile Licence, was issued on    28 October 1994. The Mobile Licence expires on 31 December 2006. Our current    GSM mobile network is 

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operated under the Mobile Licence    and the Isle of Man Communications Commission has consented to our proposed    UMTS service also being operated pursuant to the Mobile Licence. In addition,    we also benefit from certain other licences granted under applicable Manx    legislation in relation to paging, satellite and internet services. We are    subject to retail price restrictions and charge reviews by the Isle of Man    Communications Commission under our licences. Our Fixed Licence also requires    us to publish the terms and conditions on which offers of certain telecommunications    services are made.
*Mobile network services          and spectrum allocation*
We have been granted Wireless Telegraphy    Acts licences by the UK Radiocommunications Agency that permit us to establish    and use stations and apparatus for mobile transmissions in the operation of    our mobile networks. On 19 February 2001 the Radiocommunications Agency granted    us a Schedule for Third Generation Mobile Services, renewed annually, and    we will operate our proposed UMTS network pursuant to this Schedule and the    1994 Mobile Licence referred to above.
*Independent review          of telecommunications regulation*
The Isle of Man Communications Commission    has commissioned a report from a firm of independent consultants on the future    regulatory policy that should be adopted in the Isle of Man. The report, published    on 12 July 2001, recommended that competition be gradually introduced in respect    of certain services, that negotiations should commence with Manx Telecom for    a new 15-year licence for the period after 2006 and that new legislation be    introduced to strengthen the powers of the Communications Commission, to introduce    an interconnection regime based on the EU model and to introduce a system    of tariff controls. The Communications Commission has welcomed the recommendations    of the report and begun negotiations with Manx Telecom regarding a new licence.
**Key Markets and Employees**
Europe includes some of the most    advanced markets for mobile services in the world. These markets are characterised    by relatively high mobile penetration rates and revenues per customer and    are amongst the leading markets for the emergence of mobile data services.    These markets are also characterised by high population density and GDP per    capita. Across Western Europe, the proportion of total voice traffic carried    over mobile rather than fixed-line networks continues to increase. These markets    are also seeing an increasing proportion of mobile revenues attributable to    mobile data services and we expect this trend to continue.

Our mobile businesses cover two    of the largest markets in Europe, with the UK and German markets giving us    access to a total population of over 143 million people. All our markets have    seen growth over the last few years in the number of mobile telephone users,    in large part reflecting strong demand for competitively priced pre-pay offerings.    Our markets are seeing the emergence of additional wholesale opportunities    for network operators. Through wholesale agreements, network operators are    able to sell capacity and services on a large scale to other service providers    and mobile virtual network operators.

Historically, the number of customer    connections to mobile telephone networks in the markets where we are present    has been greater during the second half of the financial year than during    the first half, primarily due to increased sales during the Christmas period.    See “Operating and Financial Review and Prospects – Factors Affecting    Our Business”.

 

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The table below presents selected    data regarding the principal countries in Europe in which our businesses operate.    Due to the sale of O2 Netherlands, this table does not present    data for that business.
    **Mobile1****customers’** **mmO2**     **penetration** **customers**     **at        31 March** **at        31 March** **Country** **Population1** **2003** **2003**       **(in        millions)** **(%)** **(in        000’s)** Germany  83  69  4,812 United          Kingdom  60  85  12,050 Ireland  4  81  1,255      **Total**  147     18,117         1Source: EMC Worldwide          Cellular Database, May 2003.
The Group had the equivalent of    12,476 full-time employees at 31 March 2003, as set forth by country in the    table below:
**Country** **Number        of employees**    United          Kingdom  6,759 Germany  3,416 Netherlands  710 Ireland  1,317 Isle          of Man  274    **Total**  12,476    
For the year ended 31 March 2003,    the aggregate number of temporary staff employed by our businesses was 2,420.

In the United Kingdom, a number    of our employees are represented by two labour unions: Connect, which has    representation rights in respect of management employees; and the Communications    Workers Union, which has representation rights in respect of clerical, engineering    and technical employees. Membership of these unions is individual and voluntary.    In addition, a non-unionised employee representative body represents certain    managers. Our other operating businesses also meet with their employee representative    bodies, or works councils, regularly. We believe that our businesses have    a good relationship with our employees and their representatives.

Approximately 67 per cent of our    permanent employees are covered by collective bargaining agreements. These    agreements are kept under review, with changes being made through discussion    with the relevant representative body as required.
**Network and service          platform technology**
Last year we launched a major initiative    to build a common infrastructure to support the development of services and    applications across our networks. The deployment of a common network architecture    will be essential to bring economies of scale, support pan-European services    and enable tailoring for local market requirements. As part of this process    we implemented common service enabling platforms across our four key businesses,    which allow new applications to be swiftly rolled-out across these networks    without requiring costly and time-consuming redevelopment.
**Information technology**
The flexibility and functionality    of our information systems will be critical to our strategy and to the successful    operation of our businesses. We are currently reliant on a wide range of systems,    partly as a result of the speed of growth in the mobile market, but also as    a result of our acquisitions of retailers and service providers. In addition,    

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our customer base has expanded rapidly.    During the year O2 UK signed an agreement with IBM to deliver world-class    customer service and business support capability for voice, text and mobile    internet markets.
**Intellectual property**
BT transferred to us its interest    in certain software and other materials attracting copyright that were used    exclusively in connection with our businesses and which those businesses originally    funded. BT has transferred to us all of its rights in certain trademarks and    domain names used exclusively in our UK businesses, except that BT has retained    rights in trademarks and domain names previously used in our business which    comprise names and logos that relate to the BT Group, such as “BT”    and BT’s full-piper and half-piper logos. BT has retained ownership of    all other intellectual property rights used in our UK businesses which have    not been transferred to us and which are not already owned by us.

We have a limited non-exclusive    royalty-free licence from BT, for the operation of our worldwide businesses,    to continue to use any and all patents, copyright, unregistered design rights,    database rights and know-how. In May 2002, we introduced a single    new customer brand, O2. We have actively taken steps to protect    the new brand, including the acquisition of core trademark registrations in    O2 brand and related brand materials. In addition, we have other    pending national and European Community trademark applications in ancillary    classes.

We are aware that various third    parties use O2 or similar brands in connection with other goods    and services. We have entered into agreements with some such third parties,    which permit the brands to co-exist. These agreements contain some restrictions    on use of our brand, but we do not believe that these restrictions conflict    with our business model or day-to-day activities. It is not our intention    to trade under the O2 brand in the United States, where our securities    trade under the mmO2 plc name. We have also acquired a range of    domain names, including the core domains of mmo2.com, o2.co.uk, o2.ie, o2.nl    and o2online.de.

We have applied for patent protection    relating to technology used in our HomeZone service. The HomeZone service    is one of our products marketed in Germany under the Genion name. A third    party owns two patents which cover the technology used in the HomeZone service.    To date, this third party has not sought to challenge our patent applications    or prevent us from using the HomeZone technology. We believe that it is unlikely    to take any such action in the future. However, if that third party sought    successfully to do so, we might have to stop using the HomeZone technology.
**Insurance**
We maintain the types and amounts    of insurance customary in the industries and countries in which our Group    operates, including coverage for employee-related accidents and injuries and    property damage. We consider our insurance coverage and that of our operating    businesses to be adequate both as to the nature of the risks covered and amounts    insured for the business conducted by us.

 

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  **C.****Organisational Structure**
Our principal operating subsidiary    undertakings are detailed below, all of which are included in the Group financial    statements.
**Name** **Country of incorporation        and operation** **Activity** **Portion          of****ordinary****shares****held %**   O2          Limited1 England and Wales Intermediate holding company 100O2          (UK) Limited2 England and Wales Mobile cellular telephone        system provider and operator 100O2          Third Generation Limited3 England and Wales UMTS licence holder 100O2          (Online) Limited4 England and Wales Mobile internet business 100O2          Communications (Ireland) Limited5 Ireland Mobile cellular telephone        system provider and operator 100Manx          Telecom Limited Isle of Man Telecommunications services        supplier 100O2          (Netherlands) BV6 Netherlands Mobile cellular telephone        system provider and operator 100O2          (Germany) GmbH & Co. OHG7 Germany Mobile cellular telephone        system provider and operator 100Airwave          mmO2 Limited England and Wales Digital radio service for        public safety organisations 100        1Cellnet Group Limited changed its name to        BT Wireless Limited on 30 March 2001, and then to O2 Limited        on 3 September 2001.2BT Cellnet Limited changed its name to O2        (UK) Limited on 19 April 2002.3BT3G Limited changed its name to O2        Third Generation Limited on 19 April 2002.4Genie Internet Limited changed its name        to O2 (Online) Limited on 19 April 2002.5Esat Digifone Limited changed its name to        Digifone mmO2 Limited on 12 September 2001, and then to O2        Communications (Ireland) Limited on 23 April 2002.6Telfort Mobiel BV changed its name to O2        (Netherlands) BV on 19 April 2002. On 3 June 2003 O2 Netherlands        was sold to Greenfield Capital Partners.7Viag Interkom GmbH & Co. changed its        name to O2 (Germany) GmbH & Co. OHG on 19 April 2002.
The shares in O2 Limited    are held directly by mmO2 plc. The shares of the other operating    companies are held by O2 Limited or its wholly owned subsidiaries.    The accounting reference date of all the subsidiary undertakings is 31 March.    The Group also owns a 40 per cent stake in an associate, The Link Stores Limited,    which is a telecommunications equipment retailer.
**D.****Property, Plant and          Equipment**
Details of our tangible fixed assets    can be found in note 11 of our financial statements, included in Item 18.

We lease, own and have other legal    and/or beneficial interests in sites in the United Kingdom, Germany, Ireland    and the Isle of Man. Our properties consist primarily of buildings with integrated    technical facilities, such as switching devices, transmission towers and antennae    and, to a lesser extent, administrative buildings and call centres.

As of 31 March 2003, we also leased,    owned and had other legal and/or beneficial interests in sites in the Netherlands.    On 3 June 2003 we sold our business in the Netherlands and, as a result, no    longer have any material property interests in the Netherlands.

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Our principal administrative buildings    in the United Kingdom are mmO2’s registered office at Wellington    Street, Slough, Berkshire SL1 1YP, England, and O2 UK’s registered    office at 260 Bath Road, Slough, Berkshire, England, occupying approximately    9,012 square meters.

The remainder of the properties    (excluding cell site or retail properties) that we own or lease in the United Kingdom    account for approximately 62,000 square meters and are used as offices, call    centres and for switching apparatus.

In the United Kingdom and Ireland    there are agreements between us and the BT Group that provide for access to    and use of office, cell site and technical equipment premises currently owned    or leased by the BT Group, but occupied by us and our group companies. In    addition in Ireland, the site sharing agreements between the BT Group    and us provide for the BT Group to access and use technical equipment sites    currently leased by us.

We lease all of our properties in    Germany. Our principal administrative building in Germany is O2    Germany’s head office at Georg-Brauchle-Ring 23-25, Munich, occupying    approximately 41,121 square meters. The properties that we lease in Germany    account for a total of approximately 118,873 square meters, and primarily    comprise office premises and call centres. We have sublease agreements with    the BT Group, which account for approximately 33,189 square meters, or 30    per cent, of the property in Germany currently leased by us.
**ITEM        5****OPERATING AND FINANCIAL          REVIEW AND PROSPECTS**
This commentary discusses, and is    based on, the audited consolidated financial statements of the Group prepared    in accordance with UK Generally Accepted Accounting Principles (UK GAAP),    included in Item 18. This commentary should be read in conjunction with these    financial statements.

The financial information prepared    under UK GAAP differs in certain respects from that prepared under US Generally    Accepted Accounting Principles (US GAAP). Details of the main differences    are provided and described in note 32 to the financial statements included    in Item 18.

Definitions of the operating metrics    (including ARPU, data as a percentage of service revenue, churn and SAC) used    in this commentary can be found in “Key Information – Operating    data” in Item 3.
**Introduction**
The year ended 31 March 2003 is    our first full year of trading as a separate group following our demerger    from BT and the first full year in which we have had sole control over our    business and strategy.

During the year, we provided voice    and data mobile communications services and products in the United Kingdom,    Germany, Ireland and the Netherlands through our wholly-owned mobile businesses,    O2 UK, O2 Germany, O2 Ireland and O2    Netherlands, respectively, and through our mobile internet business, O2    Online. We also supplied fixed and mobile communications services in the Isle    of Man through our wholly-owned subsidiary, Manx Telecom and we are developing    a fully integrated national digital radio service for the police forces of    the United Kingdom through our Airwave business.

On 14 April 2003, we announced that    we had agreed the sale of O2 Netherlands to Greenfield Capital    Partners, an independent private equity and corporate finance group. The transaction    has received final competition clearance in the Netherlands and completed    on 3 June 2003. The sale has resulted in a loss on disposal of approximately    £1.4 billion. A provision for the loss on disposal has been recognised    in the 2003 financial year.

We have also undertaken a detailed    review of the carrying values of the fixed assets held by the other three    continuing mobile telecommunications businesses in our Group (being O2    UK, O2 Germany and O2 Ireland). The review indicated    that the carrying value of the fixed assets of these businesses were impaired.    An exceptional charge of £8,300 million has been recognised in the profit    and loss account in respect of these impairments.

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***Composition of the          Group***
Historically, we were part of the    BT group. Our business has been based predominantly in the United Kingdom,    although we have had joint ventures or subsidiaries in Germany, Ireland and    the Netherlands throughout our last three financial years. Since the end of    the financial year ended 31 March 2000, we have significantly expanded our    business in Germany, Ireland and the Netherlands. We completed the acquisition    of the remaining shares in our German mobile joint venture, O2    Germany, on 20 February 2001 and the remaining interest in our Dutch mobile    joint venture, O2 Netherlands, on 30 June 2000. We acquired a controlling    interest in our Irish operation, O2 Ireland, on 30 March 2000 and    purchased the remaining shares in O2 Ireland on 18 April 2001.    We have also acquired UMTS licences in the United Kingdom, Germany, Ireland,    the Netherlands and the Isle of Man.

On 19 November 2001, the Group was    demerged from BT. Prior to this date, we were not constituted as a separate    legal group of companies under a separate holding company within the existing    BT group. However, our consolidated financial statements, contained elsewhere    in this document have been prepared as though we had existed as a stand-alone    group throughout the period prior to demerger. Whilst we believe that the    financial information set out in our consolidated financial statements is    an appropriate presentation, this financial information is not necessarily    indicative of the financial results that might have occurred had we been an    independently financed and managed public entity during the periods prior    to demerger presented or of our financial results that may occur in any future    period.

O2 UK, our largest and    most established business, has steadily increased its underlying operating    profit over the past three financial years. Despite O2 UK’s    positive results, our Group has incurred consolidated operating losses over    the same period. Our recent operating losses are largely the result of consolidating    the results of O2 Germany and O2 Netherlands in our    financial statements commencing with the 2001 financial year. We also record    amortisation and impairment of telecommunications licences and goodwill arising    from the acquisition of the stakes in our businesses.

As newer telecommunications businesses    incurring significant start-up costs, O2 Germany and O2    Netherlands have historically been, and currently are, loss-making. We expect    O2 Germany to continue to incur operating losses as it increases    its customer base. The results of O2 Netherlands will be included    within those of the Group until 3 June 2003, the date of completion of the    sale of the business.

O2 Online is our online    sales channel and the developer of the Group’s mobile data capability.    It continues to invest in these areas and as a result has recorded an increased    operating loss in the current financial year compared to the previous financial    year.
***Factors affecting          our business***
During the three years ended 31    March 2003 our results of operations have been significantly affected by the    acquisitions of our German and Dutch businesses. Certain other key factors    affecting results of operations in the periods under review are discussed    below.
*The mobile telecommunications          market*
The mobile telecommunications market    has changed markedly in the past five years. Until recently, it was characterised    by high customer growth rates in all the countries in which we operate. By    31 March 2003, penetration rates were approximately 85 per cent in the United    Kingdom, 69 per cent in Germany and 81 per cent in Ireland. Our pro forma    total number of registered customers increased from approximately 5.0 million    at 31 March 1999 to approximately 16.5 million at 31 March 2001 assuming    we owned our current businesses on 31 March 1999. From 31 March 2001,    we revised the definition of how we measure our customer base, from including    all our registered customers to only including those customers who have recently    made or received a call. On the revised basis, our total active customer base    has increased by 12 per cent from 15.52 million at 31 March 2001 to 17.46    million at 31 March 2002 and by a further 11 per cent to 19.37 million at    31 March 2003.

The high penetration rates in our    markets has led to a shift in our approach to customers. We are now placing    greater focus on customer retention, and on generating increased usage from    existing customers. At the same time 

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we are also focusing on acquiring    higher spending contract customers. In general, we expect subscriber acquisition    costs to decrease and subscriber retention costs to increase, although, reflecting    our focus on higher value customers, subscriber acquisition costs for certain    customers, in particular high valued post-pay customers, may increase.
*Introduction of pre-pay          products*
A significant portion of our growth    in customers in recent years has resulted from the success of pre-pay mobile    products. We introduced our pre-pay products across the Group during the period    from July 1998 to August 1999, and now our pre-pay customers account for 66    per cent of our customers in the United Kingdom (down from 68 per cent    in 2002), 45 per cent in Germany (down from 49 per cent in 2002), 71 per cent    in Ireland (up from 70 per cent in 2002), and 75 per cent in the Netherlands.    The overall fall in the proportion of customers using pre-pay services rather    than post-pay services reflects the success of the Group in acquiring higher    spending post-pay customers. Nonetheless, pre-pay services offer us several    significant advantages, including lower SAC, higher average per minute charges,    reduced credit risk and lower administrative costs. However, lower average    outgoing usage minutes for pre-pay customers have resulted in lower ARPU.

As our ARPU from pre-pay customers    is lower than for post-pay customers, to maintain profitability we give lower    handset discounts to pre-pay customers, in line with the general industry    practice. Our overall subscriber acquisition costs per new customer have decreased    significantly as our pre-pay customer base has increased, although the Group’s    success in attracting contract customers has impacted the continuing fall    in SACs.
*Seasonality*
Historically, the number of customer    connections to mobile telephone networks in the markets where we are present    has been greater during the second half of the financial year than during    the first half, primarily owing to increased sales during the Christmas period.    Therefore, our revenues from equipment sales and connection charges, and the    aggregate costs of customer equipment and dealer commissions and our other    related costs of sales, have been greater during the second half of the financial    year than during the first half. However, there is no assurance that this    trend will continue and it is difficult to predict the seasonality of customer    connections in the future.
*Impact of regulation*
Our businesses operate in highly    regulated markets, and governmental regulation frequently limits the revenue    we may receive from certain sources, particularly in the United Kingdom. In    January 2003 the UK Competition Commission ruled that mobile network operators    call termination charges should be cut substantially. This and the regulatory    climate in the territories in which our other businesses operate is discussed    in the Regulation section of our business review.
***Critical accounting          policies***
The Group’s consolidated financial    statements are prepared in accordance with accounting principles that are    generally accepted in the UK. As part of these reporting guidelines management    are required to identify and disclose the accounting policies relating to    all aspects of the results and financial position of the Group used in preparing    the financial statements. The preparation of consolidated financial statements    requires management to make estimates and judgements that affect the reported    amounts of assets, liabilities, revenues and expenses, as well as the disclosure    of certain contingent assets and liabilities. The accounting policies used    in preparing the Group’s financial statements for the year ended 31 March    2003 are disclosed in note 1 of those financial statements.

The following accounting policies    are considered to be critical to the understanding of the consolidated financial    statements. These policies have the potential to have a significant impact    on the Group’s financial statements, either because of the significance    of the financial statement item to which they relate, or because they require    a high degree of judgement and estimation owing to the uncertainty involved    in measuring, at a specific point in time, events that are continuous in nature.

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*Tangible and intangible          fixed assets*
We estimate the useful lives of    property, plant and equipment, goodwill and other intangible assets, in order    to determine the amount of depreciation and amortisation to be charged in    any reporting period. These useful lives are estimated at the time the asset    is acquired, and are based on historical experience with similar assets, as    well as taking into account future anticipated events affecting their life.    Changes in technology or changes in the Group’s intended use of these    assets may cause the estimated life or the value of these assets to change.

We perform a review of the estimated    useful life, residual value and depreciation method for each category of tangible    fixed assets, (being property, plant and equipment and assets in the course    of construction), at the end of every reporting period. Our review of these    assets may indicate that their lives need to be shortened, resulting in an    increased depreciation charge in future periods. Alternatively, our review    may indicate a decrease in the value of the asset, recognised by an impairment    charge.
*Fixed asset impairments*
Under the principles of UK GAAP,    we assess the carrying values of our intangible fixed assets (including goodwill)    at the end of the first full financial year following acquisition and all    our fixed assets (tangible, intangible and goodwill) in any accounting period    if events, or changes in circumstances, indicate that the carrying values    may not be recoverable. Factors we believe are important and may trigger an    impairment review could include the following:
•a significant decline          in a fixed asset’s market value;  •a significant adverse          change in the business or the market in which the fixed asset is involved;  •a significant adverse          change in the statutory or other regulatory environment;  •significant underperformance          relative to expected or forecast operating results.
Under UK GAAP, when a triggering    event has occurred, we perform an impairment review by comparing the carrying    value of the income generating unit (IGU) with its recoverable amount. The    recoverable amount is deemed to be the higher of the IGU’s value-in-use    and its net realisable value. Unless an IGU is to be disposed of, the recoverable    amount is deemed to be equal to its value-in-use, which is determined by calculating    the net present value of the future estimated cash flows.

In calculating the net present value    of an IGU, management are required to make estimates and assumptions which    are fundamental to the present value of future cash flows. These include:
•the determination of the          composition of the IGU;  •the projected net cash          flows of the IGU over the period of the review;  •the determination of the          terminal value cash flows, and the terminal value growth rate; and  •the determination of the          appropriate discount rate.
In calculating the value-in-use    we believe that there is significant uncertainty as to the present value of    future cash flows. In assessing those future cash flows, we have made assumptions    using the best estimates available at the time of performing the review. In    order to estimate the net cash flows, assumptions about future revenues, the    related cost of sales, and capital expenditure have been made. These forecasts    are an integral part of approved internal business plans and include estimates    and assumptions concerning the Group’s strategic plans for existing and    new products; the active customer base growth and the related voice and data    ARPUs; churn rates; subscriber acquisition and retention costs; and the timing    of the construction of our UMTS networks.

The assumptions and estimates used    in our models can vary significantly from period to period as a result of    changes in the mobile telecommunications industry, including advances in technology;    changes in the performance of our businesses as a result of competitive pressures    or otherwise; potential difficulty in the implementation of the UMTS network;    the competitive and regulatory landscape; the take-up and charge rate of data    services; and the availability of functioning technological infrastructure    to support the UMTS roll-out.

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As a result of our reviews in the    year ended 31 March 2003, we recognised impairment charges totalling £8,300 million,    in connection with the impairment of the intangible fixed assets of the Group.    This included charges relating to the UMTS licence and goodwill in O2    UK and O2 Germany (totalling £2,300 million and £4,700    million respectively), and the impairment of goodwill relating to O2    Ireland of £1,300 million.

Under US GAAP, we recorded an impairment    charge in the year ended 31 March 2003 against goodwill relating to O2 UK    and O2 Ireland of £1,884 million. We did not record    an impairment against telecommunication licences. The method of calculating    and applying impairment charges differs significantly between UK GAAP and    US GAAP. The difference in the impairment charges for our goodwill and telecommunication    licences between UK and US GAAP is primarily as a result of the requirement    under US GAAP to first test the carrying value of long-lived assets using    undiscounted cash flows and secondarily the difference in methodology for    calculating the impairment of goodwill. Further details are contained in note    32 to the financial statements in Item 18.
*Revenue recognition*
We only recognise transactions in    turnover that are considered to be part of our principal ongoing operations.    We recognise voice and data service revenue in the profit and loss account    based on minutes of airtime processed over the Group’s networks. Turnover    derived from connection fees and subscriptions is recognised evenly over the    estimated customer relationship period, or the contracted period to which    they relate. Income received from sales of pre-pay call cards is deferred    until the customer has used the value in the card to pay for relevant calls.    Revenues from handsets are recognised at the point of sale.

In connection with recording revenue,    we maintain provisions for doubtful debts for estimated losses that result    from the inability of a portion of our customers to make required payments.    We base our provision on historical results and future expectations, the economic    and competitive environment and other relevant factors, and review the provision    regularly.
*Capitalisation of interest*
Under UK GAAP, the Group does not    capitalise interest in its financial statements. To comply with US GAAP, the    estimated amount of interest incurred whilst constructing major capital projects    is included in fixed assets and depreciated over the lives of the related    assets. This includes capitalisation of interest incurred on funding the UMTS    licences for the period up to the launch of the related services. The amount    of interest capitalised is determined by reference to the average interest    rates on outstanding borrowings and cannot exceed the annual interest expense    charged. Further details are contained in note 32 to the financial statements    in Item 18.
**Basis of presentation          of financial statements**
The consolidated financial statements    have been prepared using merger accounting principles as if the businesses    comprising the Group had been part of the Group for all periods presented,    since they have been under common control throughout this period.

For the purpose of these financial    statements, a portion of BT’s short- and long-term loans has been allocated    to the Group for the periods up to 19 November 2001, the date of demerger    from BT. The allocation has been determined by reference to the amount of    loans and other borrowings raised by BT to fund certain significant acquisitions    in the year ended 31 March 2001 of mobile businesses and assets, including    UMTS licences. These allocated loans are interest bearing and further details    are disclosed in note 1 to the financial statements in Item 18.

Businesses acquired from, or disposed    to, third parties during the periods presented have been accounted for using    acquisition accounting, from or to the date control passed.

The principal components of our    Group in the periods under review have been as follows:
•O2 UK, our          UK business, has been included throughout the periods covered by the          consolidated financial statements;  •O2 Germany, our mobile business        in Germany, has been consolidated since we increased our interest to 100 per        cent on 20 February 2001. Prior to this date, we owned a 45 per cent stake        in the company from its
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inception until 15 January 2001,    when our interest increased to 55 per cent. In our consolidated financial    statements we accounted for this interest under the equity method as a joint    venture until 20 February 2001, when we obtained regulatory approval to acquire    the remaining interest and control;
•O2 Netherlands,          our mobile business in the Netherlands, has been consolidated since          30 June 2000, when we acquired the remaining 50 per cent interest in          the company, and obtained full control. Prior to 30 June 2000, we held          a 50 per cent joint venture interest in O2 Netherlands which          has been accounted for in our consolidated financial statements under          the equity method as a joint venture. On 3 June 2003, O2 Netherlands          was sold to Greenfield Capital Partners.  •O2 Ireland,          our mobile business in Ireland, has been consolidated in our Group financial          statements throughout the periods under review. Our interest in the          issued voting share capital of O2 Ireland increased to 50.5          per cent on 30 March 2000 from the 1 per cent acquired in January 2000.          We acquired the remaining 49.5 per cent interest in O2 Ireland          on 18 April 2001;  •various businesses and          assets in the United Kingdom have been operated throughout the period          of the consolidated financial statements as separate units within the          BT Group, including the BT Mobile, BT Shops and Airwave businesses.          The businesses and assets of all these operations were transferred to          the Group prior to demerger. The assets and results of each of these          operations have been included in the consolidated financial statements          for all periods presented;  •the O2 Online          internet portal business was operated initially as a division of O2          UK. However, in 2001, the business and assets of O2 Online          were transferred into a separate legal entity which was a wholly-owned          subsidiary of O2 UK. In March 2003 the ownership of O2          Online was transferred from O2 UK to another Group company,          O2 Networks Limited; and  •Manx Telecom Limited,          O2 Third Generation Limited and Cellular Radio Limited which          have been included throughout the periods presented in the consolidated          financial statements. **Financial performance          measurement**
We define EBITDA as our earnings    before interest, tax, depreciation, amortisation and exceptional items, excluding    our share of operating profits and losses of our associates and joint ventures.    We use EBITDA, a non GAAP financial measure, as one of the key performance    indicators for evaluating the financial performance of our business units.    We believe that EBITDA provides an important measure of the underlying operating    performance of the Group because it excludes recurring non-cash items such    as depreciation and amortisation. We believe that this measure is also used    by readers of this annual report in order to assess our performance against    other comparable companies. Other measures used include revenues, operating    profit or loss, and capital expenditure.

We also believe that EBITDA is one    of the key indicators of our borrowing potential as indicated by the financial    covenants attaching to some of our credit facilities which require compliance    with EBITDA targets and EBITDA-based ratios. Further details are provided    in the sources of liquidity and capital resources section.

 

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Group operating loss is considered    to be the UK GAAP financial measure closest to EBITDA. The reconciliation    of EBITDA to Group operating loss for the loss for the periods under review    is as follows:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** **EBITDA**  859  433  317 Depreciation          before exceptional items  (932) (747) (362)Amortisation          before exceptional items  (405) (392) (298)     Operating          loss before exceptional items  (478) (706) (343)Exceptional          items  (8,300) (150) (2,821)     **Group          operating loss**  (8,778) (856) (3,164)     
As EBITDA is not a measure of financial    performance under UK GAAP, it may not be comparable to similarly titled measures    of other companies because EBITDA is not uniformly defined. EBITDA should    not be considered by investors as an alternative to Group operating loss or    loss on ordinary activities before taxation as an indication of operating    performance, or as an alternative to cash flow from operating activities as    an indication of cash flows.
**Sale of O2          Netherlands**
On 14 April 2003, the Group announced    that it had agreed the sale of its wholly-owned Dutch subsidiary, O2 Netherlands,    to Greenfield Capital Partners, an independent private equity and corporate    finance group with existing interests in the fixed telecoms sector, for €25    million in cash. The sale took the form of the sale of all the issued shares    of O2 Netherlands. Final competition clearance in the Netherlands    has been received and the sale completed on 3 June 2003.

At the date of approval of the financial    statements, 20 May 2003, the sale of O2 Netherlands had not received    final clearance from the Dutch competition commission. In accordance with    FRS 3 “Reporting financial performance”, the activities of O2    Netherlands are shown as discontinuing, as a component of continuing operations.    The Group has made a provision for the loss on disposal of £1,364 million.    This represents the impairment of the assets of O2 Netherlands,    and goodwill relating to the original purchase of the stake in O2    Netherlands, down to their net realisable value. This is equal to the proceeds    less the direct costs incurred in relation to the sale. The provision is charged    in the profit and loss account below Group operating loss.
**A.****Operating results**
The summarised results of the Group,    excluding O2 Netherlands, in the years under review are:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Group          turnover  4,611  4,076  3,110 Cost          of sales  (2,854) (2,519) (1,722)     Gross          profit  1,757  1,557  1,388 Administrative          expenses before exceptional items  (2,149) (2,141) (1,620)     Group          operating loss before exceptional items  (392) (584) (232)Exceptional          items  (8,300) (139) (2,821)     Group          operating loss  (8,692) (723) (3,053)      **Operating results** ***Introduction to          results of operations***
The following is a brief description    of the items comprised within turnover, cost of sales and administrative expenses    within our results of operations.

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***Turnover***
Our turnover from operations can    be analysed into three areas: service, equipment and other revenue, with service    revenue our principal source of income. These income streams are briefly described    below:
•*Service*. Our principal          source of income is derived from our customers’ use of our mobile          networks. This includes both voice-related airtime and data services,          such as SMS, WAP and GPRS. It also includes interconnection fees from          other networks terminating calls on our customers’ mobile phones,          and roaming fees from other network customers using our networks;  •*Equipment*. Equipment          revenue is derived from the sale of handsets and other accessories;          and  •*Other*. Other revenue          primarily relates to revenue received from other mobile networks in          situations when we are acting as a retailer or as a service provider.          Other revenue also includes connection charges and revenue from other          sources such as voice messaging and paging services. ***Cost of sales***
The principal items within cost    of sales are:
•*Service*. Service          cost of sales mainly comprises interconnection charges and operation          and maintenance costs relating to our networks. These costs may be sub-divided          into costs of a variable nature and costs which are more fixed in nature.          Interconnection charges are the payments made by us to other fixed line          or mobile network operators, both in the local country and roaming costs          when our customers make calls or send SMS messages that are terminated          on a competitor’s network. These costs are variable in nature,          increasing as the usage of the network increases. Costs relating to          the operation and maintenance of our networks mainly comprise core transmission          costs, mast site leases, network equipment maintenance and depreciation          charges related to our network assets. These costs are more fixed in          nature, and depend on the size of the network, not the usage of the          network. Service cost of sales will significantly increase once we commence          providing services pursuant to our UMTS licences, because service cost          of sales will include amortisation of our UMTS licence acquisition costs          over the remaining life of these licences and depreciation of our UMTS          networks once they are constructed;  •*Equipment*. Equipment          cost of sales includes the cost of purchasing handsets and other hardware          items, such as SIM cards, from manufacturers; and  •*Other*. Other cost          of sales primarily relates to the cost of services from other mobile          networks when we are acting as a retailer or service provider. Other          cost of sales also includes the network cost of providing voice messaging          and paging services. ***Administrative expenses          before exceptional items***
Principal administrative expenses    are:
•*Promotional and advertising*.          These costs primarily comprise bonuses and commissions to retailers,          mainly for acquisition, but increasingly for retention, of customers.          Promotional and advertising expenses also include expenditure on advertising,          marketing and loyalty programmes;  •*Overhead*. Overhead          expenses include personnel costs relating to functions such as finance,          planning, network, regulatory, legal, marketing and customer care. They          also include property charges, facilities, training and information          technology support;  •*Depreciation*. This          includes depreciation expenses not related to network assets; and  •*Amortisation*. This          comprises amortisation expenses on goodwill arising on the acquisition          of businesses. ***Exceptional items***
Exceptional items are large non-recurring    expenses and incomes that have been disclosed separately to avoid distortion    of reported trading profit.

 

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**mmO2 consolidated          results of operations for the years ended 31 March 2003, 2002 and 2001**
The following table presents certain    financial data for our Group, including O2 Netherlands, for the    years ended 31 March 2003, 2002 and 2001 extracted from our consolidated financial    statements:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Group          turnover  4,874  4,276  3,200 Cost          of sales  (3,060) (2,714) (1,814)     Gross          profit  1,814  1,562  1,386 Administrative          expenses before exceptional items  (2,292) (2,268) (1,729)Exceptional          items  (8,300) (150) (2,821)                   EBITDA1          before exceptional items  859  433  317      Group          operating loss  (8,778) (856) (3,164)Group’s          share of operating loss of joint ventures  —  —  (303)Group’s          share of operating profit of associates  5  8  17      Total          operating loss  (8,778) (848) (3,450)Provision          for loss on sale of business  (1,364) —  — Net          interest payable and similar charges  (66) (781) (669)     Loss          on ordinary activities before taxation  (10,203) (1,629) (4,119)Tax          on loss on ordinary activities  55  250  114      Loss          on ordinary activities after taxation  (10,148) (1,379) (4,005)Minority          interests  —  —  (4)     Loss          for the financial year  (10,148) (1,379) (4,009)      1EBITDA is our earnings          before interest, tax, depreciation, amortisation and exceptional items,          excluding our share of operating profits and losses of our joint ventures          and associates. The use of EBITDA as a financial performance measure          is discussed in “Operating and Financial Review and Prospects –          Financial performance measurement” in Item 5.
 

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**Year ended 31 March          2003 compared to year ended 31 March 2002** ***Group turnover***
The following table shows contributions    of our businesses to Group turnover:
  **Year        ended 31 March**       **per        cent**   **2003** **2002** **variation**        **£m** **£m**   O2 UK  3,025  2,756  10 O2 Germany  1,060  875  21 O2 Ireland  442  395  12 O2 Netherlands  263  200  32 O2 Online  93  100  (7)Other          operations  64  54  18 Intragroup          eliminations  (73) (104) (31)     **Total**  4,874  4,276  14      
Group turnover increased by 14 per    cent from £4,276 million for the year ended 31 March 2002, to £4,874 million    for the year ended 31 March 2003. All our mobile telecommunications businesses    contributed to the rise in Group turnover. The principal reasons for this    are the overall rise in subscriber numbers in the current year and the increased    usage of the Group’s services by subscribers. These factors are considered    in detail below in the review by business.
*O2 UK*
O2 UK’s overall    turnover increased by nearly 10 per cent from £2,756 million for the    year ended 31 March 2002 to £3,025 million for the year ended 31 March    2003. Turnover is largely comprised of service revenue, which increased by    13 per cent from £2,426 million for the year ended 31 March 2002 to    £2,738 million for the year ended 31 March 2003.

Penetration within the UK mobile    phone market is reaching saturation. This has driven our focus towards ensuring    that we win and retain higher quality customers. We believe that the effects    of this effort can be seen in the significant rise in service revenue.

O2 UK’s total active    customer base increased from 11.1 million at 31 March 2002 to 12.1 million    at 31 March 2003, an increase of 9 per cent, which includes a net    increase in post-pay subscribers of over half a million customers. In addition    to this, post-pay churn has continued the downward trend established last    year.

The following table details O2    UK’s revenue split between service, equipment and other revenues:
  **Year        ended 31 March**       **per        cent**   **2003** **2002** **variation**        **£m** **£m**   Service  2,738  2,426  13 Equipment  190  136  40 Other  97  194  (50)     **Total**  3,025  2,756  10      
*Service*. Service revenue    is the principal element of O2 UK’s turnover, comprising 91    per cent of total turnover for the year ended 31 March 2003. O2    UK’s service revenue increased by 13 per cent from £2,426 million    for the year ended 31 March 2002 to £2,738 million for the year    ended 31 March 2003. Of this, service revenue from post-pay customers is the    principal source of income, with post-pay revenue accounting for over 67 per    cent of the total. This represents an increase over the 65 per cent recorded    for the year ended 31 March 2002.

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O2 UK’s revenue    has grown as a result of a combination of an increase in the subscriber base,    partly arising from better retention of existing users, and an increase in    post-pay ARPU.

Post-pay subscribers’ gross    additions for the year ended 31 March 2003 total 1.7 million, taking our total    post-pay customer base to 4.1 million (representing 519,000 net additions    for the year). The post-pay churn rate has continued the downward trend established    in the 2002 financial year. Post-pay churn for the year ended 31 March 2003    was 28 per cent, a fall of 10 per cent from the churn of 31 per cent recorded    for the year ended 31 March 2002.

These improvements have been driven    by the success of the O2 brand, launched in May 2002, and new and    innovative product offerings to customers in both voice and mobile data services.    An example of these are the “bolt-ons”, our packages offering additional    data and voice services to customers, which attract high-spending users and    grow revenues from existing customers rather than incurring SACs.

Data revenues, as a proportion of    total service revenues increased steadily through the year from 11.8 per cent    for the year ended 31 March 2002 to 17.1 per cent for the year ended 31 March    2003. Data revenue as a proportion of total service revenue for the final    quarter of the year ended 31 March 2003 was 19.1 per cent. Included within    these statistics, the popularity of text messages continued to grow, with    nearly 5.8 billion messages sent during the year ended 31 March 2003, compared    with 3.4 billion during the year ended 31 March 2002.

*Equipment and other revenues*.    Equipment revenues have increased 40 per cent in the 2003 financial year compared    to the 2002 financial year. The principal reason for the rise is the increase    in the gross post-pay additions of customers in the year ended 31 March 2003.

O2 UK’s other revenue    in the 2002 financial year mainly comprised revenue from Lumina, a service    provider acquired in the 2000 financial year, and sales of non-mobile products    by the O2 retail shops. Lumina had a customer base which included    both O2 UK and Vodafone customers. At the end of the 2002 financial    year we sold the Vodafone customers and no longer derive revenue from them.    The sales by the O2 shops have also fallen following the rationalisation    of the retail chain in the first half of the 2003 calendar year. However,    the sales per store of the remaining shops were more than double those of    the previous year.
*O2 Germany*
The current year is the second full    year of ownership of O2 Germany. The total revenue of O2    Germany for the year ended 31 March 2003 was £1,060 million, an increase    of 21 per cent over the year ended 31 March 2002 revenue of £875    million.

The following table details O2    Germany’s revenue split between service, equipment and other revenues:
  **Year        ended 31 March**       **per        cent****variation**   **2003** **2002**         **£m** **£m**    Service  944  696  36 Equipment  94  127  (26)Other  22  52  (58)     **Total**  1,060  875  21      
*Service* O2 Germany’s    service revenue for the year ended 31 March 2003 has increased by 36 per cent    compared to the previous year.

This increase in revenues is principally    the result of a significant increase in the subscriber base, which has risen    from 3.9 million active subscribers at 31 March 2002, to 4.8 million active    subscribers at 31 March 2003. Post-pay customer additions in the year    ended 31 March 2002 were 651,000, representing 71 per cent of total    net additions. The pre-pay customer base increased by 14 per cent    from the 2002 financial year to the 2003 financial year, with pre-pay customers    totalling 2.2 million at 31 March 2003.

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A large proportion of the post-pay    additions during the year relate to customers who have subscribed to the Genion    Home service, our location-based tariffing technology, which allows reduced    call rates within the *homezone*. O2 Germany also offers an    equivalent service to business customers. Both Genion Home and Business are    part of our drive across the Group to attract high-value customers.

Post-pay ARPU has increased from    £313 for the year ended 31 March 2002, to £341 for the year ended    31 March 2003. This rise is a function of the continuing drive to    win higher spending customers. At 31 March 2003, over 30 per cent    of the total customer base subscribed to the Genion service.

O2 Germany have continued    to launch new data services during the 2003 financial year, following the    launch of the first operational German GPRS network in January 2001. New services    announced in the year include multimedia messaging and Java games. In addition,    SMS messaging continues to gain in popularity. This has been reflected in    the increase in the proportion of data revenues compared to total service    revenues which have risen to 19.3 per cent during the year ended    31 March 2003. The proportion for the three months ended 31 March 2003 reached    a record 21.0 per cent. The principal element of data revenue is    generated by text messages; O2 Germany recorded 1,337 million    text messages in the year ended 31 March 2003, an increase of 564 million    messages over last year.

*Equipment and other revenues.*Both equipment and other revenues have fallen by 26 per cent    and 56 per cent respectively compared to the prior year.

The fall in equipment revenues has    been caused by a decline in the sales of devices to shops and third-party    dealers in the 2002 financial year which have not been repeated in the 2003    financial year. Other revenues represent several other revenue streams. These    include certain support contracts with BT Ignite following the demerger from    BT which are reaching the end of their term.
*Other mobile telecommunication          businesses*
The Group had two other mobile telecommunication    businesses in Europe during the year – O2 Ireland and O2 Netherlands.

O2 Ireland’s revenue    has increased by 12 per cent from £395 million for the year    ended 31 March 2002, to £442 million for the year ended 31 March    2003. This increase in revenue is a combination of an increase of 75,000 in    the customer base and a 7 per cent rise in blended ARPU. Contract    customer numbers increased from 356,000 at 31 March 2002 to 366,000 active    subscribers at 31 March 2003 and the pre-pay customers bases increased from    824,000 at 31 March 2002 to 889,000 at 31 March 2003.

O2 Netherlands’    revenue has increased by 32 per cent from £200 million for    the year ended 31 March 2002, to £263 million for the year ended 31    March 2003.
*O2 Online*
O2 Online acts as the    online sales channel in the UK and Ireland and as the developer of all of    the Group’s mobile data capability. O2 Online has increased    revenues generated from outside the Group by 15 per cent from £33    million in the year ended 31 March 2002 to £38 million in the year ended    31 March 2003. External revenue includes sales of devices outside the Group’s    territories, paid-for alerts and ring-tones and advertising. Approximately    60 per cent of revenues in the year ended 31 March 2003, down from    66 per cent in the year ended 31 March 2002, were generated internally    with the Group. Internal revenue is generated mainly from connection fees    and airtime voucher sales as well as the provision of WAP gateway and portal    services to other Group companies.
***Net operating expenses          before exceptional items***
Net operating expenses before exceptional    items may be analysed between cost of sales and administrative expenses. Net    operating expenses increased by 7 per cent from £4,982 million    for the year ended 31 March 2002 to £5,352 million for the 2003 financial    year. This increase arises from an increase in the cost of sales in the current    year reflecting the increase in turnover described earlier.

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An analysis of the net operating    expenses before exceptional items for our operating companies for the periods    indicated is provided in the table below:
  **Year        ended 31 March**       **per        cent****variation**   **2003** **2002**         **£m** **£m**    O2          UK  2,691  2,458  9 O2          Germany  1,295  1,275  2 Other          mobile telecommunication businesses  705  655  8 O2          Online  216  194  11 Goodwill          amortisation  374  369  1 Other          operations and central costs  71  31  129      **Total**  5,352  4,982  7       *Group cost of sales*
Group cost of sales increased by    13 per cent from £2,714 million for the year ended 31 March    2002, to £3,060 million for the year ended 31 March 2003. This increase    in cost of sales in the 2003 financial year was commensurate with the increase    in Group turnover of 14 per cent.

The gross margin percentage (gross    profit divided by turnover) of our newer business in Germany is lower than    those of our more established businesses in the UK and Ireland. This is because    O2 Germany is in the process of building its customer base. Despite    this, O2 Germany increased its gross margin by 16 percentage points    to 28 per cent. However, the gross profit margin of the Group remained    constant at 37 per cent as both O2 Online and Airwave    contributed a higher cost of sales. This is due to the increase in activity    at both operations.
*Group administrative          expenses before exceptional items*
Group administrative expenses before    exceptional items have increased by 1 per cent from £2,268    million for the year ended 31 March 2002 to £2,292 million for the year    ended 31 March 2003. Administrative expenses have not grown in line with the    rise in revenues following the restructuring at the UK and German operations    initiated in February 2002 which are realising cost savings.

Group administrative expenses before    exceptional items, as a percentage of turnover, have decreased from 53 per cent    in the 2002 financial year to 47 per cent in the year ended 31 March    2003.

O2 Germany has a higher    ratio of administrative expenses as a percentage of turnover than those of    our more established businesses, because it is still building its customer    base. As the business of O2 Germany matures, we expect that the    ratio will fall and for O2 Germany for the year ended 31 March    2003, it has fallen by 7 percentage points compared to the year ended 31 March    2002.
*O2 UK*
O2 UK’s net operating    expenses before exceptional items have increased by 9 per cent,    from £2,458 million for the year ended 31 March 2002 to £2,691    million for the year ended 31 March 2003. Net operating expenses as a percentage    of turnover has remained constant at 89 per cent for the two financial    years under review.

The variable element of O2    UK’s service cost of sales has increased in line with the network usage.    Interconnection charges increased significantly during the financial year    2003, compared to the year ended 31 March 2002, reflecting the increased    calls from O2 UK customers terminating on other networks, including    other mobile networks whose termination charges are generally higher than    charges levied by fixed-line network providers.

O2 UK’s depreciation    charge has increased from £372 million in the year ended 31 March 2002    to £477 million in the year ended 31 March 2003, which reflects the    continued investment in improving O2 UK’s network quality    

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and the shortening of the useful    economic life of certain network assets which are being swapped out of the    network.

The advertising and marketing spend    for the year ended 31 March 2003 has increased by 9 per cent on    the 2002 financial year. This arises from an overall increase in subscriber    acquisition costs resulting from the increased level of connections in the    business in the 2003 financial year. The overall rise in SACs contrasts with    a fall in both the pre-pay and post-pay average subscriber acquisition costs.    Post-pay SACs have decreased from £180 to £177 per subscriber,    and pre-pay SACs have decreased from £53 to £25 per subscriber.

