** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

 

| **(Mark One)**                                                                                                                        |   |                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                            |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                  |
| **For the fiscal year ended December 31, 2003**                                                                                       |
|                                                                                                                                  |
| **or**                                                                                                                                |
|                                                                                                                                  |
| **o**                                                                                                                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                  |
| **For the transition period  from        to        ** |
|                                                                                                                                  |
| **Commission file number: 0-19889**                                                                                                   |

 

----

 

| **South Hertfordshire United Kingdom Fund, Ltd.**                                           |
|--------------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)                                          |
|                                                                                             |   |   |
| **Colorado**                                                                                     |   | **#84-1145140** |
| (State or Other Jurisdiction of  Incorporation or Organization)                                  |   | (I.R.S. Employer Identification No.) |
|                                                                                             |   |   |
| **ntl House, Bartley Wood Business Park,  Hook,  Hampshire, RG27 9UP, England  +44 1256 752000** |
| (Address and Telephone Number of Principal  Executive Offices)                                   |

 

----

 

Securities registered pursuant to Section 12(b) of the Act:

 

**NONE**

 

----

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

**LIMITED PARTNERSHIP INTERESTS**

 

----

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.  Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of theForm 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act)  Yes  o  No  ý

 

As of March 23, 2004, there were 56,935 limited partnership interestsof the Registrant outstanding. There is no established public market for theRegistrant’s limited partnership interests.

 

----

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**NONE**

 

 

----

 

**TABLE OF CONTENTS**

 
| PART I                                                                        |   |                                                                                        |   | 3  |
|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|----|
| Item 1.                                                                  |   | Business                                                                                    |   | 5  |
| Item 2.                                                                  |   | Properties                                                                                  |   | 15 |
| Item 3.                                                                  |   | Legal  Proceedings                                                                          |   | 16 |
| Item 4.                                                                  |   | Submission  of Matters to a Vote of Security Holders                                        |   | 17 |
| PART  II                                                                      |   |                                                                                        |   | 17 |
| Item 5.                                                                  |   | Market  for the Registrant’s Common Equity and Related Stockholder Matters             |   | 17 |
| Item 6.                                                                  |   | Selected  Financial Data                                                                    |   | 18 |
| Item 7.                                                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 18 |
| Item 7A.                                                                 |   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 25 |
| Item 8.                                                                  |   | Financial  Statements and Supplementary Data                                                |   | 26 |
| Item 9.                                                                  |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       |   | 27 |
| Item 9A.                                                                 |   | Controls  and Procedures                                                                    |   | 27 |
| PART  III                                                                     |   |                                                                                        |   | 28 |
| Item 10.                                                                 |   | Directors  and Executive Officers of the Registrant                                         |   | 28 |
| Item 11.                                                                 |   | Executive  Compensation                                                                     |   | 28 |
| Item 12.                                                                 |   | Security  Ownership of Certain Beneficial Owners and Management                             |   | 28 |
| Item 13.                                                                 |   | Certain  Relationships and Related Transactions                                             |   | 29 |
| Item 14.                                                                 |   | Principal  Accountants’ Fees and Services                                              |   | 30 |
| PART IV                                                                       |   |                                                                                        |   | 31 |
| Item 15.                                                                 |   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                       |   | 31 |
| Signatures                                                                    |   |                                                                                        |   | 33 |
| Index to Consolidated Financial Statements  and Financial Statement Schedules |   | F-1                                                                                         |

 

**“Safe Harbor” Statement under the PrivateSecurities Litigation Reform Act of 1995:**

 

Various statements contained in this document constitute“forward-looking statements” as that term is defined under the PrivateSecurities Litigation Reform Act of 1995. Words like “believe,” “anticipate,”“should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,”“positioned,” “strategy,” and similar expressions identify theseforward-looking statements, which involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements or industry results to be materially different from thosecontemplated, whether expressed or implied, by these forward-lookingstatements. These factors include those set forth under the caption “RiskFactors” in the Form 10-K filed on March 11, 2004 by the ultimateparent company of our General Partner, NTL Incorporated, or NTL, such as:

 

•                                          potentialadverse developments with respect to NTL’s and our liquidity or results ofoperations;

 

•                                          NTL’ssignificant debt payments commencing in 2005 and its and our other contractualcommitments coming due over the next several years;

 

•                                          thesuccess of NTL’s proposed refinancing transaction;

 

•                                          NTL’sand our ability to fund and execute its and our business plan;

 

•                                          theimpact of new business opportunities requiring significant up-frontinvestments;

 

•                                          ourability to attract and retain customers, increase our overall marketpenetration and react to competition from providers of alternative services;

 

•                                          NTL’sability to integrate its billing systems;

 

•                                          NTL’ssignificant management changes;

 

•                                          NTL’sand our ability to develop and maintain back-up for its and our criticalsystems;

 

•                                          ourability to respond adequately to technological developments;

 

•                                          NTL’sand our ability to maintain contracts that are critical to our operations;

 

•                                          ourability to continue to design networks, install facilities, obtain and maintainany required governmental licenses or approvals and finance construction anddevelopment, in a timely manner at reasonable costs and on satisfactory termsand conditions;

 

•                                          interestrate and currency exchange rate fluctuations; and

 

•                                          theimpact of NTL’s recent reorganization and subsequent organizationalrestructuring.

 

We assume no obligation to update these forward-looking statementscontained in this Annual Report to reflect actual results, changes inassumptions or changes in factors affecting these statements.

 

2

----

 

**PART I**

** **

**NTL CORPORATE STRUCTURE**

 

**NTL’s Completed Restructuring**

 

On May 8, 2002, NTL, then known as NTL Communications Corp., theultimate parent company of Fawnspring Limited, our General Partner, NTLEurope, Inc., NTL Europe, then known as NTL Incorporated and the formerparent company of NTL Communications Corp., and certain of their subsidiariesfiled a pre-arranged joint reorganization plan, referred to in this AnnualReport as the Plan, under Chapter 11 of the US Bankruptcy Code. We were notincluded in the Chapter 11 filing. The Plan became effective onJanuary 10, 2003, at which time NTL emerged from Chapter 11reorganization.

 

Pursuant to the Plan, the entity formerly known as NTL Incorporated andits subsidiaries and affiliates were split into two separate groups, and NTLand NTL Europe each emerged as independent public companies. The entityformerly known as NTL Communications Corp. was renamed “NTL Incorporated” andbecame the holding company for NTL group’s principal UK and Ireland assets andthe ultimate parent company of our General Partner. Prior to the consummationof the Plan, the ultimate parent company of our General Partner, then known asNTL Incorporated, which, pursuant to the Plan, was renamed “NTLEurope, Inc.” and became the holding company for the former NTL group’scontinental European and certain other assets. We are no longer affiliated withNTL Europe.

 

**Historical Structure**

 

We are a Colorado limited partnership that was formed inDecember 1991 pursuant to the public offering of our limited partnershipinterests for the purpose of acquiring one or more cable television/telephonesystems in the United Kingdom. Upon acquisition of our system, our primaryinvestment objective was to obtain capital appreciation in the value of ourinvestment in the system over the term such investment is held by us.

 

We hold 66.7% of the shares of NTL (South Hertfordshire) Limited, NTLSouth Herts, which is principally engaged in the development, construction,management and operation of broadband communications networks for telephone,cable television and Internet services in the United Kingdom. As a result ofour ownership of 66.7% of the shares of NTL South Herts, for accountingpurposes we have consolidated the results of NTL South Herts with our results.NTL indirectly holds the remaining 33.3% of the shares of NTL South Herts. Weare reliant on the support of NTL, the ultimate parent company of the GeneralPartner, to continue our operations as a going concern.