Compared to the year ended 31 March    2002, O2 UK’s overheads have decreased by 4 per cent    for the year ended 31 March 2003, which, despite the increased turnover and    concentration on improving customer service, reflects the cost control measures    during the year and the cost savings derived from restructuring of the business    announced in February 2002.
*O2 Germany*
O2 Germany’s net    operating expenses before exceptional items increased from £1,275 million    for the year ended 31 March 2002, to £1,295 million for the year ended    31 March 2003.

Net operating expenses as a percentage    of turnover was 146 per cent for the 2002 financial year, and for    the 2003 financial year has fallen to 122 per cent. This reflects    the rapid growth in revenues at O2 Germany. For O2 Germany,    we expect this ratio to be higher than the same ratio of our more established    businesses, as the newer businesses are in the process of building up their    customer bases.

The total depreciation charge (both    network and non-network fixed assets) was £259 million for the year    ended 31 March 2003, a 14 per cent increase over the charge for    the year ended 31 March 2002 of £228 million. This represents the continuing    investment by O2 Germany in their network.

Blended subscriber acquisition costs    have increased by 13 per cent from £95 per subscriber for    the year ended 31 March 2002 to £107 per subscriber for the year    ended 31 March 2003. This reflects the very high level of contract customer    connections in the year, with over 70 per cent of net additions    being post-pay customers who traditionally have required a higher SAC to attract.    Despite this, the SAC per customer for post-pay subscribers has remained almost    constant year on year.
*Other mobile telecommunication          businesses*
Net operating expenses before exceptional    items for our other mobile telecommunication businesses, O2 Netherlands    and O2 Ireland, have increased by 8 per cent from £655    million for the year ended 31 March 2002, to £705 million    for the year ended 31 March 2003.

The principal reason for the increase    is the expansion of the businesses in the 2003 financial year; the total turnover    of O2 Ireland and O2 Netherlands has grown by 18 per cent    from the 2002 financial year to the 2003 financial year.

O2 Ireland’s net    operating costs before exceptional items have increased by 6 per cent    from £337 million in the year ended 31 March 2002 to £356 million    in the year ended 31 March 2003, reflecting the effect of the 12 per cent    increase in service revenue during the 2003 financial year compared to the    2002 financial year. The effect of the revenue increase was reduced as a result    of the implementation of cost control measures.
*O2 Online*
O2 Online’s net    operating expenses before exceptional items increased by 11 per cent    from £194 million for the year ended 31 March 2002 to £216 million    for the year ended 31 March 2003. This reflects the Group’s continued    focus on developing mobile data capability. The ratio of net operating expenses    to external turnover at O2 Online in 2003 has remained consistent    with the ratio in 2002.

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***Goodwill amortisation***
The goodwill amortisation charge    before the exceptional impairment charge, included in the Group’s results    has increased marginally from £369 million in the year ended 31 March    2002 to £374 million in the year ended 31 March 2003. Goodwill    relating to our overseas businesses is held as a foreign currency denominated    asset. The fall of almost 4 per cent in the average Euro to Sterling    exchange rate for the year between the 2002 financial year and 2003 financial    year has increased the goodwill amortisation charge recognised in our reporting    currency, Sterling.
***Exceptional items***
In accordance with FRS 11 “Impairment    of fixed assets and goodwill” we regularly monitor the carrying values    of our fixed assets.

During the second half of the year    ended 31 March 2003 certain events, including our strategic review of the    Dutch market which led to the announcement of the disposal of O2    Netherlands, indicated that we should perform impairment reviews of its four    principal operations; the mobile telecommunications operations in the UK,    Germany, Ireland and the Netherlands.

In April 2003, we announced the    sale of O2 Netherlands resulting in an accounting loss of approximately    £1.4 billion, which provided an indication that the valuation of    mobile businesses may be lower than previously estimated. Additionally, following    the Competition Commission’s report on mobile termination charges, we    announced that we were reviewing the launch dates of our 3G services and would    adopt a more prudent timetable where local regulatory requirements permitted.    This revision in the timetable, together with the current absence of evidence    as to the present mass market appeal of 3G services and the limited availability    of 2G/3G compatible handsets, has led us to review and revise the business    plans of our mobile operations across our European footprint.

As a result of the above events,    the carrying value of the fixed assets of each of our principal income generating    units (IGUs), being O2 UK, O2 Germany, O2    Ireland and O2 Netherlands, were compared to their respective recoverable    amounts.

The announced disposal of O2    Netherlands has led to the carrying value of the net assets of the Dutch IGU    being written down to their recoverable amount, which in this case is the    sale proceeds less direct costs of disposal. This has resulted in an exceptional    impairment charge of £1,364 million being recognised in the profit and    loss account below Group operating loss.

With respect to the IGUs that are    held for continuing use within the Group (being O2 UK, O2    Germany and O2 Ireland), the carrying values of their fixed assets    were compared to their value in use to the Group. The value in use of each    IGU is calculated with reference to the net present value of its future cash    flows derived from the assets, using cash flow projections for the period    up to 31 March 2013. These projections cover a ten-year period, as we believe    that throughout this ten-year period, the annual growth rate of the IGUs being    assessed will differ from the average growth rates for the countries concerned.    For the periods beyond 1 April 2013, the projections use a long-term growth    rate assumed to be at or below the nominal GDP of the country concerned. The    discount rates applied to the projections were based on the post-tax weighted    average cost of capital for the Group. The effective pre-tax discount rate    for each of our territories ranged between 10.4 per cent and 12.5 per cent.

The impairment review performed    during the year ended 31 March 2003 revealed that the fixed assets of each    of the IGUs held for continuing use within the Group were impaired, resulting    in an exceptional impairment charge of £8,300 million included within    operating expenses.

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The total exceptional impairment    charges in the year ended 31 March 2003 are analysed below:
  **Goodwill** **Licences,****other****intangible****assets and****investments** **Tangible****assets** **Total**         **£m** **£m** **£m** **£m** **Operating          exceptional items:**                O2          UK  198  2,102  —  2,300    O2          Germany  903  3,797  —  4,700    O2          Ireland  1,300  —  —  1,300          2,401  5,899  —  8,300 **Non-operating          exceptional items:**                O2          Netherlands  649  423  292  1,364          3,050  6,322  292  9,664       
The carrying value of the Group’s    goodwill and licences after the impairment charges are £3,418 million    and £4,164 million respectively.

The impairment charge relating to    goodwill includes £47 million in respect of goodwill arising on acquisitions    prior to 1 April 1998 which has been written off directly to reserves. This    goodwill has been reinstated and written off through the profit and loss account.

In calculating the value in use    there is considerable uncertainty as to the present value of the future cash    flows. In assessing the future cash flows, assumptions have been made using    the best estimates available at the time of performing the impairment review.    These estimates include those used to reflect the growth rates up to 2013,    the long-term growth rates beyond 2013, the discount rate, the competitive    landscape, the take up and charge rate of data services and the availability    of functioning technological infrastructure to support the 3G roll-out. The    actual outcome is uncertain and these estimates may change over time as subsequent    changes in the mobile telecommunications industry, including advances in technology,    changes in the performance or our businesses as a result of competitive pressure    or otherwise, or potential difficulty in the implementation of the UMTS network,    may in the future shorten the estimated useful lives or result in a further    write-down of these assets.

Exceptional items for the year ended    31 March 2002 amounted to £150 million. These related to the costs arising    as a result of the demerger of the Group from BT in November 2001, and costs    relating to the reorganisation of the Group subsequent to the demerger. We    incurred exceptional costs of £27 million which were directly attributable    to the demerger of the Group from BT. The remaining £123 million of    exceptional items relate to the restructuring of our UK and German operations    post demerger, of which £87 million was in respect of redundancy costs.

 

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***EBITDA***
EBITDA is our earnings before interest,    tax, depreciation, amortisation and exceptional items, excluding our share    of operating profits and losses of our joint ventures and associates.

The reconciliation of EBITDA to    Group operating (loss)/profit, the closest UK GAAP financial measure, by business    is as follows:
  **Group        operating****(loss)/profit** **Depreciation** **Amortisation** **Exceptional****items** **EBITDA**          **2003** **2002** **2003** **2002** **2003** **2002** **2003** **2002** **2003** **2002**               **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** O2          UK  (2,116) 36  478  372  175  176  2,300  86  837  670 O2          Germany  (4,979) (472) 259  228  47  49  4,700  29  27  (166)O2          Ireland  (1,331) (57) 67  61  121  118  1,300  —  157  122 O2          Netherlands  (120) (164) 74  57  47  44  —  12  1  (51)O2          Online  (122) (103) 34  20  15  5  —  10  (73) (68)Other          businesses  (110) (96) 20  9  —  —  —  13  (90) (74)               (8,778) (856) 932  747  405  392  8,300  150  859  433             
Our businesses with larger market    shares in their countries of operation, O2 UK and O2    Ireland, have generated positive EBITDA over the last three financial years.    O2 Germany, a newer business, historically made EBITDA losses until    the 2003 financial year, during which O2 Germany achieved a positive    EBITDA result for the first time. The following table shows the contributions    of our businesses to Group EBITDA.
  **Year        ended 31 March**      **2003** **2002**       **£m** **£m** O2          UK  837  670 O2          Germany  27  (166)O2          Ireland  157  122 O2          Netherlands  1  (51)O2          Online  (73) (68)Other          operations  (90) (74)    **Total**  859  433     
Group EBITDA increased by 98 per    cent from £433 million for the year ended 31 March 2002 to £859    million for the year ended 31 March 2003. The increased EBITDA contribution    has come from all four mobile telecommunication businesses in the Group.
***Total operating          loss***
The total operating loss of the    Group increased significantly from a loss of £848 million for the year    ended 31 March 2002 to a loss of £8,773 million for the year ended    31 March 2003. This includes the exceptional impairment charge of £8,300    referred to earlier. The total operating loss excluding exceptional items    has reduced by 44 per cent from a loss of £848 million for the year    ended 31 March 2002 to £473 million for the year ended 31 March 2003.    This fall in total operating loss before exceptional items can be ascribed    to both the increased revenues generated by all our businesses arising from    the increased number of subscribers and the rise in ARPUs and to the cost    reduction measures implemented in 2002 after demerger by O2 UK    and O2 Germany.
***Net interest payable***
Net interest payable principally    relates to notional interest charged on the notional loans due to BT which    were settled on demerger, and to the finance charges payable on external debt    net of interest received on amounts invested. In the 2003 financial year,    the principal elements of our interest charge were the interest on our 

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revolving credit facility amounting    to £12 million, and the interest accrued on our long-term bonds, which    we issued in January 2002, of £63 million. In accordance with UK GAAP,    we are amortising the issue costs of our bank facility and our bonds over    the lives of the facilities (five and ten years respectively), through the    interest line in the profit and loss account. Amortisation of these costs    amounted to £3 million in the 2003 financial year. We also have interest    payable in relation to the O2 UK loan notes and interest on our    finance leases and other borrowings, and have received interest on our short-term    investments. Prior to demerger, we were principally funded by BT in a combination    of equity and notional loans. For the purpose of these financial statements,    a portion of BT’s short- and long-term loans has been allocated to the    Group for the periods up to 19 November 2001, the date of demerger from BT.    Notional interest of £756 million for the year ended 31 March 2002 was    charged on these BT loans. As part of the demerger transaction, a large portion    of these loans were capitalised so that at 19 November 2001, the date we demerged    from BT, we had net debt of £506 million. For the year ended 31 March    2002, the Group’s net interest charge, excluding the notional interest    on the BT loans, was £25 million. In the 2002 financial year, the principal    elements of our interest charge, excluding the BT loans, were the interest    on our revolving credit facility amounting to £6 million, and the interest    accrued on our long-term bonds, which we issued in January 2002, of £12    million. In accordance with UK GAAP, we are amortising the issue costs of    our bank facility and our bonds over the lives of the facilities (five and    ten years respectively) through the interest line in the profit and loss account.    Amortisation of these costs amounted to £4 million in the 2002 financial    year.
***Tax on loss on ordinary          activities***
The Group has a tax credit of £55    million for the year ended 31 March 2003 compared to a credit of £250    million for the year ended 31 March 2002. The decrease in the tax credit is    principally as a result of the notional BT interest charge in 2002 on the    allocated loans from BT existing pre-demerger. With the exception of Manx    Telecom and O2 Ireland, we do not anticipate incurring a tax charge    next year. We expect to pay tax on the profits of Manx Telecom and O2    Ireland earned in this period.
**Year ended 31 March          2002 compared to year ended 31 March 2001** ***Group turnover***
The following table shows the contributions    of our businesses to Group turnover:
  **Year        ended 31 March**       **per        cent**   **2002** **2001** **variation**        **£m** **£m**    O2          UK  2,756  2,706  2 O2          Germany1  875  65  1,246 O2          Netherlands2  200  90  122 O2          Ireland  395  309  28 O2          Online  100  15  567 Other          operations  54  47  15 Intragroup          eliminations  (104) (32) 225      **Total**  4,276  3,200  34       1Included within our consolidated          Group from 20 February 2001.2Included within our consolidated          Group from 30 June 2000.
Group turnover increased by 34 per    cent from £3,200 million for the year ended 31 March 2001, to £4,276 million    for the year ended 31 March 2002. This increase in revenues is principally    owing to the inclusion within our consolidated Group of a full year of results    from O2 Netherlands and O2 Germany which became fully    owned subsidiaries in June 2000 and February 2001 respectively. In addition,    the revenue of O2 Online has increased over six fold.

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*O2 UK*
O2 UK’s overall    turnover increased by two per cent from £2,706 million for the year    ended 31 March 2001 to £2,756 million for the year ended 31 March 2002.    Turnover largely comprises of service revenue, which increased by ten per    cent from £2,207 million for the year ended 31 March 2001 to £2,426    million for the year ended 31 March 2002.

During the year ended 31 March 2002,    we have seen the expected slowdown in growth of the mobile phone market, as    penetration levels approach 80 per cent. This has led to the smaller increase    in overall revenues in the financial year ended 31 March 2002 compared to    the 2001 financial year.

O2 UK’s total active    customer base increased from 10.6 million at 31 March 2001 to 11.1 million    at 31 March 2002, an increase of five per cent, which includes a    net increase in post-pay subscribers of approximately 100,000 over the year.    Post-pay churn has shown a significant decrease from 44 per cent for the year    ended 31 March 2001 to 31 per cent for the current year.

The following table details O2    UK’s revenue split between service, equipment and other revenues:
  **Year        ended 31 March**       **per        cent**   **2002** **2001** **variation**        **£m** **£m**    Service  2,426  2,207  10 Equipment  136  222  (39)Other  194  277  (30)     **Total**  2,756  2,706  2      
*Service*. Service revenue    is the principal element of O2 UK’s revenue, comprising 88    per cent of total turnover for the year ended 31 March 2002. O2    UK’s service revenue increased by ten per cent from £2,207 million    for the year ended 31 March 2001 to £2,426 million for the year ended    31 March 2002. Of this, service revenue from post-pay customers is the principal    source of income, with post-pay revenue accounting for over 65 per cent of    the total.

O2 UK’s revenue    has increased as a result of a combination of an increase in the subscriber    base, an increase in the post-pay ARPU, and better retention of existing users.

Post-pay subscribers’ gross    additions for the year ended 31 March 2002 total 1.3 million, taking our total    post-pay customer base to 3.5 million (representing 87,000 net additions for    the year). The post-pay churn rate has decreased significantly from 43.5 per    cent as at 31 March 2001 to 31.0 per cent at 31 March 2002.

These improvements have been as    a result of the operation focusing on business, professionals and young adult    customers, which we believe represent the higher value segments of the market,    both in pre-pay and post-pay. We are also concentrating on retaining our high-value    customers through successful customer relationship management initiatives,    such as our effective customer loyalty, retention and upgrade schemes, *First*and *Select*, which have assisted in reducing our contract churn.

Data revenues, as a proportion of    total service revenues increased steadily through the year from less than    ten per cent at 31 March 2001 to 11.8 per cent for the year ended 31 March    2002. Included within these statistics, the popularity of text messages continued    to grow, with over 3.4 billion messages sent during the year ended 31 March    2002, compared with 1.6 billion the prior year.

*Equipment and other revenue.*Both equipment and other revenues have decreased compared to the prior    year. Equipment revenues are generally decreasing as handset sale prices are    reducing. In addition the higher proportion of new pre-pay customers over    the year has decreased the overall equipment revenue as handset prices for    pre-pay customers are lower than for post-pay.

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O2 UK’s other revenue    in both the 2001 and 2002 financial years mainly comprised revenue from Lumina,    a service provider acquired in the 2000 financial year, which had a customer    base which included both O2 UK and Vodafone customers. As a result    of this acquisition, O2 UK receives revenues from customers connected    to the Vodafone network. We have been actively working to migrate these customers    to our own network, and as a result the revenues generated from the Vodafone    customers has decreased.
*O2 Germany*
O2 Germany was consolidated    from 20 February 2001 and contributed £65 million to Group turnover    for the year ended 31 March 2001. During the year ended 31 March 2002, O2    Germany contributed £875 million to Group revenue.

The following table details O2    Germany’s contribution to Group revenue between service, equipment and    other revenues:
  **Year        ended 31 March** **Year        ended****31 December**   **2002** **2001** **20001**        **£m** **£m** **£m** Service  696  45  470 Equipment  127  13  119 Other  52  7  11      **Total**  875  65  600       1The year ended 31 December          2000 comparatives, translated from the Euro at €1.6208/£1,          are included for illustration purposes only. Audited results for the          year ended 31 March 2001 are not available.
*Service*. O2 Germany’s    service revenue for the year ended 31 March 2002 has increased over 15 times    on the revenue for the period from acquisition to 31 March 2001 as a result    of consolidating a full year’s results for the first time, and by 48    per cent on the 12 month period ended 31 December 2000.

This increase in revenues, apart    from the effect of consolidating for the first time, is principally as a result    of the significant increase in the subscriber base, from 3.2 million active    subscribers at 31 March 2001, to 3.9 million active subscribers at 31 March    2002. This increase in subscribers was substantially evenly divided between    post-pay and pre-pay net additions, with post-pay accounting for 372,000,    and pre-pay 352,000 net additions during the year ended 31 March 2002.

A large proportion of the post-pay    additions during the year relate to customers who have subscribed to the Genion    Home service, our location-based tariffing technology, which allows reduced    call rates within the *homezone.*O2 Germany also offer an    equivalent service to business customers. Both Genion Home and Business are    part of our drive across the Group to attract high-value customers.

Post-pay ARPU has decreased from    £358 for the 12 months ended 31 December 2000, to £313 for the    year ended 31 March 2002. The fourth quarter ARPU to 31 March 2002 of £313    has shown an increase of two per cent over the third quarter ended 31 December    2001 ARPU of £306, as our drive to target the higher value customers    started to have an effect.

In line with our Group-wide commitment    to become a leader in data services, in January 2001 O2 Germany    became the first operator in Germany to launch an operational GPRS network,    and have introduced a number of data applications and hardware during the    current year. This has been reflected in the increase in the proportion of    data revenues which have risen to 14.5 per cent during the three months ended    31 March 2002, from 13.6 per cent for the quarter ended 30 June 2001. The    principal element of data revenue is generated by text messages; O2 Germany    recorded 958 million text messages in the year ended 31 March 2002.

*Equipment and other revenues.*Equipment revenue has increased approximately ten times to £127    million for the year ended 31 March 2002, and by seven per cent on the 12    month period ended 31 December 2000, which is 

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principally a result of the increase    in the subscriber base over the periods. Other revenue has increased seven    times from £7 million in the year ended 31 March 2001 to £52 million    in the year ended 31 March 2002.
*Other mobile telecommunication          businesses*
The revenue of our other mobile    telecommunication businesses in Europe has increased by 49 per cent from £399 million    in the year ended 31 March 2001 to £595 million in the year ended 31    March 2002.

O2 Ireland’s revenue    has increased by 28 per cent from £309 million for the year ended 31    March 2001, to £395 million for the year ended 31 March 2002. This    increase in revenue is a combination of the increase in the customer base,    offset by slight fall in ARPU. Contract customer numbers increased from 332,000    at 31 March 2001 to 356,000 active subscribers at 31 March 2002    and the pre-pay customers increased from 641,000 at 31 March 2001 to    824,000 at 31 March 2002.

O2 Netherlands was acquired    outright in June 2000, and so only contributed to the Group’s results    for nine months of the year ended 31 March 2001. As a result the consolidated    revenues of O2 Netherlands have increased by 122 per cent    from £90 million in the year ended 31 March 2001 to £200 million    in the current financial year. Revenue has also increased as a result of the    combination of an increase in subscriber numbers together with an increase    in blended ARPU for the year.

The customer base in O2    Netherlands has increased significantly by 58 per cent from a total active    base of 793,000 at 31 March 2001 to 1,255,000 active subscribers at 31 March    2002. During the year, O2 Netherlands secured a mobile banking    agreement with PostBank, in which new subscribers to O2 Netherlands    received a free pre-pay phone. Some 475,000 PostBank account holders received    the subsidised phone since the arrangement began. This has contributed to    the pre-pay ARPU increasing from £80 for the year ended 31 March 2001    to £84 for the year ended 31 March 2002.

Post pay active subscribers have    increased from 176,000 at 31 March 2001 to 233,000 at 31 March 2002, and post-pay    ARPU has also increased from £469 to £492 over the same period.    The level of contract churn has decreased from 32 per cent to 27 per cent.
*O2 Online*
O2 Online has shown continual    growth in revenue since it was launched in 1997. Revenue has increased by    over six times, from £15 million in the year ended 31 March 2001, to    £100 million in the year ended 31 March 2002. Approximately two-thirds    of the revenue in the 2002 financial year was intragroup, principally for    provision of WAP gateway and portal services to other Group companies.
***Net operating expenses          before exceptional items***
Net operating expenses before exceptional    items may be analysed between cost of sales and administrative expenses. Net    operating expenses increased by 41 per cent from £3,543 million for    the year ended 31 March 2001 to £4,982 million for the 2002 financial    year, principally as a result of consolidating a full year’s results    of O2 Germany and O2 Netherlands for the first    time.

 

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An analysis of the net operating    expenses before exceptional items, between the operating companies is provided    in the table below:
  **Year ended        31 March** **per cent**   **2002** **2001** **variation**        **£m** **£m**    O2          UK  2,458  2,418  2 O2          Germany1  1,275  103  1,138 Other          mobile telecommunication businesses2  655  488  34 O2          Online  194  163  19 Goodwill          amortisation  369  287  29 Other          operations and central costs  31  84  (63)     **Total**  4,982  3,543  41                  1Included within our consolidated          Group results from 20 February 2001.2Includes the operations          of O2 Netherlands, from 30 June 2000, and O2 Ireland. **Group cost of sales**
Group cost of sales increased by    50 per cent from £1,814 million for the year ended 31 March 2001, to    £2,714 million for the year ended 31 March 2002. The increase in    cost of sales in the 2002 financial year was primarily the result of consolidating    a full year’s result of O2 Germany and O2 Netherlands    in our consolidated financial statements for the first time.

The gross margin percentages (gross    profit divided by turnover) of our newer businesses in Germany and the Netherlands    are lower than those of our more established businesses in Ireland and the    UK. This is because the newer businesses are in the process of building their    respective customer bases. This has had the effect of reducing the Group gross    margin by six percentage points from 43 per cent in the 2001 financial year    to 37 per cent in the 2002 financial year.

The increase in activity of O2    Online and Airwave has also contributed to the increase in the Group cost    of sales.
**Group administrative          expenses before exceptional items**
Group administrative expenses before    exceptional items have increased by 31 per cent from £1,729 million    for the year ended 31 March 2001 to £2,268 million for the year ended    31 March 2002. The increase in administrative expenses in the 2002 financial    year was primarily the result of consolidating a full year’s result of    O2 Germany and O2 Netherlands in our consolidated financial    statements for the first time.

Group administrative expenses before    exceptional items as a percentage of turnover has decreased slightly from    54 per cent in the 2001 financial year to 53 per cent in the year ended 31    March 2002. Our newer businesses of O2 Germany and O2    Netherlands have higher ratios than the ratios of our more established businesses,    because they are still building their respective customer bases. The negative    impact of consolidating both O2 Germany and O2 Netherlands    for a full year for the first time in the 2002 financial year has been mitigated    by the cost reduction exercises across the Group.
*O2 UK*
O2 UK’s net operating    expenses before exceptional items have increased by two per cent, from £2,418    million for the year ended 31 March 2001 to £2,458 million for the year    ended 31 March 2002. Net operating expenses as a percentage of turnover has    remained constant at 89 per cent for the two financial years under review.

The variable element of O2 UK’s service cost    of sales has increased in line with the network usage. Interconnection charges    increased significantly during the financial year 2002, compared to the year    ended 31 March 2001, reflecting the increased calls from O2    UK customers terminating on other networks, including 

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other mobile networks whose termination charges are generally    higher than charges levied by fixed line network providers.

O2 UK’s depreciation charge has increased from    £256 million in the year ended 31 March 2001 to £372 million in    the year ended 31 March 2002, which reflects the increased investment in improving    O2 UK’s network quality.

The advertising and marketing spend for the year ended 31 March    2002 has decreased by over 25 per cent on the 2001 financial year, principally    as a result of lower subscriber acquisition costs which have decreased by    26 per cent over the same period. Both the pre-pay and post-pay    average subscriber acquisition cost have decreased, with the post-pay SACs    decreasing from £184 to £180 per subscriber, and the pre-pay decreasing    from £63 to £53 per subscriber.

Compared to the year ended 31 March 2001, O2 UK’s    overheads have decreased slightly by less than 1 per cent for the year ended    31 March 2002, which, despite the increased turnover and concentration on    improving customer service, reflects the cost control measures implemented    during the year.
*O2 Germany*
O2 Germany’s net operating expenses before exceptional    items increased significantly from £103 million for the period from    acquisition to 31 March 2001, to £1,275 million for the year ended 31    March 2002, reflecting the consolidation of O2 Germany’s full    year results into the Group’s results for the first time.

Net operating expenses as a percentage of turnover was 146 per    cent for the 2002 financial year. For O2 Germany, and indeed our    other newer mobile operation in Netherlands, we expect this ratio to be higher    than the same ratio of our more established businesses, as the newer businesses    are in the process of building up their customer bases.

The total depreciation charge (both network and non-network)    was £228 million for the year ended 31 March 2002, which represented    21 per cent of the net book value of tangible fixed assets at 31 March 2002.

Subscriber acquisition costs have decreased by 33 per cent from    £142 per subscriber over the year ended 31 December 2000 to £95    per subscriber for the year ended 31 March 2002, although the total subscriber    acquisition costs have increased over the year.
*Other mobile telecommunication          businesses*
Net operating expenses before exceptional items for our other    mobile telecommunication businesses, O2 Netherlands and O2    Ireland, has increased by 34 per cent from £488 million for the year    ended 31 March 2001, to £655 million for the year ended 31 March 2002.

The principal reason for this increase is the inclusion of O2    Netherlands net operating expenses before exceptional items for the full year    ended 31 March 2002 for the first time, which, compared to the 2001 financial    year, has increased by 60 per cent.

In addition, net operating expenses before exceptional items    have also increased in O2 Netherlands as a result of the increased    usage of the network, in line with an increase in the customer base from 793,000    at 31 March 2001 to 1,255,000 at 31 March 2002. Additionally, O2    Netherlands recorded high subscriber acquisition costs, as a result of the    PostBank arrangement, where customers were given a free mobile phone.

O2 Ireland’s net operating costs before exceptional    items have increased by 17 per cent from £287 million in the year ended    31 March 2001 to £336 million in the year ended 31 March 2002, reflecting    the effect of the 28 per cent increase in revenue during the 2002    financial year as compared to the 2001 financial year. The effect of the revenue    increase was reduced as a result of the implementation of cost control measures.
*O2 Online*
O2 Online’s net operating expenses before exceptional    items increased by 19 per cent from £163 million for the year ended    31 March 2001 to £194 million for the year ended 31 March 2002. The    revenue of O2 Online has increased by greater than six fold over    the same period, but as part of our Group-wide cost control measures we have    significantly reduced the ratio of net operating expenses to turnover.

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**Goodwill amortization**
The goodwill amortisation charge included in the Group’s    results has increased by 29 per cent from £287 million in the year ended    31 March 2001 to £369 million for the year ended 31 March 2002. This    increase is as a result of including a full year’s amortisation charge    in respect of the goodwill on O2 Germany, O2 Netherlands    and O2 Ireland for the first time in the 2002 financial year.
**Exceptional items**
Exceptional items for the year ended 31 March 2002 have been    discussed earlier.

Exceptional items for the year ended 31 March 2001 totalled    £2,821 million. Of this total, £2,800 million represents a non-cash    charge for the write-down of goodwill, reflecting impairment of the carrying    value of O2 Germany. The remaining £21 million exceptional    item was a write-off of information technology systems no longer required    following the separation of the fixed and mobile businesses of O2    Germany.
**EBITDA**
EBITDA is our earnings before interest, tax, depreciation, amortisation    and exceptional items, excluding our share of operating profits and losses    of our joint ventures and associates.

Our more established business, O2 UK, has had positive    EBITDA over the last three financial years. Similarly, O2 Ireland    has had positive EBITDA since it has been included within our consolidated    Group since 30 March 2000, the date of its acquisition. O2 Germany,    O2 Netherlands and O2 Online, our newer businesses,    have had negative EBITDA. The following table shows contributions of our businesses    to Group EBITDA.
  **Year ended        31 March**   **2002** **2001**       **£m** **£m** O2          UK  670  555 O2          Germany1  (166) (15)O2          Ireland  122  68 O2          Netherlands2  (51) (76)O2          Online  (68) (143)Other          operations  (74) (72)    **Total**  433  317              1Included within our consolidated          Group from 20 February 2001.2Included within our consolidated          Group from 30 June 2000.
The reconciliation of EBITDA to Group operating profit/(loss),    the closest UK GAAP financial measure, by business is as follows:
 **Group operating****profit/(loss)** **Depreciation** **Amortisation** **Exceptional****items** **EBITDA**  **2002** **2001** **2002** **2001** **2002** **2001** **2002** **2001** **2002** **2001**             **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** O2          UK 36  125  372  256  176  174  86  —  670  555 O2          Germany (472) (2,874) 228  23  49  15  29  2,821  (166) (15)O2          Ireland 9  (137) 57  28  44  33  12  —  122  68 O2          Netherlands (230) (51) 61  47  118  72  —  —  (51) (76)O2          Online (103) (148) 20  4  5  1  10  —  (68) (143)Other          businesses (96) (79) 9  4  —  3  13  —  (74) (72)             (856) (3,164) 747  362  392  298  150  2,821  433  317            
 

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Group EBITDA increased by 37 per cent from £317 million    for the year ended 31 March 2001 to £433 million for the year ended    31 March 2002. Group EBITDA increased for the year ended 31 March    2002 owing to increased EBITDA contributed by O2 UK and O2    Ireland, despite consolidating a full year of O2 Germany’s    and O2 Netherlands’ losses for the first time. O2    Online showed a significant improvement of EBITDA in the 2002 financial year,    whilst the negative EBITDA of the other operations, including the central    costs remained significantly unchanged.
***Group’s share          of operating loss of joint ventures***
During the year ended 31 March 2001, the Group had interest    in two joint ventures, O2 Germany and O2 Netherlands.    The remaining interest in both these companies were purchased during the year,    O2 Netherlands on 30 June 2000, and O2 Germany on 20    February 2001. The share of losses recognised in the Group consolidated results    prior to these acquisition dates was £18 million and £285 million    respectively.

The Group now wholly owns its mobile operations in the UK, Ireland,    the Netherlands and Germany. The Group no longer has interests in any joint    ventures.
***Total operating          loss***
The total operating loss of the Group decreased significantly    from a loss of £3,450 million for the year ended 31 March 2001    to a loss of £848 million for the year ended 31 March 2002.

The operating loss in the 2001 financial year included the impairment    charge of £2,800 million relating to the write-down of the goodwill    arising on the acquisition of O2 Germany, and the £21 million    write-off of O2 Germany IT assets. The operating loss before exceptional    items was £629 million in the 2001 financial year.

The 2002 financial year’s operating loss before exceptional    items was £698 million, which is an 11 per cent increase in the Group    loss compared to the previous financial year, which is a result of consolidating    a full year’s operating losses of O2 Germany and O2    Netherlands for the first time.
***Net interest payable***
Net interest payable relates to the finance charges payable    on external debt net of interest received on amounts invested. Prior to demerger,    we were principally funded by BT and net interest payable in the years ended    31 March 2002 and 2001 relates to interest payable on the notional loans    from BT and our other external loans net of interest received in respect of    amounts invested. Net interest payable was £669 million in the year    ended 31 March 2001 and £781 million in the year ended 31 March    2002. The majority of the interest payable in both years represents the notional    interest charged on the loans from BT of £16.8 billion in the year ended    31 March 2001 and for the period from 1 April 2001 to 19 November 2001. This    notional loan incurred interest at 7.2 per cent. in both periods.
***Tax on loss on ordinary          activities***
The Group has a tax credit of £250 million for the year    ended 31 March 2002 and a tax credit of £114 million for the year ended    31 March 2001. The increase in the tax credit is principally a result of the    notional BT interest charge. With the exception of Manx Telecom and O2    Ireland, we do not anticipate incurring a tax charge in the next few years.    We expect to pay tax on the profits of Manx Telecom and O2 Ireland    earned in this period.

 

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**B.****Liquidity and capital          resources**
The following table sets forth our    cash flows for the Group, including O2 Netherlands, for the    years ended 31 March 2003, 2002 and 2001 extracted without adjustment    from our consolidated financial statements.
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Net          cash inflow from operating activities  1,033  457  318 Returns          on investments and servicing of finance  (63) (9) (11)Tax          (paid)/recovered  (4) (4) 21 Net          cash outflow for capital expenditure and financial investment  (868) (1,231) (5,234)Net          cash outflow for acquisitions and disposals  —  (864) (12,574)     Cash          inflow/(outflow) before management of liquid resources and financing  98  (1,651) (17,480)Management          of liquid resources  (3) (459) — Net          cash (outflow)/inflow from financing  (47) 1,790  17,593      Increase/(decrease)          in cash in the year  48  (320) 113      
Our operating activities provided    cash of £1,033 million, £457 million and £318 million during    the three years ended 31 March 2003, 2002 and 2001 respectively. Our Group    operating losses of £8,778 million, £856 million and £3,164    million in each of the years are offset by significant non-cash depreciation    and amortisation charges totalling £9,637 million (including the operating    exceptional charge of £8,300 million), £1,139 million and £3,481    million (including the exceptional £2,800 million impairment of O2    Germany’s goodwill) respectively.

Net cash outflows for servicing    of finance have increased in the 2003 financial year compared to the previous    two years as we were funded by interest free loans from BT prior to our demerger,    although for the purposes of these financial statements we include a notional,    non-cash interest charge for the period pre-demerger in our profit and loss    account. In the year ended 31 March 2002 we incurred interest on external    funding for four months after demerger whereas in the year ended 31 March    2003 we have incurred a full year’s charge. The servicing of finance    cash outflow for the year ended 31 March 2003 consisted mainly of net interest    payable of £66 million on our loans. This can be analysed as £13    million interest paid on our revolving credit facility (2002: £6 million)    and interest paid on our long-term bonds of £64 million (2002: £8    million). Offset against this as part of the management of our liquid resources,    we have invested surplus cash in various short-term investments, on which    we have received approximately £14 million (2002: £5 million)    in interest.

The total tax paid for the Group    in the years ended 31 March 2003 and 2002 was a cash outflow of £4 million,    compared to a cash inflow of £21 million in the 2001 financial year.

Cash outflow in respect of capital    expenditure for the 2003 financial year was £868 million, which is significantly    lower than our capital expenditure cash flow for the 2002 financial year.    The reduction in capital expenditure at our main mobile telecommunications    businesses compared to 2002 is due to more focused investment in improving    2G network quality and the delay in commencing the full roll-out of our planned    3G network. The capital expenditure in the year ended 31 March 2002 of £1,231    million related mainly to tangible fixed asset purchases across our footprint    in respect of network expansion and improvement, and expenditure on the UMTS    network in the UK. The capital expenditure in 2001 of £5,234 million    mainly related to the purchase of our UK and Dutch UMTS licences.

 

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Across the Group, there are generally    timing differences between the recognition of a new fixed asset in our financial    statements, and the cash payment, because we are often able to secure delayed    non-interest bearing payment terms with our capital suppliers. The following    table presents the capital additions recognised for the Group, including O2 Netherlands,    for the years ended 31 March 2003, 2002 and 2001:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** O2          UK  362  556  721 O2          Germany1  141  250  56 O2          Ireland  59  85  127 O2          Netherlands2  59  97  112 O2          Online  21  59  48 Airwave  163  90  94 Other          operations  8  5  5 UMTS          licences and other intangible assets  131  —  4,307      **Total**  944  1,142  5,440                  1Included within our consolidated          Group results from 20 February 2001.2Included within our consolidated          Group results from 30 June 2000.
Total capital expenditure for the    year ended 31 March 2003 has fallen by a further 17 per cent to £944    million from £1,142 million for the year ended 31 March 2002. In the    2003 financial year the Group purchased a UMTS licence in Ireland for £73    million. Airwave, our business developing a national digital radio service    for the police, increased capital expenditure by 81 per cent from £90    million in the year ended 31 March 2002 to £163 million in the year    ended 31 March 2003. This reflects the accelerating programme to roll-out    the new Airwave network, resulting in ten police forces going “live”    during the 2003 financial year.

Total capital expenditure for the    year ended 31 March 2002 was £1,142 million, a significant decrease    on the 2001 year expenditure of £5,440 million. The principal reason    for this decrease is the purchase of the UMTS licences in the 2001 financial    year. Tangible fixed asset capital expenditure has remained approximately    constant, decreasing slightly from £1,133 million for the year ended    31 March 2001, to £1,121 million for the year ended 31 March 2002, despite    including a full year of capital expenditure relating to O2 Germany    and O2 Netherlands for the first time in 2002.

The capital expenditure for the    year ended 31 March 2001 represented mainly the purchase by O2    Third Generation Limited of our UK UMTS licence, and O2 Netherlands’    purchase of our Dutch UMTS licence.

Over the five years to 31 March    2008 we expect to incur capital expenditure of approximately £5.5 billion,    a material portion of which relates to the roll-out of our UMTS networks.    We expect to fund our future capital spend from our bank facilities and long-term    bonds described below, and from net cash flows from operations.

The Group will maintain tight control    of its investment programme, and in particular will aim to match the timing    and quantum of capital expenditure on our UMTS network roll-out with the emerging    demand for mobile data services. The Group currently anticipates providing    services on its UMTS network in the second half of 2004, or earlier where    local regulatory conditions require us to do so. Capital expenditure in the    2004 financial year is expected to be higher than in 2003, mainly due to the    commencement of the investment in 3G networks and higher investment in the    Airwave network in the UK.

The Group did not incur any acquisitions    expenditure during the year ended 31 March 2003. Cash outflow from acquisitions    decreased significantly from £12,574 million in the year ended 31 March    2001 to £864 million in the year ended 31 March 2002. The cash outflow    in the 2001 financial year related to the acquisition of the remaining 55    per cent interest in O2 Germany, the remaining 50 per cent interest    in O2 Netherlands, and acquiring a 

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50.5 per cent controlling    interest in O2 Ireland. In April 2001, the Group acquired the remaining    49.5 per cent interest in O2 Ireland for a total consideration    of £877 million including expenses of which £13 million was payable    after 31 March 2002. Of this deferred consideration, £8 million remained    payable after 31 March 2003.

During the year ended 31 March 2003,    the Group incurred a cash outflow from financing of £47 million. This    mainly represents the redemption of O2 UK loan notes during the    first half of the 2003 financial year. During the year ended 31 March 2002,    the Group’s cash inflow from financing was £1,790 million. This    cash inflow may be analysed between cash inflow prior to our demerger from    BT on 19 November 2001, and the financing cash inflow post demerger. Pre demerger,    we received net funds from BT amounting to £847 million. In January    2002, we received £989 million in respect of our Euro medium-term bond    issue. We repaid £74 million of our O2 UK loan notes. Our    financing activities are further described below.
***Sources of liquidity          and capital resources***
Prior to demerger our principal    sources of liquidity were funding from BT and cash from operating activities.    Since demerger our principal sources of liquidity are cash from operating    activities, bank financing and the bond financing described below.

Upon demerger from BT, we had net    debt of £506 million, of which approximately £444 million, net    of cash remaining in our Group, was owed to BT. This debt to BT was refinanced    shortly after completion of the demerger out of the financing arrangements    described below.

Total gross debt at 31 March 2003    amounted to £1,465 million (including the O2 UK hire purchase    obligations (the QTE leases), the obligations of which are fully offset by    cash deposits held in trust) and net debt was £549 million. Included    in the total gross debt were €1,000 million and £375 million of    eurobonds issued in January 2002 which have a five year and ten year    term, respectively. Loan notes outstanding in aggregate amounted to £19    million, redeemable at any time at the option of the holder. As at 31 March    2002 we had net debt of £617 million and total gross debt of £1,496    million including the QTE leases.

As at 31 March 2003, bank facilities    totalled £1,975 million. Tranche A of the syndicated facility totalled    £1,725 million, maturing on 14 September 2006; Tranche B totalled £150    million, maturing on 17 September 2003 and the bilateral facility totalled    £100 million, maturing on 19 December 2003. As at 31 March 2003, both    the syndicated and bilateral facilities were un-drawn. As at 31 March 2002    we had outstanding a multi-currency revolving credit facility with a syndicate    of banks totalling £2,475 million. During the period, £600 million    of Tranche B of the facility was cancelled. In addition, a £100 million    bilateral facility was arranged.

Interest on loans drawn under the    bank facilities is calculated at a margin above LIBOR (or in the case of Euro    advances, EURIBOR) from time to time. The margin varies according to the long-term    credit rating assigned to mmO2 plc by major credit rating agencies    but is subject to a maximum of 1.50 per cent. As at 31 March 2003 all bank    facilities bear a margin of below 1 per cent.

Interest on the bonds is at a fixed    rate at 6.375 per cent per annum and 7.625 per cent per annum on the Euro    and the Sterling bond issues, respectively. Interest on the €1,000 million    bond issue has been swapped to floating rate. Interest on €500 million    is calculated at a margin above Sterling LIBOR, having been swapped from Euro    into Sterling and interest on the other €500 million is calculated at    a margin above EURIBOR.

 

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The Group’s contractual obligations,    including commitments for future payments under hire purchase contracts, and    long- and short-term debt arrangements are summarised in the table below.    Details of these obligations are fully disclosed in notes 18, 19 and 20 of    the financial statements in Item 18.
  **Payments        due by period**        **Less        than** **1        to 2** **2        to 5** **After** **Future          commitments** **Total** **1        year** **years** **years** **5        years**         **(£m)**             Long-term          bonds  1,015  —  —  644  371 Gross          hire purchase obligations  390  31  31  84  244 Loan          notes  19  19  —  —  — Other          loans and borrowings  41  8  7  19  7        **Total**  1,465  58  38  747  622        
At 31 March 2003 we also have contracted    capital commitments of £909 million (2002: £704 million).
***Treasury management          and policies***
Group Treasury (Treasury) operates    as a centralised service for the Group. The role of Treasury is to identify,    monitor and manage financial risk within the framework of Board approved policies    and delegated authorities. Treasury is not permitted to add to the financial    risks inherent in the business and may not undertake speculative activity.

The principal financial risks to    the Group are identified below.
*Banking covenants*
It is our current policy to fully    fund our business plan by access to the debt capital markets and other sources    of funding. Borrowing is centralised and there are no material facilities    at the local operating businesses. The Group is committed to maintaining the    key financial ratios as set out in the covenants relating to the multi-currency    revolving credit facility, of Group EBITDA to interest and net debt to Group    EBITDA. As at 31 March 2003, actual ratios were Group EBITDA to interest of    13.0 times and net debt of 0.6 times Group EBITDA. As at 31 March 2003, the    Group’s projected funding requirements were fully funded through a combination    of bonds issued under the Group’s bond financing programme (£375    million and €1,000 million) and committed bank facilities (£1,975    million). As at 31 March 2002, actual ratios were Group EBITDA to interest    (excluding notional interest on allocated BT loans) of 17.3 times and net    debt of 1.4 times Group EBITDA. The Group EBITDA to interest ratio has fallen    in the 2003 financial year compared to the 2002 financial year. This reflects    a full year’s interest charge in the 2003 financial year compared to    the 2002 financial year in which in the period prior to demerger a substantial    portion of Group funding was provided by BT on a non-interest bearing basis    for the purposes of the calculation of these ratios.
*Foreign exchange management*
The policy of the Group is to hedge    (primarily by the use of foreign currency forward contracts) identified foreign    exchange flows, although the current level of transaction risk exposure is    low due to the fact that cash flows are primarily domestic in each Group company.    The policy of the Group regarding foreign exchange translation risk is to    manage material risk on the translation of future cash flows generated by    overseas assets primarily by the use of natural offsets and the use of currency    debt, cross-currency and foreign exchange swaps. Due to the variability of    the cash flows in our overseas businesses, we expect to review our hedging    strategy in the future. However, as at 31 March 2003, all net debt was denominated    in Sterling after taking account of the effect of derivative instruments.
*Interest rate management*
The debt level within the Group    is a key determinant of the impact of interest rates. It is current policy    to fix or protect expected interest flows where Group profits or key financial    ratios would be materially at risk from 

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interest rate movements. Treasury    maintains the proportion of fixed rate debt within a Board approved range    of 25 to 75 per cent by the issuance of fixed rate debt and the use of derivative    instruments (primarily interest rate swaps). As at 31 March 2003, and after    taking into account the effect of derivative instruments, 36 per cent (2002:    34 per cent) of gross borrowings (excluding the QTE lease which is fully defeased)    were fixed for a period of at least three years (2002: three years). Based    on the net debt as at 31 March 2003, a one per cent rise in market interest    rates would have an adverse effect of approximately £7 million (2002:    £2 million) on Group profit before taxation.
*Credit risk management*
It is our current policy to mitigate    credit risk to our financial counter-parties through the application of strict    counter-party limits. Counter-party limits are based on credit ratings issued    by the main credit rating agencies and outstanding transactions are weighted    according to potential risk to the Group. Counter-party limits are reviewed    on a regular basis by Treasury.
**C.****Research and development,          patents and licences**
We have not engaged in any significant    research and development activities during any of the last three financial    years, although we have worked closely with BT Exact, suppliers and applications    developers to create products suited to our markets.
**D.****Trend information**
In the three remaining markets in    which the Group operates, competition to acquire and retain high-value customers    is expected to remain robust. In addition, these markets are subject to general    economic conditions and continuing regulatory risk.

The Group believes that its O2    brand, its strong position in mobile data services, and the operational momentum    it has developed since the demerger in November 2001, will enable it to deliver    sustained progress in all the markets it serves.

In the year to 31 March 2004, O2    UK continues to target service revenue growth of 10 per cent, driven by a    combination of customer growth and higher ARPU. The increase in ARPU is expected    to be driven primarily by higher revenues from mobile data services, with    less growth coming from voice services.

In the year to 31 March 2004, O2    UK continues to target an EBITDA margin of 30 per cent for the full year,    and O2 Germany is targeting a double-digit EBITDA margin.

The asset impairment charge and    the growth and performance improvement delivered in the year ended 31 March    2003 should accelerate the Group’s progress towards delivery of positive    earnings per share.

In the year to 31 March 2004, Group    capital expenditure is expected to be higher than in the previous year, mainly    due to the commencement of investment in 3G networks, and higher investment    in the Airwave network in the UK.
**US GAAP reconciliation**
Our consolidated financial statements    are prepared up to the date of demerger from BT on a carve-out basis in accordance    with UK GAAP, which differs in certain respects from US GAAP. A detailed description    of the main differences between UK GAAP and US GAAP as they relate to us and    a reconciliation to US GAAP of net loss and net assets is given in note 32    to the financial statements in Item 18.

Our net loss determined in accordance    with US GAAP was £3,671 million, £1,463 million and £3,747    million for the years ended 31 March 2003, 2002 and 2001, respectively, compared    with our net loss determined under UK GAAP of £10,148 million, £850 million    and £3,533 million, respectively. The principal differences affecting    the determination of net loss under US GAAP for the year ended 31 March 2003    are:
•adjustments in relation          to capitalisation of interest, net of related depreciation of £(67)          million (2002: £579 million, 2001: £344 million);
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  •adjustments for goodwill          impairment of £482 million (2002: nil, 2001: nil);  •adjustments for licence          impairment of £5,899 million (2002: nil, 2001: nil);  •adjustments for fixed          asset impairment on discontinuing operations of £(25) million          (2002: nil, 2001: nil);  •adjustments for goodwill          amortisation of £374 million (2002: £23 million, 2001: £19          million);  •adjustments for mobile          licences, software and other intangible assets of £(37) million          (2002: £(217) million, 2001: £(98) million);  •adjustments for derivative          instrument valuation of £50 million (2002: £(19) million,          2000: nil); and  •adjustments for deferred          taxation on US GAAP differences of £(176) million (2002: £(240)          milion, 2001: £134 million). **Recent accounting pronouncements** ***United Kingdom***
The Group continues to apply the    transitional disclosure arrangements set out in FRS 17 “Retirement benefits”.    Mandatory implementation is not required by the Group until the year ended    31 March 2006. The transitional disclosures required are provided in note    8 to the financial statements in Item 18. The changes introduced by FRS 17    principally affect the way defined benefit pension schemes are accounted for.    At each year-end the pension scheme assets should be measured at market value    while pension scheme liabilities should be measured at a present value using    a specified actuarial valuation method and discounted at a corporate bond    rate. The resulting pension scheme surplus or deficit must be shown on the    Group’s balance sheet, and could be volatile because of the dependence    on market conditions at the balance sheet date.
***United States***
In June 2001, the Financial Accounting    Standards Board (FASB) issued SFAS No. 143, “Accounting for Obligations    Associated with the Retirement of Long-Lived Assets”, which is effective    for the Group from 1 April 2003. SFAS No. 143 requires, among other things,    that the fair value of a liability for an asset retirement obligation be recognised    in the period in which it is incurred, if a reasonable estimate of fair value    can be made and the Group has a legal obligation to do so. A legal obligation    can result from (i) a government action, such as a law or ordinance, (ii)    an agreement between entities, such as a written or oral contract, or (iii)    a promise conveyed to a third party that imposes a reasonable expectation    of performance upon the promisor under the doctrine of promissory estoppel.

The associated asset retirement    costs are capitalised as part of the carrying amount of the long-lived asset.    The asset retirement cost is subsequently allocated to expense (as depreciation    or impairment) over the useful life of the related long-lived asset. The liability    is discounted and subsequently accreted using the credit-adjusted risk-free    interest rate in effect when the liability was initially recognised. The accretion    amounts must be recognised as an increase in the carrying amount of the liability    and classified in the statement of income as other operating expense. The    Group is currently assessing the impact of the adoption of this statement    on its financial position, results of operations and cash flows.

In June 2002, the FASB issued SFAS    No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”.    SFAS No. 146 requires that a liability for costs associated with an exit or    disposal activity be recognised and measured initially at its fair value in    the period in which the liability is incurred. Previously a liability for    an exit cost was required to be recognised at the date of an entity’s    commitment to an exit plan, however, this does not, by itself, create a present    obligation to others that meets the definition of a liability. SFAS No. 146    will be effective for the Group for any exit or disposal activities that are    initiated after 31 December 2002. The Group does not anticipate adoption of    this statement having a significant impact on its financial position, results    of operations and cash flows.

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In November 2002, the FASB issued    FASB Interpretation 45 (FIN 45), “Guarantor’s Accounting and Disclosure    Requirements for Guarantees, Including Indirect Guarantees of Indebtedness    of Others”. FIN 45 requires that a liability (at fair value) be recorded    in the guarantor’s balance sheet upon issuance of a guarantee. In addition,    FIN 45 requires disclosures about the guarantees that an entity has issued,    including a reconciliation of changes in the entity’s product warranty    liabilities. The initial recognition and initial measurement provisions of    FIN 45 are applicable on a prospective basis to guarantees issued or modified    after 31 December 2002, irrespective of the guarantor’s fiscal year-end.    The disclosure (but not the accounting) requirements of FIN 45 are effective    for the Group’s 2003 financial statements.

In January 2003, the FASB issued    FASB Interpretation 46 (FIN 46), “Consolidation of Variable Interest    Entities, an Interpretation of ARB 51”. FIN 46 requires certain variable    interest entities to be consolidated by the primary beneficiary of the entity    if the equity investors in the entity do not have the characteristics of a    controlling financial interest or do not have sufficient equity at risk for    the entity to finance its activities without additional subordinated financial    support from other parties. FIN 46 is effective immediately for all new variable    interest entities created or acquired after 31 January 2003. For variable    interest entities created or acquired prior to 1 February 2003, the provisions    of FIN 46 must be applied for the first interim or annual period beginning    after 15 June 2003. The disclosure (but not the accounting) requirements    of FIN 46 are effective for the Group’s 2003 financial statements, regardless    of the date on which the variable interest entity was created. Management    is currently evaluating the impact of FIN 46 on the Group’s consolidated    financial statements.

In November 2002, the Emerging Issues    Task Force (EITF) reached a consensus on Issue 00-21 (EITF 00-21), “Revenue    Arrangements with Multiple Deliverables”. EITF 00-21 addresses certain    aspects of the accounting by a vendor for arrangements under which the vendor    will perform multiple revenue generating activities. EITF 00-21 will be effective    for interim periods beginning after 15 June 2003. The Group is currently evaluating    the impact of adoption of EITF 00-21 on its financial position and results    of operations in 2003.

 

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**ITEM        6****DIRECTORS, SENIOR MANAGEMENT          AND EMPLOYEES**  **A.****Directors and Senior          Management**
**David Varney (57) Chairman**(2),    (4), (5)

David Varney was appointed to the    Board in August 2001 as full time Chairman. In April 2003, he became part    time Chairman as envisaged at the time of the demerger from BT. He has extensive    experience both in the UK and overseas markets gained during his four years    as Chief Executive Officer of BG Group (formerly British Gas) from 1996 to    2000. Prior to joining BG Group, he held a variety of senior roles in Shell    including the position of Managing Director of AB Svenska Shell in Sweden    and Director of Shell International with responsibility for Shell’s Oil    Products business in Europe. He is also Chairman of Business in the Community.
**Executive Directors**
**Peter Erskine (51) Chief Executive    Officer**(2), (3), (4)

Peter Erskine was appointed to the    Board in August 2001. Mr Erskine is the Company’s Chief Executive Officer.    He joined the Company from BT where, since March 1993, he held a number of    senior positions including Director of BT Mobile, President and Chief Executive    of Concert, and, from 1998, Managing Director of BT Cellnet. Prior to joining    BT he was European Vice President of Sales and Customer Service for Mars and    Senior Vice President Sales and Marketing for UNITEL.

**David Finch (47) Chief Financial    Officer**(2), (3), (4)

David Finch was initially appointed    to the Board in August 2001. Mr Finch is the Company’s Chief Financial    Officer and has extensive experience in financial management having previously    held senior finance positions at Exel, Novar (formerly Caradon) and Grand    Metropolitan. In addition to Group Finance, he has direct responsibility for    the Group Treasury and Investor Relations functions.

**Rudolf Gröger (48) CEO O2    Germany**(3)

Rudolf Gröger was appointed    to the Board on 1 April 2003. Mr Gröger joined the Company in October    2001 as Chief Executive Officer of O2 Germany (previously called    Viag Interkom). Prior to this, he was Managing Director of T-Systems International    GmbH, a subsidiary of Deutsche Telekom, from 1999 to 2001. He played a key    role in the acquisition of Debis Systemhaus GmbH and its integration into    Deutsche Telekom. He has also worked for Siemens and was head of its German    information and communication product operations.

**David McGlade (42) CEO O2    UK**(3)

David McGlade was appointed to the    Board on 1 April 2003. Mr McGlade joined O2 UK (previously called    BT Cellnet) in October 2000. Before being appointed as Managing Director of    BT Cellnet, he was Chairman and Chief Executive Officer of PureMatrix, a mobile    webnet software company based in Colorado. He was also President and Chief    Executive Officer of Catch TV, President West Region of Sprint PCS where he    launched the first Code Division Multiple Access network outside Asia and    a Vice President of TCI.

**Kent Thexton (40) Chief Data    and Marketing Officer**(3)

Kent Thexton was appointed to the    Board on 1 April 2003. Mr Thexton joined O2 UK (previously called    BT Cellnet) in 1998 as Marketing Director before becoming Managing Director    of O2 Online (previously called Genie) in 2000. He was appointed    Chief Data and Marketing Officer for the Company in July 2001. Before joining    BT Cellnet, he spent eight years in the Canadian mobile industry, holding    the position of Chief Operating Officer and Executive Vice President of Rogers    Cantel (now Rogers Wireless). Prior to this, he held management positions    at Northern Telecom and Bell Canada. He is also a non-executive Director of    two private Canadian companies, Avista and Casero.

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**Non-Executive Directors**
**Andrew Sukawaty (48)**(5),    (6)

Andrew Sukawaty was initially appointed    to the Board in August 2001. Mr Sukawaty is the non-executive Deputy Chairman    of the Company and senior independent Director. He is President and Chief    Executive Officer of Cable Partners Europe LLC, which invests in and operates    cable television services in Europe. He is also Chairman of Telenet. He has    considerable experience in the mobile telephone industry and telecommunications    industries in the United States and Europe having at different times in those    periods held the offices of Chief Executive and President of Sprint PCS, Chief    Executive Officer of NTL, Chief Operating Officer of Mercury One2One, where    he launched the world’s first digital Personal Communications Services    company, and he is a former Chairman of the Cellular Telephone and Internet    Association (CTIA) in the United States.

**David Arculus (56)**(1),    (5)

David Arculus was appointed to the    Board on 1 April 2003. Mr Arculus is Chairman of Severn Trent and the Better    Regulation Task Force and a non-executive Director of Barclays and Earls Court    and Olympia Limited. Mr Arculus was previously Chairman of IPC Group Limited    and, before that, Group Managing Director of EMAP.

**David Chance (46)**(1),    (5)

David Chance was appointed to the    Board on 21 January 2003. Mr Chance was Deputy Managing Director of BSkyB    until June 1998 and is a non-executive Director of Granada, Modern Times Group    and Sunderland AFC. He previously held senior marketing and business development    roles at US telecoms companies, Scientific Atlanta and Grass Valley Group,    and European satellite broadcaster, SES.

**Stephen Hodge (61)**(1),    (6)

Stephen Hodge was initially appointed    to the Board in October 2001. Mr Hodge was Director of Finance of the Royal    Dutch/Shell Group, prior to his retirement in September 2001, where he had    responsibility for all financial and investor relations issues for the Shell    Group and its parent companies. He has extensive knowledge of the financial    management of international companies, having worked throughout the world    including Australia, the Netherlands, Venezuela and Argentina in a variety    of financial positions. He is Chairman of Shell Pensions Trust Limited and    a member of the Franchise Board of Lloyd’s of London.

**Neelie Kroes (61)**(1),    (6)

Neelie Kroes was initially appointed    to the Board in August 2001. Ms Kroes is a member of the Supervisory Boards    of a number of Dutch enterprises including Cório, Lucent Technologies,    Nederlandse Spoorwegen, New Skies Satellites and P&O Royal Nedlloyd. She    is also a member of the Supervisory Boards of Volvo Group and Thales Group.    She is a member of the Prologis Board. She is a former President of Nijenrode    University in the Netherlands. Before this, she served as Adviser to the European    Transport Commissioner and also served two periods, in the Netherlands, as    Cabinet Minister of Transport, Public Works and Telecommunications and Secretary    of State for Transport, Public Works and Telecommunications. She was also    a member of the Dutch Parliament and a member of the Rotterdam Municipal Council.

**Ian Meakins (46)**(1),    (6)

Ian Meakins was appointed to the    Board in December 2001. Mr Meakins is currently President, European Major    Markets and Global Supply of Diageo. He has held a number of senior marketing    and operational directorships since joining United Distillers in 1992 from    strategic management consultants, The Kalchas Group, where he was a founding    partner. Prior to this, he worked at Bain & Company and Procter &    Gamble.

**Paul Myners (55)**(5),    (6)

Paul Myners was initially appointed    to the Board in August 2001. Mr Myners is Chairman of Aspen Insurance and    the Guardian Media Group and a non-executive Director of The Bank of New York    and Marks and Spencer. He is a member of the Financial Reporting Council.    He was Chairman of Gartmore Investment Management until November 2001 and    has previously held directorships at National Westminster Bank, Coutts &    Co., the 

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Investment Management Regulatory    Organisation, the Lloyd’s Market Board, Celltech Group, the Scottish    National Trust, Powergen and Orange. He is a Trustee of both Tate and Glyndebourne.

**Key to membership of Board Committees:**
(1)Audit Committee  (2)Chairman’s Committee  (3)Executive Committee  (4)Finance Committee  (5)Nomination Committee  (6)Remuneration Committee
All of the non-executive Directors    are considered independent of the management of the Company.
**Company Secretary and          General Counsel**
**Philip Bramwell (46)**

Philip Bramwell joined the Company    from BT, where he was employed since April 1998, initially as Legal Manager,    Group Strategy and Development and then as Chief Counsel, Corporate Development.    Before joining BT, he was a partner in DDV, a European specialist telecommunications    consultancy firm. Prior to this, he held the position of Vice President and    General Counsel at BellSouth with responsibility for the European operations    of the Air Call and Dataserv groups and worked on cellular and mobile data    licence bids and start-ups throughout Europe.
**Executive Management          Team**
mmO2’s Executive    Committee comprises Messrs. Erskine (Chairman), Finch, Gröger, McGlade    and Thexton and the following senior executives:

**Danuta Gray (44) CEO O2    Ireland**

Danuta Gray joined the Company from    BT, where she was employed since 1984. Before transferring to her present    role in July 2001, Ms Gray was Senior Vice President of BT Wireless’s    businesses in Europe. Prior to this, she was a General Manager of BT Mobile,    Leeds from 1994 to 1999, Sales Manager and Deputy General Manager of BT Global    Communications from 1992 to 1994 and Account Director for BT Global Communications,    Commercial Sector from 1990 to 1992. She also worked in various departments    as a manager and consultant for BT.

**Andrew Harley (42) Group HR Director**

Andrew Harley joined the Company    from BT, where he had worked since August 1980. Before being appointed as    Senior Vice President, HR, BT Wireless in February 2001, Mr Harley was Senior    Vice President, Human Resources, BTopenworld, BT’s fixed internet service    provider, and before that he was Human Resources Director for BT Cellnet.    Mr Harley was also Human Resources Director for Telenordia in Sweden.

**Richard Poston (43) Director    Corporate Communications**

Richard Poston joined the Company    in September 2001. Previously Mr Poston was the Director of Communications    for TI Group from 1999 to 2001 and prior to this Director of Corporate Communications    for Racal Electronics from 1994 to 1999. He held a number of corporate communications    and public affairs roles in Racal Electronics. During this time, he was closely    involved with the early growth of Vodafone leading to its demerger from Racal    and the formation of Camelot Group, operator of the National Lottery, in which    Racal was a major shareholder. He started his career in the Royal Navy where    he served from 1978 to 1986.

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**Sohail Qadri (42) Group Director    Business Development & Strategy**

Sohail Qadri joined O2    UK (previously called BT Cellnet) in 1993 as Director of Operations and Strategy.    In 1997, Mr Qadri became Director of Mobility, Group Strategy and Development    for BT before taking on his current role. Prior to joining BT Cellnet, he    was a Principal Consultant at Coopers & Lybrand, now PricewaterhouseCoopers.

**David Williams (45) Chief Technology    Officer**

David Williams joined the Company    on 3 February 2003 and was appointed to the Executive Committee on this date.    Mr Williams joined the Company from Cingular Wireless, where he was Vice President    for Strategic Planning. Prior to the merger of SBC Wireless and BellSouth    Cellular in the US to form Cingular, he ran all technological operations for    SBC Wireless west region. He joined SBC Wireless following the acquisition    of Pacific Bell Mobile Services by that company and was instrumental in integrating    the two networks. After working for both Orange and Vodafone in the UK, he    relocated to the US in 1996 to direct the build-out of one of the US’s    first digital mobile networks for Pacific Bell.

Details of those companies and partnerships    outside the mmO2 Group of which the directors, officers and members    of the executive committee are or have been directors or partners at any time    since 1 July 1998, are as follows:
**Name****Directorships and Partnerships**  David VarneyCable and Wireless Public          Limited Company*, BG Group plc*, Transco plc*, Transco Holdings plc*,          Oil Industries Club Limited (The)*, Business in the Community.  Peter ErskineThe Link Stores Limited*,          Concert Communications Company*.  David FinchExel plc*.  Rudolf GrögerT-Systems International          GmbH*, Debis Systemhaus GmbH*.  David McGladeCatch TV Acquisition Corporation*,          Pure Matrix Inc.*, The Link Stores Limited.  Kent ThextonSolect Technology Ltd*,          Avista, Casero.  Andrew Sukawaty1Cable Broadband Wireless          Inc.*, My.Net International Ltd*., Nupremis Inc*, Post.com Limited*,          Powerwave Technologies Inc, Telenet BidCo N.V., American PCS Communications          LLC*, American PCS L.P.*, American Personal Communications Holdings          Inc.*, APC PCS LLC*, APC Realty and Equipment Company LLC*, Cox Communications          PCS L.P.*, Cox PCS Assets LLC*, Cox PCS License LLC*, NetTelco L.P.*,          Pegaso Inc.*, Sprint Spectrum Holding Company L.P.*, WirelessCo L.P.*,          Cable Partners Europe LLC.  David ArculusEarls Court & Olympia          Limited, Barclays plc, Severn Trent plc, Geest plc*, IPC Group Limited*,          The Guiton Group Limited*.  David ChanceFreeview Plus (Newsinco.166),          Granada plc, Intertrust Technologies Inc.*, Modern Times Group, Sunderland          plc, British Sky Broadcasting Group plc*, RBM (Car Park) Limited*, Richmond          Bridge Mansions Limited*.  Stephen HodgeShell Petroleum Company          Limited*, Shell Pensions Trust Limited, Lloyd’s of London Franchise          Board.  Neelie KroesNIB Capital          N.V.*, Port Support International B.V.*, VIB*, Brambles Industries Ltd.          (Australia)*, Royal Nedlloyd, Ballast Nedam, NCM Holding N.V.*, Prologis,          Corio, Fondel Finance B.V., Lucent Technologies, New Skies 
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 Satellites,          P&O Nedlloyd, Volvo Group, Thales Group, Nederlandse Spoorwegen,          Meyermonitor B.V.  Ian MeakinsUnited Distillers UK plc,          Champagnes et Spiritueux Associes, Lothian Distillers Limited, Moet          Hennessy Distribution, Neggma S.A., UDV (SJ) Limited, United Distillers          Denmark A/S, Diageo Hellas S.A., Vedima International Getranke-Vertriebs          GmbH, W&A Gilbey (South Africa) (Proprietary) Limited, London International          Group plc*, UDV Portugal-Distribuidora de Bobidas, Lda*, United Distillers          Companhia Velha, Limitada*, The North British Distillery Company Limited*.  Paul Myners2The European Private Equity          Partnership*, Gartmore Distribution Trust plc*, Gartmore Capital Strategy          Fund Limited*, Gartmore Capital Strategy Portfolio Limited*, Gartmore          Fund Managers Limited*, Gartmore Investment Limited*, Gartmore Global          Trust plc, Gartmore Investment Management plc*, McLean, Budden Limited*,          Nippon Credit Gartmore Investment Management Limited*, Orange plc*,          National Westminster Life Assurance Limited*, National Westminster Bank          plc*, Gartmore Share Equity Trust P.L.C., Guardian Media Group plc,          Marenwood Limited*, National Maritime Museum Cornwall Trust, PowerGen          plc*, PowerGen UK plc*, Royal Academy Trust, GSET Dealing Ltd*, GMIT          Subsidiary Ltd*, Guardian Newspapers Ltd, Nationwide Asset Management          Holdings Limited*, Marks and Spencer Group plc, The Bank of New York,          Nationwide UK Holding Company Limited*, Asset Management Holding plc*,          Glyndebourne Arts Trust, Aspen Insurance Holdings Limited.  Philip BramwellNew Cellular Holdings          plc*, DDV Telecommunications Strategy NV*, BT Wireless Investments Ltd*.  Richard PostonRacal Group Services Limited*,          TI Corporate Services Limited*.  Sohail QadriMaxis Communications Berhad*,          SFR S.A.*, Rogers Wireless Communications, Inc*.   *Past directorships/partnerships1My.Net International Ltd        is being wound up by way of a creditors’ voluntary liquidation. In        May 2001, the date of the last assessment by the directors of My.Net International        Ltd, the shortfall to creditors was estimated at £5 million.2Mr Myners, a director          was a divisional director of British & Commonwealth Holdings PLC          until his resignation on 12 March 1990. His resignation followed          the disposal by the company of its subsidiary, Gartmore Investment Management          Limited, of which Mr Myners was Chairman and Chief Executive. On          3 June 1990, the company was placed into administrationn. The circumstances          leading up to that company being placed into administration were the          subject of a report by the Department of Trade and Industry. Mr Myners          was not the subject of criticism in this report. The administration          is ongoing. At the date of this annual report, the amount of the shortfall          to creditors is approximately £18 million.  **B.****Compensation**
The discussion in this section forms    a remuneration report that has been prepared by the Remuneration Committee    (the Committee) and has been approved by the Board.

This remuneration report complies    with the Directors’ Remuneration Report Regulations 2002 (the Regulations),    which apply to the Company for the first time this year. This report sets    out how the principles of the Combined Code (the UK guide for corporate governance    for publicly listed companies in the UK) relating to executive Director remuneration    are applied by the mmO2 Group.

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The Regulations require the Group’s    auditors to report to shareholders on the auditable part of this remuneration    report and to state whether, in their opinion, that part of this remuneration    report has been properly prepared in accordance with the Companies Act 1985    (as amended by the Regulations). The auditable sections of the report include    those relating to Directors’ remuneration and benefits, share incentive    schemes and pension benefits.

A resolution will be put to shareholders    at the Annual General Meeting on 30 July 2003 inviting them to consider and    approve this remuneration report.

**Membership and responsibilities    of the Remuneration Committee**

The Committee consists entirely    of independent non-executive Directors who are independent of management and    free from any business or other relationship which could materially interfere    with the exercise of their judgement. No member of the Committee has any personal    financial interest, other than as a shareholder, in the matters to be decided    by the Committee.

During the year the Committee was    chaired by Andrew Sukawaty, and its other members were Stephen Hodge, Neelie    Kroes, Ian Meakins and Paul Myners. David Chance was invited to, and attended,    Committee meetings during January, February and March 2003 following his appointment    as a non-executive Director on 21 January 2003. The Chairman and    Chief Executive Officer are invited to attend meetings of the Committee, save    that they are absent when their own remuneration is under consideration. Biographies    can be found in Item 6, “Directors, Senior Management and Employees    – A. Directors and Senior Management”.

The Committee is responsible for    determining policy on the remuneration and performance of executive Directors,    the Company Secretary and General Counsel and members of the Executive Committee    as described throughout this Item 6.B. It determines, within agreed terms    of reference, specific remuneration packages for each of the executive Directors,    the Company Secretary and General Counsel and members of the Executive Committee,    including:
•service contracts;  •salaries;  •benefits;  •pension rights;  •any compensation payments;          and  •the operation of the mmO2          Executive Share Portfolio (the Portfolio).
The Committee has responsibility    for agreeing any awards or options granted under the Portfolio.

The Committee takes advice from    both inside and outside the Group on a range of matters, including the scale    and composition of the total remuneration package payable in comparable companies    to people with similar qualifications, skills and experience.

The following people and organisations    provided advice or services that materially assisted the Committee in its    consideration of Directors’ remuneration matters during the year ended    31 March 2003:
•the Committee consulted          the Chief Executive Officer on matters relating to the remuneration          of the other executive Directors who report to him. The Chairman and          Andrew Harley, Group HR Director, were consulted in relation to the          remuneration of all executive Directors.  •the Committee also had          access to advice from independent executive remuneration consultants,          New Bridge Street Consultants, on all aspects of executive remuneration.          New Bridge Street Consultants were appointed by the Committee and provided          no other services to the Company during the financial year.
The committee met six times between    1 April 2002 and 31 March 2003.

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**Compliance**
The Group has complied with the    Combined Code’s provisions relating to Directors’ remuneration throughout    the year ended 31 March 2003.

**Remuneration policy**

The Committee operates on the principle    that executive Directors, the Company Secretary and General Counsel and members    of the Executive Committee should be provided with appropriate incentives    to encourage superior performance and should, in a fair and responsible manner,    be rewarded for their contribution to the success of the Group.

mmO2 is committed to    developing and maintaining appropriate remuneration strategies which attract,    retain and motivate key people. The Company is committed to aligning the remuneration    of senior executives across the whole business who may have different remuneration    histories. In addition, the Committee considers it vital to align the interests    of the leadership team with those of shareholders, and to link a significant    proportion of the package to shareholder value.

The remuneration policy for the    executive Directors, the Company Secretary and General Counsel and members    of the Executive Committee is based on the following principles:
•base pay will generally          be positioned at the median of the relevant market, but due consideration          is given to executive wage levels in other companies and to general          wage levels elsewhere in the Company;  •emphasis will be placed          on providing a total cash and total compensation package that has potential          to be upper quartile for high performance; and  •performance-related remuneration          will seek to align the interests of executive Directors with those of          the shareholders through the imposition of stretching business performance          targets and share based long-term incentives.
The policy has been designed to    provide an appropriate balance between fixed remuneration and variable reward,    which is linked to the performance of the Group and the individual. Presently,    on the basis of achievement of “on-target” bonus and the annualised    value of performance related long-term incentives, approximately 55 per cent    of each executive Director’s total remuneration will be derived from    the variable elements of reward (annual bonus and long-term incentives) with    approximately 45 per cent being derived from the fixed elements (base salary,    pensions and benefits in kind).

The Committee will review the total    remuneration of the executive Directors annually to ensure adherence to the    above.

This remuneration report sets out    the Company’s policy on executive Directors’ remuneration for the    year ending 31 March 2004 and, so far as practicable, for subsequent years.    The inclusion in the report of the remuneration policy in respect of subsequent    years is required by the Regulations. However, the Committee believes it is    appropriate to operate a dynamic policy which evolves and adjusts in light    of changing circumstances, both internally and in the wider market. In operating    such a dynamic policy, the Committee has discretion in determining the actual    levels of the variable elements of remuneration, such as annual bonus and    long-term incentives. Accordingly, while the Committee is able to state its    remuneration policy for the year ending 31 March 2004 with reasonable    certainty, of necessity, it is likely to change over time. Any changes in    policy for subsequent years will be described in future reports on Directors’    remuneration, which will continue to be subject to shareholder approval. All    statements in this report in relation to remuneration policy for subsequent    years should be read in light of this paragraph.

**Elements of remuneration**

Executive remuneration comprises:    base salary, annual incentives (bonus), long-term incentives, pensions and    benefits. The long-term incentive schemes and the bonus are performance-related,    and the Committee regards them as key elements in the executive Directors’    remuneration package.

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**Base salary**

Base salaries for all executive    Directors, the Company Secretary and General Counsel and other Executive Committee    members are reviewed (but not necessarily increased) annually by the Committee.    Salary increases are made when the Committee believes that this would result    in a better reflection of past and future contribution, level of responsibility,    competitiveness and criticality to the business. In considering base salaries    the Committee makes reference to market information and data for comparable    positions in comparable businesses.

As at 31 March 2003, David Varney    (Chairman) received an annual salary of £500,000. The Committee had    recommended an annual salary increase of 5 per cent to David Varney for the    year ended 31 March 2003 which he waived. From 1 April 2003, however,    in line with a reduction in time commitment, Mr Varney’s annual salary    will be reduced to £350,000. As at 31 March 2003, the annual salaries    payable to Peter Erskine, Chief Executive Officer, and David Finch, Chief    Financial Officer, were £545,000 and £375,000 respectively. With    effect from 1 June 2003 their annual salaries will be £620,000    and £400,000 respectively.

Rudolf Gröger (CEO O2    Germany), David McGlade (CEO O2 UK) and Kent Thexton (Chief Data    and Marketing Officer) were appointed to the Board on 1 April 2003 with salaries    of €550,000, £360,000 and £330,000 respectively.

**Annual incentives**

In respect of the year ended 31    March 2003, mmO2 operated an annual incentive scheme based on a    balance of key performance indicators, including EBITDA, cash flow, revenue    and customer satisfaction targets. Targets were determined at the start of    the financial year and agreed by the Committee. The Committee has discretion,    by exception, to adjust bonuses up or down where the incentive outcomes do    not in its view fully reflect the performance of the relevant executive Director.    The bonuses remain subject to the stated maximums for each executive Director.

Bonus as a percentage of salary    payable for the year ended 31 March 2003 was for the Chief Executive Officer    65 per cent of salary for achieving on-target performance and a maximum    of 100 per cent. For the Chief Financial Officer, the percentages were 50    per cent and 75 per cent respectively. Bonuses are not pensionable. David    Varney does not participate in annual incentive arrangements.

In the year ended 31 March 2003,    Peter Erskine earned an annual bonus of £387,000. David Finch earned    an annual bonus of £206,250.

The annual incentive arrangements    for the year ending 31 March 2004 will be based on a balance of key performance    indicators, including EBITDA, cash flow, revenue and customer satisfaction    targets. Targets were determined by the Committee at the start of the financial    year.

For the year ending 31 March 2004,    the percentage of salary payable to the Chief Executive Officer at on-target    and maximum will remain unchanged at 65 per cent and 100 per cent respectively.    The Chief Financial Officer’s bonus potential will also be 65 per cent    at on-target and 100 per cent at maximum to reflect his performance and key    contribution to the business.

The new executive Directors each    have an on-target and maximum bonus potential of 80 per cent and 120 per cent    of salary for the year ending 31 March 2004. These reflect the Company’s    policy of driving and rewarding superior performance for these key contributors    to business success.

**Long-term incentives**

The Portfolio is the primary vehicle    for aligning the interests of key employees and executive Directors with those    of shareholders. It comprises three elements:
•performance shares;  •share options; and  •restricted shares.

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The Committee is responsible for    the operation of the Portfolio. The Committee actively reviews the most appropriate    elements of the Portfolio to use from time to time to incentivise participants.    In the year ended 31 March 2003 only the share option element of the    Portfolio was operated. It is the Committee’s intention that no executive    Director or employee should participate in all three elements in the same    year. Participation is solely at the discretion of the Committee, and all    employees of the mmO2 Group, including executive Directors, are    eligible to be invited to participate. The Committee determines the appropriate    performance targets to be applied to awards and options and reviews the extent    to which they have been met.

During the year ended 31 March 2003,    the Committee undertook a comprehensive review of its long-term incentive    policies in light of experience since the demerger from BT, developments in    both market and best practice and the impending changes in the accounting    treatment of share plans.

As a result the Committee has concluded    that it will operate the Performance Share element of the Portfolio as the    primary form of long-term incentive for the year ending 31 March 2004. This    is to:
•provide the opportunity          for a more robust performance condition, thereby more clearly aligning          the interests of executives with those of shareholders; and  •align more closely the          benefits received by participants with the accounting charges likely          to be incurred by the Company.
Awards and options are not pensionable    and may not be assigned or transferred except on a participant’s death,    when they may be assigned to the participant’s personal representatives.    The Committee will keep under review the issue of whether an ongoing personal    shareholding requirement should be introduced for executive Directors and    senior executives.

The Committee is satisfied that    all the schemes described below constitute a well-considered overall plan    for executive Directors’ long-term remuneration. These schemes are kept    under regular review to take account of changing circumstances. Share incentive    scheme payments are not taken into account for pension purposes.

**Performance shares element**

Under this element of the Portfolio    shares will be awarded and will normally vest subject to the satisfaction    of a predetermined and challenging performance condition, as well as continued    employment with the Company. The performance condition will relate to the    total shareholder return (TSR) performance of the Company when compared with    the TSR performance of the constituent companies of the FTSE E300 Telecoms    Service Index as at the date of award. TSR compares the net return to a mmO2    plc shareholder (share price growth and assumed reinvestment of any dividends)    with that of a shareholder in each of the comparator companies. The FTSE E300    Telecoms Service Index represents the 22 largest European telecommunications    companies with market capitalisation ranging between £1.9 billion and    £84 billion. The Index includes three UK-based companies.

After reviewing the various types    of performance measures in common usage, the Committee concluded that it wished    to continue to operate TSR as the performance measure given that, in the view    of the Committee, it is the most appropriate means of aligning the interests    of executives with those of shareholders in the context of the Company’s    current state of development. Several potential comparator groups were considered    and the Committee concluded that comparison with the constituents of the E300    Telecoms Service Index provided the most clear measure for determining the    success or otherwise of the management team at mmO2 against similar    companies.

These shares will normally vest    in full if the Company’s TSR performance places it at or above the upper    quartile of the comparator group over a fixed three-year period. No vesting    will occur if the Company’s TSR performance places it below the median    of the comparator group. If the Company’s TSR performance places it at    the median, 30 per cent will vest. If the Company’s TSR performance is    between the median and upper quartile, the shares will vest on a straight-line    basis. There will be no retesting opportunities.

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In addition awards will only vest    to the extent that the Committee is satisfied that the Company’s TSR    performance is a genuine reflection of the Company’s underlying financial    performance over the period. In circumstances where the Committee makes adjustments    on this basis it will explain its reasoning in the subsequent report on Directors’    remuneration.

The Company’s relative TSR    performance will be periodically measured and reported to the Committee and    participants. This measurement will be undertaken by an independent third    party.

**Share options element**

Following the review of long-term    incentives by the Committee, it is not proposed to make any regular option    grants in the year ending 31 March 2004; however, the Committee reserves the    ability to grant options in exceptional circumstances; for example, if required    to secure an appointment.

Options granted in the year ended    31 March 2003 were granted on terms that they normally only become exercisable    on the third anniversary of grant subject to a demanding performance condition    being met. This relates to the TSR performance of the Company when compared    with the TSR performance of the constituent companies in the FTSE 100 Index    at the date of grant (the Comparator Group). The FTSE 100 was selected as    the Comparator Group as this was considered an objective group from a shareholder    perspective.

These options will only become exercisable    in full if, at one of the test dates described below, the Company’s TSR    performance places it at or above the upper quartile of the Comparator Group.    No part of the option will become exercisable if the Company’s TSR performance    places it below the median of the Comparator Group. If the Company’s    TSR performance places it at the median, 50 per cent will become exercisable.    If the Company’s TSR performance is between the median and upper quartile,    the option will become exercisable on a straight-line basis.

This performance target will first    be tested on the third anniversary of grant; if the target is not satisfied    in full after this period, it can be retested on two subsequent occasions,    on the fourth and fifth anniversaries of grant, extending the length of the    performance period at each test. The proportion of options that can be exercised    will increase if the Company’s TSR performance improves between the test    dates.

For options granted in the year    ended 31 March 2003, the first performance test is expected to be July 2005.    TSR performance from 18 July 2002 (the start of the performance period) to    31 March 2003 places mmO2 at 2nd position within the Comparator    Group. As noted above, these options will only become exercisable in full    if the Company’s TSR performance meets the relevant target at one of    the test dates described above.

Each of the executive Directors    was made a grant of share options with an aggregate exercise price equal to    three times salary in July 2002. Details of these grants can be found in Item    6. “Directors, Senior Management and Employees – B. Compensation    – Directors’ Remuneration – Executive Share Options”.
**Restricted shares element**
Awards under this plan will be solely    at the discretion of the Committee. There are currently no intentions to make    any awards under this plan in the forthcoming financial year; however, the    Committee reserves the ability to grant awards in exceptional circumstances    – for example, if required to secure an appointment.

 

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**Performance graphs**
The performance graphs below illustrate    the Company’s total shareholder performance over the period from 19 November    2001, when the Company was first listed following its demerger from BT, to    31 March 2003 compared to that of each of the FTSE 100 Index and the FTSE    Technology, Media and Telecommunications (TMT) Index over the same period.    These graphs have been prepared in accordance with the Regulations. The FTSE    100 Index was selected by the Committee because it is recognised as an externally    valid and robust comparator group of UK-based companies of similar size to    mmO2 in terms of market capitalisation. The FTSE TMT Index, which    the Company outperformed, was chosen because it more closely compares the    Company with its sector.

 

The graphs look at the value to    31 March 2003 of £100 invested in mmO2 on 19 November 2001    compared with the value of £100 invested in the FTSE 100 or FTSE TMT    Indices respectively. The other points plotted are the values at the intermediate    financial year-ends.
**Former long-term incentives**
These are described on pages 86 and  87.

**All-Employee share plans**

The Committee believes that it is    in the interests of all employees across the business to be given the opportunity    to own mmO2 shares, and wishes to encourage this by taking advantage    of favourable tax treatment where available for employee shareholdings.

Executive Directors are eligible    to participate in the Company’s all-employee share schemes on the same    terms as other employees. The schemes are:
•the mmO2 Sharesave          Plan, under which the Directors can grant options to all employees across          the business to acquire shares at an exercise price set at a discount          of up to 20 per cent to the market value of a share at the time of invitation.          This scheme operates within specific tax legislation in the UK (under          which savings contributions towards the aggregate exercise cost of the          option cannot exceed £250 per month) and exercise of these options          is not subject to satisfaction of a performance target;  •the mmO2 Share          Ownership Plan, under which the Directors can award shares to UK employees          on a variety of tax-favoured terms. This scheme operates within specific          tax legislation, and there are no performance conditions attached to          awards of shares.

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**Pension benefits**
There are pension arrangements in    place in the main jurisdictions in which the mmO2 Group operates.    Schemes vary in accordance with local market practices in each jurisdiction,    and as such there are several arrangements in place for executive Directors,    the Company Secretary and General Counsel and Executive Committee members,    including 401k plans and final salary schemes.

Each of the executive Directors    is entitled to final salary related pension benefits up to the statutory earnings    cap. In addition, they are entitled to supplementary pension benefits in respect    of earnings above the statutory earnings cap (comprising unfunded final salary    related benefits in the case of Peter Erskine and funded defined contribution    benefits in the case of David Finch). Peter Erskine’s pension arrangements    provide for a total pension of two-thirds of final salary at age 60, inclusive    of any retained benefits from his previous employment, and a widow’s    pension of two-thirds of his pension. The majority of his pension is provided    outside the mmO2 Pension Plan as an unfunded benefit promise from    the Company. The increase in his accrued pension and transfer value at 31    March 2003 is partly as a result of the increase in pay at separation from    BT which now fully impacts on his accrued pension.

David Finch’s pension arrangements    provide for an annual accrual of 1/30th of the earnings cap subject to any    restriction due to retained benefits. In addition, he is entitled to a supplementary    defined contribution benefit, the level of which is determined on an annual    basis. For the year ended 31 March 2003 this was equal to 32.5 per cent of    base salary; 21 per cent paid to a Funded Unapproved Retirement Benefit Scheme    (FURBS), and 11.5 per cent paid as a cash supplement. David Varney has no    contractual entitlement to participation in pension arrangements.

The pension arrangements provide    for life cover of four times salary.

The Committee, having considered    the policy for executive Directors’ pension provision in light of the    launch of the new mmO2 Pension Plan on 1 July 2002, made no changes    to the existing provisions for either Peter Erskine or David Finch.

Details of pension arrangements    within mmO2 are set out in note 8 to the financial statements,    included in Item 18.
**Other benefits**
The main benefit provisions in the    contracts of executive Directors are a company car or cash equivalent; healthcare    for the executive and family; dental care for the executive and spouse and    personal tax and financial planning costs reimbursed to a maximum of £5,000    per annum. Life cover of four times salary is provided for David Varney.
**Contracts and notice          periods**
It is the Committee’s general    policy that executive Directors will have contracts and service agreements    with the same provisions. Where this may not be possible initially, every    effort will be made to revert to the Committee’s policy as soon as practicable.

Peter Erskine entered into a service    agreement with mmO2 dated 14 September 2001 and effective from    24 October 2001. The notice period required by the Company to terminate    this agreement is 12 months. The Company may in its discretion terminate without    notice and make a payment in lieu of notice to Peter Erskine equal to the    sum of 12 months’ pay, the value of employers’ pension contributions,    benefits, and a bonus payment of not less than the previous year’s bonus.    This may be paid in a lump sum or in monthly instalments until the end of    the notice period or, if earlier, such time as Peter Erskine obtains qualifying    alternative employment. This payment in lieu of notice provision does not    prevent the Company from terminating in breach of contract, which may enable    the Company to pay a reduced amount by requiring greater mitigation. On termination    of Peter Erskine’s employment within 12 months of a change of control,    mmO2 is obliged to make a liquidated damages payment equal to the    base salary, the value of employer pension contributions and benefits for    the notice period, plus additional payments generally equal to the annual    bonus potential for that year, and in respect of the loss of rights under    share incentive schemes.

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David Finch entered into a service    agreement with mmO2 dated 14 September 2001 and effective from    19 November 2001. The notice period required by the Company to terminate    this agreement is 12 months. The Company may in its discretion terminate this    agreement without notice and make a payment in lieu of notice to David Finch    equal to the sum of 12 months’ pay, the value of employers’ pension    contributions, benefits and a bonus payment of not less than the previous    year’s bonus. This may be paid in a lump sum or in monthly instalments    until the end of the notice period or, if earlier, such time as David Finch    obtains alternative employment. This payment in lieu of notice provision does    not prevent the Company from terminating in breach of contract, which may    enable the Company to pay a reduced amount by requiring greater mitigation.    On termination of David Finch’s employment within 12 months of a change    of control, mmO2 is obliged to make a liquidated damages payment    equal to the base salary, the value of employer pension contributions and    benefits for the notice period, plus additional payments generally equal to    the annual bonus potential for that year, and in respect of the loss of rights    under share incentive schemes.

With effect from 1 April 2003, David    Varney serves as Chairman under a letter of appointment dated 31 March 2003.    Mr Varney’s time commitment has been reduced to an average of between    two and three days per week, and the annual salary payable to Mr Varney has    been reduced to £350,000. The previous annual salary was £500,000    for full-time work. Mr Varney’s appointment will end no later than the    date of the Company’s Annual General Meeting in 2004. The appointment    may be terminated at any time prior to this date by either party giving three    months’ notice.
**Recent appointments          to the Board**
In respect of the additional executive    Director appointments to the Board which took effect on 1 April 2003 (Rudolf    Gröger, David McGlade and Kent Thexton), full remuneration details including    contracts and notice periods will be available in the remuneration report    relating to the year ending 31 March 2004. Remuneration policy as set out    above is reflected in the contracts and remuneration of these new Board members.    However, in recognition of local market practice in Germany Mr Gröger’s    contract is initially for a fixed term ending on 31 October 2005, but    will convert to a one-year rolling contract after the end of this initial    period. Additionally, in the event of termination of Mr Gröger’s    employment within 12 months of a change of control of mmO2 or O2 Germany,    the employer is obliged to make a cash payment equal to two times his base    salary and bonus. The amount of bonus payable will be that expected for on-target    performance. On-target bonus is equal to 80 per cent of base salary.
**Remuneration of non-executive          Directors**
The Company recognises that the    demand for non-executive Directors reflects a market for such positions. In    appointing non-executive Directors the Company has regard to the practice    of other companies and the increasing time demands on non-executive Directors,    which go well beyond attendance at relevant committee meetings.

The fees of non-executive Directors    are determined by the Chairman and Chief Executive Officer who have access    to independent advice. Up to 31 March 2003:
(a)the annual fee payable          to the non-executive Directors (other than Andrew Sukawaty) was £30,000          (plus an additional fee of £3,000 per annum for membership of          each Board Committee in excess of one Committee); and   (b)the Deputy Chairman of          the Company (Andrew Sukawaty) was entitled to a fee of £100,000          per annum.
In the year ended 31 March 2003,    the remuneration of non-executive Directors was reviewed in light of the Higgs    Report on the “Role and Effectiveness of Non-Executive Directors”.    It was agreed that with effect from 1 April 2003 the annual fee payable to    the non-executive Directors (other than Andrew Sukawaty) will be £40,000,    plus an additional fee of £5,000 for chairmanship of a committee, and    an additional fee of £5,000 each for membership of the Audit and Remuneration    Committees and £3,000 for membership of the Nomination Committee. The    fee for the Deputy Chairman of the Company remains unchanged.

The level of fees for the non-executive    Directors will be reviewed on an annual basis.

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During the year ended 31 March 2003    the Board approved a proposal for payment of non-executive Directors’    fees in shares. Under this arrangement each non-executive Director has agreed    that a portion of their after-tax fee, equivalent to a minimum of 50 per cent    and up to a maximum of 100 per cent, would be invested in shares (the Share    Portion). Fees are paid quarterly in arrears and the shares are allotted on    the same basis. The number of shares to be allotted in respect of each quarter    is calculated by dividing the Share Portion for the quarter by the average    middle market quotation on the three dealing days preceding the date of the    quarterly allotment.

Each non-executive Director has entered  into a letter of appointment with mmO2 which covers, amongst other  items, their terms of appointment and a general statement of their role and  duties. Non-executive Directors are appointed initially for three years. Towards  the end of that period, the Board will consider whether to continue their appointment,  which will then become terminable on 12 months’ notice from either the  Company or the Director. The initial terms of three years began at demerger  or 20 December 2001 in the case of Ian Meakins, and 21 January 2003 in the case  of David Chance. (Since the adoption of this remuneration report, each of the  non-executive Directors have agreed to enter into revised letters of appointment  with mmO2 which cover, in greater detail, their terms of appointment  and their role and duties and specify that their appointment will become terminable  on one month’s notice by either the Company or the Director). The non-executive  Directors do not participate in any of mmO2’s pension or incentive  arrangements.
***Policy on outside          appointments***
It is the Company’s policy    to support the undertaking of external directorships or similar roles by executive    Directors, including the Chairman and senior managers where it is beneficial    for both the individual concerned and the Company and where it does not detract    from their responsibilities to the Company. Appointments relating to executive    Directors and Executive Committee members require the prior approval of either    the Chairman or the Board. Appointments relating to other senior managers    require the prior approval of the Chairman.