 

In addition, NTL is the indirect parent company of our General Partner.The General Partner may, pursuant to the Limited Partnership Agreement datedDecember 31, 1991, or the Partnership Agreement, provide consultingservices to us or designate consulting services to NTL or other affiliates. TheGeneral Partner purchased one of our partnership interests by contributing$1,000 to our capital.

 

3

----

 

**Summary Corporate Structure**

 

The following chart shows on a condensed basis the corporate structureof NTL and its relationship to us as of December 31, 2003. It does notshow NTL’s operating or other intermediate companies.

 

 

----

*                                         FawnspringLimited, a wholly-owned subsidiary of NTL and our General Partner.

 

**                                  NTL (SouthHertfordshire) Limited, or NTL South Herts, our 66.7% subsidiary of which NTLowns 33.3%.

 

**Exchange rates**

 

The following table sets forth, for theperiods indicated, the high, low, period average and period end noon buyingrate in the City of New York for cable transfers as certified for customspurposes by the Federal Reserve Bank of New York expressed as US dollars per£1.00. The noon buying rate of the UK pound on March 23, 2004 was $1.85per £1.00.

 
| **Year Ended December 31,**        |   | **Period End** |   | **Average(1)** |   | **High** |   | **Low** |   |
|------------------------------------|--------|----------------|--------|----------------|--------|----------|--------|---------|--------|
|                               |   |           |   |           |   |     |   |    |   |
| 1999                               |   | 1.62           |   | 1.61           |   | 1.68     |   | 1.55    |   |
| 2000                               |   | 1.49           |   | 1.51           |   | 1.65     |   | 1.40    |   |
| 2001                               |   | 1.45           |   | 1.44           |   | 1.50     |   | 1.37    |   |
| 2002                               |   | 1.61           |   | 1.51           |   | 1.61     |   | 1.41    |   |
| 2003                               |   | 1.78           |   | 1.64           |   | 1.78     |   | 1.55    |   |
| 2004 (through March 23, 2004) |   | 1.85           |   | 1.83           |   | 1.90     |   | 1.79    |   |

 

----

(1)                                  The average rate isthe average of the noon buying rates on the last day of each month during therelevant period.

 

The above rates may differ from the actual rates used in thepreparation of the consolidated financial statements and other financialinformation appearing in this annual report on Form 10-K. Our inclusion ofthese exchange rates is not meant to suggest that the UK pound amounts actuallyrepresent these US dollar amounts or that these amounts could have beenconverted into US dollars at any particular rate, if at all.

 

Unless we otherwise indicate, all US dollar amounts as ofDecember 31, 2003 are translated to UK pound sterling at an exchange rateof $1.7842 to £1.00, and all amounts disclosed for the year endedDecember 31, 2003 are based on an average exchange rate of $1.6348 to£1.00. All amounts disclosed as of December 31, 2002 are based on anexchange rate of $1.6095 to £1.00, and all amounts disclosed for the year endedDecember 31, 2002 are based on an average exchange rate of $1.5025 to£1.00. All amounts disclosed as of December 31, 2001 are based on anexchange rate of $1.4543 to £1.00, and all amounts disclosed for the year endedDecember 31, 2001 are based on an average exchange rate of $1.4392 to£1.00.

 

4

----

 

**Item 1.    Business**

 

**RECENT DEVELOPMENTS**

 

On March 8, 2004, NTL entered into a commitment letter with CreditSuisse First Boston, Deutsche Bank, AG London, Goldman Sachs International andMorgan Stanley Senior Funding, Inc relating to a £2.425 billion new creditfacility. The commitment by these lenders is subject to customary conditions aswell as the issuance by NTL Cable PLC, a newly-formed wholly-owned subsidiaryof NTL, of up to approximately £800 million equivalent in sterling, USdollars and euro denominations of ten-year senior notes. The proceeds of thehigh-yield bond offering, together with the proceeds from the new creditfacility, will be used to repay in full NTL’s existing senior creditfacilities, the existing notes issued by Diamond Holdings Limited and thedebentures issued by NTL (Triangle) LLC. The aim of any new financing is toextend the maturity of NTL’s indebtedness and to reduce NTL’s weighted average costof debt. NTL cannot provide any assurance that this refinancing transactionwill be consummated.

 

**ABOUT SOUTH HERTFORDSHIRE UK FUND, LIMITED**

 

We are a Colorado limited partnership that was formed inDecember 1991 pursuant to the public offering of our limited partnershipinterests for the purpose of acquiring one or more cable television/telephonesystems in the United Kingdom. Upon acquisition of our system, our primaryinvestment objective was to obtain capital appreciation in the value of ourinvestment in the system over the term such investment is held by us.

 

We hold 66.7% of the shares of NTL (South Hertfordshire) Limited, NTLSouth Herts, which is principally engaged in the development, construction,management and operation of broadband communications networks for telephone,cable television and Internet services in the United Kingdom. As a result ofour ownership of 66.7% of the shares of NTL South Herts, for accountingpurposes we have consolidated the results of NTL South Herts with our results.NTL indirectly holds the remaining 33.3% of the shares of NTL South Herts. Weare reliant on the support of NTL, the ultimate parent company of the GeneralPartner, to continue our operations as a going concern.

 

**ABOUT NTL SOUTH HERTS**

 

***FranchiseArea***

 

The South Hertfordshire franchise area comprises the threeadministrative areas of Three Rivers, Watford and Hertsmere, with a populationof approximately 240,000. The franchise area covers commuter suburbs of London,and many people who reside in the franchise area use the available fast railand motorway services to travel to work in central London. South Hertfordshirehas benefited from the completion in 1986 of the M25 London Motorway, whichmakes commuting from the franchise area to other areas in or near London moreconvenient. An M1 motorway link exists to give London-bound commuters directaccess from Watford to the London highway system. The M1 link is half a milefrom our headend. There are approximately 94,000 homes in the franchise area,of which approximately 92,000 are passed by our cable television/telephonenetwork. Construction in the franchise area is substantially complete. Theaverage housing density in the South Herts franchise area is approximately1,150 homes per square mile.

 

The South Hertfordshire franchise area contains approximately 7,000businesses, 80% of which are small or medium-sized. In addition, there areseveral business parks containing predominantly industrial and manufacturingconcerns.

 

***Operations***

 

Construction of a cable television-only network in the SouthHertfordshire franchise area commenced in early 1991 and, an integrated cabletelevision/telephone network architecture was developed for this franchise inlate 1991. As of December 31, 2003, approximately 92,000 homes, or 98% oftotal homes, in this area had been passed. Cable television services commencedin April 1992 and telephone services commenced in February 1993,following completion of the installation of a telephone switch. InJanuary 2000, NTL commenced the rollout of digital cable televisionservices within the South Herts franchise and in 2001 commenced broadbandInternet access services. As of December 31, 2003, NTL South Hertsserviced 24,776 basic cable television customers including 20,780 digital cablecustomers, 29,674 residential telephone customers and 10,850 broadbandcustomers, representing a total of 33,121 customers with a penetration level of36%.

 

Management control is exercised by our General Partner, althoughmanagement control is delegated to other affiliated companies of NTL. Ourbusiness is managed by NTL Group Limited (“NTLG”), a subsidiary of NTL, fromheadquarters in Hook, Hampshire. NTL and we believe that management of ourbusiness as an integral part of the larger NTL group reaps the benefits ofsynergy and maximizes returns. NTLG performs a variety of management functionsand procures services on our behalf. Pursuant to an agreement with NTLG, wehave the legal right to offset amounts receivable from NTLG against amountspayable to NTLG. Consequently, the net balance payable to NTL is disclosedunder accounts payable to affiliates and related parties in the accompanyingfinancial statements.

 

Our operations are fully integrated into the operations of NTL.Accordingly, as an integrated part of NTL’s UK operations, the followingbusiness description describes the portion of NTL’s UK operations of which wecomprise a part.