 

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**Directors’ remuneration**
Directors’ remuneration (excluding    pension arrangements) was as follows:
  **Salary        and fees** **Annual        and****special bonuses** **Benefits****excluding pensions1** **Gains        from****long-term****incentive****plans2** **Total**          **2003** **2002** **2003** **2002** **2003** **2002** **2003** **2003** **2002**              **£** **£** **£** **£** **£** **£** **£** **£** **£** David          Varney  500,000  393,0563 —  150,000  17,308  24,537  —  517,308  567,593 Peter          Erskine4  537,500  449,464  387,000  250,000  36,651  31,350  48,3035 1,009,454  730,814 David          Finch  370,833  235,2156 206,250  145,000  48,158  13,388  109,3337 734,574  393,603 Andrew          Sukawaty8  100,000  76,25611 —  —  —  —  —  100,000  76,256 David          Chance8  7,06412 —  —  —  —  —  —  7,064  — Stephen          Hodge8  36,000  18,00013 —  —  —  —  —  36,000  18,000 Neelie          Kroes9  36,000  21,09914 —  —  —  —  —  36,000  21,099 Ian          Meakins8  36,000  10,18415 —  —  —  —  —  36,000  10,184 Paul          Myners10  36,000  21,09914 —  —  —  —  —  36,000  21,099  1Benefits include car provision          or cash allowance, healthcare, financial planning, dental care, home          security and life cover.2There were no gains from          long-term incentives in the year ended 31 March 2002.3From date of initial appointment          18 June 2001. Appointed to the Board 31 August 2001.4Highest paid Director.          Appointed to the Board 31 August 2001.5Gain on vesting of 1997          Executive Share Award as described in Item 6. “Directors, Senior          Management and Employees – B. Compensation – Former long-term          incentives – BT Executive Share Plan”.6From date of initial appointment          1 August 2001. Initially appointed to the Board 31 August 2001.7Gain on vesting of Restricted          Share Award as described in Item 6. “Directors, Senior Management          and Employees – B. Compensation – Directors’ Remuneration          – Restricted Shares”.8Elected to receive 50          per cent of their Directors’ fees after tax in shares.9Elected to receive 75          per cent of Directors’ fees after tax in shares.10Elected to receive 100          per cent of Directors’ fees after tax in shares.11Initially appointed as          Deputy Chairman 31 August 2001.12Appointed 21 January 2003.13Initially appointed 1          October 2001.14Initially appointed 31          August 2001.15Appointed 20 December          2001.
 

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**Pension provisions**   **Total        accrued****pension1****At 31 March** **Transfer        value****of accrued****benefit2,3****At 31 March** **Increase        in****accrued pension****during year** **Increase        in****accrued pension****during year****(including****inflation)** **Transfer****value of real****increase in****accrued benefit****(less Directors’****contributions)2,3** **Increase        in****transfer****value less****Directors’****contri-****butions**  **Directors’****contri-****butions**    **2003** **2002** **2003** **2002** **2003** **2002** **2003** **2002** **2003** **2002**                 **£000** **£000** **£000** **£000** **£000** **£000** **£000** **£000** **£000** **£000** **£000** **£000** Peter          Erskine                                     mmO2          Pension Plan  33  29  324  337  3  3  4  4  16  23  (28) 15 Unfunded          Plan  160  117  2,155  1,562  41  29  43  30  543  380  593  0               Total  193  146  2,479  1,899  44  32  47  34  559  403  565  15               David          Finch  5  2  40  20  3  24  3  24  24  20  20  0                1The accrued annual pension          represents the maximum defined benefit liability for mmO2.          The amounts will be reduced by any retained benefits from previous employment.2The transfer values have          been calculated on the basis of actuarial advice. The transfer values          of the Inland Revenue approved benefits have been calculated in accordance          with Actuarial Guidance Note GN11 using the assumptions adopted by the          mmO2 Pension Plan Actuary. The unapproved element of pension          benefits has been valued using assumptions appropriate to the FRS 17          accounting standard, which are consistent with GN11 principles.3These figures represent          liabilities of the Company and the mmO2 Pension Plan, not          sums paid to the individual.4Part year figure.
Under arrangements to provide Mr    Finch with supplementary pension benefits in respect of earnings above the    statutory earnings cap, for the year ended 31 March 2003 the Company contributed    £77,875 to a money purchase funded unapproved retirement benefits scheme    (FURBS) in respect of Mr Finch (£43,167 for the year ended 31 March    2002). In addition, a cash supplement of £42,646 was paid to Mr Finch    (£26,833 for the year ended 31 March 2002).
**Share price**
The closing market price of mmO2    shares at 31 March 2003 was 44.75p and the range from 1 April 2002 to that    date was 37p to 68.25p.
**Beneficial interests          in ordinary shares**
The beneficial interests of the    Directors and their immediate families in mmO2 ordinary shares    of 0.1p each as at 31 March 2003 are set out in the table below.
  **As        at 31 March 2003** **As        at 1 April 2002**     David          Varney  277,2371,2,3 274,019 Peter          Erskine  534,7101,3 405,444 David          Finch  608,9641,3 304,211 Andrew          Sukawaty4  45,738  — David          Chance4,5  —  — Stephen          Hodge4  74,159  60,000 Neelie          Kroes4  27,529  — Ian          Meakins4  16,465  — Paul          Myners4  228,320  200,000          1Since 31 March 2003 David          Varney, Peter Erskine and David Finch have each acquired 471 additional          ordinary shares under the terms of the mmO2 Share Ownership          Plan. There have been no other changes in the Directors’ beneficial          and non-beneficial interests in share capital, including options to          subscribe for shares, or in the debentures of the Company and its subsidiaries          between 31 March 2003 and 13 May 2003.
 

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2Includes 1,000 shares          in the form of 100 mmO2 American Depositary Shares (ADSs)          (1 ADS = 10 ordinary shares).3Includes shares held by          the trustee in respect of the mmO2 Share Ownership Plan.4Additionally, shares will          be allotted as a result of the reinvestment of fees for the quarter          to 31 March 2003. These shares are expected to be allotted following          the publication of this report.5Appointed 21 January 2003. **Executive share options**
The table below shows the options    which were granted and/or remained outstanding under the share option element    of the Portfolio held by Directors during the year ended 31 March 2003. Vesting    is subject to the satisfaction of corporate performance criteria as detailed    in Item 6. “Directors, Senior Management and Employees – B. Compensation    – Share options element”. The table also shows options over BT shares    held by David Varney prior to demerger. These were re-granted over mmO2    shares as indicated.
   **Plan**  **Grant        date**  **Number        at 1 April 2002**  **Options Granted during        the year ended 31 March 2003**  **Exercised**  **Lapsed**  **Number        at 31 March 20031**  **Exercise        price**  **Date exercisable**            David          Varney  mmO2 Legacy share        option plan2  22 June 2001  491,272  —  —  —  491,272  101.7p  2004-2011    Executive share option plan  23 November 2001  1,724,137  —  —  —  1,724,137  87p  23 November 2004 –        23 November 2011    Executive share option plan  25 July 2002  —  3,260,869  —  —  3,260,869  46p  25 July 2005 –        25 July 2012                              Peter          Erskine  Executive share option plan  23 November 2001  1,724,137  —  —  —  1,724,137  87p  23 November 2004 –        23 November 2011       25 July 2002  —  3,554,347  —  —  3,554,347  46p  25 July 2005 –        25 July 2012                              David          Finch  Executive share option plan  23 November 2001  1,206,896  —  —  —  1,206,896  87p  23 November 2004 –        23 November 2011       25 July 2002  —  2,445,652  —  —  2,445,652  46p  25 July 2005 –        25 July 2012  1In the financial year          ended 31 March 2003, options were granted for nil consideration under          the share option element to 1,041 employees, based on their past and          anticipated future contribution to the business. The maximum face value          of shares granted under option was three times salary although most          grants were at 30 per cent to 60 per cent of salary. The exercise price          for such options is not set at a discount to the market value of shares          under option at the time of grant.2As at 31 March 2003. The          options were re-granted on 20 December 2001.
No share options granted to Directors    lapsed or were exercised during the year.

Unrealised gains on executive share    options were nil as at 31 March 2003.
**Sharesave options**
The table below shows the sharesave    options over mmO2 ordinary shares held by Directors during the    year ended 31 March 2003.
    **Number        at**     **Number        at**           **1 April**     **31 March** **Exercise**      **Grant        date** **2002** **Exercised** **Lapsed** **2003** **Price** **Date        exercisable**          David          Varney  21        December 2001  12,978  —  —  12,978  73.2p  14        February 2005-14 August 2005 Peter          Erskine  21 December        2001  12,978  —  —  12,978  73.2p  14 February        2005-14 August 2005 David          Finch  21 December        2001  12,978  —  —  12,978  73.2p  14 February        2005-14 August 2005 
 

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**Restricted shares**
The table below shows the number    of restricted shares awarded to executive Directors under the operation of    the Portfolio.
    **Number        held**     **Number        held**        **at        1 April**     **at        31 March**      **Grant        date** **20021** **Vested** **Lapsed** **2003** **Vesting        date**         Peter          Erskine2  23/11/01  575,815  —  —  575,815  23/11/04 David          Finch3  23/11/01  604,606  201,535  —  403,071  201,535 on        23/11/03                   201,536 on        23/11/04                      1Restricted share awards          were granted to a small group of senior executives (including executive          Directors) shortly after demerger. Most awards were granted on terms          that they will normally only vest on the third anniversary of grant          if the participant builds up a significant personal shareholding in          the Company within 18 months of grant and retains this until the vesting          date as well as remaining in employment with the mmO2 Group          until this time. The awards vest on a pro rata basis if the participant          builds up a lower personal investment. As at 31 March 2003 both Peter          Erskine and David Finch had met their shareholding requirement, and          are required to maintain that shareholding until the third anniversary          of award in order for their restricted shares awards to vest in full.2Vesting is subject to          the satisfaction of a personal shareholding requirement as set out in          note 1. The personal shareholding requirement for Peter Erskine is equal          to the number of shares under award.3Vesting is subject to          the satisfaction of a personal shareholding requirement. The personal          shareholding requirement for David Finch is equal to one-third of the          shares under award. Under the terms of David Finch’s Restricted          Share Plan award 201,535 shares vested on 22 November 2002. In relation          to awards granted on 23 November 2001 which vested on 22 November 2002          the market value of a share on these two dates was 87 pence and 54.25          pence respectively. **BT legacy share awards**
In addition, Peter Erskine has the    following mmO2 shares under award from BT Legacy Share Awards,    a description of which can be found below. Following demerger, these awards    were adjusted to relate solely to mmO2 shares, and any performance    measure has been translated into a measure of mmO2 performance    from demerger to the end of the performance period.
    **Number        of**     **Number        of**        **mmO2        shares**     **mmO2        shares**        **1        April**     **31        March**      **Year        of award** **2002** **Vested** **Lapsed** **2003** **Vesting        date**         BT          Executive Share Plan  19971  256,137  107,939  148,198  —  2002    19982  154,057  —  —  154,057  2004    19993  144,198  —  —  144,198  2005                 Total     554,392  107,939  148,198  298,255                    BT          Incentive Share Plan  20004  312,750  —  —  312,750  2003                 Total     312,750        312,750                    BT          Deferred Bonus Plan5  2001  127,656  —  —  127,656  2004                 Total     127,656        127,656                     1As a result of the vesting          of the 1997 BT Executive Share Plan award 107,939 mmO2 shares          were transferred to Peter Erskine on 1 August 2002. The remaining shares          under this award lapsed under the terms of the award. The market value          of a share on 1 August 2002 was 44.75 pence.2The performance period          for the 1998 BT Executive Share Plan ended on 31 March 2003. The performance          condition was not met and as a result 154,057 shares will lapse following          the year end.3The value of those shares          which would transfer to the Director under the Executive Share Plan          at the end of the five-year performance period providing the performance          criteria has been satisfied in full and based on a share price of 44.75          pence as at 31 March 2003 would be £64,528.4The performance period          for the 2000 BT Incentive Share Plan ended on 31 March 2003. The performance          condition was not met and as a result 312,750 shares will lapse following          the year end.5Vesting of shares awarded          under the BT Deferred Bonus Plan is subject only to the continued employment          of the Director with the Company.

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**Non-beneficial interests**
At 31 March 2003, Peter Erskine    had a non-beneficial interest in 5,853,475 mmO2 ordinary shares    held in trust by Ilford Trustees (Jersey) Limited as trustee of the BT Deferred    Bonus Plan, BT Incentive Share Plan, BT Retention Share Plan and BT Executive    Share Plan.

At 31 March 2003, Peter Erskine    and David Finch had a non-beneficial interest in 5,824,695 mmO2    ordinary shares and 81,573 mmO2 American Depositary Shares held    in trust by Computershare Trustees (C.I.) Limited as trustee of the mmO2    Restricted Share Plan.
**Executive Committee**
The aggregate remuneration of members    of the Executive Committee and the Company Secretary and General Counsel,    other than executive Directors, for services in all capacities during the    2003 financial year was £8.7 million. In addition, loans outstanding    to senior officers of the Company as at 31 March 2003 were £150,000.

The members of the Executive Committee    and the Company Secretary and General Counsel beneficially own less than 1    per cent of the Company’s outstanding ordinary shares.

**Former long-term incentives**

**BT Legacy Share Awards**

A number of key employees (including    the Chief Executive Officer) of mmO2 were participants in BT share    plans prior to demerger. The awards made under these plans have been adjusted    so that they relate solely to mmO2 shares, and any performance    measure has been translated into a measure of mmO2 performance    from demerger to the end of the performance period. On vesting these awards    will be satisfied in existing mmO2 shares held by an employee trust    which has already been funded by BT.

No further awards will be made under    these plans to mmO2 employees.

Details of Peter Erskine’s    shares under award from these plans are set out above, and a short description    of each is set out below.

**BT Deferred Bonus Plan (BT DBP)**

Awards of BT shares were made to    executives based on their performance in the financial year preceding the    relevant date of grant and vest after three years. Peter Erskine currently    has 127,656 mmO2 shares under award which will vest in 2004.

**BT Incentive Share Plan (BT ISP)**

Participants are awarded shares    which will normally vest at the end of a three-year period provided a predetermined    TSR target is met. The performance period for the 2000 BT ISP award ended    on 31 March 2003. The performance condition was not met and as a result 312,750    mmO2 shares held by Peter Erskine will lapse following the year    end.
**BT Executive Share          Plan (BT ESP)**
Awards under the BT ESP normally    vest at the end of five years provided a predetermined TSR target is met.    Awards of shares were granted in each of the years from 1994 to 1999. Under    the terms of the 1997 BT ESP award, 107,939 mmO2, shares vested    to Peter Erskine in August 2002. The performance period for the 1998 BT ESP    award ended on 31 March 2003. The performance condition was not met and as    a result 154,057 mmO2 shares will lapse following the year end.    Subject to performance 144,198 mmO2 shares will normally vest to    Mr Eskine in 2005.

If mmO2’s performance    in the year to 31 March 2003 were to continue at the same level, then none    of the remaining awards under the BT ESP would vest, as the relevant performance    targets would not be met.

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**mmO2 Legacy Option    Plan**

Subsisting options over BT shares    granted under BT executive share option plans have been replaced with options    over mmO2, shares, granted under the mmO2 Legacy Option    Plan, for those participants now employed by mmO2. The replacement    options were granted on the same terms, and are exercisable between the same    dates, as the options for which they were exchanged.

There are no performance conditions    relating to the vesting of these options other than continued employment with    the mmO2 Group. This reflects the terms of the underlying BT Option    plan. The legacy options will be satisfied using new issue shares, and options    granted under this plan do not count towards the dilution limits established    for mmO2 share option plans.

David Varney has 491,272 shares    under option under this plan, which are shown on page 84.

**Cash-based incentives**

Prior to demerger a variety of cash-based    incentive plans operated in the mmO2 businesses in the UK, Germany,    the Netherlands and Ireland and also within O2 Online. mmO2    has taken steps to terminate some plans early and does not intend to renew    the others when they reach the end of their performance periods. Each of the    incentive plans is briefly described below.

Under a plan introduced by O2    Germany in November 2000, eligible employees are entitled, no earlier than    April 2004, to a payment based on the value of the goodwill of O2    Germany at that time. Payment is only made if O2 Germany achieves    positive EBITDA in the financial year prior to payment.

Under a plan operated by O2    Netherlands, key employees and management are entitled to payments determined    by reference to O2 Netherlands’ achievement of business targets.    The final payment in respect of this plan will be made in the year to 31 March    2004 and is not affected by the disposal of O2 Netherlands. Following    this all participation will cease and no further awards will be made.

Under a plan operated by O2    Ireland, key employees and management are entitled to cash payments by reference    to the performance of O2 Ireland up to the date of payment. The    final payment in respect of this plan will be made in the forthcoming financial    year. Following this all participation will cease and no further awards will    be made. A substantial part of the plan (also cash-based), related to the    growth in value of O2 Ireland, has been replaced with grants and    awards under the Portfolio.

A plan operated for O2    Online’s management team was terminated in July 2001 by reference to    O2 Online’s achievement of pre-set performance conditions    up to that date. The crystallised cash amounts were paid to participants in    instalments between 30 November 2001 and 31 March 2003, subject to their continued    employment up to the relevant date. No further payments will be made under    this arrangement.
**C.****Board Practices**
The Board continues to seek compliance    with corporate governance best practice and supports high standards in corporate    governance. The application, during the financial year, of the principles    in Section 1 of the Combined Code are described in the appropriate sections    of this statement and in the report on directors’ remuneration. The Directors    consider that the Company has fully complied with the provisions set out in    Section 1 of the Combined Code.

**The Board**

The Board comprises the Chairman,    Chief Executive Officer, Chief Financial Officer, three further executive    Directors, and seven independent non-executive Directors, one of whom, Andrew    Sukawaty, the Deputy Chairman, is recognised as the senior independent Director    to whom concerns can be conveyed independently of the Chairman.

The Board has regular scheduled    meetings throughout the year together with an annual off-site conference to    review and discuss corporate strategy. Additional meetings are held as necessary.    During the financial year ended 31 March 2003, the Board met ten times. Whilst    not actively involved in the day-to-day management of the 

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Company, the non-executive Directors    play an important role in bringing their independent judgement and considerable    knowledge and experience to the Board’s deliberations. The Directors’    biographies appear in Item 6. “Directors, Senior Management and Employees    – A. Directors and Senior Management”.

The Board is responsible for the    overall Group strategy and competent management of the affairs of the Group.    The Board has a formal schedule of matters specifically reserved to it for    decision, including the approval of strategic plans and the annual operating    plan, significant investments and capital projects, and treasury and risk    management policies.

Guidelines are in place concerning    the content, presentation and delivery of papers by management to Directors    for each Board meeting, so that the Directors have enough information to be    properly briefed. Where issues arise at Board meetings, the Chairman ensures    that all Directors are properly briefed and, where necessary, appropriate    further enquiries are made.

All Directors have access to the    advice and services of the Company Secretary who is responsible to the Board    for ensuring that Board procedures are followed and maintaining compliance    with all applicable rules and regulations. The removal of the Company Secretary    is a matter for the Board as a whole. There is an agreed procedure for Directors    to take, if necessary, independent professional advice at the Company’s    expense.

At the time of a Director’s    appointment to the Board, an internal induction programme is provided on the    Group’s strategic and business plans and developments to date. The content    of this induction programme and, where appropriate, any additional training    which may be required by the Director, is kept under review. Directors are    also advised of their legal and other obligations as a Director of a listed    company.

Non-executive Directors are appointed    initially for three years. Towards the end of that period, the Board will    consider whether to continue their appointment for a further three year period.    Under the terms of the new letter referred to above such appointment can become    terminable on one month’s notice from either the Company or the Director.

In accordance with the Combined    Code and the Company’s Articles of Association, all Directors submit    themselves for re-election at least every three years.

The Board has adopted appropriate    governance policies dealing with the conduct of Board affairs and delegations,    which are described below.
***Board Committees***
The Board has delegated authority    to the following committees on specific matters. All of the committees have    formal terms of reference. Minutes of meetings are formally recorded.

**Chairman’s Committee. Chairman:    David Varney**    The Chairman’s Committee advises and assists the Chairman in the preparation    for Board meetings. The Committee also acts on behalf of the Board between    scheduled Board meetings, in exceptional circumstances, where it is not possible    or practicable to convene a meeting of the Board. In addition to the Chairman,    Peter Erskine and David Finch are members of the Committee.

**Audit Committee. Chairman: Stephen    Hodge**    During the financial year, all the non-executive Directors were members of    the Audit Committee. Since 1 April 2003, the Committee comprises Stephen Hodge,    David Arculus, David Chance, Neelie Kroes and Ian Meakins. The Committee monitors    the adequacy of the Group’s accounting policies and financial reporting;    reviews the half-yearly and annual financial statements before they are presented    to the Board; monitors internal financial and non-financial controls, including    the system for maintaining these controls; maintains a liaison with the internal    and external auditors, keeping under review the scope and results of the audit,    its cost effectiveness and the independence and objectivity of the auditors    and matters relating to the provision of, including the extent of, their 

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non-audit services. The Committee    focuses primarily on compliance with legal requirements, accounting standards    and the rules of the UK Listing Authority and other regulators. The Committee    also receives formal reports from the Head of Internal Audit who attends meetings.

The Committee meets four times a    year, with part of each meeting currently being held between the Committee    members and the external auditors in private. Since the year-end, the Board    has adopted a formal policy governing the independence of the Company’s    external auditors and defining those non-audit services that may be provided    to the Group, including those which require the prior approval of the Audit    Committee.

**Finance Committee. Chairman:    David Varney**    The Finance Committee considers financing and investment decisions concerning    the Group. The Committee normally meets four times a year. In addition to    the Chairman, Peter Erskine and David Finch are members of the Committee.

**Nomination Committee. Chairman:    David Varney**    During the financial year, all the non-executive Directors were members of    the Nomination Committee. Since 1 April 2003, the Committee comprises    David Varney, David Arculus, David Chance, Paul Myners and Andrew Sukawaty.    The Committee is responsible for reviewing the structure, size and composition    of the Board and for recommending candidates for the approval of the Board    for Board membership.

**Remuneration Committee. Chairman:    Andrew Sukawaty**    During the financial year, all the non-executive Directors were members of    the Remuneration Committee. Since 1 April 2003, the Committee comprises    Andrew Sukawaty, Stephen Hodge, Neelie Kroes, Ian Meakins and Paul Myners.    The Committee is responsible for determining the framework and policy for    the remuneration of the Chairman, all executive Directors, the Company Secretary    and General Counsel and members of the Executive Committee and for determining,    within agreed terms of reference, specific remuneration packages for each    of these, including any pension rights, any compensation payments and the    implementation of executive incentive schemes. The Committee will operate    on the principle that members of the executive management should be provided    with appropriate incentives to encourage superior performance and should,    in a fair and responsible manner, be rewarded for their individual contributions    to the success of the Group. The discussion pertaining to directors’    remuneration is found in Item 6. “Directors, Senior Management and Employees    – B. Compensation”.

The Chief Executive Officer, Peter    Erskine, together with the other executive Directors and his senior executive    team, is responsible for the executive day-to-day running of the Company.    He chairs the **Executive Committee**, which is responsible for the preparation    and maintenance of strategic plans for the Group and for monitoring the performance    of the Group as a whole.

During the financial year, a **Disclosure    Committee** was established to consider the materiality of information and    the respective disclosure obligations in releases made to regulatory bodies.    This Committee assists the Chief Executive Officer and Chief Financial Officer    to evaluate the effectiveness of the Group’s disclosure controls and    procedures to ensure that material information relating to the Group is made    known to them by others.
**Future governance**
The Board will continue to keep    its corporate governance aligned with best practice and intends to carry out    a further review following the Financial Reporting Council announcement of    its amendments to the Combined Code in response to Derek Higgs’ review    of the role and effectiveness of non-executive directors and Sir Robert Smith’s    report on the role of audit committees. The Group will continue to comply    with New York Stock Exchange listing rules and the SEC rules implementing    the Sarbanes-Oxley Act of 2002, where they apply to the Group as a foreign    issuer.
**Internal control** ***Responsibility***
The Board has overall responsibility    for the Group’s systems of internal control and risk management and for    reviewing the effectiveness of those systems. Such systems are designed to    manage, rather than eliminate, the risk 

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of failure to achieve business objectives;    any system can provide only reasonable and not absolute assurance against    material misstatement or loss.

The Board sets the policy on Internal    Control and Risk Management that is implemented by management. This policy    is in accordance with the Turnbull Guidance “Internal Control: Guidance    for Directors on the Combined Code”.

Internal Control compliance, Risk    Management and Internal Audit are the responsibility of separate functions    within the Company but they operate holistically to deliver an effective internal    control system.
***Risk management***
The Group has a detailed ongoing    risk management process for identifying, evaluating and managing the significant    risks faced by the Company. This process has been reviewed and updated during    the year.

Risk assessment and evaluation take    place as an integral part of the Group’s annual strategic planning cycle    and this includes the consideration of major business risks by senior management.

The risk management process comprises    the following key elements:
•Group operating companies          and key functions in the business carry out risk assessments, using          workshop techniques, to determine the nature and extent of risks facing          the Company;  •the Executive Committee          undertakes a formal Group-wide risk review every six months, which is          reviewed by the Board. Risk management is a formal item at each Executive          Committee meeting;  •registers are produced          which detail significant risks and indicate likelihood, impact, and          the level of controls, together with mitigating actions;  •the profile of the significant          risks from the registers is summarised and tracked using a consolidated          risk map;  •senior management is accountable          and responsible for managing risks within the Group, supported by dedicated          risk managers. These risk managers assist in embedding risk management          within the business culture, via risk forums, team meetings, training          sessions and the Company’s intranet;  •the Internal Audit function          also promotes effective risk management in the business’ operations;          and  •a fast track process for          identifying and responding to evolving risks and significant changes          to existing risks so that they are reported to an appropriate level          of management and corrective action is taken. ***Control environment***
The Audit Committee, on behalf of    the Board, considers the effectiveness of the operation of internal control    procedures in the Group during the financial year. The Audit Committee, which    meets quarterly, reviews reports from the Executive Committee and from both    the internal and external auditors, keeping under review the scope and results    of the audit and the cost effectiveness, independence and objectivity of the    auditors and reports its conclusions to the Board. The Audit Committee has    carried out these actions during the year.

Senior management report each six    months to the Chief Financial Officer on the operation of internal controls    in their area of responsibility and report any significant control failings    or weaknesses.
***Annual assessment***
The Chief Executive Officer receives    annual reports from senior executives responsible for major Group operations    with their opinions on the effectiveness of the operation of internal controls    during the financial year.

The Board has reviewed the nature,    extent and changes to the significant risks to the business. The Group’s    current key risks are summarised in “Item 3. Key Information – D.    Risk Factors”.

The Internal Control and Risk Management    policy has been reviewed during the year.

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The Group’s internal auditors    carry out regular assessments of the quality of the Internal Control and Risk    Management process as part of their cyclic risk based audit approach.

These processes have been in place    for the whole of the financial year and have continued up to the date on which    this document was approved.

***Business ethics***To reinforce our commitment to achieve best practice in our standards    of business ethics and corporate governance, mmO2 has introduced    new guidelines on Business Principles covering the whole Group, which have    been endorsed by the Chairman. This followed an extensive review process involving    internal consultation and an external benchmarking exercise. A copy of the    statement is available on the Company’s web site. These high-level principles    are supported by a confidential helpline and e-mail facility, which are available    to employees who have questions regarding the application of the principles.    The Company also continues to require its business partners and suppliers    to apply these principles when dealing with mmO2.

**Investor relations**    The Company is committed to ongoing development of open and effective communications    with shareholders. The Chief Executive Officer and the Chief Financial Officer    regularly meet with institutional shareholders and analysts and the Company’s    Annual General Meeting is used as an opportunity to communicate with private    investors and encourage their participation. All substantial issues, including    the adoption of the annual report and financial statements, are proposed at    the Annual General Meeting on separate resolutions. At the Annual General    Meeting the number of proxy votes to be cast for or against each resolution,    together with the number of proxy abstentions, are indicated after the vote    has been dealt with on a show of hands. It is intended that the Chairmen of    the Audit, Nomination and Remuneration Committees will be available to answer    questions at the Annual General Meeting.

**Going concern**The Directors have reviewed the Group’s liquid resources and borrowing    facilities and the Group’s budget and cash flow forecast for the year    to 31 March 2004 and outline projections for the subsequent year. On the basis    of this review, the Directors are satisfied that the Group has adequate resources    to continue in operational existence for the foreseeable future. For this    reason, the Directors adopt the going-concern basis in the preparation of    the financial statements.

 

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  **D.****Employees**
The following tables present information    concerning employee numbers and costs.
  **2003** **2002** **2001**        **No.** **No.** **No.** Average          number of full time employee equivalents (including Executive Directors)          by class of business:             Mobile          telecommunications  11,643  13,999  13,731    Mobile          internet services  269  307  138    Other          businesses  866  810  474      **Total          employees**  12,778  15,116  14,343      Average          number of full time employee equivalents (including Executive Directors)          by geographic area:             UK  7,081  8,750  7,746    Germany  3,527  4,084  4,046    Other  2,170  2,282  2,551      **Total          employees**  12,778  15,116  14,343      
The costs incurred in respect of    these employees were:
  **2003** **2002** **2001**        **£m** **£m** **£m** Wages          and salaries  446  483  291 Social          security costs  47  59  26 Employee          share ownership scheme  4  2  2 Pension          costs (note 8)  24  26  23      **Total          staff costs**  521  570  342      
At 31 March 2003, the Group employed    12,476 (2002: 14,300) full time employee equivalents.

In the United Kingdom, a number    of our employees are represented by two labour unions: Connect, which has    representation rights in respect of management employees and the Communications    Workers Union, which has representation rights in respect of clerical, engineering    and technical employees. Membership of these unions is individual and voluntary.    In addition, certain managers are represented by a non-unionised employee    representative body. Our other operating businesses also meet with their employee    representative bodies, or works councils, regularly. We believe that our businesses    have a good relationship with our employees and their representatives.

Approximately 67 per cent of our    permanent employees are covered by collective bargaining agreements. These    agreements are kept under review, with changes being made through discussion    with the relevant representative body as required.
**E.****Share ownership**
Under UK GAAP, the cost of shares    expected to be awarded under each plan is amortised evenly over the period    from the original date of grant of the particular award, to the time of vesting.    Under US GAAP, the Group adopted the disclosure-only option in SFAS No. 123,    “Accounting for Stock-Based Compensation”. Accordingly, the Group    accounts for share options in accordance with APB Opinion No. 25, “Accounting    for Stock Issued to Employees”, under which compensation expense is recognised    to the extent that the fair market value of the shares optioned exceeds the    option exercise price. Aggregate share compensation of £3 million (2002:    £2 million) has been recognised under APB No. 25 in the year. A charge    of £2 million was recognised under UK GAAP.

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**Share Option and Purchase Schemes**The Group operates savings-related    share option schemes for its employees and those of participating subsidiaries    and further share option schemes (the mmO2 Share Option Plan and    the mmO2 Legacy Option Plan) for selected Group employees.

***Sharesave Scheme***    The mmO2 Sharesave Plan is a savings-related share option scheme    available to all employees. Share options are normally exercisable on completion    of a three-year or five-year Save-As-You-Earn contract. Under this scheme,    the option exercise price is set at a 20 per cent discount to the market price    at the date of grant. Similar savings related schemes exist for Group employees    based outside the UK.

***mmO2 Share Option    Plan***From 1 April 2002 to 31 March 2003, options were granted for nil consideration    to 1,041 employees. All such options have an exercise price equal to the market    value at grant date. These options were granted on the terms that they normally    only become exercisable on the third anniversary of grant, subject to certain    performance criteria. If these criteria are not met on the third anniversary    of grant, the performance goals will be retested on the fourth and fifth anniversaries.    Options under this scheme generally have a life of ten years.

***mmO2 Legacy Option    Plan***    Subsisting options over BT shares granted under BT executive share option    plans have been replaced with options over mmO2 shares, granted    under the Legacy Option Plan, for those participants now employed by mmO2.    The replacement options were granted on the same terms, and are exercisable    between the same dates, as the options for which they were exchanged.

Options are normally exercisable    up until the tenth anniversary of the date of the original grant. The exercise    price of these options equalled the market value as at original grant date.

Options outstanding in relation    to Group employees under these share option schemes as at 31 March 2003 together    with their exercise prices and vesting periods, were as follows:
    **Options        outstanding over****ordinary shares** **Options        exercisable over****ordinary shares**       **Range          of exercise prices1** **Number****outstanding** **Weighted-****average****remaining****contractual****life** **Weighted-****average****exercise****price** **Number****exercisable** **Weighted-****average****exercise****price**         **m** **years** **£** **m** **£** £0.44  37  3  0.44  —  — £0.46  77  9  0.46  —  — £0.48-0.69  13  9  0.65  3  0.69 £0.73-0.84  8  2  0.73  1  0.83 £0.87  46  9  0.87  3  0.87 £0.91-2.29  5  7  1.36  2  1.64           186  8  0.60  9  1.02                          1Share options over American          Depositary Shares (ADS) have exercise prices termed in US Dollars. For          purposes of disclosure, these options’ exercise prices have been          translated into Sterling at the year end exchange rate. As each ADS          represents 10 ordinary shares, the number of options and exercise prices          have been adjusted by this ratio to reflect the options on a like for          like basis.
 

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Options granted, exercised and lapsed    in respect of Group employees under these share option schemes during the    years ended 31 March 2003, 2002 and 2001 were as follows:
  **Options        over****ordinary shares** **Options        over ADSs**       **Ordinary        shares1** **ADSs2**     **Range          of exercise prices1** **Savings-****related****share****options** **Other****share****options** **Weighted-****average****exercise****price** **Other****share****options** **Weighted-****average****exercise****price**         **m** **m** **£** **m** **£** Balance          at 31 March 2000  55  2  1.05  —  — Granted  10  2  1.82  —  — Exercised  (11) (1) 0.77  —  — Lapsed  (4) —  1.50  —  —        Balance          at 31 March 2001  50  3  1.37  —  — Lapsed          on demerger  (50) (3) 1.37  —  —        Balance          on demerger  —  —  —  —  — Granted  31  65  0.82  6  1.17 Lapsed  —  (2) 0.84  —  —        Balance          at 31 March 2002  31  63  0.82  6  1.17 Granted  37  81  0.45  —  — Lapsed  (23) (6) (0.72) (3) 0.87        **Balance          at 31 March 2003**  45  138  0.60  3  1.49                          1All          options granted, exercised, lapsed and outstanding for periods prior          to demerger have been adjusted to reflect the exchange ratio of 4.1266          shares of mmO2 per share of BT.2Share options over ADSs          have exercise prices termed in US Dollars. For purposes of disclosure,          these options’ exercise prices have been translated into Sterling          at the year end exchange rate. As each ADS represents 10 ordinary shares,          the number of options and exercise prices have been adjusted by this          ratio to reflect the options on a like for like basis. 
***mmO2 Restricted    Share Plan***Restricted share awards have been granted to a small group of senior    executives. Most of these awards were granted on terms that they will normally    only vest on the third anniversary of grant if the participant builds up a    pre-determined personal shareholding in the Group, and remains in employment    with the Group. Shares required to satisfy these awards are held in trust    during the restricted period. In accordance with APB No. 25, an expense has    been recognised to the extent that executives have commenced building their    personal shareholding. The weighted average grant date fair value of the 9.4    million shares granted under this plan in the year ended 31 March 2002    was £0.80. No shares were granted under this plan in the year ended    31 March 2003.

For disclosure purposes, the fair    value of all share options granted is estimated using the Black-Scholes option-pricing    model. The following weighted average assumptions were used for share options    granted by the Group:
  **2003** **2002** **2001**        **%** **%** **%** Annual          dividends  —  —  2 Expected          volatility  27  55  40 Risk          free interest rate  4  5  7      
The expected life applied in the    model anticipated the life of options extending one month later than the first    exercise date.

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Had compensation expense been determined    on the basis of fair value pursuant to SFAS No. 123, net loss and net loss    per share would have been as follows:
  **2003** **2002** **2001**        **in        £ millions, except per share****data which is stated in pence** **Net          loss**          As          reported  3,671  1,463  3,747      Pro          forma  3,676  1,463  3,750      **Net          loss per share**          As          reported  42.3  16.9           Pro          forma  42.4  16.9           
The weighted average fair value    of share options granted in the year ended 31 March 2003 was £nil (2002:    £0.16) for options exercisable one year after the date of grant, £nil    (2002: £0.22) for options exercisable two years after the date of grant,    £0.13 (2002: £0.35, 2001: £0.80) for options exercisable    three years after the date of grant and £0.23 (2002: £0.46, 2001:    £1.03) for options exercisable five years after the date of grant.

***BT Legacy Share Awards***    A number of key employees of mmO2 were participants prior to demerger    in BT share plans. The awards have been adjusted so that they relate solely    to mmO2 plc shares, and any performance measure has been translated    into a measure of the Group’s performance from demerger to the end of    the performance period. On maturity these awards will be satisfied in existing    mmO2 shares held by an employee trust which has already been funded    by BT.

In accordance with the rules of    these plans the awards were converted into awards over mmO2 plc    shares on the basis of an adjustment factor of 4.1266.

**Incentive Share Plan, (ISP) and    Retention Share Plan, (RSP)**    Participants are awarded shares which will normally vest at the end of a three-year    period provided a pre-determined total shareholder return, (TSR), target is    met.

**Executive Share Plan, (ESP)**    Participants are awarded shares which will normally vest at the end of five    years provided a pre-determined TSR target is met.

**Deferred Bonus Plan, (DBP)**Awards of shares were made to executives based on their performance in    the preceding financial year and vest after three years. Under the DBP there    are no associated performance goals.

Under the Separation Agreement between    the Group and BT, it has been endorsed and agreed that all share awards required    under the ISP, RSP, ESP and DBP will be honoured by BT and will be satisfied    by issuance of existing mmO2 shares held by a BT trust which has    already been funded by BT. Thus, the Group is not responsible for any of the    options or shares under these schemes and will bear no compensation expense    in association with them.

Further details on the above plans    can be found by reference to Item 6. “Directors, Senior Management and    Employees – B. Compensation”.

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**ITEM        7****MAJOR SHAREHOLDERS          AND RELATED PARTY TRANSACTIONS**  **A.****Major Shareholders**
**Share and ADR prices**

At 30 June 2003, no person or company    is known to hold more than three per cent of the Company’s ordinary shares    except for those disclosed in the following table:
**Shareholder** **Number        of mmO2 plc****ordinary shares** **Percentage        of issued****ordinary share capital**    The          Capital Group Companies Inc.  976,870,022  11.27 Legal          & General Investment Management Limited  301,362,565  3.48     
The Company is not directly or indirectly    owned or controlled by any other company or any government.
  **Pence        per****ordinary share** **US$        per ADS**       **High** **Low** **High** **Low**         **pence** **pence** **$** **$** January          2003  50.75  44.25  8.40  7.23 February          2003  50.00  45.50  8.01  7.11 March          2003  50.00  42.00  7.85  6.65 April          2003  57.75  45.75  9.24  7.15 May          2003  61.50  53.75  10.05  8.42 June          2003  64.50  56.25  10.50  9.23       
The prices are the highest and lowest    closing middle market prices for mmO2 plc ordinary shares, as derived    from the Daily Official List of the London Stock Exchange, and the highest    and lowest sales prices of mmO2 plc ADSs, as reported on the New    York Stock Exchange, for the months indicated.

**Analysis of shareholdings**
      **Ordinary        shares of 0.1p each** **Size of shareholding****at 31 March 2003** **Number        of****shareholders** **Percentage****of total** **Number        of****shares held** **Percentage****of total**      1          – 500  881,078  53.92  228,968,612  2.64 501          – 999  391,086  23.93  273,372,625  3.15 1,000          – 9,999  355,708  21.77  718,091,666  8.28 10,000          – 99,999  4,814  0.30  91,024,650  1.05 100,000          – 999,999  838  0.05  326,499,980  3.77 1,000,000          – 4,999,999  351  0.02  793,287,188  9.15 5,000,000          and above  198  0.01  6,238,936,906  71.96       **Total**  1,634,073  100.00  8,670,181,627  100.00       
At 31 March 2003, the number of    holders of record of mmO2 plc ordinary shares in the USA was 3,427    with holdings of 2,213,767 ordinary shares, and the number of registered holders    of ADSs was 1,972 with holdings of 12,970,703 ADSs, representing 129,707,030    ordinary shares. Because certain of these ordinary shares and ADSs were held    by brokers or other nominees, the number of holders of record or registered    holders in the USA is not representative of the number of beneficial holders    or of the residence of beneficial holders.

 

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**Interest of management in certain    transactions**

During and at the end of the 2003    financial year, none of the Company’s Directors had a significant interest    in any material transaction in relation to the Group’s business.
**B.****Related Party Transactions**
None
**C.****Interests of Experts          and Counsel**
Not applicable.
**ITEM        8****FINANCIAL STATEMENTS**  **A.****Consolidated Financial          Statements and Other Financial Information** **Audited Consolidated          Financial Statements**
Please refer to Item 18 “Financial    Statements” for our audited consolidated financial statements.
**Legal Proceedings**
The Group does not believe there    are any pending legal proceedings which would have a material adverse effect    on the financial position or results of operations of the Group.
**Dividend Distributions**
The board of mmO2 currently    expects that all available cash from operations will be used to finance the    growth and development of the mmO2 businesses and to meet the mmO2    Group’s capital and other expenditure requirements. Therefore, the Company    does not anticipate paying dividends in the foreseeable future.

The Directors do not recommend the    payment of a dividend for the year ended 31 March 2003.
**B.****Significant Changes**
Except as disclosed in note 3 to    the financial statements in Item 18 with respect to the completion of the    sale of O2 Netherlands, there has been no significant change in    our financial or trading position since 31 March, 2003, the date to which    our audited consolidated financial statements were prepared.
**ITEM        9****THE OFFER AND LISTING**  **A.****Offer and Listing Details**
Our American Depositary Shares,    each representing ten ordinary shares of nominal value 0.1p each, have been    listed and traded on the New York Stock Exchange since 19 November 2001 under    the symbol “OOM”. Our shares have also been listed on the London    Stock Exchange since 19 November 2001 under the symbol “OOM”. Prior    to these listings, there was no public market for our equity securities.

The New York Stock Exchange and    the London Stock Exchange are the principal trading markets for our ADSs and    ordinary shares.

The high and low closing sale prices    of the ordinary shares on the London Stock Exchange and of the ADSs on the    New York Stock Exchange for each of the last 6 months can be found by reference    to Item 7. “Major Shareholder and Related Party Transactions – A.    Major Shareholders – Share and ADR prices”.
**B.****Plan of Distribution**
Not applicable.

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**C.****Markets**
The ordinary shares of the Company were listed on the London    Stock Exchange on 19 November 2001. On the same date ADSs were also listed    on the New York Stock Exchange. The ratio of ADSs to ordinary shares is 1:10.    The ADSs have been issued by JPMorgan Chase Bank as Depositary for the ADSs.
**D.****Selling Shareholders**
Not applicable.
**E.****Dilution**
Not applicable.
**F.****Expenses of the Issue**
Not applicable.
**ITEM          10****ADDITIONAL INFORMATION**  **A.****Share Capital**
Not applicable.
**B.****Memorandum and Articles          of Association**
Incorporated by reference to our Registration Statement on Form    20-F filed with the Securities and Exchange Commission on 20 September 2001,    and incorporated herein by reference except with respect to the following    change to the Articles of Association:

     On 20 December 2001, the one issued    redeemable preference share of £50,000 was redeemed, following which,    pursuant to a conditional special resolution passed on 11 September 2001,    the authorised redeemable preference share capital was sub-divided into and    redesignated as 50,000,000 ordinary shares with a face value of 0.1p each.
**C.****Material contracts**
The following contracts, not being contracts entered into in    the ordinary course of business, have been entered into by a member of our    Group and either:
•have been entered into          within the two years immediately preceding the date of this annual report          and are material: or  •contain any provision          under which any member of our Group has any obligation or entitlement          which is material at the date of this annual report:  (a)the Demerger Agreement          dated 18 September 2001 between mmO2 BT and BT Group plc.          The Demerger Agreement sets out the obligations of the parties in implementing          the steps to achieve the demerger transaction. Under the Demerger Agreement,          mmO2 agreed to transfer BT Group Investments to BT Group          plc. In exchange for such transfer, BT Group plc agreed to allot and          issue BT Group plc ordinary shares to mmO2 shareholders in          satisfaction of the dividend required to effect the last step of the          demerger transaction and that each mmO2 shareholder at the          demerger record time was entitled to receive one BT Group plc ordinary          share for each mmO2 ordinary share then held. No party to          this agreement has given any representation, warranty or indemnity to          the others and no party has any right to rescind this agreement.  (b)the Separation Agreement          dated 18 September 2001 between mmO2, BT Group plc, O2,          and BT, which was amended and restated on 31 October 2001. Under the          Separation Agreement, prior to the demerger transaction becoming effective,          BT agreed to convert into equity party of the intercompany debt owed          by the mmO2 Group to the BT Group such that the net indebtedness          (excluding trading balances) owed by the 
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 mmO2 Group (including the BT        Group) outstanding at the effective date of the demerger transaction was        approximately £500 million.   Following the demerger          transaction, mmO2 and BT Group plc also agreed to allocate          certain assets and liabilities and rights and obligations between their          respective groups. mmO2 was to be responsible for insuring          the ongoing activities of its business following the demerger transaction.   The allocation of assets          and liabilities in the Separation Agreement supplemented the asset and          share transfer agreements entered into between members of our Group          and the BT Group to effect the reorganisation.  (c)the Tax Agreement dated          18 September 2001 between mmO2 and BT Group plc. The Tax          Agreement contains provisions relating to, among other things, the allocation          of tax liabilities between the mmO2 Group and the BT Group,          the manner in which the groups will prepare and agree tax computations          and returns, the basis on which certain claims and elections can be          made (including the surrender of tax reliefs from one group to the other          and the ability of the BT Group to “roll over” capital gains          into assets owned by the mmO2 Group), the conduct of negotiations          and disputes with the tax authorities, the exchange of information relating          to their tax affairs and certain other administrative matters.  (d)the Wireless Trading Agreement          dated 14 September 2001 between O2 UK and BT. The Wireless          Trading Agreement provides that BT will continue to promote exclusively          our mobile telecommunications products and services to the business          market in the United Kingdom. This agreement is for an initial term          of three years and may be terminated by either party if the other does          not meet certain performance targets. Either party may also terminate          the agreement upon, among other things, material or persistent breach          or insolvency proceedings. Either party may also terminate the agreement          upon 12 months’ notice following a change of control of the other          party. mmO2 UK will pay BT a percentage of the revenue it          receives for sales to business customers introduced by BT. BT may also          buy mobile network capacity from O2 UK at wholesale prices          in order to provide communications solutions to its own business customers.          BT has undertaken to ensure that a specified minimum level of revenue          will be generated for O2 UK by sales through BT to business          customers contracting directly with O2 UK through BT as an          agent rather than through wholesale sales by O2 UK to BT.          Subject to limited exceptions, BT has agreed not to solicit business          customers who have contracts with O2 UK at the time the agreement          was entered into.  (e)the Sponsors’ Agreement          dated 18 September 2001 between mmO2, BT, Merrill Lynch International,          Morgan Stanley & Co. International Limited and Salomon Brothers          International Limited, pursuant to which Merrill Lynch International,          Morgan Stanley & Co. International Limited and Salomon Brothers          International Limited agreed to act as joint sponsors for mmO2          in connection with its admission. Under this agreement, mmO2          has given certain customary representations, warranties and undertakings          to the joint sponsors including as to the accuracy of the information          contained in the UK Listing Particulars, as to other matters relating          to the mmO2 Group and its businesses and in connection with          its admission BT has given certain limited warranties in connection          with the implementation of the reorganisation, the scheme of arrangement          and the demerger transaction and certain other matters.  (f)a syndicated credit facilities          agreement (which became available for drawdown on the date of our demerger),          dated 14 September 2001 (the “Facility Agreement”), between          mmO2 and O2 as borrowers, certain financial institutions          who have participated in the credit facility (the “Banks”).   The Facility Agreement          provides for the Banks to make available to mmO2 and O2          a five year committed £1,725 million multicurrency revolving credit          facility (“Tranche A”) and provides a 364 day committed £1,750          million multi-currency revolving facility (“Tranche B”).   Cash advances under Tranche          A are for general corporate purposes of the mmO2 Group. £1,000          million of Tranche B was refinanced through €1,000 million and          £375 million Eurobond issues launched in January 2002 and which          have a five-year and ten-year term, respectively. Tranche B matured          14 September 2001 and 
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 was replaced by a £300 million, 364        day syndicated committed multi-currency facility (the “Facility”).        The Facility was reduced to £150 million on 31 December 2002.   The facilities are guaranteed          by mmO2 in respect of drawings of each additional borrower,          and by such subsidiaries of mmO2 as are nominated by mmO2          and accede to the Facility Agreement as guarantors.  (g)A €5,000 million          Euro Medium Term Note Programme (the “Programme”), was established          for the issue of Euro Medium Term Notes (the “Notes”). Notes          issued will be constituted by a trust deed dated 18 December 2001          entered into between the Issuer and Bankers Trustee Company Limited.          Under the Programme, the Issuer may issue Notes denominated in any currency          under the terms and conditions as set out in an offering circular dated          18 December 2001 (the “Offering Circular”) up to €5,000          million (or its equivalent in other currencies) outstanding at any time.          The €1,000 million and £375 million Eurobond issues were          launched in January 2002 under the Programme.  **D.****Exchange Controls**
There are currently no exchange controls or other limitations    in the UK affecting security holders.
**E.****Taxation**
The following discussion is a general summary of certain material    UK tax and US federal income tax considerations under present law relevant    to the purchase, ownership and disposition of our shares or American Depositary    Shares (ADSs). It applies only if you are a US holder (as defined below),    you hold our shares or ADSs as capital assets and you use the US dollar as    your functional currency. It does not address the tax treatment of US holders    subject to special rules, such as banks, securities dealers, traders in securities    that elect to mark to market, insurance companies, tax-exempt entities, holders    of ten per cent or more of our voting shares, persons holding our shares or    ADSs as part of a hedge, straddle, conversion or constructive sale transaction    and persons that are resident or ordinarily resident in the United Kingdom.