 

5

----

 

**NTL’s business**

 

NTL is a leading broadband and communications services company in theUK based on total residential subscriber numbers. NTL provides the followingcommunication services to its customers:

 

•                                          *ntl: home* provides residential telephone,cable television and Internet services, as well as wholesale Internet accesssolutions to Internet Service Providers, or ISPs, in the UK; and

 

•                                          *ntl: business* provides data, voice andInternet services to large businesses, public sector organizations and small-and medium-sized enterprises, or SMEs, located near our existing residentialbroadband network in the UK.

 

***ntl:home***

 

NTL’s ntl: home segment provides residential telephone, cabletelevision and Internet services in the UK as well as wholesale Internet accesssolutions to UK ISPs. NTL is the largest direct provider of residentialbroadband services in the UK. NTL refers to each service NTL provides as arevenue generating unit, or RGU. For example, if NTL provided one customer withbroadband Internet and telephone services, this customer would represent twoRGUs. As of December 31, 2003, NTL had approximately 2.9 million ntl:home customers, representing approximately 5.5 million RGUs. As ofDecember 31, 2003, NTL’s customer penetration rate was approximately36.9%. The customer penetration rate measures the number of customers for NTL’sservices divided by the number of homes within NTL’s service area that canpotentially be served by NTL’s network with minimal connection costs. For theyear ended December 31, 2003, ntl: home revenues increased by 14.2% to$2,442.5 million from $2,139.0 million in 2002, and expressed in UKpounds revenues increased by 4.9% to £1,494.1 million from£1,423.7 million during the same period.

 

During 2003, ntl: home added 181,500 net new customers compared with anet loss of 174,300 customers in 2002. This achievement is primarily the resultof NTL’s efforts since 2002 to improve the pricing and packaging of itsservices, improve its customer service experience and re-build a sales forcethat had previously been scaled back. NTL’s gross activations increased to557,800 in 2003 from 292,800 in 2002. In addition, NTL’s deactivations declinedfrom 467,100, or a 16.8% average customer churn rate in 2002 to 376,300, or a13.4% average customer churn rate in 2003. Customer churn is a cable industryterm for the percentage of customers that stop using a provider’s services.

 

***ntl:home services***

 

*Bundling advantage*

 

In addition to providing its customers with better service, NTL alsocontinues its efforts to cross-sell or up-sell its services to existing customers.As of December 31, 2003, NTL had approximately 949,200 broadband Internetsubscribers. NTL’s packaging and pricing are designed to encourage itscustomers to use multiple services like dual telephone and broadband Internetaccess, dual telephone and narrowband Internet access, dual telephone andtelevision, or triple telephone, television and Internet access. For example,NTL’s Family Pack bundle offers over 100 television channels and a telephoneline rental, and is subscribed for by approximately 70% of its DTV customers.In addition, NTL offers subscribers “two-for-one” incentives, like a free basicDTV subscription (for 12 months) with the purchase of our 24 hourunlimited UK call package.

 

NTL believes that it is uniquely positioned in its service areas to usebundling to increase its customer base, reduce its customer churn rate andincrease its profitability. As of December 31, 2003, over 70% of itscustomers received multiple services from NTL, and each of its ntl: homecustomers represented on average approximately two RGUs. In its service areas,NTL is the only service provider that can provide the full range of servicesthat NTL offers. The table below shows other typical service providers whooffer their services in NTL’s areas:

 
|             |   | **ntl: home  service bundling**                    |   |
|------------------|--------|----------------------------------------------------|--------|
|             |   | **ntl: home**                                      |   | **BT(1)** |   | **BSkyB(1)** |   | **Broadband  Resellers(2)** |   | **Telephone  Resellers(3)** |   | **Freeview** |   |
|             |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Telephone        |   | ü          |   | ü          |   | X |   | X |   | ü          |   | X |   |
| Broadband        |   | ü          |   | ü          |   | X |   | ü          |   | ü          |   | X |   |
| Dial Up          |   | ü          |   | ü          |   | X |   | ü          |   | ü          |   | X |   |
| Television       |   | ü          |   | X |   | ü          |   | X |   | X |   | ü          |   |
| Bundled Services |   | ü          |   | X |   | X |   | X |   | X |   | X |   |

 

----

ü                  = service available

 

X             =service not available

 

6

----

 

(1)                                  Although BT Groupplc, or BT, and British Sky Broadcasting Group plc, or BSkyB co-market eachother’s telephone and television services, customer and technical supportremains distinct and customers are required to retain and pay for the differentservices separately.