This summary does not consider your particular circumstances.    It is not a substitute for tax advice. We urge you to consult your own tax    advisers about the particular tax consequences to you in light of your particular    circumstances of ownership of our shares or ADSs.

As used in this discussion, “US holder” means a beneficial    owner of our shares or ADSs that is (i) a US citizen or individual resident,    (ii) a corporation or certain other business entities organised under US law,    (iii) a trust subject to the control of a US person and the primary supervision    of a US court, or (iv) an estate the income of which is subject to US federal    income tax regardless of its source.
**UK taxation** ***Dividends***
No tax is required to be withheld at source from dividends paid    on our shares or ADSs. See “– US Federal Income Taxation –    Dividends”.
***Dispositions***
Except as discussed below, you will not be liable for tax on    capital gains realised on your disposal of our shares or ADSs unless you are    resident or ordinarily resident in the United Kingdom, or you carry on a trade,    profession or vocation in the United Kingdom through a branch or agency in    the UK for years in which your disposal occurs and our shares or ADSs are    or have been used, held or acquired for the purposes of such trade (or profession    or vocation), branch or agency.

If you are an individual who has been resident or ordinarily    resident in the United Kingdom during the five years before you disposed of    our shares or ADSs, you are likely to be liable for tax on capital gains if    you return to the United Kingdom, subject to any available exemption or relief.

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***UK Inheritance Tax***
Our ordinary shares will be assets    situated, and our ADSs are likely to be assets situated, in the United Kingdom    for the purposes of the UK inheritance tax. Subject to the discussion of the    UK-US estate tax treaty in the next paragraph, UK inheritance tax may apply    if you hold our shares or ADSs, and you gift them or die even if you are neither    domiciled nor deemed to be domiciled in the United Kingdom. If you transfer    our shares or ADSs at less than full market value, you may be treated as making    a gift. Special rules apply to gifts if the donor retains some benefit, to    close companies, and to trustees of settlements.

If your domicile is in the United    States for purposes of the UK-US estate tax treaty and you are not a UK national,    you will not be subject to UK inheritance tax if you die or gift our shares    or ADSs unless our shares or ADSs are part of the business property of a UK    permanent establishment or pertain to a UK fixed base of an individual used    for the performance of independent personal services.

The UK-US estate tax treaty provides    a credit mechanism if our shares or ADSs are subject to both UK inheritance    tax and to the US federal estate or gift tax.
***UK stamp duty and          stamp duty reserve tax***
UK stamp duty and stamp duty reserve    tax, or SDRT, are generally payable upon the issue and deposit of our shares    with the depository or its nominee in exchange for our ADSs evidenced by ADRs.    The current rate of stamp duty and SDRT imposed on these issues and transfers    is 1.5 per cent applied, in each case, to the value of the consideration or,    in some circumstances, to the value of our shares. The stamp duty or SDRT    is payable by the depository. In accordance with the terms of the deposit    agreement holders of our ADRs must reimburse the depository for the stamp    duty or SDRT.

No such SDRT or stamp duty will    however arise from the issuance and deposit of our shares pursuant to the    scheme of arrangement.

No UK stamp duty will be payable    on the transfer of our ADRs if the instrument of transfer is not executed    in the United Kingdom and remains outside the United Kingdom. Transfer of    our ADRs will not give rise to a liability for SDRT.

A transfer of our shares by the    depository to an ADR holder where there is no change in beneficial ownership    will result in UK stamp duty at the rate of £5 per transfer.

Transfers of our shares to persons    other than the depository or its nominee will give rise to UK stamp duty or    SDRT at the time of transfer or agreement to transfer, normally at the rate    of 0.5 per cent (rounded up, in the case of stamp duty, to the nearest £5)    of the amount payable for our shares. The purchaser usually pays SDRT or UK    stamp duty. If our shares are later transferred to the depository, additional    UK stamp duty or SDRT will normally be payable as described above.
**US Federal Income Taxation**
If the obligations contemplated    by the deposit agreement are performed in accordance with their terms, holders    of our ADSs generally will be treated for US federal income tax purposes as    the owners of our shares represented by those ADSs.
***Dividends***

For US federal income tax purposes,    the gross amount of any distribution (including any additional income arising    from a foreign tax credit claim as described below) paid to a US holder of    shares or ADSs will be treated as a dividend and taxed as ordinary income    to such US holder on the date of receipt by the depositary (in the case of    our ADSs) or the holder (in the case of our shares) to the extent paid out    of our current or accumulated earnings and profits, as determined for US federal    income tax purposes. Distributions in excess of our current and accumulated    earnings and profits will be treated first as a tax-free return of capital    to the extent of the US holder’s tax basis in the share or ADSs, and    to the extent in excess of such tax basis, will be treated as a gain from    a sale or exchange of such shares or ADSs. The dividends will not be eligible    for the dividends-received deduction 

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available to corporations. Dividends    paid in pounds sterling will be includible in income in a US dollar amount    based on the exchange rate in effect on the date received by the depository    (in the case of our ADSs) or the holder (in the case of our shares) whether    or not the payment is converted into US dollars at that time. Any gain or    loss you recognize on a subsequent conversion of pounds sterling for a different    amount generally will be US source ordinary income or loss.

If you hold our shares or ADSs and    you are eligible for benefits under the United Kingdom-United States Income    Tax Convention that was entered into force on 25 April 1980 (the 1980 Convention),    you may be entitled to a foreign tax credit for UK withholding tax. The amount    of the foreign tax credit equals the tax credit payment that you are entitled    to receive from the UK Inland Revenue. At current rates, a dividend of £90    entitles an eligible US holder to a Treaty payment of £10 which is completely    offset by a UK withholding tax of £10. Because the tax credit payment    and the withholding tax offset each other, the UK Inland Revenue neither makes    the payment nor collects the tax. The offsetting payments nevertheless have    US tax significance. If you elect the benefits of the 1980 Convention, you    must include the tax credit payment in your income and you can claim a foreign    tax credit for the UK withholding tax (subject to otherwise applicable limitations    on foreign tax credit claims). To make the election, you must file a completed    US Internal Revenue Service Form 8833 with your US federal income tax return    for the relevant year. The rules relating to the determination of the foreign    tax credit are complex. You should consult your own tax advisor regarding    the advisability of claiming the foreign tax credit, including the limitations    associated therewith and any alternatives available to you.

US holders should be aware that    a new United Kingdom – United States Income Tax Convention entered into    force on 31 March 2003 (the New Convention) and generally will have effect    in respect of dividends paid on or after 1 May 2003. Certain articles in the    New Convention limit or restrict the ability of a US holder to claim benefits    under the New Convention while similar provisions were not contained in the    1980 Convention. Under the New Convention there will be no hypothetical Treaty    payment and no notional UK withholding tax applied to a dividend. Therefore,    it will not generally be possible for US holders to claim a foreign tax credit    in respect of any dividend paid by us on or after 1 May 2003. However, a US    holder entitled to benefits under the 1980 Convention may elect to have the    provisions of the 1980 Convention continue for an additional twelve months    if the election to apply the 1980 Convention would result in greater benefits    to the holder. If a US holder were to make an effective election, the discussion    above with respect to dividends subject to the 1980 Convention would continue    to apply to dividends paid by us prior to 1 May 2004. US holders should consult    their own tax advisors to determine whether the US holder is eligible for    benefits under the 1980 Convention and the New Convention, whether, and to    what extent, a foreign tax credit will be available with respect to dividends    received from us, and whether it may be advisable in light of the US holder’s    particular circumstances to elect to have the provisions of the 1980 Convention    continue in force until 1 May 2004.
***Dispositions***
You will recognize capital gain    or loss on the sale or other disposition of our shares or ADSs in an amount    equal to the difference between adjusted tax basis in the shares or ADSs and    the amount realized from the sale or other disposition. Gain or loss upon    the disposition of shares or ADSs generally will be US source gain or loss,    and will be treated as long-term capital gain or loss if, at the time of the    disposition, the holding period for the shares or ADSs exceeds one year. If    you are an individual, any capital gains generally will be subject to US federal    income tax at preferential rates if specified minimum holding periods are    met. The deductibility of capital losses is subject to significant limitations.

The surrender of ADSs in exchange    for shares pursuant to the Deposit Agreement governing the ADSs will not be    a taxable event for US federal income tax purposes. Accordingly, you will    not recognize any gain or loss upon such surrender.

A US holder that receives pounds    sterling on the sale or other disposition of our shares will realize an amount    equal to the US dollar value of the pounds sterling on the date of sale (or,    in the case of cash basis or electing accrual basic taxpayers, the settlement    date). A US holder will have a tax basis in the pounds sterling received 

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equal to the US dollar amount realized.    Any gain or loss realized on a subsequent conversion of the pounds sterling    for a different amount generally will be US source ordinary income or loss.
***Recent US Tax Law          Changes Applicable to Individuals***
Recent US tax legislation generally    has reduced the rates of tax payable by individuals (as well as certain trusts    and estates) on many items of income. Under the Jobs and Growth Tax Relief    Reconciliation Act of 2003 (the “2003 Act”), the marginal tax rates    applicable to ordinary income generally have been lowered effective 1 January    2003. Furthermore, for capital assets held for over one year and sold or exchanged    on or after 6 May 2003 but in taxable years beginning before 1 January 2009,    the maximum rate of tax generally will be 15 per cent (rather than the higher    rates of tax generally applicable to items of ordinary income). Finally, “qualified    dividend income” received in taxable years beginning after 31 December    2002 and beginning before 1 January 2009, generally will be taxed at the rates    applicable to these capital gains i.e., a maximum rate of 15 per cent) rather    than the rates applicable to other items of ordinary income. For this purpose,    “qualified dividend income” generally includes dividends paid on    shares in US corporations as well as dividends paid on shares in certain non-US    corporations if, among other things, (i) the shares of the non-US corporation    (including ADRs backed by such shares) are readily tradable on an established    securities market in the United States, or (ii) the non-US corporation is    eligible with respect to substantially all of its income for the benefits    of a comprehensive income tax treaty with the United States which contains    an exchange of information program (qualifying treaties are to be identified    by the Secretary of the US Treasury Department). We currently anticipate that    dividends paid by us with respect to our shares or ADSs should constitute    “qualified dividend income” for US federal income tax purposes and    that US holders who are individuals should be entitled to the reduced rates    of tax, as applicable. However, the precise extent to which dividends paid    by non-US corporations will constitute “qualified dividend income”    and the effect of such status on the ability of a taxpayer to utilize associated    foreign tax credits is not entirely clear at present. It is anticipated that    there will be administrative pronouncements concerning these provisions in    the future. In the meantime, investors are urged to consult their own tax    advisors regarding the impact on their particular situations of the provisions    of the 2003 Act.
***US Information reporting          and backup withholding***
Dividend payments made to holders    of shares or ADSs and proceeds from the sale, exchange or redemption of shares    or ADSs may be subject to information reporting requirements and US federal    backup withholding tax at a current rate of 28 per cent. Certain exempt persons    (such as corporations) are not subject to these information reporting requirements.    Backup withholding will not apply, however, to a holder who furnishes a correct    taxpayer identification number or certificate of foreign status and makes    any other required certification or who is otherwise exempt from the backup    withholding. US persons who are required to establish their exempt status    generally must furnish a completed Internal Revenue Service Form W-9 (Request    for Taxpayer Identification Number and Certification). Non-US holders generally    will not be subject to US information reporting or backup withholding. However,    such holders may be required to provide certification of non-US status in    connection with payments received in the United States or through certain    US-related financial intermediaries.

Backup withholding is not an additional    tax. Amounts withheld as backup withholding may be credited against a holder’s    US federal income tax liability, and a holder may obtain a refund of any excess    amounts withheld under the backup withholding rules by filing the appropriate    claim for refund with the US Internal Revenue Service and furnishing any required    information.
**F.****Dividends and Paying          Agents**
Not applicable.**G.****Statements by Experts**
Not applicable.

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  **H.****Documents on Display**   The documents that are          exhibits to this annual report can be obtained from the Securities and          Exchange Commission’s (“SEC”) public reference facilities          at 450 Fifth Street, N.W., Washington DC 20549, USA, at prescribed rates.          Additionally, copies of this material may also be obtained from the          SEC’s Internet website at http://www.sec.gov.  **I.****Subsidiary Information**
Not applicable.**ITEM        11****QUANTITATIVE AND QUALITATIVE          DISCLOSURES ABOUT MARKET RISK** We are exposed to interest          rate risk and foreign exchange rate risk. See note 18 to our consolidated          financial statements in Item 18, “Financial Statements”, for          a description of how we manage these risks.  **ITEM        12****DESCRIPTION OF SECURITIES          OTHER THAN EQUITY SECURITIES**  **A.****Debt Securities**
Not applicable.**B.****Warrants and Rights**
Not applicable.**C.****Other Securities**
Not applicable.**D.****American Depositary          Shares**
Not applicable.
 

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**PART II**
**ITEM        13****DEFAULTS, DIVIDEND          ARREARAGES AND DELINQUENCIES**
Not applicable.**ITEM        14****MATERIAL MODIFICATIONS          TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**
Not applicable.**ITEM        15****CONTROLS AND PROCEDURES** Our chief executive office          and chief financial officer, after evaluating the effectiveness of our          disclosure controls and procedures (as defined in Exchange Acts Rule          13a-14(c)) within 90 days of the date of this report, have concluded          that, as of such date, our disclosure controls and procedures were effective          to ensure that material information relating to our company was made          known to them by others within our company, particularly during the          period in which this Form 20-F was being prepared.   There were no significant          changes in our internal controls or in other factors that could significantly          affect these controls subsequent to the date our chief executive officer          and chief financial officer completed their evaluation, nor were there          any significant deficiencies or material weaknesses in our internal          controls requiring corrective actions.  **ITEM        16****[RESERVED]**
Not applicable.
**PART III**
**ITEM        17****FINANCIAL STATEMENTS**
Please see Item 18.
 

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**mmO2 GROUP**

 
**ITEM        18****FINANCIAL STATEMENTS**
**INDEX TO    THE FINANCIAL STATEMENTS**
**Contents** **Page****mmO2          GROUP**Report          of the independent accountants F-2Consolidated          profit and loss account F-3Consolidated          statement of total recognised gains and losses F-4Consolidated          balance sheet F-5Reconciliation          of Group operating loss to operating cash flows F-6Consolidated          cash flow statement F-6Consolidated          net debt F-7Notes          to the consolidated financial statements F-8   **O2          (Germany) GmbH & Co. OHG. (formerly Viag Interkom GmbH & Co.)**Report          of the independent accountants F-68Combined          profit and loss accounts F-69Combined          balance sheets F-70Combined          cash flow statements F-71Reconciliation          of net cash flow to movements in net debt F-71Notes          to the combined financial statements F-72
 

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**mmO2 GROUP**

 

**REPORT OF THE INDEPENDENT ACCOUNTANTS**

To the Board of Directors and Shareholders    of mmO2 plc:

In our opinion, the accompanying    consolidated balance sheets and the related consolidated profit and loss accounts,    statements of total recognised gains and losses, reconciliations of movements    in shareholders funds and cashflow statements present fairly, in all material    respects, the financial position of mmO2 and its subsidiaries at    31 March 2003 and 31 March 2002, and the results of their operations    and their cashflows for the three years in the period ended 31 March    2003, in conformity with accounting principles which, as described in Note 1,    are generally accepted in the United Kingdom. These financial statements are    the responsibility of the Company’s management; our responsibility is    to express an opinion on these financial statements based on our audits. We    conducted our audits of these statements in accordance with auditing standards    generally accepted in the United States of America and in the United Kingdom,    which require that we plan and perform the audit to obtain reasonable assurance    about whether the financial statements are free of material misstatement.    An audit includes examining, on a test basis, evidence supporting the amounts    and disclosures in the financial statements, assessing the accounting principles    used and significant estimates made by management, and evaluating the overall    financial statement presentation. We believe that our audits provide a reasonable    basis for our opinion.

As indicated in Note 1, mmO2    plc represents the mobile business which was demerged from British Telecommunications    plc (“BT”) on 19 November 2001. The consolidated financial    statements for the periods prior to the demerger have been prepared on a carve-out    basis as described in Note 1. The balance sheets, profit and loss accounts    and cash flow statements of mmO2 plc prepared on a carve-out basis    differ from those presented in the mmO2 Annual Report and Financial    Statements prepared for filing purposes in the United Kingdom (the “UK    Statutory Accounts”). When preparing financial statements on a carve-out    basis a portion of BT’s short- and long-term loans and other borrowings    are allocated to mmO2 plc. The basis of preparation adopted for    the UK Statutory Accounts shows the results and financial position of mmO2    plc with no push-down allocation of loans and other borrowings.

Accounting principles generally    accepted in the United Kingdom vary in certain important respects from accounting    principles generally accepted in the United States of America. The application    of the latter would have affected the determination of consolidated net income    for each of the three years in the period ended 31 March 2003 and the    determination of consolidated shareholders’ equity at 31 March 2003    and 2002 to the extent summarised in Note 32 to the consolidated financial    statements.

/s/ PricewaterhouseCoopers LLP  PricewaterhouseCoopers LLP  Chartered Accountants and Registered Auditors  London, England  20 May 2003
 

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**mmO2 GROUP**

 
**CONSOLIDATED PROFIT          AND LOSS ACCOUNT**     **Year        ended 31 March**   **Note** **2003** **2002** **2001**           **£m** **£m** **£m** **Turnover:          Group and share of joint ventures and associates**  2  5,020  4,407  3,712 Group’s          share of joint ventures’ turnover     —  —  (337)Group’s          share of associates’ turnover     (146) (131) (175)        **Group          turnover**  2  4,874  4,276  3,200 **Net          operating expenses (including exceptional items)**  3  (13,652) (5,132) (6,364)        **Group          operating loss**  3,4  (8,778) (856) (3,164)Group’s          share of operating loss of joint ventures     —  —  (303)Group’s          share of operating profit of associates     5  8  17         **Total          operating loss**     (8,773) (848) (3,450)Provision          for loss on sale of business  3,12  (1,364) —  — Net          interest payable and similar charges  9  (66) (781) (669)        **Loss          on ordinary activities before taxation**     (10,203) (1,629) (4,119)Tax          on loss on ordinary activities  10  55  250  114         **Loss          on ordinary activities after taxation**     (10,148) (1,379) (4,005)Minority          interests     —  —  (4)        **Retained          loss for the financial year**  24  (10,148) (1,379) (4,009)        
In all three years all profits and    losses arise from continuing operations.

 

The accompanying notes on pages    F-8 to F-67 are an integral part of these financial statements.

 

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**mmO2 GROUP**

 
**CONSOLIDATED STATEMENT          OF TOTAL RECOGNISED GAINS AND LOSSES**     **Year        ended 31 March**   **Note** **2003** **2002** **2001**           **£m** **£m** **£m** **Loss          for the financial year**     (10,148) (1,379) (4,009)**Currency          translation differences arising on foreign currency net investment in:**             Subsidiaries  24  1,333  161  (21)Joint          ventures     —  —  10         **Total          recognised losses relating to the year**     (8,815) (1,218) (4,020)        
 

The accompanying notes on pages    F-8 to F-67 are an integral part of these financial statements.

 

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**mmO2 GROUP**

 

**CONSOLIDATED BALANCE SHEET**
    **As        at 31 March**   **Note** **2003** **2002**          **£m** **£m** **Fixed          assets**          Intangible          assets  13  7,582  15,992 Tangible          assets  14  3,875  4,094 Investments  15  3  37              11,460  20,123        **Current          assets**          Stocks     73  68 Debtors  16  924  1,090 Investments  17  848  859 Cash          at bank and in hand     68  20              1,913  2,037 **Creditors:**amounts falling due within one year  18  (1,572) (1,521)       **Net          current assets**     341  516        **Total          assets less current liabilities**     11,801  20,639        **Creditors:**amounts falling due after more than one year  19  (1,451) (1,403)**Provisions          for liabilities and charges**  22  (284) (402)       **Net          assets**     10,066  18,834        **Capital          and reserves**          Called          up share capital  23  9  9 Other          reserves  24  12,087  22,656 Profit          and loss account  24  (2,030) (3,831)             10,066  18,834        
The Company balance sheet is shown    in note 31.

These financial statements were    approved by the Board of Directors on 20 May 2003 and were signed on its behalf    by:
**P Erskine Chief Executive        Officer** **D Finch Chief Financial          Officer**
 

The accompanying notes on pages    F-8 to F-67 are an integral part of these financial statements.

 

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**mmO2 GROUP**

 

**RECONCILIATION    OF GROUP OPERATING LOSS TO OPERATING CASH FLOWS**
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Group          operating loss  (8,778) (856) (3,164)Depreciation          and amortisation charges  9,637  1,139  3,481 Loss          on disposal of fixed assets  8  9  4 (Increase)/decrease          in stocks  (5) 89  (31)Decrease/(increase)          in debtors  166  (38) 151 Increase/(decrease)          in creditors  58  24  (130)(Decrease)/increase          in provisions  (53) 90  7      **Net          cash inflow from operating activities**  1,033  457  318      
**CONSOLIDATED    CASH FLOW STATEMENT**
    **Year        ended 31 March**   **Note** **2003** **2002** **2001**           **£m** **£m** **£m** **Net          cash inflow from operating activities**     1,033  457  318 Returns          on investments and servicing of finance  25  (63) (9) (11)Taxation  25  (4) (4) 21 Capital          expenditure and financial investment  25  (868) (1,231) (5,234)Acquisitions          and disposals  25  —  (864) (12,574)        **Cash          inflow/(outflow) before management of liquid resources and financing**     98  (1,651) (17,480)Management          of liquid resources  25  (3) (459) — Financing  25  (47) 1,790  17,953         **Increase/(decrease)          in cash in the year**  26  48  (320) 113         
 

The accompanying notes on pages    F-8 to F-67 are an integral part of these financial statements.

 

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**mmO2 GROUP**

 

**CONSOLIDATED NET DEBT**
    **As        at 31 March**   **Note** **2003** **2002**          **£m** **£m** Cash          at bank and in hand     68  20 Current          asset investments  17  848  859              916  879 Euro          medium-term notes (net of issue costs)  19  (1,015) (982)Loan          notes  18  (19) (58)Obligations          under hire purchase contracts  20  (390) (406)Other          loans and borrowings     (41) (50)       **Net          debt**     (549) (617)       
 

The accompanying notes on pages    F-8 to F-67 are an integral part of these financial statements.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**1.****Accounting policies** ***Accounting conventions***
The financial statements are prepared    under the historical cost convention and in accordance with applicable accounting    standards in the United Kingdom (“UK GAAP”). A summary of the more    important Group accounting policies is set out below, together with an explanation    of the basis of preparation used in order to present a true and fair view.    These differ in certain significant respects from accounting standards in    the United States of America and a reconciliation to generally accepted accounting    principles in the United States of America (“US GAAP”) is included    in note 32 to the financial statements.

All principal subsidiary undertakings’    financial years are coterminous with those of mmO2 plc. O2    Germany has been accounted for as a subsidiary from February 2001. Prior to    this date O2 Germany had an accounting reference date of 31 December.    It has not been practicable for O2 Germany to prepare audited carve-out    financial statements for the year ended 31 March 2000 and consequently, the    results presented for the year ended 31 March 2001 include the Group’s    share of O2 Germany’s turnover, net losses and net liabilities    for the period from 1 January 2000 to 19 February 2001, together with    consolidated financial results for the period from 20 February 2001 to 31    March 2001.
***Basis of preparation*** *Carve-out accounting*
mmO2 plc was incorporated    on 30 March 2001. On 19 November 2001, its ordinary shares were listed on    the London Stock Exchange and the New York Stock Exchange. This was the culmination    of a group reorganisation undertaken by British Telecommunications plc (“BT”)    to demerge its wireless business.

The financial statements have been    prepared as if the mmO2 Group had been demerged from BT prior to    1 April 2000. This presents information which more accurately reflects the    ongoing operations of the Group. Accordingly the demerger and related transactions    have been accounted for using carve-out accounting principles as applicable    to group reorganisations up to the date of actual demerger. Whilst the financial    information set out in the consolidated financial statements is an appropriate    presentation, this financial information is not necessarily indicative of    the financial results that might have occurred had mmO2 plc been    an independently financed and managed public entity during the periods presented    or of the financial results that may occur in any future period. During the    year ended 30 March 2001 and the period from 1 April 2001 to 19 November    2001 included in these financial statements, the Group was not consituted    as a discrete legal group of companies under a single holding company. The    new Group holding company, mmO2 plc, to which the Group’s    operations were transferred on demerger was established on 30 March 2001.    For the period to demerger, these financial statements therefore reflect the    combination of the consolidated financial statements of these operations which    comprise the mmO2 Group following the demerger from BT. Included    within the Group are the O2 UK group of companies in the United    Kingdom, and the mobile operations of other companies in the Group owned prior    to demerger either directly by BT or through its subsidiary companies, together    with certain other business units within BT. Financial information in respect    of companies or business units that have historically been integrated with    other BT operations and that are now combined within the mmO2 Group,    has been included in these financial statements on a carve-out basis.

Furthermore, for the purpose of    these financial statements, a portion of BT’s short- and long-term loans    has been allocated to the Group for the periods up to 19 November 2001,    the date of demerger from BT. The allocation has been determined by reference    to the amount of loans and other borrowings raised by BT to fund certain significant    acquisitions in the year ended 31 March 2001, of mobile businesses and    assets, including UMTS licences. This has resulted in £16.8 billion    of intercompany loans due to BT at 31 March 2001, bearing interest at

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**1.****Accounting policies          (Continued)**
7.2 per cent., and £16.8 billion    of intercompany loans from 1 April 2001 to 19 November 2001, bearing    an average annual interest rate of 7.2 per cent. The analysis of these    loans between long and short term creditors is consistent with the year end    redemption profile of BT’s loans and other borrowings. The interest rates    applied have been calculated with reference to the average annual composite    interest cost of BT’s loans and other borrowings for each period. There    are no hedging transactions associated with these intercompany loans. The    interest expense allocated to the Group is not indicative of the interest    expense that would have been incurred if the mmO2 Group had been    a separate stand-alone group. As part of the demerger transaction, a large    portion of these loans were capitalised so that at 19 November 2001, the date    we demerged from BT, we had net debt of £506 million.

The financial statements include    the results for mmO2 plc and its subsidiaries. All intercompany    accounts and transactions have been eliminated.
***Use of estimates***
The preparation of financial statements    in conformity with generally accepted accounting principles requires management    to make estimates and assumptions that affect the amounts reported in the    consolidated financial statements and accompanying notes. Actual results could    differ from those estimates. Estimates are used when accounting for certain    items such as revenue recognition, provision for bad and doubtful debtors,    depreciation and amortisation, valuation of inventory, pensions and other    benefits, and asset impairment.
***Turnover***
Group turnover, which excludes value    added tax and other sales taxes, comprises the value of services provided    and equipment sales.

Mobile telecommunications service    turnover includes turnover earned for usage of the Group’s wireless network    for voice and data transmission by O2 customers, connection charges,    subscription fees and interconnect revenues. Post-pay customers are billed    in arrears based on usage and turnover is recognised when the service is rendered.    Turnover for pre-pay customers is recorded as deferred revenues prior to commencement    of services and is recognised as the pre-pay services are rendered. Inbound    roaming revenues, earned from other mobile operators whose customers roam    onto the O2 network, and outbound roaming revenues, earned from    certain customers roaming outside their domestic coverage area, are recognised    based upon usage and are included in mobile service turnover. Turnover from    subscription fees is recognised evenly throughout the periods to which they    relate. Revenues from connection charges are deferred and recognised over    the estimated customer relationship period and are included in other turnover.

Hardware turnover principally consists    of revenues from the sale of wireless mobile devices. The revenue and related    expenses associated with the sale of wireless handsets and accessories are    recognised when the products are delivered and accepted by the customer.

***Subscriber acquisition costs***

Subscriber acquisition costs, which    include the commission costs associated with acquiring new subscribers and    other incremental costs of customer acquisition, are charged to the profit    and loss account as incurred.

***Research and development***

Expenditure on research and development    is written off in the year in which it is incurred.

***Advertising***

Advertising costs are included in    administrative expenses and are expensed as incurred.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**1.****Accounting policies          (Continued)**
***Foreign currencies***

Transactions denominated in foreign    currencies are translated at the exchange rates ruling at the dates of the    transactions, adjusted for the effects of any hedging arrangements except    for material exceptional items which are translated at the rate ruling at    the date of the transaction. Monetary assets and liabilities denominated in    foreign currencies at the balance sheet date are retranslated at the rates    ruling at that date.

The balance sheets of foreign subsidiaries    are translated into sterling at the closing rates of exchange and the differences    arising from the translation of the opening net investment in subsidiaries    at the closing rate are taken direct to reserves and are reported in the statement    of total recognised gains and losses. The profit and loss and cash flows for    the year of foreign subsidiaries are translated at the average rates of exchange    for the year.

All other exchange gains or losses    are dealt with in the profit and loss account.

***Goodwill***

Goodwill, arising from the purchase    of subsidiary undertakings and interests in associates and joint ventures,    represents the excess of the fair value of the purchase consideration over    the fair value of the net assets acquired.

For all acquisitions arising on    or after 1 April 1998, the goodwill arising is capitalised as an intangible    asset. The goodwill is amortised on a straight-line basis from the time of    acquisition over a period estimated by the Directors to be its useful economic    life. The economic life is normally between 10 and 20 years, subject to review    if and when an event or change occurs which may affect the asset life. Where    applicable, goodwill relating to overseas businesses is held as a foreign    currency denominated asset.

For acquisitions made before the    adoption of Financial Reporting Standard (“FRS”) 10 “Goodwill    and Intangible Assets”, on 1 April 1998, the goodwill was written off    directly to reserves. The goodwill written off directly to reserves will be    charged to the profit and loss account on the subsequent disposal of the business    to which it relates.

***Other intangible fixed assets***

Licence fees paid to governments,    which permit telecommunication activities to be operated for defined periods,    are capitalised at cost and are amortised from the later of the start of the    licence period or launch of service, to the end of the licence period on a    straight-line basis. Other licences are amortised over the period of the licence    on a straight-line basis.

***Tangible fixed assets***

Tangible fixed assets are stated    at historical cost less depreciation. The cost of tangible fixed assets includes    directly attributable incremental costs incurred in their acquisition and    installation.

Depreciation is provided on tangible    fixed assets from the date they are brought into use, in equal instalments    over their estimated useful lives, taking into account any residual values.    The lives assigned to tangible fixed assets are:
Freehold          buildings40 yearsLeasehold          land and buildingsUnexpired        portion of lease or 40 years,         whichever is the shorterNetwork          assets5 to 15 yearsPlant          and machinery2 to 5 yearsComputers,          software and office equipment2 to 6 yearsMotor          vehicles5 years
No depreciation is provided on freehold    land or assets in course of construction.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**1.****Accounting policies          (Continued)**
***Fixed asset investments***

Investments in associates and joint    ventures are included in the consolidated financial statements using the equity    method of accounting. The profit and loss account includes the Group’s    share of profits or losses of associates and joint ventures.

Other investments held as fixed    assets comprise equity shareholdings and other interests and are stated at    cost less provisions for impairment.

***Own shares***

The Group partially hedges its future    obligations under certain share awards by holding its own shares in the mmO2    Employee Share Trust. The cost of shares expected to be awarded under each    plan is amortised evenly over the period from the original date of grant of    the particular award to the time of vesting.

Own shares are held at cost less    amortisation charged to date.

***Fixed asset impairment***

Goodwill, other intangible assets    and tangible assets are reviewed for impairment: (i) at the end of the first    full financial year following acquisition; and (ii) in other periods if events    or changes in circumstances indicate that the carrying values may not be recoverable.    Such events may include continuing operating losses, technological obsolescence    or significant adverse changes in the business or the market in which the    fixed asset is used.

The impairment review is performed    by comparing the carrying value of the asset, or group of assets, with their    recoverable amount. For assets used in the continuing operations of the Group    the recoverable amount is the assets’ value in use which is estimated    by calculating the present value of it’s future cash flows. For assets    to be disposed, the recoverable amount is the assets’ net realisable    value. Impairment charges are recognised in the profit and loss account to    the extent that the carrying value exceeds the recoverable amount in the period    in which the impairment is identified.

***Stocks***

Stocks comprise mainly handsets    and are stated at the lower of cost and net realisable value (which reflects    the value to the business of the handset in the hands of the subscriber) on    a first-in, first-out basis, after provisions for obsolescence.

***Debtors***

Debtors are stated at estimated    net realisable value. Net realisable value is the invoiced amount less provisions    for bad and doubtful debtors. Provisions are made specifically against debtors    where there is evidence of a dispute or an inability to pay. An additional    provision is made based on an analysis of balances by age, previous losses    experienced and general economic conditions.

***Provisions***

Provisions are recognised by the    Group when three criteria are met: (i) the Group has a constructive or legal    obligation as a result of a past event; (ii) if it is probable that a transfer    of economic benefits will be required to settle the obligation and (iii) a    reliable estimate of the obligation can be made.

A provision is made for the present    value of the cost of restoration of mast sites at the date of acquisition    of the site in accordance with FRS 12 “Provisions, contingent liabilities    and contingent assets”.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**1.****Accounting policies          (Continued)**
***Post retirement benefits***

The Group participates in or operates    a number of pension schemes as disclosed in note 8 to the financial statements.

All pension schemes are accounted    for in accordance with the provisions of Statement of Standard Accounting    Practice (SSAP) 24 “Accounting for pension costs”. The Group continues    to apply the transitional disclosure requirements set out in FRS 17 “Retirement    benefits” which are provided in note 8.

The Group participates in a number    of multi-employer pension schemes providing benefits based on final pensionable    salary, where the assets of the schemes are held separately from those of    the participating employers. In its capacity as a participating employer,    the Group is required to pay to the pension schemes a predetermined percentage    of the pensionable payroll costs of those employees who are members of the    scheme. These costs are charged to the profit and loss account in the period    to which they relate.

The Group is also the principal    employer for certain pension schemes. For these funded and unfunded defined    benefit schemes, the expected costs of providing pensions and other post retirement    benefits, as calculated periodically by professionally qualified actuaries,    are charged to the profit and loss account so as to spread the cost over the    service lives of employees in the schemes in such a way that the pension cost    is a substantially level percentage of current and expected future pensionable    payroll. For the funded schemes, the assets of the schemes are held separately    from those of the principal employer. For the unfunded schemes, no contributions    are made by either employees or the employer to a separate pension fund but    a provision is recorded on the balance sheet to recognise the accrued liability    of the Group to date.

The Group also supports a number    of defined contribution pension schemes where the benefits are based on the    level of contributions paid. Costs arising from these schemes are charged    to the profit and loss account in the period to which they relate.

***Deferred taxation***

Deferred tax is provided in full    on all timing differences which result in an obligation at the balance sheet    date to pay more tax, or a right to pay less tax, at a future date, at rates    expected to apply when they crystallise based on current tax rates and law.    Timing differences arise from the inclusion of items of income and expenditure    in taxation computations in periods different from those in which they are    included in the financial statements. Deferred tax assets are recognised to    the extent that it is regarded as more likely than not that they will be recovered.    Deferred tax assets and liabilities are not discounted.

***Financial instruments –    Debt instruments***

Debt instruments are stated at the    amount of net proceeds received. Financing costs are amortised over the term    of the debt to ensure a constant rate of charge.

***Criteria to qualify for hedge    accounting***

The Group considers its derivative    financial instruments to be hedges when certain criteria are met. For foreign    currency derivatives, the instrument must be related to actual foreign currency    assets or liabilities or a probable commitment and whose characteristics have    been identified. It must involve the same currency or similar currencies as    the hedged item and must also reduce the risk of foreign currency exchange    movements on the Group’s operations. For interest rate derivatives, the    instrument must be related to assets or liabilities or a probable commitment,    such as a future bond issue, and must also change the interest rate or the    nature of the interest rate by converting a fixed rate to a variable rate    or vice versa.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**1.****Accounting policies          (Continued)**
***Accounting for derivative financial instruments***

Interest differentials, under interest rate swap agreements    used to vary the amounts and periods for which interest rates on borrowings    are fixed, are recognised by adjustment of interest payable.

The forward exchange contracts used to change the currency mix    of net debt are revalued to balance sheet rates with net unrealised gains    and losses being shown as part of debtors or creditors. The difference between    spot and forward rate for these contracts is recognised as part of net interest    payable over the term of the contract.

The forward exchange contracts hedging transaction exposures    are revalued at the prevailing forward rate on the balance sheet date with    net unrealised gains and losses being shown as debtors and creditors.

***Leases and hire purchase contracts***

Rentals under operating leases are charged to the profit and    loss account in equal annual amounts over the periods of the leases.

Assets held under finance leases and hire purchase contracts    are capitalised at their fair value on the inception of the leases and depreciated    over the shorter of the period of the lease and the estimated useful economic    lives of the assets. The finance charges are allocated over the period of    the lease in proportion to the capital amount outstanding and are charged    to the profit and loss account.
**2.****Segmental analysis**
The Group’s operations have been divided internally into    three classes of business, in line with day-to-day managerial and budgetary    control:
1)the supply of mobile telecommunications          services and products;  2)the provision of mobile          internet services; and  3)other businesses, which          comprises Airwave, a terrestrial trunked radio business, and Manx Telecom,          the fixed and mobile telecommunications business in the Isle of Man.
Mobile telecommunications services mainly derives its turnover    from the calls made and received by its customers using mobile telephones,    from subscription fees charged to its contract customers and from handset    equipment sales. Mobile internet services generate revenues through advertising,    provision of content and application and from e-commerce and m-commerce activities.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**2.****Segmental analysis          (Continued)**    **Total****turnover** **Group****turnover** **Depreciation,****amortisation****and****impairment1** **Operating****profit/(loss)****of associates****and joint****ventures** **Total****operating****profit/(loss)**          **£m** **£m** **£m** **£m** **£m** **Year          ended 31 March 2003**                Mobile          telecommunications                   UK  3,171  3,025  2,953  5  (2,111)   Germany  1,060  1,060  5,006  —  (4,979)   Other          countries  705  705  1,6092 —  (1,451)       **Total          mobile telecommunications**  4,936  4,790  9,568  5  (8,541)Mobile          internet services                   UK  93  93  49  —  (122)Other          businesses                   UK  64  64  19  —  (23)Central          overheads and adjustments  —  —  1  —  (87)Inter-segment          eliminations  (73) (73) —  —  —        **Group          total**  5,020  4,874  9,637  5  (8,773)       **Year          ended 31 March 2002**                Mobile          telecommunications                   UK  2,887  2,756  548  8  44    Germany  875  875  277  —  (472)   Other          countries  595  595  280  —  (221)       **Total          mobile telecommunications**  4,357  4,226  1,105  8  (649)Mobile          internet services                   UK  100  100  25  —  (103)Other          businesses                   UK  54  54  9  —  (22)Central          overheads and adjustments  —  —  —  —  (74)Inter-segment          eliminations  (104) (104) —  —  —        **Group          total**  4,407  4,276  1,139  8  (848)       
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**2.****Segmental analysis          (Continued)**    **Total****turnover** **Group****turnover** **Depreciation,****amortisation****and****impairment** **Operating****profit/(loss)****of associates****and joint****ventures** **Total****operating****profit/(loss)**          **£m** **£m** **£m** **£m** **£m** **Year          ended 31 March 2001**                Mobile          telecommunications                   UK  2,881  2,706  431  17  141    Germany  390  65  2,8583 (285) (3,159)   Other          countries  411  399  182  (18) (205)       **Total          mobile telecommunications**  3,682  3,170  3,471  (286) (3,223)Mobile          internet services                   UK  15  15  5  —  (148)Other          businesses                   UK  47  47  5  —  (17)Central          overheads and adjustments  (14) (14) —  —  (44)Inter-segment          eliminations  (18) (18) —  —  (18)       **Group          total**  3,712  3,200  3,481  (286) (3,450)        1     In the year ended 31          March 2003, the exceptional depreciation, amortisation and impairment          charged to total operating profit of £8,300 million comprised          a charge of £2,401 million in respect of impairment of goodwill          and £5,899 million in respect of telecommunication licences and          investments held in the Group’s businesses. Further details are          disclosed in note 12.2     Excludes non-operating exceptional impairment        charge of £1,364 million relating to the sale of O2        Netherlands as disclosed in note 12.3     Includes exceptional charges of £2,800        million in respect of impairment of goodwill and £21 million IT        integration costs written off related to O2 Germany. 
Turnover is based on the country of invoice origination, which    is not materially different to turnover by destination. Other countries include    the Netherlands and Ireland. Central overheads and adjustments includes central    costs, eliminations and other consolidation adjustments.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**2.****Segmental analysis          (Continued)**        **Net        operating** **Associates**   **Capital** **Tangible** **assets/** **and        joint**   **expenditure1** **fixed        assets** **(liabilities)2** **ventures**         **£m** **£m** **£m** **£m** **Year          ended and as at 31 March 2003**             Mobile          telecommunications                UK  362  2,111  6,226  —    Germany  141  1,072  3,203  —    Other          countries  116  288  1,198  —       Total          mobile telecommunications  619  3,471  10,627  — Mobile          internet services                UK  17  48  20  — Other          businesses                UK  170  353  295  — Corporate          assets and adjustments  1  3  (109) —       **Group          total**  807  3,875  10,833  —       **Year          ended and as at 31 March 2002**             Mobile          telecommunications                UK  611  2,219  8,857  34    Germany  248  1,065  7,183  —    Other          countries  180  540  3,567  —       Total          mobile telecommunications  1,039  3,824  19,607  34 Mobile          internet services                UK  42  65  46  — Other          businesses                UK  95  202  161  — Corporate          assets and adjustments  —  3  (36) —       **Group          total**  1,176  4,094  19,778  34       **Year          ended and as at 31 March 2001**             Mobile          telecommunications                UK  720  2,012  9,114  33    Germany  56  1,071  7,385  —    Other          countries  240  485  2,856  —       Total          mobile telecommunications  1,016  3,568  19,355  33 Mobile          internet services                UK  48  44  12  — Other          businesses                UK  70  115  232  — Corporate          assets and adjustments  —  —  (92) —       **Group          total**  1,134  3,727  19,691  33        1Capital expenditure comprises tangible fixed        asset additions.2Net operating assets comprise tangible and        intangible fixed assets (including goodwill), stocks, debtors, creditors        (excluding debt) falling due within and after one year and provisions        (excluding deferred tax).

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**2.****Segmental analysis          (Continued)** **Joint ventures**
The Group’s share of the turnover    and operating losses of joint ventures included in the above geographical    analysis is as follows:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Share          of turnover             Germany  —  —  325    Other  —  —  12      **Total**  —  —  337      Share          of operating losses             Germany  —  —  (285)   Other  —  —  (18)     **Total**  —  —  (303)     
The Group’s share of turnover    and operating losses of joint ventures for the year ended 31 March 2001 includes    the results of O2 Germany for the 14 months ended 20 February 2001.    For the three months ended 31 March 2000 the Group’s share of O2    Germany’s turnover and operating loss was £61 million and £39    million, respectively.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**2.****Segmental analysis          (Continued)** ***Group turnover***   **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Mobile          telecommunications          Service          turnover             UK  2,738  2,426  2,207    Germany  944  696  45    Other  645  550  216      **Total          service turnover**  4,327  3,672  2,468      Equipment          turnover             UK  190  136  222    Germany  94  127  13    Other  33  28  27      **Total          equipment turnover**  317  291  262      Other          turnover             UK  97  194  277    Germany  22  52  7    Other  27  17  156      **Total          other turnover**  146  263  440      **Total          mobile telecommunications turnover**  4,790  4,226  3,170      Mobile          internet services             UK  93  100  15 Other          businesses             UK  64  54  47 Less          segmental eliminations  (73) (104) (32)     **Group          turnover**  4,874  4,276  3,200        **3.****Net operating expenses** ***Continuing operations***   **2003** **2002** **2001**        **£m** **£m** **£m** Group          turnover  4,874  4,276  3,200 Cost          of sales  (3,060) (2,714) (1,814)     Gross          profit  1,814  1,562  1,386 Administrative          expenses  (10,592) (2,418) (4,550)              Administrative          expenses before exceptional items  (2,292) (2,268) (1,729)      Exceptional          items  (8,300) (150) (2,821)     **Group          operating loss**  (8,778) (856) (3,164)     
Net operating expenses comprise    cost of sales and administrative expenses (including exceptional items) and    total £13,652 million in 2003 (2002: £5,132 million, 2001: £6,364    million).

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**3.****Net operating expenses          (Continued)**
On 14 April 2003, the Group announced    the sale of O2 Netherlands, its wholly owned Dutch subsidiary,    to Greenfield Capital Partners, for a consideration of €25 million. At    the date of approval of these financial statements, 20 May 2003, final competition    clearance from the Dutch competition commission had not been received. The    sale was completed on 3 June 2003. In accordance with FRS 3 “Reporting    financial performance”, the results of O2 Netherlands for    the three years ended 31 March 2001, 2002 and 2003 are classified as “discontinuing”    as a component within continuing operations above and are analysed below:
***Discontinuing operations***   **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Turnover  263  200  90 Cost          of sales  (206) (195) (92)     Gross          profit  57  5  (2)Administrative          expenses  (143) (138) (109)              Administrative          expenses before exceptional items  (143) (126) (109)              Exceptional          items  —  (12) —      **Operating          loss**  (86) (133) (111)     
The figures reported in 2001 as    discontinuing operations represent the results of O2 Netherlands    from 30 June 2001. This is the date from which O2 Netherlands    has been accounted for as a wholly owned subsidiary of the Group.

Provision for the loss on disposal    of O2 Netherlands of £1,364 million has been charged as an    exceptional item below Group operating loss in accordance with FRS 3. The    remaining carrying value of O2 Netherlands is equal to the sales    proceeds of €25 million less direct costs relating to the sale.    No provision has been made for operating losses that may be incurred by O2    Netherlands from 1 April 2003 to the date of completion of the disposal.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL    STATEMENTS**

 
**4.****Group operating loss**
Group operating loss is stated after    charging/(crediting):
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Depreciation          of tangible fixed assets:             Owned  907  677  358    Held          under hire purchase contracts  25  70  4 Amortisation          of intangible fixed assets (before impairment):             Goodwill  374  369  287    Other  31  23  11 Rentals          under operating leases:             Hire          of plant and machinery  48  64  1    Other          operating leases  135  108  14 Advertising          costs  195  198  92 Staff          costs (note 7)  521  570  342 Own          work capitalised  (62) (121) (63)Loss          on disposal of fixed assets  8  9  4 Research          and development  9  8  3 Exceptional          items:             Impairment          of intangible assets (note 12)  8,300  —  2,800    Costs          relating to demerger from BT  —  27  —    Costs          relating to business closure and reorganisation  —  123  —    Write-off          of O2 Germany IT systems relating to integration  —  —  21      
Exceptional items shown above for    the year ended 31 March 2003 relate to the impairment of fixed assets in the    Group’s operating businesses in the UK, Germany and Ireland. Further    details are provided in note 12. In the year ended 31 March 2002 the exceptional    reorganisation costs related to the restructuring of the UK and German operations    post demerger and include £87 million in respect of redundancy costs.    The exceptional items charged in 2002 gave rise to a cash outflow of £27    million in that year. An impairment of goodwill relating to O2 Germany    was recognised in 2001. The impairments recognised in 2003 and 2001 do not    result in any cash flows.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**5.****Auditors’ remuneration**
The aggregate fees paid to auditors    during the year for audit and other services is analysed below:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£000** **£000** **£000** Statutory          audit fees:             UK  500  500  600    Other          countries  500  400  600         1,000  900  1,200      Non-audit          fees:             Accounting          and assurance  614  394  200    Merger          and acquisition  90  —  —    Tax          advisory  296  22  —    Systems          implementation  176  —  —         1,176  416  200      
The audit fees for the Company were    £10,000 (2002: £10,000).
**6.****Directors’ emoluments**
The emoluments of the Directors    for the year ended 31 March 2003 and the benefits received under long-term    incentive plans were, in summary, as follows:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£000** **£000** **£000** Salaries  1,408  1,078  390 Performance          related bonus(1)  593  545  306 Gains          under long-term incentive plans(2)(3)  158  —  — Other          benefits  102  69  25         2,261  1,692  721 Payments          to non-executive Directors  251  147  —      **Total          emoluments**  2,512  1,839  721                  (1)Includes £150,000          paid by BT in 2002 in respect of David Varney’s contribution to          the successful demerger.(2)In addition to the emoluments          disclosed above, in 2002 an additional £186,880 was paid as a          result of the early vesting of the BT Cellnet long-term incentive plan          as a result of the demerger.(3)In 2003, represents gains          on vesting of 1997 Executive Share Award and vesting of Restricted Share          Award.
During the year, two Directors (2002:    two) accrued retirement benefits under the Group’s UK defined benefit    pension plan. In addition, contributions of £77,875 (2002: £43,167)    in respect of one Director (2002: one) were paid to a defined contribution    pension plan.

More detailed information concerning    Directors’ remuneration, shareholdings, pension entitlement, share options    and other long-term incentive plans is shown in the report on Directors’    remuneration in “Directors, Senior Management and Employees — B.    Compensation — Directors’ Remuneration” in Item 6.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**7.****Employees**    **Year        ended 31 March**   **2003** **2002** **2001**        **No.** **No.** **No.** Average          number of full time employee equivalents (including Executive Directors)          by class of business:             Mobile          telecommunications  11,643  13,999  13,731    Mobile          internet services  269  307  138    Other          businesses  866  810  474      **Total          employees**  12,778  15,116  14,343      Average          number of full time employee equivalents (including Executive Directors)          by geographic area:             UK  7,081  8,750  7,746    Germany  3,527  4,084  4,046    Other  2,170  2,282  2,551      **Total          employees**  12,778  15,116  14,343      
The costs incurred in respect of these employees were:
  **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** Wages          and salaries  446  483  291 Social          security costs  47  59  26 Employee          share ownership scheme  4  2  2 Pension          costs (note 8)  24  26  23      **Total          staff costs**  521  570  342      
At 31 March 2003, the Group employed 12,476 (2002: 14,300) full    time employee equivalents.

The Group operates a number of employee incentive schemes including    a sharesave plan, a share ownership plan and various executive and employee    option schemes. Full details are disclosed in “Directors, Senior Management    and Employees — E. Share Ownership — Share Options and Purchase    Schemes” in Item 6.
**8.****Pension costs**    **Year        ended 31 March**   **2003** **2002** **2001**        **£m** **£m** **£m** mmO2          Pension Plan cost  12  —  — Contributions          to the BT Pension Scheme  4  20  20 Other          defined benefit schemes  4  4  2 Defined          contribution schemes  4  2  1         24  26  23      
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**8.****Pension costs (Continued)**
The Group operates a number of pension schemes in its businesses.    All the Group’s pension schemes are provided through either defined benefit    or defined contribution arrangements. Defined benefit schemes generally provide    pensions based on the employee’s length of service and their final pensionable    salary. Defined contribution schemes offer employees individual funds which    are converted into pension benefits on retirement. The majority of the schemes’    assets are held independently of the Group’s finances.
***The mmO2          Pension Plan***
This plan is divided into defined benefit and defined contribution    sections, as discussed below.
***Defined benefit          section***
In the UK, until 30 June 2002, the Group was a participating    employer in the BT Pension Scheme (BTPS), a funded defined benefit pension    scheme which is the principal pension scheme of BT. The BTPS is closed to    new members. Prior to the demerger from BT, certain employees of the Group    were eligible to participate in this scheme. While participating the Group    paid to the BTPS a predetermined percentage of the pensionable payroll costs    of those Group employees who were members of the scheme. These costs have    been charged in the period to which they relate.

A formal actuarial valuation of the BTPS was performed as at    31 December 1999. Another formal actuarial valuation is due at 31 December    2002. Details of the financial position of the BTPS and further information    regarding the scheme are contained in the financial statements of BT Group    plc.

On 1 July 2002 the mmO2 Pension Plan (mmO2    PP), a new pension plan (with defined benefit and defined contribution sections),    was established for employees in the United Kingdom by the Group in accordance    with the Separation Agreement relating to the demerger of the Group from BT.    The defined contribution section is covered below. Any active member of the    BTPS employed by the Group could join a defined benefit section of, and elect    to transfer their past service liability from the BTPS to, the new plan. The    vast majority of those eligible to transfer elected to do so. The benefits    of all deferred and pensioner members at 30 June 2002 remain in the BTPS.

A share of the assets of the BTPS, determined on the basis of    the past service liabilities of the members electing to transfer their benefits    to the new plan, were transferred to the mmO2 PP on 17 March 2003.

From 1 July 2002, the Group has been the principal employer    of the mmO2 PP. The pension costs have been assessed in accordance    with the advice of a qualified actuary using the projected unit method. The    defined benefits sections of the mmO2 PP are closed to new entrants    and therefore the current service cost is likely to increase as the members    approach retirement. The principal assumptions used to determine the pension    cost for the period from 1 July 2002 are:
  **mmO2        PP****%**    Nominal          rate of increase in salaries  4.25%        p.a. Nominal          rate of increase of pensions in payment  2.50% p.a. Investment          return pre retirement  6.50% p.a. Investment          return post retirement  6.00% p.a. Inflation          assumption  2.50% p.a.    
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**8.****Pension costs (Continued)**
The first full actuarial valuation of the mmO2 PP    will have an effective date of 30 June 2003. An initial report has been completed    recommending an interim contribution rate and having an effective date of    1 July 2002. The employer contribution rate has been set at 11.6 per cent    of pensionable salaries. This rate will be reviewed as part of the first full    valuation. On the inception of the mmO2 PP at 1 July 2002 no assets    or benefits had accrued to members in the new scheme. Following the confirmation    of the members electing to transfer their liabilities from the BTPS, a funding    level of 99 per cent as at 1 July 2002 was assessed. The transfer of assets    to the mmO2 PP to cover the liabilities of the members electing    to transfer was completed on 17 March 2003 and the actual funding level has    declined from 99 per cent owing to the fall in the UK equity market over that    period.

The difference between the assets and liabilities has been amortised    over the expected future working life of the active membership using the straight    line method and included in the cost.
***Other defined benefit          pension schemes***
The Group also operates funded defined benefit pension schemes    in the Netherlands and in the Isle of Man. The combined cost under SSAP 24    charged in the year for these schemes was £3 million (2002: £2    million). At 31 March 2003, the Netherlands scheme had 693 active members    (2002: 851 active members), and the Isle of Man scheme had 409 members of    whom 264 were active (2002: 403 members of whom 274 were active). The Isle    of Man scheme was closed to new entrants on 30 June 2002. A defined contribution    scheme is available for new employees.

The sale of O2 Netherlands to Greenfield Capital    Partners was announced on 14 April 2003. The assets and liabilities of the    O2 Netherlands pension scheme are included in the disposal.

The aggregate market value of the assets of these schemes as    at 31 March 2003 was £21 million (2002: £25 million).

The Group operates an unfunded defined benefit pension scheme    in the UK. A provision, determined in accordance with SSAP 24, is recorded    on the balance sheet to recognise the accrued liability to date for this scheme.

The provision recorded at 31 March 2003 for the unfunded scheme    was £5 million (2002: £4 million). The cost charged for the scheme    for the year was £1 million (2002: £1 million). At 31 March 2003,    the scheme had 23 members, of whom 22 were active (2002: 24 members,    all of whom were active).

In Germany the Group operates a number of defined benefit schemes.    Until May 2001 the O2 Germany main scheme was unfunded. This scheme    has been changed to a funded arrangement with payments being made to provide    for previously unfunded liabilities over the period to the active members’    retirements. The vast majority of members of the O2 Germany main    scheme are now accruing benefits under the defined contribution arrangement.    The other defined benefit schemes are unfunded. A provision of £7 million    (2002: £5 million) is recorded on the balance sheet to recognise the    liabilities of the defined benefit schemes. At 31 March 2003 the German schemes    had 3,742 members (2002: 4,294 members).

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**8.****Pension costs (Continued)*****Defined contribution          schemes***
The mmO2 PP has a defined contribution section. Prior    to 1 July 2002, the Group participated in the BT Retirement Plan (BTRP),    a defined contribution scheme established by BT with effect from 1 April 2001    for employees and certain employees of its subsidiaries who were not eligible    to join the BTPS. Members of the BTRP could elect to transfer their funds    under management into the new mmO2 Plan (defined contribution section)    on its inception. These funds were transferred on 14 March 2003. The cost    for the year to 31 March 2003 was £1 million.

The Group also operates defined contribution schemes in Ireland    and Germany. The cost for the year to 31 March 2003 was £1    million in Ireland and £2 million in Germany.

The assets of the defined contribution arrangements are held    separately from those of the Group in independently administered funds. There    were no contributions outstanding or pre-paid at the year end.
***FRS 17 disclosures***
In accordance with the transitional arrangements of FRS 17 “Retirement    benefits”, certain information regarding the Group’s pension arrangements    are disclosed below. No comparative information is presented at the end of    last year in respect of the mmO2 PP as it was established during    the current year, although information is provided at 1 July 2002, the date    of inception of the Plan.

The initial actuarial valuation of the mmO2 PP (including    the subsequent assessment of the assets and liabilities transferred from the    BTPS) has been updated to 31 March 2003 by an independent qualified actuary    in accordance with the transitional arrangements of FRS 17. In accordance    with FRS 17, the defined benefit liabilities have been measured using the    projected unit method. Plan assets are stated at their market value.
  **31        March** **1        July** **Main          assumptions under FRS 17** **2003** **2002**       **mmO2        PP** **mmO2        PP**         Nominal          rate of increase in salaries  3.75% 4.20%Nominal          rate of increase of pensions in payment       –          Pension increases with inflation  2.50% 2.70%–          Pension increases with inflation limited to 5% p.a.  2.40% 2.70%Discount          rate  5.80% 6.00%Inflation          assumption  2.50% 2.70%Expected          long-term return for:       –          Equities  7.50% 7.70%–          Other  3.80% —     
The assumptions, adopted for FRS 17 purposes, for the other    defined benefit schemes around the Group are consistent with those used for    the mmO2 PP.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**8.****Pension costs (Continued)**
The assets and liabilities of the    defined benefit pension schemes are:
    **31 March**   **31 March**   **31 March** **2003** **1 July** **2002**   **2003** **other** **2002** **other**   **mmO2        PP** **schemes** **mmO2        PP** **schemes**         **£m** **£m** **£m** **£m** Fair          value of assets comprises:             –          Equities  177  11  227  16 –          Bonds  —  10  —  6 –          Other  20  —  —  1       Fair          value of assets  197  21  227  23 Present          value of liabilities  (268) (39) (259) (36)      Deficit  (71) (18) (32) (13)Related          deferred tax asset  21  5  10  4       Net          pension liability  (50) (13) (22) (9)      
The fair value of the assets of    the mmO2 PP at 30 April 2003 were approximately £215 million.

Under FRS 17, the mmO2    PP would be represented on the balance sheet as a liability of £71 million    (£50 million net of deferred tax).

The following table sets out the    amounts which would be charged to the profit and loss account and statement    of total recognised gains and losses in accordance with the requirements of    FRS 17. For the mmO2 PP, the amount charged for the period from    1 April 2002 to 30 June 2002 is the contributions paid to the BTPS of £4    million and is in addition to charges shown below.
  **Period from**      **1 July 2002        to** **Year ended**   **31 March 2003** **31 March 2003**   **mmO2        PP** **other schemes**       **£m** **£m** Analysis          of the amount charged to operating loss:       Current          service cost (employers’)  14  3 Vested          past service cost  —  (1)    Total          operating charge  14  2     Analysis          of the amount credited/(charged) to other finance income:       Expected          return on pension plan scheme assets  14  1 Interest          on pension plan liabilities  (12) (2)    Net          return  2  (1)    Analysis          of the amount recognised in the statement of total recognised gains          and losses:       Actual          return less expected return on pension plan assets1  (62) (7)Experience          gains and losses arising on plan liabilities  (4) 2 Changes          in assumptions underlying the present value of plan liabilities  26  —     Actuarial          loss recognised in the statement of total recognised gains and losses  (40) (5)     1     Excluding          the returns on assets of the Group’s defined contribution arrangements          which do not impact on the balance sheet liability.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**8.****Pension costs (Continued)**    **Period from**      **1 July 2002        to** **Year ended**   **31 March 2003** **31 March 2003**   **mmO2        PP** **other schemes**       **£m** **£m** **Movement          in deficit during the period/year**       Deficit          at 1 July 2002/1 April 2002  (32) (13)Movement          in period/year:       Total          current service cost  (21) (4)Total          contributions  20  4 Vested          past service costs  —  1 Other          finance income  2  (1)Actuarial          loss recognised in the statement of total recognised gains and losses  (40) (5)    Deficit          in plan at 31 March 2003  (71) (18)    **History          of experience gains and losses**       Difference          between the expected and actual return on plan assets:       Amount          – loss  (62) (7)Percentage          of plan assets  (32)% (33)%Experience          gains and losses on plan liabilities:       Amount          – (loss)/gain  (4) 2 Percentage          of the present value of plan liabilities  (1)% 5%Total          amount recognised in statement of total recognised gains and losses:       Amount          – loss  (40) (6)Percentage          of the present value of plan liabilities  (15)% (15)%    
At 31 March 2002, the expected assets    of the mmO2 PP were calculated assuming that all eligible employees    elected to transfer their past service liabilities to the new plan. On this    basis, the fair value of plan assets, as at 31 March 2002, would have    been £299 million. Under FRS 17 the new plan was not expected to have    either a significant surplus or a deficit.

The actual liabilities of the mmO2    PP at 1 July 2002 were £259 million. The reduction compared to the anticipated    liabilities at 31 March 2002 has occurred as a result of a reduction in the    number of employees eligible to transfer their benefits to the mmO2    PP following the restructuring programme in the UK announced by the Group    in 2002. The past service liabilities of the members not eligible to transfer    remain in the BTPS. The assets of the mmO2 PP at 1 July 2002 have    also fallen compared with the indicative asset valuation disclosed at 31 March    2002. This is a combined result of the reduction in the numbers of employees    transferring their benefits to the mmO2 PP and the fall in UK equity    markets between 31 March and 1 July 2002.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**9.****Net interest payable          and similar charges**    **2003** **2002** **2001**        **£m** **£m** **£m** **Group**          Interest          receivable and similar income  18  9  74 Net          interest receivable on sale and leaseback transaction (note 20)  1  2  — Interest          payable and similar charges:               Bank          loans and overdrafts  (7) (6) (2)     Amortisation          of debt issue costs  (3) (4) —      Debentures  (63) (12) —      Other          borrowings  (12) (15) (11)     Loans          from BT  —  (756) (660)     Group          net interest (payable)/receivable  (66) (782) (599)     **Share          of joint ventures**          Interest          receivable and similar income  —  —  2 Interest          payable and similar charges  —  —  (72)**Share          of associates**          Interest          receivable and similar income  —  1  —      Share          of joint ventures and associates net interest receivable/(payable)  —  1  (70)     Net          interest payable  (66) (781) (669)       **10.****Tax on loss on ordinary          activities**    **2003** **2002** **2001**        **£m** **£m** **£m** **Current          tax**          United          Kingdom corporation tax at 30 per cent  —  (13) — Tax          on Group’s share of results of associates  2  2  7 Adjustments          in respect of prior periods  —  (2) 1 Non          United Kingdom tax  8  2  —      **Total          current tax charge/(credit)**  10  (11) 8      **Deferred          tax (credit)/charge at 30 per cent**          Origination          and reversal of timing differences  (72) (233) (121)Adjustments          in respect of prior periods  7  (6) (1)     **Total          deferred tax (credit)/charge**  (65) (239) 122      **Tax          (credit)/charge on loss on ordinary activities**  (55) (250) (114)     
In the year ended 31 March 2003,    the loss on ordinary activities before taxation was £10,203 million    (2002: £1,629 million, 2001: £4,119 million).

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**10.****Tax on loss on ordinary          activities (Continued)**
The tax assessed for the year varied    from the amount computed by applying the corporation tax rate to loss on ordinary    activities before taxation. The differences were attributable to the following    factors:
  **2003** **2002** **2001**        **£m** **£m** **£m** UK          corporation tax on loss at standard rate  (3,061) (489) (1,235)Non-deductible          depreciation, amortisation and impairment  2,387  124  929 Non-deductible          non-UK losses  23  44  178 UK          and non-UK tax rate differences  (7) (3) (1)Capital          allowances for period in excess/(deficit) of depreciation  14  (21) (49)Losses          carried forward  657  260  185 Pre-demerger          losses  —  74  — Other          timing differences and adjustments  (3) —  1      **Current          tax charge/(credit) for year**  10  (11) 8      
**Factors that may affect future    tax charges**

The Group expects to be able to    claim capital allowances in excess of depreciation in future years. The future    tax charges will also continue to be affected by the fact that relief is not    available for goodwill amortisation and by the inability to offset non-UK    tax losses against taxable profits in the UK and other jurisdictions.

The deferred taxation (credit)/charge    was mainly the result of the tax effect of timing differences as follows:
  **2003** **2002** **2001**        **£m** **£m** **£m** Excess          capital allowances  4  44  49 Other          timing differences  (76) (277) (170)Adjustments          in respect of prior periods  7  (6) (1)     **Total          deferred tax charge**  (65) (239) (122)       **11.****Loss per share**
Basic and diluted loss per share    has been calculated by dividing the loss for the financial year of £10,148    million (2002: £850 million, 2001: £3,533 million) by 8,670 million    shares (2002: 8,670 million, 2001: 8,670 million), being the weighted average    number of ordinary shares in issue during the year. For 2002 the number of    ordinary shares is based on the weighted average number of shares in issue    for the period from demerger to 31 March 2002. For 2001 the number of ordinary    shares is based on the issued share capital of BT at the date of demerger    and a one-for-one allotment at this date.
**12.****Impairment review**
In accordance with FRS 11 “Impairment    of fixed assets and goodwill” the Group regularly monitors the carrying    values of its fixed assets.

During the second half of the year    ended 31 March 2003 certain events, including the Group’s strategic review    of the Dutch market which led to the announcement of the disposal of O2    Netherlands, indicated the Group should perform impairment reviews of its    four principal operations; its mobile telecommunications operations in the    UK, Germany, Ireland and the Netherlands.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**12.****Impairment review (Continued)**
In April 2003, the Group announced    the sale of O2 Netherlands resulting in an accounting loss of approximately    £1.4 billion, which provided an indication that the valuation of mobile    businesses may be lower than previously estimated. Additionally, following    the Competition Commission’s report on mobile termination charges, the    Group announced that it was reviewing the launch dates of its 3G services    and would adopt a more prudent timetable where local regulatory requirements    permitted. The revision in this timetable, together with the current absence    of evidence as to the present mass market appeal of 3G services and the limited    availability of 2G/3G compatible handsets, has led management to review and    revise the business plans of its mobile operations across its European footprint.

As a result of the above events,    the carrying value of the fixed assets of each of the Group’s principal    income generating units (IGUs), being O2 UK, O2 Germany,    O2 Ireland and O2 Netherlands, were compared to their    respective recoverable amounts.

The announced disposal of O2    Netherlands has led to the carrying value of the net assets of the Dutch IGU    being written down to their recoverable amount, which in this case is the    sale proceeds less direct costs of disposal. This has resulted in an exceptional    impairment charge of £1,364 million being recognised in the profit and    loss account below Group operating loss.

With respect to the IGUs that are    held for continuing use within the Group (being O2 UK, O2    Germany and O2 Ireland), the carrying values of their fixed    assets were compared to their value in use to the Group. The value in use    of each IGU is calculated with reference to the net present value of its future    cash flows derived from the assets, using cash flow projections for the period    up to 31 March 2013. These projections cover a ten-year period, as management    believes that throughout this ten-year period, the annual growth rate of the    IGUs being assessed will differ from the average growth rates for the countries    concerned. For the periods beyond 1 April 2013, the projections use a long-term    growth rate assumed to be at or below the nominal GDP growth rate of the country    concerned. The discount rates applied to the projections were based on the    post-tax weighted average cost of capital for the Group. The effective pre-tax    discount rate for each of our territories ranged between 10.4 per cent and    12.5 per cent.

The impairment review performed    during the year ended 31 March 2003 revealed that the fixed assets of each    of the IGUs held for continuing use within the Group were impaired, resulting    in an exceptional impairment charge of £8,300 million included within    operating expenses.

The total exceptional impairment    charges are analysed below:
    **Licences,**           **other**           **intangible**           **assets        and** **Tangible**      **Goodwill** **investments** **assets** **Total**         **£m** **£m** **£m** **£m** **Operating          exceptional items:**             O2          UK  198  2,102  —  2,300 O2          Germany  903  3,797  —  4,700 O2          Ireland  1,300  —  —  1,300          2,401  5,899  —  8,300 **Non-operating          exceptional items:**             O2          Netherlands  649  423  292  1,364          **3,050**  **6,322**  **292**  **9,664**       

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**12.****Impairment review (Continued)**
The carrying value of the Group’s    goodwill and licences after the impairment charges are £3,418 million    and £4,164 million respectively.

The impairment charge relating to    goodwill includes £47 million in respect of goodwill arising on acquisitions    prior to 1 April 1998 which has been written off directly to reserves. This    goodwill has been reinstated and written off through the profit and loss account.

In calculating the value in use    there is considerable uncertainty as to the present value of the future cash    flows. In assessing the future cash flows, assumptions have been made using    the best estimates available at the time of performing the impairment review.    These estimates include those used to reflect the growth rates up to 2013,    the long-term growth rates beyond 2013, the discount rate, the competitive    landscape, the take up and charge rate of data services and the availability    of functioning technological infrastructure to support the 3G roll-out. The    actual outcome is uncertain and these estimates may change over time as subsequent    changes in the mobile telecommunications industry, including advances in technology,    changes in the performance of our businesses as a result of competitive pressure    or otherwise, or potential difficulty in the implementation of the UMTS network,    may in the future shorten the estimated useful lives or result in a further    write down of these assets.

Similar impairment reviews were    performed during the years ended 31 March 2002 and 2001. The review in 2001    resulted in an exceptional charge to operating costs of £2,800 million    in respect of O2 Germany, which was allocated to goodwill.
**13.****Intangible assets**    **Goodwill** **Licences****and other****intangible****assets** **Total**        **£m** **£m** **£m** **Cost**          At          1 April 2002  9,835  9,695  19,530 Additions  —  137  137 Disposals  —  (4) (4)Currency          movements  838  727  1,565      **At          31 March 2003**  10,673  10,555  21,228      **Amortisation**          At          1 April 2002  3,474  64  3,538 Charge          for the year  374  31  405 Impairment          charge (note 12)  3,003  6,288  9,291 Currency          movements  404  8  412      **At          31 March 2003**  7,255  6,391  13,646      **Net          book value**          **At          31 March 2003**  3,418  4,164  7,582      **At          31 March 2002**  6,361  9,631  15,992      
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**14.****Tangible assets**    **Land        and****buildings** **Plant        and****equipment** **Assets        in****course of****construction** **Total**         **£m** **£m** **£m** **£m** **Cost**             At          1 April 2002  222  5,429  569  6,220 Additions  2  233  572  807 Transfers  92  401  (493) — Disposals  (18) (171) —  (189)Currency          movements  27  353  10  390       **At          31 March 2003**  325  6,245  658  7,228       **Depreciation**             At          1 April 2002  79  2,047  —  2,126 Charge          for the year  42  890  —  932 Impairment          charge (note 12)  —  274  18  292 Disposals  (12) (169) —  (181)Currency          movements  15  169  —  184       **At          31 March 2003**  124  3,211  18  3,353       **Net          book value**             **At          31 March 2003**  201  3,034  640  3,875       **At          31 March 2002**  143  3,382  569  4,094       
The net book value of land and buildings    comprises:
  **2003** **2002**       **£m** **£m** Freehold  80  29 Long          leases  22  16 Short          leases  99  98     Net          book value  201  143     The          net book value of assets held under hire purchase contracts comprises:       Cost  731  698 Accumulated          depreciation  (347) (314)    Net          book value  384  384     
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**15.****Fixed asset investments**  **Group** **Interests        in****associates****and other****investments** **Own****shares** **Total**      **£m** **£m** **£m** **Cost**          At          1 April 2002  90  4  94 Additions  —  2  2 Profit          retained for the year  3  —  3      **At          31 March 2003**  93  6  99      **Provisions**          At          1 April 2002  56  1  57 Charge          for the year  3  2  5 Impairment          charge (note 12)  34  —  34      **At          31 March 2003**  93  3  96      **Net          book value**          **At          31 March 2003**  —  3  3      **At          31 March 2002**  34  3  37                 **Parent company** **Shares        in****subsidiary****undertakings** **Own        shares**      **£m** **£m** **Cost**       At          1 April 2002  18,498  4 Additions  —  2     **At          31 March 2003**  18,498  6     **Provisions**       At          1 April 2002  —  1 Charge          for the year  —  2 Impairment          charge  7,215  —     **At          31 March 2003**  7,215  3     **Net          book value**  —    **At          31 March 2003**  11,283  3     **At          31 March 2002**  18,498  3     
The Directors consider that disclosing    full particulars of all subsidiary undertakings would lead to a statement    of excessive length. A list of principal subsidiary undertakings is given    in note 30. A full list of subsidiary undertakings at 31 March 2003 will be    annexed to the Company’s next Annual Return.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**16.****Debtors**    **Group** **Parent****company**   **2003** **2002** **2003** **2002**         **£m** **£m** **£m** **£m** Trade          debtors  594  584  —  — Amounts          due from Group undertakings  —  —  440  705 Other          debtors  39  166  9  10 Prepayments  204  237  —  — Accrued          income  87  103  —  —          924  1,090  449  715       
Trade debtors are stated after deducting    £128 million as at 31 March 2003 (2002: £105 million) for doubtful    debts. The amount charged to the Group’s profit and loss account for    doubtful debts for the year ended 31 March 2003 was £72 million    (2002: £61 million).

T-Mobile Deutschland GmbH (T-Mobile)    provides national roaming capacity to O2 Germany in areas where    O2 Germany has not developed its own network. The cost of    the contract is determined based on a fixed number of minutes available to    O2 Germany. In February 2003 an extension to this agreement    gave O2 Germany increased access to T-Mobile’s 3G network    over a longer period. Amounts already paid for minutes which have not yet    been used of £106 million (2002: £172 million) are included in    prepayments at 31 March 2003. Outstanding contractual payments due to    T-Mobile at 31 March 2003 are £151 million (2002: £nil million).
**17.****Current asset investments**    **Group** **Parent****company**   **2003** **2002** **2003** **2002**         **£m** **£m** **£m** **£m** Money          market deposits  414  131  414  131 Money          market funds  79  328  79  328 Other          deposits  354  384  —  — Certificates          of tax deposit  1  16  —  —          848  859  493  459       
All current asset investments mature    within one year, except for an amount of £323 million (2002: £384    million) included within other deposits, relating to the O2 UK    hire purchase contracts as disclosed in note 20, which is receivable in more    than one year.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**18.****Creditors: amounts          falling due within one year**    **Group** **Parent****company**   **2003** **2002** **2003** **2002**         **£m** **£m** **£m** **£m** Bank          loans and overdrafts  —  —  —  190 Other          loans  8  7  —  — Loan          notes (note 20)  19  58  —  — Obligations          under hire purchase contracts (note 20)  39  36  —  — Trade          creditors  423  384  —  — Corporation          tax  10  2  —  — Other          taxation and social security  64  52  —  — Other          creditors  28  163  —  — Accrued          expenses  781  649  14  12 Deferred          income  200  170  —  —          1,572  1,521  14  202         **19.****Creditors: amounts          falling due after more than one year**    **Group** **Parent****company**   **2003** **2002** **2003** **2002**         **£m** **£m** **£m** **£m** Debentures          (note 20)  1,015  982  1,015  982 Other          loans  33  43  —  — Obligations          under hire purchase contracts (note 20)  351  370  —  — Other          creditors  52  8  —  —          1,451  1,403  1,015  982         **20.****Debentures and other          borrowings**    **Group** **Parent****company**   **2003** **2002** **2003** **2002**         **£m** **£m** **£m** **£m** **Analysis          of loan repayments:**             Within          one year or on demand  27  65  —  190 Between          one and two years  7  7  —  — Between          two and five years  663  632  643  610 After          five years  378  386  372  372          1,075  1,090  1,015  1,172       
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**20.****Debentures and other          borrowings (Continued)** **Obligations under finance          leases and hire purchase contracts**   **Group**      **2003** **2002**       **£m** **£m** Within          one year  39  51 Between          one and five years  147  203 After          five years  348  335        534  589 Less:          finance charges allocated to future periods  (144) (183)       390  406     
In January 2002 mmO2    plc issued two debentures in the form of a €1,000 million 6.375% fixed    rate bond and a £375 million 7.625% fixed rate bond which have a five    and ten-year term respectively.

Loan notes of £132 million    were issued by O2 UK between March 1999 and April 2000 for the    purchase of various businesses. At 31 March 2003 loan notes totalling £19    million (2002: £58 million) were outstanding and repayable on demand.

Obligations under hire purchase    contracts are mainly in respect of leases of plant and equipment. On 30 March 2001    and 9 April 2001 hire purchase financing contracts were signed between O2    UK and a number of US leasing trusts. Under the contracts O2 UK    sold and repurchased material portions of its GSM radio and switching equipment.    O2 UK has deposited sufficient funds with a trust company to meet    the future hire purchase obligations. The deposit account is included in current    asset investments. The hire purchase agreement is for 16 years with an early    buy out option after 12 years. In accordance with the Separation Agreement    signed on demerger, BT continues to guarantee all future hire purchase obligations    of the trust company. O2 UK has provided a counter indemnity to    BT for this guarantee. mmO2 has put in place bank guarantees totalling    £63 million to cover specific risks under this hire purchase transaction.
**21.****Financial instruments          and risk management**
Financial risks are identified and    managed by a centralised Group treasury function. The Group’s treasury    policy, including details of the nature, terms and credit risk associated    with financial instruments with off-balance sheet risk are described in the    Treasury Management and Policies section of the “Operating and Financial    Review and Prospects – B. Liquidity and Capital Resources – Treasury    Management and Policies” in Item 5.

Short-term debtors and creditors,    where permitted by FRS 13 “Derivatives and Other Financial Instruments:    Disclosures”, have been excluded from the following disclosures, which    are after taking account of interest rate and currency swaps where applicable.

The Group holds or issues financial    instruments mainly to finance its operations, for the temporary investment    of short-term funds and to manage currency and interest rate risks arising    from its operations. Further details on the financing of operations is contained    in the Source of Liquidity and Capital Resources section in the operating    and financial review and prospects.

The Group uses derivative financial    instruments to manage its exposure to market risks such as changes in interest    rates and foreign exchange rates. The objective is to match the profile and    characteristics of Group funding (equity and debt) to that of the assets funded    and to mitigate foreign exchange risk under the guidelines approved by the    Board of Directors in the Treasury Policy document.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**21.****Financial instruments          and risk management (Continued)** **Fair value of financial          instruments**
The Group held the following financial    assets and financial liabilities at 31 March 2003. The book and fair values    of the assets are presented below.

Fair value is the amount at which    a financial instrument could be exchanged in an arm’s length transaction    between informed and willing parties, other than a forced or liquidation sale    and excludes accrued interest. Book values are stated before deducting any    unamortised issue costs.
  **Book        value****2003** **Fair        value****2003** **Book        value****2002** **Fair        value****2002**         **£m** **£m** **£m** **£m** **Liabilities**             Long-term          borrowings  (1,065) (1,105) (987) (951)Hire          purchase contracts  (390) (370) (406) (406)Loan          notes  (19) (19) (58) (58)Other          loans and borrowings  (41) (41) (50) (50)         (1,515) (1,535) (1,501) (1,465)      **Assets**             Hire          purchase contracts  354  392  384  384 Short-term          deposits  414  414  344  344 Money          market funds  79  79  131  131 Cash          at bank and in hand  68  68  20  20          915  953  879  879       **Derivative          financial instruments held to manage the interest rate and currency          profile of the Group**             Interest          rate swaps  —  15  —  (9)Cross-currency          swaps  38  53  (2) (13)Forward          foreign exchange contracts  6  7  —  1          44  75  (2) (21)       **Summary of methods          and assumptions**
For interest rate swaps, currency    swaps and forward foreign exchange contracts, the fair value is based upon    market price of comparable instruments where available and if not available    by the discounting of future cash flows to net present values using appropriate    interest and currency rates.

For short-term deposits and borrowings    and cash at bank, the fair value of the short-term deposits, money market    funds and cash at bank approximate to the book carrying value due to the short-term/on    demand maturity of these instruments.

For long-term borrowings the fair    value of the sterling and Euro denominated bonds have been estimated using    quoted market prices.

For other borrowings the fair value    of other short-term borrowings approximate to the carrying value due to the    short-term/on demand maturity of these instruments.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**21.****Financial instruments          and risk management (Continued)** **Hedges**
Under the Group’s accounting    policy as detailed in note 1 to the financial statements, gains and losses    on derivative instruments used for hedging are not recognised in the financial    statements. The gains and losses are as follows:
    **Gains**  **Losses**   **Total        net****gains/(losses)****2003**         **£m** **£m** **£m** Unrecognised          gains and losses at 1 April 2002  1  (20) (19)Gains          and losses arising in previous years that were recognised in the year  —  —  —      Gains          and losses arising in previous years that were not recognised in the          year  1  (20) (19)Gains          and losses arising in the year that were not recognised in the year  30  20  50      **Unrecognised          gains and losses on hedges at 31 March 2003**  31  —  31 Of          which:          Gains          and losses expected to be recognised in 2003-04  7  —  7 Gains          and losses expected to be recognised in 2004-05 or later  24  —  24       **Currency exposures**
The table below shows the extent    to which Group companies have monetary assets and liabilities in currencies    other than their local currencies.
  **Net        foreign currency monetary assets**    **Functional          currency of Group operations** **Sterling** **US        dollars** **Euro** **Total**        **£m** **£m** **£m** **£m** Sterling  —  3  1  4 Other          currencies  —  —  —  —       **Total**  —  3  1  4        **Foreign exchange transaction          risk management**
Taking into account the effect of    forward instruments, the Group’s identified exposure to foreign currency    risk of expected future sales and expenditure is immaterial as at 31 March    2003.
**Financial instruments          held for trading purposes**
The Group does not trade in financial    instruments.
**Financial assets**
Financial assets consist of sterling    and euro denominated cash at bank, short-term money market deposits and investments    in a AAA-rated money market fund. Money market deposits have a maturity profile    between overnight and three months and earn interest at market rates. Investments    in the money market fund can be called on either a same day or next day basis    and yield income/interest on the basis of performance of the underlying assets    measured against one-week and three-month LIBOR/EURIBOR benchmarks.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**21.****Financial instruments          and risk management (Continued)**    **2003** **2002**         **Hire** **Short-term**       **Short-term**      **Cash        at** **purchase** **deposits**   **Cash        at** **Hire** **deposits**      **bank        and** **related** **and        money**   **bank        and** **purchase** **and        money**      **in        hand** **assets** **market        funds** **Total** **in        hand** **related        assets** **market        funds** **Total**             **£m** **£m** **£m** **£m** **£m** **£m** **£m** **£m** **Currency:**                            Sterling  7  —  290  297  (17) —  265  248    Euro  58  —  137  195  34  —  210  244    Other  3  354  66  423  3  384  —  387           **At          31 March 2003**  68  354  493  915  20  384  475  879           
At 31 March 2003, the Group had    no fixed rate financial assets.
**Financial liabilities**   **2003**        **Floating**   **Fixed        rate** **Fixed        rate financial**   **Fixed        rate** **rate**   **financial        liabilities** **liabilities        weighted**   **financial** **financial**   **weighted        average** **average        period for**   **liabilities** **liabilities** **Total** **interest        rate** **which        rate is fixed**          **£m** **£m** **£m** **%** **(years)** **Currency:**                   Sterling  434  562  996  7.66% 8.2    Euro  —  103  103  —  —    Other  372  —  372  6.68% 6.3        **At          31 March 2003**  806  665  1,471  7.21% 7.3                           **2002**        **Floating**   **Fixed        rate** **Fixed        rate financial**   **Fixed        rate** **rate**   **financial        liabilities** **liabilities        weighted**   **financial** **financial**   **weighted        average** **average        period for**   **liabilities** **liabilities** **Total** **interest        rate** **which        rate is fixed**          **£m** **£m** **£m** **%** **(years)** **Currency:**                   Sterling  373  414  787  7.625% 8.8    Euro  —  303  303  —  —    Other  406  —  406  6.68% 7.3        **At          31 March 2002**  779  717  1,496  7.13% 8.5        
The effect of the Group’s interest    rate swaps are to classify €500 million of Euro borrowings as floating    rate in both years. The Group also has cross-currency and foreign exchange    swaps, which classify €500 million and €350 million respectively    of Euro borrowings as floating rate in sterling in both years. The impact    of the cross-currency and foreign exchange swaps is to reduce the Euro borrowings    and increase Sterling borrowings by £309 million (2002: £309 million)    and £234 million respectively.

Floating rate financial liabilities    bear interest at rates, based on relevant national LIBOR/EURIBOR equivalents,    which are fixed in advance for periods of six months.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**21.****Financial instruments          and risk management (Continued)** **Borrowing facilities**
The Group has the following undrawn    committed floating rate borrowing facilities available at 31 March 2003 in    respect of which all conditions precedent had been met at that date:
  **Total**   **2003**      **£m** Expiring          within one year  250 Expiring          in more than two years  1,725    **Total**  1,975    
The facilities expiring within one    year include the 364-day tranche of the Revolving Credit Facility (RCF) and    a 364-day bilateral facility. The facility expiring in more than two years    is the five-year tranche of the RCF, which matures in September 2006. All    facilities incur commitment fees at market rates.
**22.****Provisions for liabilities          and charges**    **Deferred**   **Other**      **taxation** **Restructuring** **provisions** **Total**         **£m** **£m** **£m** **£m** At          1 April 2002  286  81  35  402 (Credited)/charged          against loss for the year  (65) —  24  (41)Utilised          in the year  —  (82) —  (82)Currency          movements  —  1  4  5       **At          31 March 2003**  221  —  63  284        **Deferred taxation**
The elements of deferred taxation    provided for in the financial statements, are as follows:
  **2003** **2002**       **£m** **£m** Accelerated          capital allowances  362  358 Other  (11) (20)Unrelieved          tax losses carried forward  (130) (52)    **Total          provision for deferred taxation**  221  286      **Other provisions**
Other provisions as at 31 March    2003 include £25 million (2002: £20 million) in respect of mast    site restoration costs and £12 million (2002: £9 million) in respect    of pensions provisions. It also includes amounts provided for legal claims.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**23.****Called up share capital**  **Number of shares**  **£m**             **Authorised**       Ordinary          shares of 0.1 pence each  20,050,000,000  20 Deferred          shares of £1 each  40  —        20,050,000,040  20     **Called          up, allotted and fully paid**       Ordinary          shares of 0.1 pence each  8,670,181,627  9 Deferred          shares of £1 each  40  —        8,670,181,667  9     
During the year, the Company issued    132,211 ordinary shares of 0.1 pence each for a total cash consideration of    £65,081.

The Company has in issue 40 deferred    shares of £1 each. The holders of the deferred shares have no right    to attend or vote at any general meeting of the Company. The deferred shares    do confer the right to receive a cumulative dividend of 1 per cent of the    nominal value of the deferred shares each year. On a return of capital on    the winding-up of the Company, the holders are entitled to receive any accumulated    unpaid dividends and, subject to all other classes of shares being repaid,    the amount paid up on the deferred shares. The deferred shares are classified    as non-equity.
**24.****Reconciliation of movements          in shareholders’ funds**    **Called        up****share capital** **Other****reserves** **Profit        and****loss account** **Owners’        net****investment** **Total        equity****shareholders’****funds**          **£m** **£m** **£m** **£m** **£m** **Group**                **At          1 April 2000**  —  —  —  2,053  2,053 Retained          loss for the year  —  —  —  (4,009) (4,009)Currency          translation differences  —  —  —  (11) (11)Funding          flows with BT  —  —  —  4,419  4,419        **At          31 March 2001**  —  —  —  2,452  2,452 Funding          flows with BT  —  —  (1,003) 17,591  16,588 Transfer          on demerger  9  23,189  (3,146) (20,043) 9 Retained          loss for the period after demerger  —  —  (376) —  (376)Transfer          from profit and loss account  —  (533) 533  —  — Currency          translation differences  —  —  161  —  161        **At          31 March 2002**  9  22,656  (3,831) —  18,834 Retained          loss for the year  —  —  (10,148) —  (10,148)Reinstatement          of goodwill previously written off to reserves  —  —  47  —  47 Transfer          from profit and loss account  —  (10,569) 10,569  —  — Currency          translation differences  —  —  1,333  —  1,333        **At          31 March 2003**  9  12,087  (2,030) —  10,066        

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**24.****Reconciliation of movements          in shareholders’ funds (Continued)**
Other reserves arose on demerger. They relate to the difference    between the carrying value of the Group held by BT prior to demerger (representing    BT’s investments and funding in the Group) and amounts settled with BT    on demerger to acquire the assets and liabilities of the Group.

Aggregate goodwill as at 31 March 2003 in respect of acquisitions    completed prior to 1 April 1998 of £15 million (2002: £62 million)    has been written off against reserves in accordance with the accounting policy    existing prior to the adoption of FRS 10 “Goodwill and intangible assets”.

If the Group had fully adopted the provisions of FRS 17 “Retirement    benefits” in the year ended 31 March 2003, the pension schemes deficit    (net of deferred tax) of £63 million as disclosed in note 8 to the financial    statements would have been recognised on the Group’s balance sheet. Instead    the Group is providing the following analysis of reserves in accordance with    the transitional disclosures required regarding the pension schemes:
  **£m** Profits          and loss account excluding pension deficit  (2,030)Pension          deficit (net of related deferred tax asset)  (63)   Profit          and loss account including pension deficit  (2,093)          **Called        up****share capital** **Other****reserves** **Profit        and****loss account** **Total        equity****shareholders’****funds**         **£m** **£m** **£m** **£m** **Company**             On          incorporation  —  —  —  — Issue          of shares  9  —  —  9 Arising          on demerger from BT  —  18,488  —  18,488 Retained          loss for the year  —  —  (6) (6)      **At          31 March 2002**  9  18,488  (6) 18,491 Retained          loss for the year  —  —  (7,291) (7,291)Transfer          from profit and loss account  —  (7,215) 7,215  —       **At          31 March 2003**  9  11,273  (82) 11,200       
The Company has taken advantage of s.230 of the Companies Act    1985 not to present the Company’s own profit and loss account. The loss    attributable to shareholders of the Company for the year was £7,291    million (period from incorporation on 30 March 2001 to 31 March 2002: £6    million).