 

(2)                                  For example,Freeserve, Tiscali, AOL Europe and Virgin.net.

 

(3)                                  For example, Alpha Telecom,One.Tel, Tesco and Carphone Warehouse.

 

*Broadband Internet access*

 

NTL was the first communications provider in the UK to launch ahigh-speed cable modem Internet service. This service links customers of itslocal cable networks to the Internet at up to 20 times the speed possibleover standard telephone lines. Broadband Internet usage by residentialcustomers remains a relatively new and undeveloped market. As ofDecember 31, 2003, out of approximately 6.8 million homes currently ableto receive broadband Internet service from NTL, NTL had approximately 949,200residential broadband customers, a penetration rate of 14.0%.

 

Unlike standard dial-up Internet, NTL’s broadband Internet service isan “always on” service, eliminating logging-on delays and the need to log offwhile using the telephone. NTL offers three tiers of broadband Internetservices to its customers: 150Kb/s, 600Kb/s and 1024Kb/s, or 1Mb/s. NTL’s600Kb/s service provides an advantage over competing digital subscriber line,or DSL, services, which are generally offered at speeds of approximately512Kb/s.

 

*Cable television*

 

NTL offers both analog television, ATV, and digital television, DTV, toits customers. NTL has a number of ATV packages, which can be supplemented withpremium channels and/or pay per view services. NTL also offers a wide range ofdigital services, including access to over 150 channels, advanced interactivefeatures and a range of pay per view services. The selection of cable channelsthat NTL currently offers to its customers varies based on the particular areain which the service is provided. This variation is a result of the differentchannels offered by the various cable networks NTL acquired over the pastseveral years and will decrease as DTV continues to be rolled out. In additionto offering many of the popular channels available on BSkyB’s satelliteplatform, NTL also offers to all of its digital customers, through its jointventure with Telewest, a cable-only movie, sport and special events pay perview television service called “Front Row.” Front Row represented the firstalternative in the UK to BSkyB in the provision of films and sports eventsthrough pay television.

 

NTL’s DTV technology enables a significant range of interactiveservices to be delivered that make use of the always-on return path. Examplesof interactive services include game playing, television email and access tonews, entertainment and information services from an on-screen menu.

 

As of December 31, 2003, NTL provided cable television services toapproximately 2.0 million residential customers, of which approximately1.3 million received its DTV service and approximately 693,600 receivedits ATV service. This represents a decrease since December 31, 2002 ofapproximately 31,700 residential television customers, which includes anincrease of approximately 101,000 DTV service customers and a decrease ofapproximately 132,700 ATV service customers. As of December 31, 2003, thepenetration rate for NTL’s residential cable television services wasapproximately 26.0%.

 

*Telephone*

 

NTL provides local, national and international telephone services toits residential customers. NTL tiers its product offering with attractivepricing that includes “Talk Plans” that enable customers to make unlimited localand national calls for a fixed monthly fee in addition to the standard linerental. NTL believes that this combination of product tiering and pricing addsvalue to its offerings and enhances its market competitiveness. As ofDecember 31, 2003, NTL provided telephone service to approximately2.5 million residential customers, an increase of approximately 113,500telephone service customers since December 31, 2002. As ofDecember 31, 2003, the penetration rate for NTL’s residential telephoneservices was approximately 33.5%.