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**25.****Analysis of cash flows          for headings netted in the cash flow statement**    **2003** **2002** **2001**        **£m** **£m** **£m** **Returns          on investments and servicing of finance**          Interest          received  18  31  2 Finance          costs  —  (22) — Interest          paid  (81) (18) (13)        (63) (9) (11)     **Taxation**          UK          corporation tax (paid)/recovered  (4) (4) 21         (4) (4) 21      **Capital          expenditure and financial investment**          Purchase          of tangible fixed assets  (779) (1,240) (990)Purchase          of intangible fixed assets  (89) (21) (4,306)Sale          of tangible fixed assets  —  30  62         (868) (1,231) (5,234)     **Acquisitions          and disposals**          Purchase          of subsidiary undertakings (2001: acquired net of £96 million          cash)  —  (864) (9,410)Investments          in joint ventures and associated undertakings  —  —  (3,168)Disposal          of associated undertaking  —  —  4         —  (864) (12,574)     **Management          of liquid resources**          Increase          in money market deposits and funds  (3) (459) —         (3) (459) —      **Financing**          Net          cash contributions from BT  —  847  3,938 New          loans from BT  —  —  13,800 Debentures          issued  —  989  — Other          loans issued  —  28  — Loan          repayments  (47) (74) (145)        (47) 1,790  17,593      
Liquid resources comprise money market deposits and funds (note    17).

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**26.****Analysis of net debt**    **At****1 April****2002** **Cash        flow** **Other          non-cash****changes and****exchange****movements** **At****31 March****2003**         **£m** **£m** **£m** **£m** Cash          at bank and in hand  20  48  —  68 Current          asset investments  859  3  (14) 848 Debt          due after one year  (1,025) —  (23) (1,048)Debt          due within one year  (65) 47  (9) (27)Finance          leases  (406) —  16  (390)         (617) 98  (30) (549)       ***Reconciliation of          net cash flow to movements in net debt***   **2003** **2002** **2001**        **£m** **£m** **£m** Increase/(decrease)          in cash in the period  48  (320) 113 Management          of liquid resources  3  459  — Cash          outflow/(inflow) from decrease/(increase) in debt  47  (1,295) (13,655)     Change          in net debt resulting from cash flows  98  (1,156) (13,542)Other          non-cash movements  (30) 17,133  1 Debt          assumed on acquisitions  —  —  (33)     Decrease/(increase)          in net debt in the year  68  15,977  (13,574)Net          funds/(debt) at beginning of year  (617) (16,594) (3,020)     **Net          (debt)/funds at end of year**  (549) (617) (16,594)     
Other non-cash movements relate principally to the inception    of new finance leases, interest accrued thereon and foreign exchange gains    and losses arising in relation to items of net debt held in foreign currencies.
**27.****Acquisitions**
In February 2001, Telenor exercised a put option to sell its    remaining 49.5 per cent interest in O2 Ireland to the Group and    this transaction was completed in April 2001, following approval by the regulator.

The total consideration for this stake was £877 million    including expenses resulting in additional goodwill of £884 million.    The consideration includes £17 million payable to the former Managing    Director for his 2 per cent stake in the non-voting shares of O2    Ireland, of which £8 million (2002: £13 million) is payable after    the year end.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**28.****Financial commitments          and contingent liabilities** **Obligations under hire          purchase contracts**
Future gross hire purchase payments payable by Group as at 31    March 2003 are as follows:
  **£m** **Payable          in the year ending 31 March:**    2004  39 2005  43 2006  37 2007  34 2008  33 Thereafter  348    **Total          future gross hire purchase payments**  534    
Hire purchase commitments are mainly in respect of leases of    plant and equipment. Full details of these leases are provided in note 20.
**Capital commitments**   **2003** **2002**       **£m** **£m** Contracts          placed for capital expenditure not provided in the accounts  909  704      **Operating lease commitments**
At 31 March 2003 the Group was committed to making the following    payments during the next year in respect of operating leases:
  **2003** **2002**   **Land        and****buildings** **Other** **Land        and****buildings** **Other**         **£m** **£m** **£m** **£m** **Leases          which expire:**             Within          one year  7  4  10  23 Between          one and five years  32  25  20  7 After          five years  127  7  73  34          166  36  103  64       
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**28.****Financial commitments          and contingent liabilities (Continued)**
Future minimum operating lease payments    due by the Group as at 31 March 2003 are as follows:
  **£m** **Payable          in the year ending 31 March:**    2004  202 2005  193 2006  198 2007  162 2008  154 Thereafter  959    **Total          future minimum operating lease payments**  1,868    
mmO2 plc has provided    a guarantee of all liabilities of Airwave mmO2 Limited under its    contracts with PITO (the Police Information Technology Organisation) and the    police force customers.

There are no other contingent liabilities    or guarantees other than those detailed in note 20 to the financial statements    and those arising in the ordinary course of the Group’s business and    on these no material losses are anticipated. The Group has insurance cover    to certain limits for major risks on property and major claims in connection    with legal liabilities arising in the course of its operations.

The Group does not believe there    are any pending legal proceedings which would have a material adverse effect    on the financial position or results of operations of the Group.
**29.****Related party disclosures**
The Group demerged from BT in the    year ended 31 March 2002. In accordance with FRS 8 “Related party disclosures”,    BT is not a related party of the Group in the year ended 31 March 2003. Transactions    and balances with BT in the year ended 31 March 2002 were:
  **2002**      **£m** Telecommunications          services (net)  172 Building          rental  (50)Other  (75)   **Total          net transactions (analysed below)1**  47     1All transactions are at          arm’s length rates.    **2002**      **£m** **Turnover**    BT  607 **Purchases**    BT  (560)   **Total          net transactions**  47    
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**29.****Related party disclosures          (Continued)**
The Group had the following balances    outstanding with BT as at 31 March 2002:
  **2002**      **£m** Trade          debtors  92 Trade          creditors  (115)   
During the year the Group also undertook    transactions with other related parties as follows:
  **2003** **2002**       **£m** **£m** **Turnover**       The          Link Stores Limited  54  47 **Purchases**       The          Link Stores Limited  (79) (95)    **Total          net transactions**  (25) (48)     **Joint venture loans**
During the year ended 31 March 2001,    the Group provided loans to its joint venture, O2 Germany, totalling    £2,591 million. Following the acquisition of the remaining shareholding    in O2 Germany in February 2001, there were no loans owed to the    Group by joint ventures as at 31 March 2002 or 31 March 2003.
**30.****Principal subsidiary          undertakings and associates**
The principal operating subsidiary    undertakings are detailed below, all of which are included in the Group financial    statements.
**Name**  **Country of incorporation and operation**  **Activity**  **Portion of        ordinary shares held %**     O2          Limited  England and Wales  Intermediate holding company  100 O2          (UK) Limited1  England and Wales  Mobile cellular telephone system provider        and operator  100 O2          Third Generation Limited2  England and Wales  UMTS licence holder  100 O2          (Online) Limited3  England and Wales  Mobile internet business  100 O2          Communications (Ireland) Limited4  Ireland  Mobile cellular telephone system provider        and operator  100 Manx          Telecom Limited  Isle of Man  Telecommunication services supplier  100 O2          (Netherlands) BV5  Netherlands  Mobile cellular telephone system provider        and operator  100 O2          (Germany) GmbH & Co. OHG6  Germany  Mobile cellular telephone system provider        and operator  100 Airwave          mmO2 Limited  England and Wales  Digital radio service for public safety        organisations  100  1BT Cellnet Limited changed          its name to O2 (UK) Limited on 19 April 2002.2BT3G Limited changed its          name to O2 Third Generation Limited on 19 April 2002.3Genie Internet Limited          changed its name to O2 (Online) Limited on 19 April 2002.4Esat Digifone Limited          changed its name to Digifone mmO2 Limited on 12 September          2001, and then to O2 Communications (Ireland) Limited on          23 April 2002.5Telfort Mobiel BV changed          its name to O2 (Netherlands) BV on 19 April 2002. On 3 June          2003 O2 Netherlands was sold to Greenfield Capital Partners.6Viag Interkom GmbH &          Co. changed its name to O2 (Germany) GmbH & Co. OHG on          19 April 2002.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**30.****Principal subsidiary          undertakings and associates (Continued)**
The shares in O2 Limited    are held directly by mmO2 plc. The shares of the other operating    companies are held by O2 Limited or its wholly owned subsidiaries.    The accounting reference date of all the subsidiary undertakings is 31 March.    The Group also owns a 40 per cent stake in an associate, The Link Stores Limited,    a telecommunications equipment retailer which is incorporated and operates    in England and Wales.
**31.****Parent Company Balance          Sheet of mmO2 plc at 31 March 2003**    **Note** **2003****£m** **2002****£m**      **Fixed          assets**          Investments          in subsidiary undertakings  15  11,283  18,498 Investment          in own shares  15  3  3              11,286  18,501 **Current          assets**          Debtors  16  449  715 Investments  17  493  459 Cash          at bank and in hand     1  —              943  1,174 **Creditors:**          amounts falling due within one year  18  (14) (202)       **Net          current assets**     929  972        **Total          assets less current liabilities**     12,215  19,473        **Creditors:**          amounts falling due after more than one year  19  (1,015) (982)       **Net          assets**     11,200  18,491        **Capital          and reserves**          Called          up share capital  23  9  9 Other          reserves  24  11,273  18,488 Profit          and loss account  24  (82) (6)       **Shareholders’          funds**     11,200  18,491        
These financial statements were    approved by the Board of Directors on 20 May 2003 and were signed on its behalf    by:

**P Erskine** Chief Executive    Officer**D Finch** Chief Financial Officer

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information** **Reconciliation with          US GAAP**
The Group’s financial statements    are prepared in accordance with accounting principles generally accepted in    the United Kingdom (UK GAAP), which differ in certain respects from generally    accepted accounting principles in the United States of America (US GAAP).
**I.****Differences between          accounting principles generally accepted in the United Kingdom and the          United States of America**
The following are the main differences    between UK GAAP and US GAAP which are relevant to the Group’s financial    statements.
**(a)****Capitalisation of interest**
Under UK GAAP, the Group does not    capitalise interest in its financial statements. To comply with US GAAP, the    estimated amount of interest incurred whilst constructing major capital projects    is included in fixed assets and depreciated over the lives of the related    assets. This includes capitalisation of interest incurred on funding the UMTS    licences for the period up to the launch of the related services. The amount    of interest capitalised is determined by reference to the average interest    rates on outstanding borrowings and cannot exceed the annual interest expense    charged. As at 31 March 2003 under US GAAP, gross capitalised interest of    £1,299 million (2002: £1,214 million) was subject to depreciation    generally over periods of five to 20 years.
**(b)****Goodwill and intangible          assets**
Under UK GAAP, in respect of acquisitions    completed prior to 1 April 1998, the Group wrote off goodwill arising from    the purchase of subsidiary undertakings, associates and joint ventures on    acquisition against Owners’ net investment. The goodwill is reflected    in the net income of the period of disposal, as part of the calculation of    the gain or loss on divestment to the extent it has not already been recognised    in the profit and loss account. Under US GAAP, such goodwill is held as an    intangible asset in the balance sheet and was previously amortised over its    useful life with only the unamortised portion being included in any gain or    loss on divestment. Under UK GAAP, goodwill arising on acquisitions completed    on or after 1 April 1998 is amortised over its useful life. In addition, under    UK GAAP, contingent purchase consideration is generally included as part of    the purchase cost at the date of acquisition. Under US GAAP, this cost is    not recognised until the contingency is resolved or the amount is determinable    beyond a reasonable doubt.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
In June 2001, the FASB issued Statement    of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other    Intangible Assets.” The Group adopted SFAS No. 142 on 1 April 2002. SFAS    No. 142 requires the cessation of amortisation of intangible fixed assets    that have an indefinite useful life, including goodwill. Instead, such intangible    fixed assets are reviewed for impairment annually, or sooner should a triggering    event occur. Those intangible fixed assets that have definite useful lives    continue to be amortised over their useful life, with impairment reviews being    carried out when triggering events occur. Such definite lived intangible assets    are tested for impairment in accordance with SFAS No. 144, “Accounting    for the Impairment or Disposal of Long-Lived Assets”. In considering    whether a triggering event has occurred under SFAS No. 142 and SFAS No. 144,    the Group looks for the existence of facts and circumstances, either internal    or external, which indicate that the carrying value of the asset may not be    recovered.

Certain intangible fixed assets    recognised under US GAAP purchase accounting requirements are subsumed within    goodwill under UK GAAP. Under US GAAP, these separately identified intangible    assets are valued and amortised over their useful lives. Under US GAAP, the    Group separately identified intangible assets which arose on acquisition,    other than goodwill, relating to customer bases, trademarks and tradenames,    internally developed software, assembled workforce and licences. In accordance    with the provisions of SFAS No. 142, the net balance of £53 million    for assembled workforce was transferred to goodwill and will no longer be    subject to amortisation.

As of 1 April 2002, the Group performed    the transitional impairment test under SFAS No. 142 and compared the carrying    value for each reporting unit to its fair value, which was determined based    on discounted cash flows. Upon completion of the transitional impairment test,    the Group determined that there was no transitional impairment as of 1 April    2002.

During the second half of the year    ended 31 March 2003 certain trigger events indicated the Group should perform    impairment reviews of its four principal reporting units; its mobile telecommunications    operations in the UK, Germany, Ireland and the Netherlands in accordance with    SFAS No. 142 and SFAS No. 144.

In April 2003, the Group announced    the sale of O2 Netherlands resulting in an accounting loss of approximately    £1.4 billion, which provided an indication that the valuation of mobile    businesses may be lower than previously estimated. Additionally, following    the Competition Commission’s report on mobile termination charges, the    Group announced that it was reviewing the launch dates of its 3G services    and would adopt a more prudent timetable where local regulatory requirements    permitted. The revision in this timetable, together with the current absence    of evidence as to the present mass market appeal of 3G services and the limited    availability of 2G/3G compatible handsets, has led management to review and    revise the business plans of its mobile operations across its European footprint.
As a result of the above events and in conjunction  with the Group’s annual impairment review under SFAS 142, the carrying  value of the fixed assets of O2 UK, O2 Germany and O2  Ireland and the goodwill that arose on their acquisition was reviewed. In evaluating  whether any long-lived assets and intangibles were impaired, the undiscounted  cash flows of O2 UK, O2 Germany and O2 Ireland  were compared to their carrying values. To test the carrying value of goodwill,  the fair value of each reporting unit, based on the present value of future  cash flows, was compared to the carrying value of the reporting units’  assets and liabilities. Where the carrying value of the reporting unit exceeded  the fair value, the fair value of all assets and liabilities of the reporting  unit, including any unrecognised intangible assets, was estimated in order to  determine the implied value of goodwill.
 

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
Based on our analyses under US GAAP,    the Group recorded charges of £409 million and £1,475 million    to reduce the carrying value of the goodwill that arose on the acquisitions    of O2 UK and O2 Ireland respectively.

Under UK GAAP the Group recorded    an impairment of £8,300 million of the intangible assets relating to    O2 UK, O2 Germany and O2 Ireland, of which    £2,401 million related to the impairment of goodwill and £5,899    million related to the impairment of long-lived assets. The difference in    the impairment charges is primarily as a result of the requirement under US    GAAP to first test the carrying value of long-lived assets using undiscounted    cash flows and secondarily the difference in methodology for calculating the    impairment of goodwill.

As a result of the announced disposal    of O2 Netherlands, the carrying values of the net assets of O2    Netherlands have been written down to their net realisable amount, being the    sale proceeds less direct costs of disposal. This has resulted in an impairment    charge of £1,424 million being recognised in the profit and loss account    of which £684 million related to goodwill and £740 million related    to long-lived assets.

The difference between the impairment    charge recorded for US GAAP and UK GAAP in respect of O2 Netherlands    is due to the different carrying values of the net assets.

The changes in the carrying amount    of goodwill for the segments and in total for the year ended 31 March 2003    are as follows:
  **Mobile        telecommunications** **Other**      **UK        £m** **Germany        £m** **Other        £m** **businesses        £m** **Total        £m**        Balance          at 31 March 2002  2,820  605  2,397  5  5,827 Impairment          charges  (409) —  (2,159) —  (2,568)Foreign          exchange and other movements  —  126  310  —  436        **Balance          at 31 March 2003**  2,411  731  548  5  3,695        
The following table represents the    components of amortisable intangible assets for US GAAP purposes as of 31 March    2003:
  **Gross        carrying****amount** **Accumulated****amortisation****2003** **Gross        carrying****amount** **Accumulated****amortisation****2002**   **£m** **£m** **£m** **£m**       Licences  10,489  423  9,690  — Other          intangible assets  519  302  522  235          11,008  723  10,212  235       
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The following table presents current    and expected amortisation expense for other identifiable intangible assets    for the current year and the subsequent five years.
  **Amount**   **£m**    Aggregate          amortisation expense for the year ended 31 March:    2003  37    Expected          amortisation expense for the year ending 31 March:    2004  165 2005  579 2006  579 2007  579 2008  579    
The above table represents the Group’s    estimate regarding future amortisation of amortisable intangible assets recorded    on the balance sheet as at 31 March 2003. Due to the effects of foreign    exchange, any future investments or capital expenditure on intangible assets,    and the date on which the assets are likely to be put into service, it is    likely that the actual charge will be different.

As at 31 March 2003, the gross    carrying value of goodwill before impairment and amortisation under US GAAP    was £10,257 million (2002: £9,412 million).
**(c)****Software impairment**
In 2001, O2 Germany wrote    off certain software related to the integration of the fixed and mobile business    units that were abandoned as a result of the split of the mobile and fixed    line businesses of Viag Interkom. Under US GAAP, the software abandonment    is treated as a purchase price allocation adjustment for the portion acquired    on 20 February 2001. The portion owned by the Group prior to the February    acquisition is expensed at the acquisition date. Under UK GAAP, the entire    amount of software is written off subsequent to the purchase after BT has    attained full control of the entity and commenced the reorganisation of Viag    Interkom. The adjustment presented reverses the expense recorded under UK    GAAP related to the purchase price adjustment. The corresponding effect on    shareholders’ funds of the software write-off increases the recognised    goodwill.
**(d)****Employee share plans**
Share options have been granted    under the mmO2 Sharesave Plan at a 20 per cent discount to the    market price of the date of grant. Under UK GAAP, the share issues are recorded    at their discounted price when the options are exercised. Under US GAAP, a    plan is considered compensatory when the discount to market price is in excess    of 15 per cent. Compensation cost is recognised for the difference between    the exercise price of the share options granted and the quoted market price    of the shares at the measurement date (the grant date in this case) and accrued    over the vesting period of the options.

Additionally, certain shares have    been awarded to a small group of executives under the mmO2 Restricted    Share Plan on the basis that they will only vest if participants build up    a pre-determined personal shareholding in the Group. Under US GAAP an expense    is only recognised where it can be reasonably assured that the executive will    build up the required personal shareholding and such an expense is recognised    over the vesting period.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The Group’s potentially dilutive    share options are anti-dilutive and therefore, in accordance with US GAAP,    are not included in the computation of weighted average shares used in computing    the diluted loss per share.
**(e)****Investments accounted          for under the equity method**  1)Additional US GAAP adjustments          to equity method investments
Under UK GAAP, certain joint ventures    and associates have been accounted for using the equity method of accounting.    For the purposes of this reconciliation, adjustments have been made to restate    net loss and shareholders’ funds of these associates to US GAAP. The    only material reconciling item is capitalised interest, which reduced US GAAP    net loss by £nil for the year ended 31 March 2003 (2002: £nil,    2001: £66 million). This adjustment is reflected in the capitalised    interest reconciling line item.
2)Change in the reporting          period of a subsidiary
Under UK GAAP, the additional reporting    period, or lag time, resulting from a parent changing a subsidiary’s    year end is included in the income statement. Under US GAAP, the results from    this period are treated as a direct adjustment to retained earnings. The amount    included in the US GAAP reconciliation of net loss relates to the O2    Germany equity loss pick-up for the three-month period 1 January 2000    through 31 March 2000 included in the UK GAAP profit and loss account    for the year ended 31 March 2001.
**(f)****Other employee compensation          expense**
Under UK GAAP certain amounts paid    and payable to former owners of purchased companies who are also employees    are included as part of the acquisition cost of these companies. Under US    GAAP, where payment of those amounts is based on achievement of certain performance    goals, they qualify as employee compensation expense and are recognised in    the financial statements when the performance goals are met.
**(g)****Restructuring costs**
The Group recognised a restructuring    charge related to employee termination benefits and real estate closures.    This plan called for the reduction of over 1,900 positions in the technical,    retail and administrative departments of O2 UK and O2    Germany. Under US GAAP, site closure costs can only be recognised for the    period post cessation of operations at that site, whereas under UK GAAP the    provision may be recognised at the time of managements’ commitment, communication    and reasonable estimate of the associated cost. As of 31 March 2002,    approximately 650 employees had been terminated, with all other terminations    and associated closures occurring in the year ended 31 March 2003.
**(h)****Treasury stock**
In the year ended 31 March    2003, mmO2 Employee Share Trust purchased 2 million shares on the    stock market for £1 million (year ended 31 March 2002, 6 million    shares for £4 million). Under UK GAAP these shares have been classified    as a fixed asset investment and a charge of £2 million (2002: £1    million) has been recognised for stock compensation. Under US GAAP such shares    are classified as treasury stock and are included as a deduction in shareholders’    funds. This treasury stock has been accounted for under the cost method.
**(i)****Derivative financial          instruments**
Under UK GAAP certain derivative    financial instruments qualify for hedge accounting which do not qualify for    hedge accounting under US GAAP. The financial instruments, under US GAAP,    are carried at market value with valuation adjustments recorded in the profit    and loss account.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**  **(j)****Deferred tax effect          of US GAAP adjustments**
As at 31 March 2003, the adjustment    of £(278) million (2002: £(102) million) reconciling shareholders’    funds under UK GAAP to the amount under US GAAP included the tax effect of    US GAAP adjustments. This comprises an adjustment to increase non-current    assets by £742 million (2002: £74 million increase) and increase    long-term liabilities by £1,020 million (2002: £176 million increase).
**(k)****Long-term licence creditors**
In the year ended 31 March    2003, O2 Ireland purchased a UMTS ‘B’ licence. The total    licence fee is €114 million phased over 15 years. Under US GAAP the asset    cost has been recorded at the discounted present value of the phased payments    and a corresponding creditor established. Over the 15 year period the creditor    will be accreted in order to recognise the full €114 million due. Under    UK GAAP the asset and creditor have been recognised at their undiscounted    value.
**(l)****Pension liability**
Due to the different methods of    calculating pension liabilities, the pension scheme deficit calculated under    UK GAAP using FRS 17 differs from the calculation under SFAS No. 87 “Employers    accounting for pensions”.

In 2003, a minimum liability relating    to certain pension plans has been recognised in other comprehensive income    under US GAAP, whereas this balance is not provided for under UK GAAP, but    included as a disclosure item only.
**(m)****Foreign exchange**
The Group carries a significant    portion of its net assets in Euros. The foreign exchange adjustment reflects    the retranslation of US GAAP adjustments which are Euro denominated.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**  **II.****Net loss and owners’          net investment reconciliation**
The following statements summarise    the material estimated adjustments, which reconcile net loss and owners’    net investment/shareholders’ funds from that reported under UK GAAP to    that which would have been reported had US GAAP been applied.
  **Note** **2003** **2002** **2001**           **£m** **£m** **£m**    **Net          loss**                Net          loss under UK GAAP      (10,148) (1,379) (4,009)   Adjustment          for:                   Capitalisation          of interest, net of related depreciation  (a)  (67) 579  344       Goodwill          impairment  (b)  482  —  —       Licence          impairment  (b)  5,899  —  —       Fixed          asset impairment on discontinuing operations  (b)  (25) —  —       Goodwill          amortisation  (b)  374  23  19       Mobile          licences, software and other intangible assets  (b)  (37) (217) (98)      Software          impairment  (c)  —  —  12       Employee          share plans  (d)  (1) (1) (8)      Equity          investments: adjustment for change in reporting period  (e)  —  —  51       Other          employee compensation expense  (f)  —  (3) (8)      Restructuring          costs  (g)  (21) 21  —       Fair          value of derivatives  (i)  50  (19) —       Deferred          taxation on US GAAP differences  (j)  (176) (467) (50)      Long-term          licence creditors  (k)  (1) —  —               Net          loss as adjusted for US GAAP      (3,671) (1,463) (3,747)              Basic          and diluted net loss per share, as adjusted for US GAAP (pence)      (42.3) (16.9)      
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**    **Note** **2003** **2002**          **£m** **£m** **Shareholders’          funds**          Net          assets under UK GAAP     10,066  18,834 Adjustment          for:             Capitalisation          of interest, net of related depreciation  (a)  912  979    Goodwill          impairment  (b)  435  —    Licence          impairment  (b)  5,899  —    Fixed          asset impairment on discontinuing operations  (b)  (25) —    Purchase          business combinations and amortisation of intangible assets  (b)  69  (268)   Employee          share plans  (d)  (4) (3)   Other          employee compensation expense  (f)  (11) (11)   Restructuring          costs  (g)  —  21    Treasury          stock  (h)  (3) (3)   Fair          value of derivatives  (i)  31  (19)   Deferred          taxation on US GAAP differences  (j)  (278) (102)   Long-term          licence creditors  (k)  (1)      Pension          liability  (l)  (38) —    Foreign          exchange  (m)  (7) —        Net          assets as adjusted for US GAAP     17,045  19,428        
Had the cessation of goodwill amortisation    requirement of SFAS No. 142 been applied in prior periods, results of operations    would have been as follows:
  **2002****£m** **2001****£m**     Net          loss as reported under US GAAP   (1,463) (3,747)Add          back: Goodwill amortisation   346  268     Adjusted          net loss   (1,117) (3,479)    Basic          and diluted net loss per share as reported under US GAAP (pence)   (16.9)   Add          back: Goodwill amortisation (pence)  4.0          Basic          and diluted adjusted net loss per share (pence)   (12.9)         
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The net loss under UK GAAP has been    prepared for statutory reporting purposes using accounting policies which    differ in certain respects to those used in the Listing Particulars, Form    20-F/A and Form 20-F. The impact of the different accounting policies is set    out below:
  **2003** **2002** **2001**        **£m** **£m** **£m**            Net          loss on Form 20-F basis  (10,148) (1,379) (4,009)Notional          loans due to BT  —  756  660 Deferred          taxation on US GAAP differences  —  (227) (184)     Net          loss under UK GAAP for UK statutory reporting purposes  (10,148) (850) (3,533)     
The above adjustments have no impact    on the net loss as adjusted for US GAAP.
**III. Accounting for          stock options**
Under UK GAAP, the cost of shares    expected to be awarded under each plan is amortised evenly over the period    from the original date of grant of the particular award, to the time of vesting.    Under US GAAP, the Group adopted the disclosure-only option in SFAS No. 123,    “Accounting for Stock-Based Compensation”. Accordingly, the Group    accounts for share options in accordance with APB Opinion No. 25, “Accounting    for Stock Issued to Employees”, under which compensation expense is recognised    to the extent that the fair market value of the shares optioned exceeds the    option exercise price. Aggregate share compensation of £3 million (2002:    £2 million) has been recognised under APB No. 25 in the year. A charge    of £2 million was recognised under UK GAAP.
***Share option and          purchase schemes***
The Group operates savings-related    share option schemes for its employees and those of participating subsidiaries    and further share option schemes (the mmO2 Share Option Plan and    the mmO2 Legacy Option Plan) for selected Group employees.
*Sharesave Plan*
The mmO2 Sharesave Plan    is a savings-related share option scheme available to all employees. Share    options are normally exercisable on completion of a three-year or five-year    Save-As-You-Earn contract. Under this scheme, the option exercise price is    set at a 20 per cent discount to the market price at the date of grant. Similar    savings related schemes exist for Group employees based outside the UK.
*mmO2 Share          Option Plan*
From 1 April 2002 to 31 March 2003,    options were granted for nil consideration to 1,041 employees. All such options    have an exercise price equal to the market value at grant date. These options    were granted on the terms that they normally only become exercisable on the    third anniversary of grant, subject to certain performance criteria. If these    criteria are not met on the third anniversary of grant, the performance goals    will be retested on the fourth and fifth anniversaries. Options under this    scheme generally have a life of ten years.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)** *mmO2 Legacy          Option Plan*
Subsisting options over BT shares    granted under BT executive share option plans have been replaced with options    over mmO2 shares, granted under the Legacy Option Plan, for those    participants now employed by mmO2. The replacement options were    granted on the same terms, and are exercisable between the same dates, as    the options for which they were exchanged.

Options are normally exercisable    up until the tenth anniversary of the date of the original grant. The exercise    price of these options equalled the market value as at original grant date.

Options outstanding in relation    to Group employees under these share option schemes as at 31 March 2003 together    with their exercise prices and vesting periods, were as follows:
    **Options        outstanding over****ordinary shares** **Options        exercisable over****ordinary shares** Range          of exercise prices1 **Number****outstanding** **Weighted-****average****remaining****contrac- tual****life** **Weigthted****average****exercise****price** **Number****exercisable** **Weighted-****average****exercise****price**          **(m)** **(years)** **(£)** **(m)** **(£)** £0.44  37  3  0.44  —  — £0.46  77  9  0.46  —  — £0.48-0.69  13  9  0.65  3  0.69 £0.73-0.84  8  2  0.73  1  0.83 £0.87  46  9  0.87  3  0.87 £0.91-2.29  5  7  1.36  2  1.64           186  8  0.60  9  1.02         1Share options over American          Depositary Shares (ADS) have exercise prices termed in US Dollars. For          purposes of disclosure, these options’ exercise prices have been          translated into Sterling at the year end exchange rate. As each ADS          represents 10 ordinary shares, the number of options and exercise prices          have been adjusted by this ratio to reflect the options on a like for          like basis.
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
Options granted, exercised and lapsed    in respect of Group employees under these share option schemes during the    years ended 31 March 2003, 2002 and 2001 were as follows:
  **Options        over ordinary shares** **Options        over ADSs**   **Ordinary        shares1** **ADSs2** Range          of exercise prices1 **Savings-****related****share****options** **Other****share****options** **Weighted-****average****exercise****price** **Other****share****options** **Weighted-****average****exercise****price**          **(m)** **(m)** **(£)** **(m)** **(£)** Balance          at 31 March 2000  55  2  1.05  —  — Granted  10  2  1.82  —  — Exercised  (11) (1) 0.77  —  — Lapsed  (4) —  1.50  —  —        Balance          at 31 March 2001  50  3  1.37  —  — Lapsed          on demerger  (50) (3) 1.37  —  —        Balance          on demerger  —  —  —  —  — Granted  31  65  0.82  6  1.17 Lapsed  —  (2) 0.84  —  —        Balance          at 31 March 2002  31  63  0.82  6  1.17 Granted  37  81  0.45  —  — Lapsed  (23) (6) (0.72) (3) 0.87        **Balance          at 31 March 2003**  45  138  0.60  3  1.49         1All options granted, exercised,          lapsed and outstanding for periods prior to demerger have been adjusted          to reflect the exchange ratio of 4.1266 shares of mmO2 per          share of BT.2Share options over ADSs          have exercise prices termed in US Dollars. For purposes of disclosure,          these options’ exercise prices have been translated into Sterling          at the year end exchange rate. As each ADS represents 10 ordinary shares,          the number of options and exercise prices have been adjusted by this          ratio to reflect the options on a like for like basis. **mmO2 Restricted          Share Plan**
Restricted share awards have been    granted to a small group of senior executives. Most of these awards were granted    on terms that they will normally only vest on the third anniversary of grant    if the participant builds up a pre-determined personal shareholding in the    Group, and remains in employment with the Group. Shares required to satisfy    these awards are held in trust during the restricted period. In accordance    with APB No. 25, an expense has been recognised to the extent that executives    have commenced building their personal shareholding. The weighted average    grant date fair value of the 9.4 million shares granted under this plan in    the year ended 31 March 2002 was £0.80. No shares were granted    under this plan in the year ended 31 March 2003.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
For disclosure purposes, the fair    value of all share options granted is estimated using the Black-Scholes option-pricing    model. The following weighted average assumptions were used for share options    granted by the Group:
  **2003** **2002** **2001**         **%** **%** **%** Annual          dividends  –  –  2 Expected          volatility  27  55  40 Risk          free interest rate  4  5  7 
The expected life applied in the    model anticipated the life of options extending one month later than the first    exercise date.

Had compensation expense been determined    on the basis of fair value pursuant to SFAS No. 123, net loss and net loss    per share would have been as follows:
  **2003** **2002** **2001**        **(in        £ millions, except per share****data which is stated in pence)** **Net          loss**          As          reported  3,671  1,463  3,747      **Pro          forma**  3,676  1,463  3,750      **Net          loss per share**          As          reported  42.3  16.9           **Pro          forma**  42.4  16.9           
The weighted average fair value    of share options granted in the year ended 31 March 2003 was £nil (2002:    £0.16) for options exercisable one year after the date of grant, £nil    (2002: £0.22) for options exercisable two years after the date of grant,    £0.13 (2002: £0.35, 2001: £0.80) for options exercisable    three years after the date of grant and £0.23 (2002: £0.46, 2001:    £1.03) for options exercisable five years after the date of grant.
**BT Legacy Share Awards**
A number of key employees of mmO2    were participants prior to demerger in BT share plans. The awards have been    adjusted so that they relate solely to mmO2 plc shares, and any    performance measure has been translated into a measure of the Group’s    performance from demerger to the end of the performance period. On maturity    these awards will be satisfied in existing mmO2 shares held by    an employee trust which has already been funded by BT.

In accordance with the rules of    these plans the awards were converted into awards over mmO2 plc    shares on the basis of an adjustment factor of 4.1266.
**Incentive Share Plan,          (ISP) and Retention Share Plan, (RSP)**
Participants are awarded shares    which will normally vest at the end of a three-year period provided a pre-determined    total shareholder return, (TSR), target is met.
**Executive Share Plan,          (ESP)**
Participants are awarded shares    which will normally vest at the end of five years provided a pre-determined    TSR target is met.

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)** **Deferred Bonus Plan,          (DBP)**
Awards of shares were made to executives    based on their performance in the preceding financial year and vest after    three years. Under the DBP there are no associated performance goals.

Under the Separation Agreement between    the Group and BT, it has been endorsed and agreed that all share awards required    under the ISP, RSP, ESP and DBP will be honoured by BT and will be satisfied    by issuance of existing mmO2 shares held by a BT trust which has    already been funded by BT. Thus, the Group is not responsible for any of the    options or shares under these schemes and will bear no compensation expense    in association with them.
**IV.****Group cash flow statements**
Under UK GAAP, the Group cash flow    statement is presented in accordance with FRS 1 “Cash flow statements”.    The statements prepared under FRS 1 present substantially the same information    as that required under SFAS No. 95 “Statement of Cash Flows”.

Under SFAS No. 95, cash and cash    equivalents include cash and short-term investments with original maturities    of three months or less. Under FRS 1, cash comprises cash in hand and at bank    and overnight deposits, net of bank overdrafts.

Under FRS 1, cash flows are presented    for operating activities, returns on investments and servicing of finance,    taxation, capital expenditure and financial investments, acquisitions and    disposals, dividends paid to the Company’s shareholders, management of    liquid resources and financing. SFAS No. 95 requires a classification of cash    flows as resulting from operating, investing and financing activities.

Cash flows under FRS 1 in respect    of interest received, interest paid and taxation would be included within    operating activities under SFAS No. 95. Cash flows from purchases, sales and    maturities of trading securities, while not separately identified under UK    GAAP, would be included within operating activities under US GAAP.

The following statements summarise    the combined cash flow statements as if they had been presented in accordance    with US GAAP, and include the adjustments that reconcile cash and cash equivalents    under US GAAP to cash at bank and in hand reported under UK GAAP.
  **2003** **2002** **2001**        **£m** **£m** **£m** Net          cash provided by operating activities  966  444  328 Net          cash used in investing activities  (868) (2,095) (17,808)Net          cash provided by financing activities  (47) 1,790  17,593      Net          increase in cash and cash equivalents  51  139  113 Exchange          movement on cash and cash equivalents  31  —  — Cash          and cash equivalents under US GAAP at the beginning of the year  479  340  227      Cash          and cash equivalents under US GAAP at the end of the year  561  479  340 Short-term          investments  (493) (459) — Bank          overdrafts  —  —  49      Cash          at bank and in hand under UK GAAP at the end of the year  68  20  389      
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**  **V.****Pensions**
Information in respect of the net    periodic benefit cost and related obligation determined in accordance with    SFAS No. 87 and SFAS No. 132 is given below. A description of the pension    arrangements of the Group is given in note 8 to the financial statements.    The assumptions used to determine the net periodic benefit cost and the year-end    benefit obligation or the mmO2 Pension Plan (mmO2 PP)    are shown below. The assumptions used for the other defined benefit schemes    around the Group are consistent with those used for the mmO2 PP.
  **Cost        for period from****1 July 2002 to****31 March 2003** **Year-end****benefit obligation**       **%** **%** Assumptions       Discount          rate  6.0  5.8 Long-term          rate of return on plan assets  7.7  7.1 Increase          in compensation levels  4.2  3.7 Inflation          rate  2.7  2.5 Increase          in payment of pensions          –          pension increases in line with inflation  2.7  2.5    –          pension increases limited to 5% p.a.  2.7  2.4  **Components of net benefit          expenses**
No comparatives for the year ended    31 March 2002 are presented as in that period most pension obligations were    provided for in the BT Pension Scheme (BTPS). Under UK GAAP and US GAAP multi-employer    accounting was applied to the Group’s participation in the BTPS. This    applied until the inception of the mmO2 PP on 1 July 2002 for which    the Group is the principal employer. The cost for the period from 1 April    2002 to 30 June 2002 equals the contributions paid to the BTPS of £4    million and is in addition to the costs shown below. For the Group’s    other arrangements, the difference between UK GAAP and US GAAP is not significant.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)** **Supplementary information          for United States investors**
The net benefit expense for the    year ended 31 March 2003 for the Group’s defined benefit pension schemes    in aggregate may be analysed as follows:
  **2003**      **£m** Service          cost  (17)Interest          cost on benefit obligation  (13)Expected          return on plan assets  15 Net          amortisation and deferral – recognised losses  (1)   Net          periodic benefit cost  (16)Defined          contribution cost  (4)   Net          benefit expense  (20)   
The funded status of the Group’s    pension schemes at 31 March 2003 was:
  **2003**      **£m** Benefit          obligation at end of year  (310)Fair          value of plan assets  218    Plan          assets below benefit obligation  (92)Unrecognised          net loss  82    Net          amount recognised  (10)   Comprising:    Benefit          provision (including additional minimum liability)  (48)Amount          recognised through accumulated other comprehensive income  38    Net          amount recognised  (10)          **2003**      **£m** Change          in additional minimum liability before tax:    Accrued          pension benefit expense  38    Other          comprehensive income before tax  38    
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The change in the benefit obligation    and the plan assets of the Group’s pension schemes in the year ended    31 March 2003 may be analysed as follows:
  **2003****£m**       Benefit          obligation at start of year  (298)Service          cost  (17)Interest          cost  (13)Contributions          by plan participants  (8)Actuarial          gains  26    Benefit          obligation at end of year  (310)        Fair          value of plan assets at start of year  250 Actual          return on plan assets  (56)Contributions          by plan participants  8 Contributions          by employer  16    Fair          value of plan assets at end of year  218     **VI. Deferred taxation**
The elements of deferred taxation    to be considered for US GAAP purposes are as follows:
  **As        at 31 March**   **2003** **2002**       **£m** **£m** Bad          debt provision  11  8 Other          general provision  —  7     **Deferred          current tax assets**  11  15     Tax          losses carried forward  1,712  893 Other  38  8     **Deferred          non-current tax asset**  1,750  901 Allowance  (878) (631)    **Total          deferred non-current tax asset after allowance**  872  270 Capitalised          interest  (312) (385)Intangible          assets  (708) (16)Accelerated          capital allowance  (362) (359)    **Total          deferred tax liabilities**  (1,382) (760)    **Net          deferred non-current liabilities (net of deferred tax assets)**  (499) (475)    
 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The table below represents the deferred    tax for loss carry forwards and expiry dates as at 31 March 2003:
  **O2** **O2** **O2** **O2**     **UK** **Germany** **Nether-        lands** **Ireland** **Total**          **£m** **£m** **£m** **£m** **£m** Total          (no expiration)  708  920  84  —  1,712        
The Group provides a valuation allowance    against its net deferred tax assets on a country by country basis if, based    on available objective evidence, it is probable that they will not be fully    realised.
**VII. Additional US          GAAP disclosures** ***(a) Investments***
Under UK GAAP, the Group accounts    for joint venture investments using the gross equity method of accounting.    The profit and loss account includes the Group’s share of the operating    profit and loss, interest income or expense and attributable taxation of those    companies. The balance sheet shows the Group’s share of the gross assets    and liabilities of those companies and attributed goodwill. Under US GAAP,    these investments would be accounted for using the net equity method. The    profit and loss account would include on one line an item with the Group’s    share of the loss before tax of £nil (2002: £nil, 2001: £374    million). The balance sheet would show on one line an item with the Group’s    share of the net assets of those companies.
***(b) Exceptional          items***
Under UK GAAP exceptional costs    totalling £8,300 have been recognised (2002: £150 million; 2001:    £2,821 million). Under US GAAP these would not be considered exceptional    items and would be classified within net operating expenses.
***(c) Use of estimates          in preparation of financial statements***
The preparation of financial statements    in conformity with accounting principles generally accepted in the United    Kingdom and the United States of America requires management to make estimates    and assumptions that affect the reported amounts of assets and liabilities    and disclosure of contingent assets and liabilities to the date of the financial    statements and the reported amounts of revenue and expenses during the period.    Actual results could differ from those estimates.
***(d) Recent US GAAP          Accounting Pronouncements***
In June 2001, the Financial Accounting    Standards Board (FASB) issued SFAS No. 143, “Accounting for Obligations    Associated with the Retirement of Long-Lived Assets”, which is effective    for the Group from 1 April 2003. SFAS No. 143 requires, among other things,    that the fair value of a liability for an asset retirement obligation be recognised    in the period in which it is incurred, if a reasonable estimate of fair value    can be made and the Group has a legal obligation to do so. A legal obligation    can result from (i) a government action, such as a law or ordinance, (ii)    an agreement between entities, such as a written or oral contract, or (iii)    a promise conveyed to a third party that imposes a reasonable expectation    of performance upon the promisor under the doctrine of promissory estoppel.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**
The associated asset retirement    costs are capitalised as part of the carrying amount of the long-lived asset.    The asset retirement cost is subsequently allocated to expense (as depreciation    or impairment) over the useful life of the related long-lived asset. The liability    is discounted and subsequently accreted using the credit-adjusted risk-free    interest rate in effect when the liability was initially recognised. The accretion    amounts must be recognised as an increase in the carrying amount of the liability    and classified in the statement of income as other operating expense. The    Group is currently assessing the impact of the adoption of this statement    on its financial position, results of operations and cash flows.

In June 2002, the FASB issued SFAS    No. 146, “Accounting for Costs Associated with Exit or Disposal    Activities”. SFAS No. 146 requires that a liability for costs associated    with an exit or disposal activity be recognised and measured initially at    its fair value in the period in which the liability is incurred. Previously    a liability for an exit cost was required to be recognised at the date of    an entity’s commitment to an exit plan, however, this does not, by itself,    create a present obligation to others that meets the definition of a liability.    SFAS No. 146 will be effective for the Group for any exit or disposal    activities that are initiated after 31 December 2002. The Group does    not anticipate adoption of this statement having a significant impact on its    financial position, results of operations and cash flows.

In November 2002, the FASB issued    FASB Interpretation 45 (FIN 45), “Guarantor’s Accounting and    Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness    of Others.” FIN 45 requires that a liability (at fair value) be    recorded in the guarantor’s balance sheet upon issuance of a guarantee.    In addition, FIN 45 requires disclosures about the guarantees that an    entity has issued, including a reconciliation of changes in the entity’s    product warranty liabilities. The initial recognition and initial measurement    provisions of FIN 45 are applicable on a prospective basis to guarantees    issued or modified after 31 December 2002, irrespective of the guarantor’s    fiscal year-end. The disclosure (but not the accounting) requirements of FIN 45    are effective for the Group’s 2003 financial statements.

In January 2003, the FASB issued    FASB Interpretation 46 (FIN 46), “Consolidation of Variable Interest    Entities, an Interpretation of ARB 51.” FIN 46 requires certain    variable interest entities to be consolidated by the primary beneficiary of    the entity if the equity investors in the entity do not have the characteristics    of a controlling financial interest or do not have sufficient equity at risk    for the entity to finance its activities without additional subordinated financial    support from other parties. FIN 46 is effective immediately for all new    variable interest entities created or acquired after 31 January 2003.    For variable interest entities created or acquired prior to 1 February    2003, the provisions of FIN 46 must be applied for the first interim    or annual period beginning after 15 June 2003. The disclosure (but not    the accounting) requirements of FIN 46 are effective for the Group’s    2003 financial statements, regardless of the date on which the variable interest    entity was created. Management is currently evaluating the impact of FIN 46    on the Group’s consolidated financial statements.

In November 2002, the Emerging Issues    Task Force (EITF) reached a consensus on Issue 00-21 (EITF 00-21),    “Revenue Arrangements with Multiple Deliverables”. EITF 00-21    addresses certain aspects of the accounting by a vendor for arrangements under    which the vendor will perform multiple revenue generating activities. EITF     00-21 will be effective for interim periods beginning after 15 June 2003.    The Group is currently evaluating the impact of adoption of EITF 00-21    on its financial position and results of operations in 2003.

 

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**mmO2 GROUP****NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 
**32.****Reconciliation from          UK GAAP to US GAAP and supplementary information (Continued)**  **(e)****Recent UK accounting          standards**
The Group continues to apply the    transitional disclosure arrangements set out in FRS 17 “Retirement    benefits”. Mandatory implementation is not required by the Group until    the year ended 31 March 2006. The transitional disclosures required are    provided in note 8 to the financial statements. The changes introduced    by FRS 17 principally affect the way defined benefit pension schemes    are accounted for. At each year-end the pension scheme assets should be measured    at market value while pension scheme liabilities should be measured at a present    value using a specified actuarial valuation method and discounted at a corporate    bond rate. The resulting pension scheme surplus or deficit must be shown on    the Group’s balance sheet, and could be volatile because of the dependence    on market conditions at the balance sheet date.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)**

 
**REPORT OF THE INDEPENDENT          ACCOUNTANTS**
To the Board of Directors and Owner    of VIAG Interkom:

In our opinion, the accompanying    combined balance sheets and the related combined profit and loss accounts    and combined cash flow statements, present fairly, in all material respects,    the financial position of Viag Interkom as at 31 December 1999 and 2000,    and the results of its operations and its cash flows for each of the three    years in the period ended 31 December 2000, in conformity with accounting    principles which, as described in Note 1, are generally accepted in the United    Kingdom. These financial statements are the responsibility of the management    of Viag Interkom GmbH & Co.; our responsibility is to express an opinion    on these financial statements based on our audits. We conducted our audits    of these statements in accordance with auditing standards generally accepted    in the United States of America, which require that we plan and perform the    audit to obtain reasonable assurance about whether the financial statements    are free of material misstatement. An audit includes examining, on a test    basis, evidence supporting the amounts and disclosures in the financial statements,    assessing the accounting principles used and significant estimates made by    management, and evaluating the overall financial statement presentation. We    believe that our audits provide a reasonable basis for our opinion.