 

***ntl:home Strategy***

 

NTL’s network infrastructure enables NTL to offer existing and newcustomers within its service areas bundled services that include telephone,television and Internet services. NTL continues to focus on increasing customerpenetration of relatively higher margin services like broadband Internet andtelephone services through its competitively-priced bundled packages. NTLbelieves this will enable it to increase customer use of its services, therebyincreasing its RGUs and average revenues per customer. From time to time, NTLhas discussed with some of its suppliers of television programming content,including BSkyB, more favorable pricing or bundling terms. NTL and BSkyB havereached agreement on the main principles of a marketing incentive scheme thatwill provide NTL with improved economic terms based on increased sales ofBSkyB’s premium movie and sports channels. Conclusion of this deal is subjectto certain matters, including the negotiation of a long form carriageagreement. Accordingly, there can be no assurance that any changes to the termsof NTL’s current agreement will be made. NTL also continues to focus onimproving its customer service in order to minimize its customer churn ratewhile continuing to decrease its operating costs. NTL expects to improvecustomer call center efficiencies, provide

 

7

----

 

customers with on-line access to their accounts and improve overallcustomer satisfaction with the integration of its different billing systems toa common platform.

 

***ntl:business***

 

ntl: business provides a wide range of voice, data and Internet basedcommunications services for NTL’s business customers. ntl: business targetslarge businesses, public sector organizations and SMEs. NTL generally dividesits customers into three categories based on revenues generated or revenuesexpected to be generated by that customer:

 

•                                          *Tier 1—*each Tier 1 customergenerally provides NTL with more than £100,000 of revenues annually.

 

•                                          *Tier 2*—each Tier 2 customergenerally provides NTL with between £25,000 and £100,000 of revenues annually.

 

•                                          *Tier 3*—each Tier 3 customergenerally provides NTL with less than £25,000 of revenues annually.

 

This segmentation of existing customers enables divisional directors todevote resources and provide levels of service appropriate to levels ofcustomer revenues. We primarily focus on our Tier 1 and Tier 2customers. For the year ended December 31, 2003, ntl: business revenuesdecreased by 1.8% to $461.2 million from $469.8 million in 2002, andrevenues expressed in UK pounds decreased by 9.8% to £282.1 million from£312.7 million. For the year ended December 31, 2003, Tier 1 andTier 2 customers accounted for a majority of ntl: business’s revenues, withTier 1 customers accounting for a significant portion of those revenues.

 

***ntl:business Services***

 

***VoiceServices***

 

*Business Exchange Lines*

 

NTL’s business exchange lines provide its business customers withanalog telephone services that connect to customer telephone handsets orprivate automatic branch exchanges, or PABXs. Revenues for this service arederived from service installation, line rental and usage charges.

 

*Business Line ISDN 30*

 

NTL’s Business Line ISDN 30 service delivers 30 digital exchange linesover a single physical access link. The exchange lines may be used for voice ordata applications or a mix of both. The number of digital exchange lines issized to a customer’s needs. Revenues for this service are derived from serviceinstallation, line rental and usage charges.

 

*Centrex*

 

NTL’s single and multi-site Centrex solutions provide customers withthe facilities of a PABX without the need to invest in the provision andmaintenance of a local PABX. Telephone calls between users within a building orin different buildings are handled through NTL’s network but appear to the userto be transferred through a local PABX. Revenues for this service are derivedfrom installation, equipment rental, line rental and call charges.

 

***DataServices***

 

*Leased Lines*

 

NTL’s leased line services provide high quality dedicated connectionsbetween two customer locations. Customers use leased lines for voice, data andvideo applications, and for forming the basis of private networks. Servicespeeds are available at 2Mb/s, 10Mb/s, 34Mb/s, 45Mb/s, 100Mb/s, 155Mb/s and1000Mb/s or 1Gb/s. Revenues for this service are derived from serviceinstallation and recurring rental charges based on distance.

 

*Virtual Private Network*

 

NTL provides virtual private connections between customer locations.Virtual private networks deliver several connections over a single access link.This provides the benefits of a dedicated private network at a lower cost.Revenues for this service are derived from installation, access circuit rentaland virtual connection rental charges.