As indicated in Note 1, Viag Interkom    represents the mobile business which has been carved out of the overall Viag    Interkom GmbH & Co. business and include all or a portion of Viag Interkom    GmbH & Co., Viag Interkom Management GmbH, Interkom Shop GmbH, Viag Europlattform    AG and Interkom Gesellschaft für internationale Kommunikation in der    Datenverarbeitung GmbH. The financial position, results of operations and    cash flows of Viag Interkom could differ from those that would have resulted    had Viag Interkom operated as a separate, stand alone group.

Accounting principles generally    accepted in the United Kingdom vary in certain significant respects from accounting    principles generally accepted in the United States of America. The application    of the latter would have affected the determination of net income expressed    in Euros for each of the two years in the period ended 31 December 2000    and the determination of Owners’ net investment and combined financial    position also expressed in Euros as at 31 December 1999 and 2000 to the    extent summarized in Note 22 to the combined financial statements.

Munich, Germany    14 September 2001

PwC Deutsche Revision    Aktiengesellschaft    Wirtschaftsprüfungsgesellschaft
(Gesswein)   (ppa. Rekitt)    Wirtschaftsprüfer  Wirtschaftsprüfer
 

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**O2 GERMANY****(formerly VIAG INTERKOM)**

 
**COMBINED PROFIT AND          LOSS ACCOUNTS**     **Year        ended 31** **December**   **Notes** **1998** **1999** **2000**           **€’000** **€’000** **€’000** **Turnover**  2  4,303  373,471  959,806 Cost          of sales     (72,558) (564,530) (1,026,040)        **Gross          loss**     (68,255) (191,059) (66,234)              Sales          and marketing expenses     (27,298) (105,646) (221,548)Administrative          expenses     (240,850) (435,940) (609,270)        **Operating          loss**  3  (336,403) (732,645) (897,052)              Interest          receivable and similar income  4  3,213  5,840  8,407 Interest          payable and similar charges  5  (67) (603) (166,430)        **Loss          on ordinary activities before taxation**     (333,257) (727,408) (1,055,075)Taxation          on loss on ordinary activities  6  —  —  —         **Loss          for the financial year**  15  (333,257) (727,408) (1,055,075)        
Turnover and operating loss derive    entirely from continuing activities. Other than the loss for the financial    year, there have been no other recognized gains or losses during the years    1998, 1999 and 2000. The profit and loss accounts have been prepared on the    historical cost basis. Accordingly, neither combined statements of comprehensive    income nor reconciliations of movement in Owners’ net investment are    shown.

 

The accompanying notes on pages    F-72 to F-90 are an integral part of the combined financial statements

 

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**O2 GERMANY****(formerly VIAG INTERKOM)**

 
**COMBINED BALANCE SHEETS**     **As        at 31** **December**   **Note** **1999** **2000**          **€’000** **€’000** **Fixed          assets**          Intangible          assets  8  18,762  8,475,541 Tangible          assets  9  1,262,389  1,757,898        **Total          fixed assets**     1,281,151  10,233,439        **Current          assets**          Stocks  10  39,538  103,336 Debtors  11  393,781  525,487 Cash          at bank and in hand     53,858  204,407        **Total          current assets**     487,177  833,230        **Creditors:**          amounts falling due within one year          Loans          and other borrowings  12  —  (9,032,461)Other          creditors  13  (466,321) (427,653)       **Net          current assets/(liabilities)**     20,856  (8,626,884)       **Total          assets less current liabilities**     1,302,007  1,606,555            Provisions          for liabilities and charges  14  (17,591) (22,497)       **Net          assets**     1,284,416  1,584,058                   **Owners’          net investment**  15  1,284,416  1,584,058        
 

The accompanying notes on pages    F-72 to F-90 are an integral part of the combined financial statements

 

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**O2 GERMANY****(formerly VIAG INTERKOM)**

 
**COMBINED          CASH FLOW STATEMENTS**     **Year        ended 31** **December**   **Notes** **1998** **1999** **2000**           **€’000** **€’000** **€’000**               **Net          cash outflow from operating activities**  16  (174,318) (740,020) (855,596)        **Returns          on investments and servicing of finance**                Interest          received     3,213  5,840  8,407    Interest          paid, including finance costs     (67) (603) (1,527)        **Net          cash inflow from returns on investments and servicing of finance**     3,146  5,237  6,880         **Capital          expenditure and financial investments**                Purchase          of intangible fixed assets     (895) (11,746) (8,458,082)   Purchase          of tangible fixed assets     (674,369) (598,808) (767,842)   Disposal          of tangible fixed assets     2,015  —  2,914         **Net          cash outflow for capital expenditure and financial investment**     (673,249) (610,554) (9,223,010)        **Cash          outflow before management of liquid resources and financing**     (844,421) (1,345,337) (10,071,726)        **Financing**                Increase          in Owners’ net investment  15  826,794  1,391,557  1,354,717    Increase          in short-term borrowings from Owners     —  —  8,867,558         **Net          cash inflow from financing**     826,794  1,391,557  10,222,275         **(Decrease)/increase          in cash and cash equivalents**     (17,627) 46,220  150,549                       Cash          and cash equivalents as at beginning of period     25,265  7,638  53,858 (Decrease)/increase          in cash and cash equivalents     (17,627) 46,220  150,549         **Cash          and cash equivalents as at end of period**     7,638  53,858  204,407         
**Reconciliation    of net cash flow to movements in net debt**
     **Year        ended 31** **December**      **1998** **1999** **2000**              **€’000** **€’000** **€’000**               (Decrease)/increase          in cash in the year     (17,627) 46,220  150,549 Cash          inflow from increase in debt     —  —  (8,867,558)        (Increase)/decrease          in net debt resulting from cash flows     (17,627) 46,220  (8,717,009)Other          non-cash movements     —  —  (164,903)        **(Increase)/decrease          in net debt in the year**     (17,627) 46,220  (8,881,912)Net          debt as at 1 January     25,265  7,638  53,858         **Net          funds/(debt) as at 31** **December**  17  7,638  53,858  (8,828,054)        
The accompanying notes on pages    F-72 to F-90 are an integral part of the combined financial statements

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS**

**1.****Basis of preparation,          combination and accounting policies**
**Description of Business and Ownership**

Viag Interkom GmbH & Co. (“Viag”), an integrated    fixed and mobile telecommunications company headquartered in Munich, was launched    in May 1995 as a joint venture between British Telecommunications plc (“BT”)    and Viag AG, with BT holding a 50 per cent stake. BT’s stake    was reduced to 45 per cent when Telenor AS acquired a 10 per cent    stake in April 1997. In January 2001, BT increased its stake to 55 per cent    and on 20 February 2001 BT acquired 100 per cent of the business.    On 28 February 2001 the business, assets and liabilities of Viag’s fixed-line    business were sold to a new company, BT Ignite GmbH & Co. OHG (“Ignite”),    set up for the purpose. The remaining assets and liabilities of Viag consist    entirely of the assets and liabilities of the mobile business and its subsidiary    undertakings (together “Viag Interkom”).

The business of Viag Interkom comprises the operation of a mobile    telecommunications network in Germany, offering mobile services to the consumer    and business markets.

In May 1997 Viag entered one of the largest mobile telecommunication    markets in Europe with the acquisition of the fourth German GSM license, followed    by the launch of the GSM network in October 1998. In August 2000, a UMTS license    was acquired from the German state at auction at a cost of DEM16.5 billion    (€8.4 billion). Since January 2001 Viag Interkom has also offered mobile    data services via GPRS (2.5 G).

The future performance of Viag Interkom will be significantly    influenced by the growth of the UMTS market in Germany. Viag Interkom has    incurred substantial operating losses since inception and has had negative    cash flow from operations. Under the UMTS license acquired in 2000, Viag Interkom    is required to develop a third generation mobile network in Germany which    will require substantial future investments. Historically, Viag Interkom has    relied upon support from its partners to provide funding for operations and    will continue to rely upon funding from the mmO2 Group in the future.    As described above, on 20 February 2001, Viag Interkom became a wholly-owned    subsidiary of BT.

**Basis of preparation and presentation**

These combined financial statements represent the carve-out    of the mobile operations of Viag and its subsidiary undertakings and include    all or a portion of Viag Interkom GmbH & Co., Viag Interkom Management    GmbH, Interkom Shop GmbH, Viag Europlattform AG and Interkom Gesellschaft    für Internationale Kommunikation in der Datenverarbeitung GmbH.

The financial statements have been prepared in Deutschemarks    and converted to Euros using the fixed exchange rate of DEM 1.9558 to EUR1.

**Basis of carve-out**

Viag Interkom, until the separation referred to above, was a    fully integrated business unit of Viag. The combined financial statements    reflect the results, financial position and cash flows of Viag Interkom as    if it was a separate entity for all periods presented.
*General*
The combined financial statements reflect the assets, liabilities,    operating results and cash flows of Viag Interkom and has been prepared from    the accounting records of Viag. The combined financial information includes    balances which were directly attributable to the Viag Interkom business or    which were apportioned based on allocations deemed reasonable by management,    to present the results of operations, financial position and cash flows of    Viag Interkom on a stand-alone basis.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **1.****Basis of preparation,          combination and accounting policies (Continued)**
The principal allocation methodologies are described below.

Viag Interkom had not in the past formed a separate legal group    or been structured with a holding company as a separate legal entity. The    investment by the Viag Owners attributable to Viag Interkom has been shown    on the balance sheet as the Owners’ net investment. Viag Interkom had    not been charged with any financing costs in respect of amounts included in    the Owners’ net investment during the period covered by this report.

Viag Interkom had no separate share capital and reserves for    the periods covered by these financial statements. All funding of the Viag    Interkom operations during the period of the combined financial statements    has been financed by Owners’ loans or Owners’ net investment. Trading    and short-term asset management balances with Ignite are included within debtors    and creditors as appropriate.

As an integrated business unit of Viag, Viag Interkom has not    prepared separate financial statements in accordance with UK GAAP in the normal    course of its operations. These combined financial statements were prepared    in accordance with UK GAAP for the purposes of the mmO2 Group demerger.    Changes in Owners’ net investment represent transfers to or from the    Owners, after giving effect to the losses attributable to the Owners during    the period and are assumed to be settled in cash.

As Viag Interkom was not a separate legal entity its results    in the period under review have not been the subject of separate taxation    returns during the period under review. For the purpose of this report, the    tax charge has been calculated at the applicable municipal corporate tax rate    for the years concerned.
*Profit and loss account*
Turnover and direct product cost of sales were allocated to    Viag Interkom by direct attribution through the use of product codes. Mobile    network costs, primarily depreciation and maintenance costs, were allocated    to Viag Interkom by direct attribution according to the same allocation as    for network assets. Network costs for the use of the fixed network were charged    to Viag Interkom based upon actual usage at an average annual price. The price    was calculated based upon market rates charged by Ignite to third parties    during each period adjusted by an appropriate discount rate. The discount    used is consistent with a rate that would have been applied had Viag Interkom    been an autonomous related party.

Depreciation and amortization expense were allocated based on    the allocation of the intangible and tangible fixed assets. However, costs    have been reduced by an assumed charge to Ignite, based on usage, for the    use of shared assets. The charge was based on the depreciation of the fixed    assets concerned and thus no profit was achieved in total. The usage of the    common assets by Ignite, and thus the charge to Ignite, was estimated based    on the ratio of average headcount during each of the periods as this ratio    is considered by management to be representative of the attributable costs    of the respective operations.

Direct costs and product specific overhead costs were allocated    by direct attribution through the use of cost centre information, which identified    Viag Interkom activities. Non product specific overhead costs, primarily general    administrative overhead including the accounting department and senior management    were allocated based upon the ratio of average headcount during each of the    periods. This ratio is considered by management to be a reasonable basis for    determining the attributable costs of the respective operations.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **1.****Basis of preparation,          combination and accounting policies (Continued)**
The pension cost attributable to Viag Interkom has been based    on the pension charge incurred by individual operations in respect of specific    pension plans of which employees of Viag Interkom are members. For the purposes    of presentation of the Viag Interkom financial statements, Viag Interkom’s    participation in the Viag pension plans has been treated as if the members    were continuing participants within the current Viag scheme. The charges included    in the financial statements reflect the pension arrangements of Viag.

All interest income and interest expense was allocated to Viag    Interkom since all cash and loans have been allocated to Viag Interkom.
*Balance Sheet*
The allocation of intangible and tangible fixed assets corresponds    to the actual asset separation agreed as at February 28, 2001 rolled    back through the historical periods.

Network assets and other technical equipment have been allocated    to Viag Interkom based on the identification of the mobile network platforms    and associated asset components. The fixed network platforms, transmission    network, fixed network accommodation sites and the corresponding business    customer sales branches were excluded from the Viag Interkom network assets.    Shared fixed assets (software and other equipment) have been allocated entirely    by direct attribution based upon the nature of each asset.

Stocks, debtors and prepaid expenses have been allocated to    Viag Interkom based upon direct identification.

Creditors have been allocated to Viag Interkom according to    management’s best estimate based upon an analysis of the creditors. Any    remaining balance was allocated based upon the ratio of fixed asset capital    expenditure as this ratio is considered by management to be a reasonable representation    of the overall purchasing activity of Viag Interkom.

Employee related accrued liabilities and provisions were allocated    to Viag Interkom based upon the average headcount ratio during each of the    periods.

**Use of estimates**

The preparation of the carve-out financial statements requires    management to make estimates and assumptions that affect the reported amounts    of assets and liabilities and disclosure of contingent assets and liabilities    at the date of the financial statements and the reported amounts of income    and expenditure during the reported periods. Actual results may differ from    those estimates.

The financial statements herein may not necessarily reflect    the financial position, results of operations, and cash flows of Viag Interkom    in the future or what they would have been had Viag Interkom been a separate,    stand-alone entity during the periods presented.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **1.****Basis of preparation,          combination and accounting policies (Continued)**
**Accounting policies**

The financial statements are prepared under the historical cost    convention and in accordance with the applicable accounting standards in the    United Kingdom. A summary of the principal accounting policies, which have    been applied consistently in all the periods presented, are set out below:

**Turnover**

Turnover from services, which excludes value added tax, is recognized    in the profit and loss account based on charges for minutes of airtime including    SMS, monthly fees and international roaming as well as minor income from internet-portal    related activities. Turnover from connection charges and activation fees is    deferred and recognized over the customer relationship period. Turnover from    subscription fees is recognized evenly throughout the periods to which they    relate. Turnover from the sales of handsets and other hardware is recognized    at the point of sale. Pre- paid call card sales are deferred until the customer    uses the stored value in the card to pay for relevant calls.

**Cost of sales**

Cost of sales comprises network costs, including national roaming    charges, costs of interconnecting to other networks and international roaming,    costs for content provisioning, hardware cost of sales, bad debts, customer    management costs and outsourcing of billing.

**Selling and administrative expenses**

All marketing costs, commissions paid to distributors and customer    retention costs are classified as selling and marketing expenses. All other    operating costs, including non-network depreciation and central overheads,    are classified as administrative expenses.

All selling and administrative expenses, including advertising    and promotional costs, are charged to the profit and loss account as incurred.

**Subscriber acquisition costs**

Subscriber acquisition costs (“SACs”) which include    the commission costs associated with acquiring new customers, are charged    to the profit and loss account as incurred.

**Research and development**

Expenditure on research and development is expensed as incurred.

**Interest**

Interest payable, including that related to financing the construction    of tangible fixed assets, is expensed as incurred.

**Taxation**

The charge for taxation is based on the profit for the year    and takes into account deferred taxation. Provision is made for deferred taxation    in respect of all timing differences that have originated but not reversed    by the balance sheet date. Deferred tax assets are recognized only to the    extent that it is regarded as more than likely they will be recovered. Viag    Interkom has not pursued the policy of discounting deferred tax balances.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **1.****Basis of preparation,          combination and accounting policies (Continued)**
**Foreign currencies**

Transactions in foreign currencies    are recorded at the exchange rates ruling on the dates of those transactions.    Monetary assets and liabilities denominated in foreign currencies are translated    at the rate of exchange ruling at the balance sheet date.

**Basis of combination**

The combined financial statements    incorporate the financial statements of Viag Interkom and its subsidiaries.    All intercompany transactions and balances have been eliminated. The accounts    include the results of subsidiaries acquired during the year, where significant,    from the relevant date of acquisition. They also include the results of subsidiaries    disposed of during the year up to the relevant date of disposal.

**Intangible assets**
*Goodwill*
Goodwill, arising from the acquisition    of subsidiary undertakings and interests in associates, represents the excess    of the fair value of the purchase consideration over the fair value of the    net assets acquired. The goodwill is amortized over a 20 year period.
*Other intangible assets*
License fees paid to the government    and associated bid costs, which permit telecommunication activities to be    operated for defined periods, are capitalized at cost and amortized from the    later of the start of the license period or launch of service to the end of    the license period on a straight line basis.

**Tangible fixed assets**

Tangible fixed assets are stated    at historical cost, less accumulated depreciation. Cost in the case of network    services includes planning and construction costs, site installation and equipment    upgrade costs.

Depreciation is provided on tangible    fixed assets on a straight-line basis from the time they are available for    use, so as to write off their costs over their estimated useful lives taking    into account any expected residual values. No depreciation is provided on    freehold land or assets in the course of construction.
Principal useful lives          used are:           Technical equipment8 years Leasehold land and buildingsShorter of the expected useful life or the        term of the lease Plant and machinery5 years Computers and office equipment2 to 5 years
Leasehold improvements are depreciated    on a straight line basis over the shorter of the expected useful life or the    term of the lease.

**Asset impairment**

Intangible and tangible fixed assets    are tested for impairment if and when an event that might affect asset values    has occurred. Such events or changes in circumstances may include continuing    operating losses, technological obsolescence or significant adverse changes    in the business or the market. An impairment loss is recognized to the extent    that the carrying amount cannot be recovered either by selling the asset or    by the discounted future earnings from operating the asset.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **1.****Basis of preparation,          combination and accounting policies (Continued)**
**Leased assets**

Viag Interkom has not entered into    any finance lease arrangements.

Annual rentals from operating leases    are charged to the profit and loss account on a straight line basis over the    lease term.

**Stocks**

Stocks consist mainly of handsets    and are stated at the lower of cost or estimated net realizable value (which    reflects the value to the business of the handset in the hands of the subscriber)    on a first in, first out basis, after provision for obsolescence.

**Pension costs**

Employees of Viag Interkom participate    in the Viag Interkom GmbH & Co. pension scheme, a salary dependent unfunded    pension scheme. The pension liability is provided for by Viag Interkom in    its balance sheet. No contributions are made by either employees or Viag Interkom    to a separate pension fund.

Pension benefits are based upon    the pension commitment (Pensionplan) of Viag Interkom GmbH & Co. dated    15 August 1998.

Pension costs for inclusion in the    profit and loss account are calculated under the UK Statement of Standard    Accounting Practice No. 24 (“SSAP 24”) and under the US Statement    of Financial Accounting Standards No. 87 (“SFAS 87”). Actuarial    valuations of the scheme are carried out on an annual basis in order to calculate    the pension cost to be charged in the profit and loss account.

**Site restoration costs**

To the extent that the costs for    the restoration of sites are expected to materialize, a provision is created    in full, on a discounted basis, and recognized over the estimated average    remaining lease period to which the provision relates.
**2.****Segmental analysis**
The directors consider that Viag    Interkom has only one business segment, namely that of providing a mobile    communications network and related services. Viag Interkom’s operations    are based entirely in Germany.
**3.****Operating loss**
Operating loss is stated after charging:
  **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** Hire          of plant and equipment  2,421  2,792  1,356 Operating          lease rentals in respect of land and buildings  9,865  15,186  38,072 Operating          lease rentals in respect of motor vehicles and plant and equipment  1,255  2,168  2,949 Depreciation          of owned tangible fixed assets  41,850  155,936  265,553 Amortization          of intangible assets  426  966  1,303 (Profit)/loss          on disposal of fixed assets  (119) 1  3,866 Year          2000 expenses  —  828  — Euro          conversion expenses  —  —  731 
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **4.****Interest receivable          and similar income**    **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** Interest          from related parties  393  3,614  1,599 Bank          interest receivable    2,820      1,803      4,505 Other          interest receivable  —  423  2,303         3,213  5,840  8,407        **5.****Interest payable and          similar charges**    **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** Interest          payable to owners  16  —  164,903 Bank          interest payable        11            9  102 Other          interest payable  40  594  1,425         67  603  166,430        **6.****Taxation on loss on          ordinary activities**
No corporate tax charges have been    incurred because of net losses arising in each period.
**7.****Employee information**
The average monthly number of employees    employed by Viag Interkom is set out below. The majority are employed by Viag    although the employment costs of staff seconded from BT have been charged    directly to Viag Interkom and are included below. The aggregate employee costs    were as follows:
  **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000**            Wages          and salaries  72,369  120,596  159,413 Social          security costs  11,370  18,524  25,480 Pension          costs  1,606  2,011  1,154         85,345  141,131  186,047      
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **7.****Employee information          (Continued)**
The average number of employees    during the year was made up as follows:
  **Year        ended 31** **December**   **1998** **1999** **2000**        **No.** **No.** **No.**            Technology  745  883  958 Customer          operations  347  919  1,760 Administration  269  435  461           1,361    2,237    3,179 BT          secondees, charged to Viag Interkom  124  125  137         1,485  2,362  3,316      
**Pensions**

The pension costs for the periods    were based on valuations carried out by professional qualified independent    actuaries. The pension liability as at 31 December for each year was    based on the valuation undertaken for Viag Interkom GmbH & Co. The costs    and liabilities subsequently attributed to the Viag Interkom business were    based on the employees remaining within the Viag Interkom business.

The main assumptions in the past    valuations were:
             **Year        ended 31** **December**   **1998** **1999** **2000**                 Discount          rate  6.0%  6.25%  6.25% Salary          increase  2.5%  2.75%  2.75% Pension          increase  1.00%  1.25%  1.25%            
Details of the pension provisions    are provided in note 14.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **8.****Intangible assets**    **Licenses** **Goodwill** **Total**        **€’000** **€’000** **€’000** **Cost**          **As          at 1** **January 1999**  8,523  —  8,523 Additions  11,746  —  11,746      **As          at 31** **December 1999**  20,269  —  20,269 Additions  8,450,311  7,771  8,458,082      **As          at 31** **December 2000**  8,470,580  7,771  8,478,351                 **Amortization**          **As          at 1** **January 1999**  541  —  541 Charge          for the year   966  —  966      **As          at 31** **December 1999**  1,507  —  1,507 Charge          for the year   1,149  154  1,303      **As          at 31** **December 2000**  2,656  154  2,810                 **Net          book value as at 31** **December 1999**  18,762  —  18,762      **Net          book value as at 31** **December 2000**  8,467,924  7,617  8,475,541      
In 1998, Viag acquired GSM license    for the commencement of the mobile business. This license is being amortized    over a 20-year period. In 2000, Viag acquired one of six German UMTS licenses    which will be amortized over its remaining 20-year term from the date of the    launch of 3G services.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **9.****Tangible assets**    **Leasehold****buildings** **Technical****equipment** **Other****equipment** **Assets        under****construction** **Total**          **€’000** **€’000** **€’000** **€’000** **€’000** **Cost**                **As          at 1** **January 1999**  7,660  587,625  97,206  180,956  873,447 Additions  2,741  428,439  32,284  135,344  598,808 Transfers  1,165  131,872  2,908  (135,945) — Disposals  —  (221) (3,710) —  (3,931)       **As          at 31** **December 1999**  11,566  1,147,715  128,688  180,355  1,468,324 Additions  34,551  587,544  62,674  83,073  767,842 Transfers  2,754  77,527  8,330  (88,611) — Disposals  (1,369) (1,379) (11,503) —  (14,251)       **As          at 31** **December 2000**  47,502  1,811,407  188,189  174,817  2,221,915        **Depreciation**                **As          at 1** **January 1999**  1,312  33,869  18,749  —  53,930 Charge          for the year   2,152  115,668  38,116  —  155,936 Disposals  —  (89) (3,842) —  (3,931)       **As          at 31** **December 1999**  3,464  149,448  53,023  —  205,935 Charge          for the year  4,133  225,393  36,027  —  265,553 Disposals  (713) (303) (6,455) —  (7,471)       **As          at 31** **December 2000**  6,884  374,538  82,595  —  464,017                         **Net          book value at 31** **December 1999**  8,102  998,267  75,665  180,355  1,262,389        **Net          book value at 31** **December 2000**  40,618  1,436,869  105,594  174,817  1,757,898        
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **10.****Stocks**    **As        at 31** **December**   **1999** **2000**       **€’000** **€’000** Spare          parts  3,538  5,493 Goods          for resale  36,000  97,843        39,538  103,336       **11.****Debtors: amounts falling          due within one year**    **As        at 31** **December**   **1999** **2000**       **€’000** **€’000** Trade          debtors  185,643  206,560 Less:          Provision for doubtful debts  (18,912) (15,105)       166,731  191,455 Payments          on account (see below)  200,838  254,763 Prepayments  2,222  36,127 Other          debtors  23,990  43,142        393,781  525,487     
Payments on account relate to a national roaming agreement entered    into with DeTeMobil Deutsche Telekom MobilNet GmbH (“T-Mobil”) on    11 May 1999 and revised on 18 May 2000, under which T-Mobil provides    national roaming capacity to Viag Interkom in areas where Viag Interkom has    not developed its own network. The cost of the contract is determined based    on a fixed number of minutes available to Viag Interkom, for which payment    is made by instalments. The price for future minutes is renegotiable at the    point at which all minutes have been used by Viag Interkom. The payments on    account represent amounts paid in advance for certain of the contractual minutes.

Outstanding contractual payments due to T-Mobil at 31 December    2000 are €154 million (1999: €297 million; 1988: nil).

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **12.****Loans and borrowings:          amounts falling due within one year**    **As        at 31** **December**   **1999** **2000**       **€’000** **€’000**         **UMTS          loans**       BT       —  3,800,254 E.ON  —  3,800,254 Telenor  —  844,500         **Other          loans**       BT  —  183,820 E.ON  —  195,324 Telenor  —  43,406         **Interest          expenses**       BT  —  74,625 E.ON  —  74,604 Telenor  —  15,674        —  9,032,461     
**Loans due to the Owners**

BT, E.ON and Telenor AS each granted Viag Interkom interest    bearing loans, which terminated on 31 May 2001. The interest rates varied    between 5.39 per cent and 5.72 per cent. As part of the    consideration for the acquisition of Telenor AS and E.ON’s shareholdings    in Viag by BT on 15 January 2001 and 20 February 2001, respectively,    the liabilities were assumed by a subsidiary of BT. As part of the transfer    of Viag’s fixed line business to Ignite a proportion of the debt was    repaid in February 2001.
**13.****Other creditors: amounts          falling due within one year**    **As        at 31** **December**   **1999** **2000**       **€’000** **€’000**         Trade          creditors  340,806  221,652         Accruals  116,332  161,528 Deferred          income  2,430  29,318 Other          creditors  6,753  15,155        466,321  427,653     
Accruals represent amounts owed for goods received but not invoiced    and for staff costs.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **14.****Provisions for liabilities          and charges**    **Pension****provision** **Provision****for site****restoration** **Total**        **€’000** **€’000** **€’000**            **As          at 1 January 1998**  1,095  —  1,095 Increase          for year  1,606  7,189  8,795      **As          at 31 December 1998**  2,701  7,189  9,890 Increase          for year  2,011  5,690  7,701      **As          at 31 December 1999**  4,712  12,879  17,591 Increase          for year  1,154  3,752  4,906      **As          at 31 December 2000**  5,866  16,631  22,497       **Deferred Taxation**
Losses are set out in note 15 and are indicative of the losses    incurred by Viag Interkom although not the actual tax losses available for    offset. No deferred tax assets have been recognized since, on the basis of    available evidence, it is more likely than not that taxable profits will not    be available for offset in the foreseeable future.
**15.****Owners’ net investment**    **As        at 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000**            Opening          Owners’ net investment  126,730  620,267  1,284,416 Net          investment for the year  826,794  1,391,557  1,354,717            Loss          for the financial year  (333,257) (727,408) (1,055,075)     Closing          Owners’ net investment  620,267  1,284,416  1,584,058        **16.****Reconciliation of operating          loss to operating cash flows**    **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000**            **Operating          loss**  (336,403) (732,645) (897,052)Depreciation  41,850  155,936  265,553 Amortization  426  966  1,303 (Profit)/loss          on disposal of fixed assets  (119) 1  3,866 Increase          in stocks  (8,908) (30,630) (63,798)Increase          in debtors  (13,115) (353,117) (131,706)Increase/(decrease)          in creditors  133,155  211,769  (38,668)Increase          in provisions  8,796  7,700  4,906      **Net          cash outflow from operating activities**  (174,318) (740,020) (855,596)     
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **17.****Analysis of net debt**    **As        at 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000**            Cash          in hand and at bank  7,638  53,858  204,407 Debt          due after one year  —  —  (9,032,461)     **Net          funds/(debt)**  7,638  53,858  (8,828,054)       **18.****Financial instruments          and risk management**
Viag Interkom’s funding has been provided through equity    contributions and short term loans from its Owners.

Viag Interkom purchases financial instruments in order to finance    its operations and to manage the interest rate and currency risk that arise    from those operations and from its finance resources.

The main risks arising from Viag Interkom’s financial instruments    are interest rate risk, liquidity risk and foreign currency risk.

**Interest rate risk**

Viag Interkom finances its operations through short term loans    from its Owners based on floating interest rates.

**Liquidity risk**

Viag Interkom has relied and continues to rely on funding from    its shareholders for investment and operational requirements.

**Foreign currency risk**

During the reporting period Viag Interkom activities have primarily    been conducted in DEM and Euro. In general, it is Viag Interkom’s policy    to hedge other foreign currency exposure through forward contracts. In the    three years ending 31 December 2000 the level of foreign exchange hedging    by Viag Interkom is not significant.

Viag Interkom held the following cash at bank and in hand:
  **As        at 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000**            German          Deutschmark        4,618      36,884       185,165 UK          Sterling  152  4,289  5,457 US          Dollars  2,868  12,685  13,785         7,638  53,858  204,407        **19.****Financial commitments**    **As        at 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** Capital          expenditure contracted for, but not provided in the accounts  225,000  383,000  470,000      
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **19.****Financial commitments          (Continued)**
**Lease commitments**

Viag Interkom had annual commitments    under operating leases as follows:
  **As        at 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** **Land          and buildings**          Expiring          within one year  —  —  — Expiring          between two to five years inclusive  —  —  — Expiring          thereafter  24,747  62,178  87,635         24,747  62,178  87,635      **Motor          vehicles and plant and equipment**          Expiring          within one year  —  —  — Expiring          between two to five years inclusive  982  2,454  2,876         982  2,454  2,876         25,729  64,632  90,511        **20.****Contingent liabilities**
Debitel, a German service provider,    filed an action in the courts of Munich against Viag Interkom, claiming that    there is a statutory obligation upon Viag Interkom to allow service providers    the ability to market its services. The court’s decision is still pending.    However, a preliminary finding requires Viag Interkom and Debitel to attempt    to negotiate a contractual settlement. If Viag Interkom and Debitel are unable    to reach a negotiated settlement, then further legal proceedings are possible.    If Debitel succeeds in its claim, Viag Interkom will be obliged to grant them    and subsequently other service providers, the ability to market its services.    In this event, Viag Interkom would be obliged to service additional customers    which would lead to additional revenue for Viag Interkom, but potentially    at relatively low margin. Debitel may also be entitled to damages, however,    management believe that it is unlikely that material damages will arise in    respect of this claim. Certain other telecommunications operators in Germany    are required to allow service providers to market their GSM services. There    is, however, no such clause in Viag Interkom’s GSM license. A final judgement    on this action is not expected before the end of 2001.

At the date the carve-out financial    statements for the three years ended 31 December 2000 were signed, the    directors of Viag Interkom were not aware of any other contingent liabilities.
**21.****Related party transactions**
Viag Interkom has entered into significant    related party transactions during the period in respect of financing arrangements.    These are summarized in note 12.

Under the ownership of Viag the    mobile and fixed line operations were not treated as separate entities and    therefore no formal charges were made between the two for services provided.    Following the separation of the businesses future transactions will be charged    based on trade agreements outlining the use of the Ignite transmission network    by Viag Interkom and the provision of mobile technology for certain Ignite    products. Based on the network records maintained by Viag the market values    of transactions between Viag Interkom and Ignite for the years ended 31 December    1998, 1999 and 2000 were as follows:

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **21.****Related party transactions          (Continued)**    **Year        ended 31** **December**   **1998** **1999** **2000**        **€’000** **€’000** **€’000** Housing  6,793  12,118  16,220 Network          Capacity National Carrier Line  4,721  26,134  38,725 Network          Capacity DTAG  639  639  1,278 Network          Capacity Increase Access  5,630  14,444  15,143      Total  17,783  53,335  71,366      
Following the separation of the    mobile and fixed line businesses on 28 February 2001, Viag Interkom will charge    Ignite on a monthly basis for shared services including office space and the    use of the Corporate Communications Centre.
**22.****Reconciliation to United          States generally accepted accounting principles (US GAAP)**
Viag Interkom’s financial statements    are prepared in accordance with accounting principles generally accepted in    the United Kingdom (“UK GAAP”), which differ in certain respects    from accounting principles generally accepted in the United States of America    (“US GAAP”).
**I.****Differences between          accounting principles generally accepted in the United Kingdom and United          States**
The following are the primary differences    between UK GAAP and US GAAP which are relevant to Viag Interkom’s financial    statements.
(a)Capitalization of interest
Under UK GAAP, Viag Interkom does    not capitalize interest in its financial statements. Under US GAAP the estimated    amount of interest incurred while constructing major capital projects is included    in fixed assets and depreciated over the lives of the related assets. This    includes capitalization of interest incurred on funding the UMTS license for    the period up to the launch of the related services.
(b)Deferred taxation
 The net deferred tax liability    arising from the US GAAP reconciling items has not been recorded, as it is    offset by deferred tax assets resulting from Viag Interkom’s share of    Viag’s tax losses. There is a valuation allowance against the remainder    of those tax losses.
**II.****Reconciliation of net          loss**
The following statements summarize    the significant estimated adjustments, which reconcile net loss and Owners’    net investment from that reported under UK GAAP to that which would have been    reported had US GAAP been applied. There is no net tax effect from the US    GAAP adjustments due to a full valuation allowance.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **22.****Reconciliation to United          States generally accepted accounting principles (Continued)**    **Year        ended 31** **December**   **1999** **2000**       **€’000** **€’000** Net          loss under UK GAAP  (727,408) (1,055,075)US          GAAP adjustment:          Capitalization          of interest, net of related depreciation  —  161,609     Net          loss as adjusted for US GAAP  (727,408) (893,466)    **III.****Reconciliation of Owners’          net investment**  **Year        ended 31** **December**   **1999** **2000**       **€’000** **€’000** Owners’          net investment under UK GAAP  1,284,416  1,584,058 US          GAAP adjustment:          Capitalization          of interest, net of related depreciation  —  161,609     Owners’          net investment as adjusted for US GAAP  1,284,416  1,745,667     **IV.****Combined cash flow          statements**
Under UK GAAP, the combined cash    flow statements are presented in accordance with UK Financial Reporting Standard    No. 1 (“FRS 1”). The statements prepared under FRS 1 present substantially    the same information as that required under SFAS No. 95.

Under SFAS No. 95 cash and cash    equivalents include cash and short-term investments with original maturities    of three months or less. Under FRS 1, cash comprises cash in hand and at bank    and overnight deposits, net of bank overdrafts.

Under FRS 1 cash flows are presented    for: operating activities, returns on investments and servicing of finance,    taxation, capital expenditure and financial investments, acquisitions and    disposals, dividends paid to the company’s shareholders, management of    liquid resources and financing. SFAS No. 95 requires a classification of cash    flows as resulting from operating, investing and financing activities.

Cash flows under FRS 1 in respect    of interest received, interest paid (net of that capitalized under US GAAP)    and taxation would be included within operating activities under SFAS No.    95. Cash flows from purchases, sales and maturities of trading securities,    while not separately identified under UK GAAP, would be included within operating    activities under US GAAP. Capitalized interest, while not recognized under    UK GAAP, would be included in investing activities under US GAAP. Dividends    paid would be included within financing activities under US GAAP.

 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **22.****Reconciliation to United          States generally accepted accounting principles (Continued)**
The following statements summarize    the combined cash flow statements as if they had been presented in accordance    with US GAAP, and include the adjustments which reconcile cash and cash    equivalents under US GAAP to cash at bank and in hand reported under UK GAAP.
  **Year        ended 31** **December**   **1999** **2000**       **€’000** **€’000**         Net          cash used in operating activities  (734,783) (848,716)Net          cash used in investing activities  (610,554) (9,223,010)Net          cash provided by financing activities  1,391,557  10,222,275     Net          increase in cash and cash equivalents  46,220  150,549 Cash          and cash equivalents under US GAAP at beginning of year  7,638  53,858     Cash          and cash equivalents under US GAAP at end of year  53,858  204,407 Short-term          investments with original maturities of less than three months  —  —     Cash          at bank and in hand under UK GAAP at end of year  53,858  204,407     
 

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**O2 GERMANY****(formerly VIAG INTERKOM)****NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)**

  **23.****Subsidiary undertakings          and associates**
Principal operating subsidiary undertakings    and associates at each balance sheet date, all of which were unlisted, were    as follows:
   **Viag Interkom        interest**     **Activity** **1998** **1999** **2000** **Country        of operations**     **%** **%** **%**    Interkom          Gesellschaft für Internationale Kommunikation in der Datenverarbeitung          GmbH  Dormant        Company  100  100  —  Germany Viag          Interkom Management GmbH  Management        Company  —  100  —  Germany Bertelsmann          Game Channel GmbH & Co. KG  Internet        games  —  50  —  Germany Bertelsmann          Interactive GmbH  Internet        games  —  50  —  Germany Viag          Europlattform AG  Piloting        of UMTS services  —  —  100  Liechtenstein Interkom          Shop GmbH  Retailer  —  —  100  Germany 
The results and operations of certain    of the above investments did not have a significant impact on the results    and assets and liabilities of Viag Interkom and therefore have not been consolidated    in the three years to 31 December 2000.
**24.****Post Balance sheet          Events**
On 15 January 2001, BT acquired    the 10 per cent Shareholding in Viag held by Telenor AS. On 20 February    2001 BT acquired E.ON’s remaining 45 per cent shareholding    in Viag. As part of the consideration for the acquisition of the additional    shareholdings the loans provided by Telenor AS and Viag were repaid by BT    and the liability was assumed by BT Interkom GmbH.

 

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 **ITEM          19**     **EXHIBITS** **Exhibit        Number** **Description of Exhibits** 1.1 Memorandum and Articles of      Association of mmO2 plc.*2.1 Deposit Agreement among the      mmO2 plc, Morgan Guaranty Trust Company of New York, as depositary,      and Holders of American Depositary Receipts.**3.1 Not Applicable.4.1 Demerger Agreement between      British Telecommunications plc, mmO2 plc and BT Group plc.**4.2 Separation Agreement between      BT Group plc, British Telecommunications plc, mmO2 plc and O2      Limited.**4.3 Tax Agreement between BT Group      plc and mmO2 plc.**4.4 Wireless Trading Agreement      between British Telecommunications plc and BT Cellnet Limited.**4.5 Sponsors’ Agreement between      mmO2 plc, British Telecommunications plc, Merrill Lynch International,      Morgan Stanley & Co. International Limited and Salomon Brothers International      Limited.**4.6 £3,500,000,000 Multicurrency      Trading Revolving Facility between mmO2, as parent, mmO2      and O2 Limited, as original borrowers, Barclays Capital, Deutsche      Bank AG London, HSBC Investment Bank plc, J.P. Morgan plc, Salomon Brothers      International Limited and The Royal Bank of Scotland plc, as lead arrangers,      certain financial institutions, as the original banks, The Royal Bank of      Scotland plc, as agent, and the Royal Bank of Scotland plc, as the issuing      bank.**4.7 Amended and Restated Separation      Agreement between BT Group plc, mmO2 plc and O2 Limited.***4.8 Programme Agreement in relation      to the €5,000,000,000 Euro Medium Term Note Programme between mmO2,      Bankers Trustee Company Limited as Trustee, Deutsche Bank AG London as arranger,      Barclays Bank PLC, HSBC Bank plc, Salomon Brothers International Limited,      Deutsche Bank AG London, J.P. Morgan Securities Ltd and The Royal Bank of      Scotland plc, as dealers.****4.9 Trust Deed relating to €5,000,000,000      Euro Medium Term Note Programme between mmO2 and Bankers Trustee      Company Limited, as Trustee.****4.10 BT      Executive Share Plan4.11 BT      Incentive Share Plan4.12 BT      Deferred Bonus Plan4.13 mmO2      Legacy Option Plan4.14 mmO2      Executive Share Option Plan4.15 mmO2      Restricted Share Plan4.16 Directors’      Service Contracts5.1 Not Applicable.6.1 Not Applicable.7.1 Not Applicable.8.1 See Item 4.C, “Information      on the Company – Organisational Structure.”9.1 Not Applicable.12.1 Joint      Certification of Peter Erskine, Chief Executive Officer and David Finch,      Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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*Previously included in          mmO2’s registration statement on Form 20-F, as filed          with the Securities and Exchange Commission on 20 September 2001,          and incorporated herein by reference except with respect to the following          change to the Articles of Association:   On 20 December 2001, the          one issued redeemable preference share of £50,000 was redeemed,          following which, pursuant to a conditional special resolution passed          on 11 September 2001, the authorised redeemable preference share capital          was sub-divided into and redesignated as 50,000,000 ordinary shares          with a face value of 0.1p each.  **Previously included in          mmO2’s registration statement on Form 20-F, as filed          with the Securities and Exchange Commission on 20 September 2001,          and incorporated herein by reference.  ***Previously included in          mmO2’s registration statement on Form 20F/A, as filed          with the Securities and Exchange Commission on 31 October 2001,          and incorporated herein by reference.  ****Previously included in mmO2’s        annual report on Form 20F, as filed with the Securities and Exchange Commission        on 12 July, 2002, and incorporated herein by reference.  
 

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**GLOSSARY OF TERMS**
**Terms          Used****US Equivalent or Brief        Description**Articles          of AssociationBylawsAssociatesEquity investmentsBalance          sheetStatement of financial positionCalled-up          share capitalOrdinary shares, issued        and fully paidCapital          allowancesTax depreciation allowancesCreditorsPayablesDebtorsReceivablesFinance          leaseCapital leaseFinancial          yearFiscal yearFreeholdOwnership with absolute        rightsInterest          payableInterest expenseInterest          receivableInterest incomeJoint          ventureEquity investmentNominal          valuePar valueOrdinary          sharesCommon stockOverdraftA line of credit, contractually        repayable on demand unless a fixed-term has been agreed, established through        a customer’s current accountPreference          sharesPreferred stockProfit          & loss accountIncome statementProfit          & loss account reserveRetained earningsProvisionsReservesShare          capitalOrdinary shares or common        stock issued and fully paidShareholders’          fundsStockholders’ equityStockInventoriesTangible          fixed assetsProperty, plant and equipmentTurnoverRevenue
 

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**DEFINITIONS**

The following definitions apply    throughout this document unless the context requires otherwise:
“Airwave” Airwave mmO2 Limited, a company        incorporated in England and Wales with a registered number 3985643.“analogue” The first generation of mobile telecommunications        technology in which radio signals are modulated proportionally by the        strength and frequency of audio sounds.“ARPU” Average Revenue Per User.“BT” British Telecommunications public limited        company, a company incorporated in England and Wales with registered number        1800000.“BT          Group” BT Group plc and its subsidiary undertakings        from time to time.“BT          Group Investments” BT Group Investments Limited, a company        incorporated in England and Wales with registered number 4278695.“BT          Group plc” BT Group plc, a company incorporated in        England and Wales with registered number 4190816.“GPRS” General Packet Radio Service. A technology,        sometimes referred to as 2.5G, that allows customers to remain connected        to the network between calls for the receipt and transmission of data.“GSM” The Global System for Mobile communications.        Originally defined as a pan-European standard for digital cellular telephone        networks to support roaming, it is now one of the world’s main digital        mobile standards.“Manx          Telecom” Manx Telecom Limited, a company incorporated        in the Isle of Man with registered number 28059.“mmO2”          or the “Company” mmO2 plc, a company incorporated        in England and Wales with registered number 4190833.“mmO2          Group” or “Group” mmO2 plc and its subsidiary undertakings        from time to time.“mmO2          Ordinary Shares” or “ordinary shares” Ordinary shares of 0.1 pence each in the        capital of mmO2.“MMS” Multimedia Messaging Services.“O2” O2 Limited, formerly BT Wireless        Limited, formerly Cellnet Group Limited, a company incorporated in England        and Wales with registered number 2604354 together, where the context requires,        with its subsidiary and associated undertakings.“O2          Germany” O2 (Germany) GmbH & Co.OHG,        formerly VIAG Interkom GmbH & Co. OHG, a company incorporated in Germany.“O2          Ireland” O2 Communications (Ireland) Limited,        formerly Digifone mmO2 Limited, formerly Esat Digifone Limited,        a company incorporated in Ireland, together where the context requires        with its subsidiary and associated undertakings.
 

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“O2          Netherlands” O2 (Netherlands) B.V., formerly        Telfort Mobiel BV, a company incorporated in the Netherlands.“O2          Online” O2 (Online) Limited, formerly        Genie Internet Limited, a company incorporated in England and Wales with        registered number 01906156 together, where the context requires, with        its subsidiary and associated undertakings.“O2          UK” O2 (UK) Limited, formerly BT        Cellnet Limited, a company incorporated in England and Wales with registered        number 1743099 together, where the context requires, with its subsidiary        and associated undertakings.“PDA” Personal Digital Assistant.“SAC” Subscriber Acquisition Cost.“SMS” a service sometimes known as text messaging,        which enables mobile telephone users to send and receive written messages        on their handsets.“TETRA” Terrestrial Trunked Radio. Radio technology        used in networks that require a high level of security and availability.“UMTS” Universal Mobile Telecommunications System.        An international standard of third generation, or 3G, mobile telecommunications.“WAP” Wireless Application Protocol. A global,        open standard for accessing online services through mobile devices.“we”          or “us” mmO2 and/or, if the context so        requires, one or more members of the mmO2 Group.
 

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**SIGNATURES**

The registrant hereby certifies    that it meets all of the requirements for filing on Form 20-F and that it    has duly caused and authorised the undersigned to sign this annual report    on its behalf.

**mmO2 plc**
  By: /s/ David Finch        ——————————        Name: David Finch        Title: Chief Financial Officer
Date: 7 July 2003

 

 

 

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**CERTIFICATIONS**

I, Peter Eskine, certify that:
1.I have reviewed this annual          report on Form 20-F of mm02 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          function):    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: 7 July 2003    By: /s/ Peter Erskine        ——————————        Name: Peter Erskine        Title: Chief Executive Officer
 

 

 

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**CERTIFICATIONS**
 I, David Finch, certify          that:  1.I have reviewed this annual          report on Form 20-F of mm02 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          function):    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: 7 July          2003    By: /s/ David Finch        ——————————        Name: David Finch        Title: Chief Financial Officer
 

 

 

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