 

*Structured Cabling*

 

NTL provides in-building structured cabling services which includedesign, installation and project management of cable installations andupgrades. Revenues for this service are determined on a project by projectbasis.

 

8

----

 

*LAN Services*

 

NTL provides design, installation and maintenance services for itscustomers’ local area networks, or LANs. Revenues for this service aredetermined on a project by project basis.

 

***Internet***

 

*Dedicated Internet Access*

 

NTL provides high speed dedicated Internet access to organizations thatsupport web services from their own locations as well as organizations thathave heavy demands for access to the Internet. Because NTL owns its network,NTL can provide competitively priced Internet access at higher speeds. Inaddition, NTL also provides cable modem access to its smaller customers. NTL’spricing is based on installation charges and recurring rental charges that varybased on the speed of access.

 

***ntl:business Strategy***

 

NTL’s network infrastructure passes within 200 meters of more than570,000 business premises in the UK. NTL uses its network infrastructure andbrand to offer voice, data and Internet services to these business customers.NTL is currently focused on its existing business customer base with anemphasis on providing them a full set of services at competitive prices. NTLhas also undertaken a detailed review of its cost base in this segment, with aview to right-sizing the organization for its customer base and improvingprofitability. For example, ntl: business decreased its headcount fromapproximately 2,100 employees in December 2002 to approximately 1,300employees in December 2003. NTL plans to return to selective,capital-efficient customer growth in 2004.

 

**NTL’s Network**

 

NTL’s business is underpinned by significant investment by NTL and thecompanies it has acquired in NTL’s network infrastructure. NTL believes that itcan successfully grow its business by generating additional revenue from itsexisting assets with limited infrastructure upgrade and capital investment.

 

ntl: networks operates, manages and maintains the core networkinfrastructure that transports NTL’s voice, Internet, data, optical and DTVservices. The networks group governs the architecture of all of NTL’s networks,plans and implements network capacity and operates NTL’s telephone, data andbackbone transmission networks. It plans network strategy and createsarchitecture for national and local access networks, setting technicalstandards for the whole network. It also manages NTL’s network security and theradio frequency spectrum on the broadband local access network. There are twodedicated network sites.

 

***Infrastructure***

 

NTL’s broadband communications network in the UK currently passesapproximately 8.4 million homes. NTL’s high-capacity two-way localbroadband fiber networks serve entire communities throughout NTL’s regionalfranchise areas. NTL’s fiber optic cables also pass a significant number ofbusinesses in these areas and are connected to distribution points or nodes.

 

The core network has a fiber backbone that is approximately 9,900kilometers long. This includes 7,600 kilometers which are owned oroperated by NTL and approximately 2,300 kilometers which are leased fiberfrom other network owners. A total of 99 switches direct telephone trafficaround the core and local networks. In addition, NTL has more than 500 hubsites, points of presence, repeater nodes or other type of network site, andover 140 radio sites.

 

The transmission network uses synchronous digital hierarchy. Thistechnology allows high-speed data transmission and redirects transmissions inthe event of a problem to prevent any disruption. NTL’s backbone network alsoprovides asynchronous transfer mode, or ATM, and Internet protocol, or IP,services. The duct network was built with sufficient duct capacity toaccommodate up to 2,300 fibers on the majority of the network. This network wasdesigned to enable the placement of active components, like routing devices,close to NTL’s customers, allowing NTL to offer a broad range of voice and dataservices. The backbone transmission network connects all NTL’s voice switchesand broadband Internet protocol routers.

 

NTL has a variety of alternative methods to carry NTL’s nationaltelecommunications network over the “last mile” to the premises of thosecustomers which are located outside of NTL’s cabled areas. NTL:

 

•                                          obtainspermits to construct telecommunications networks, and build out its network toreach its customers. Although this is often the most costly means of reaching acustomer, the expense can be justified in the case of larger customers or wherea significant level of traffic is obtained from a customer;

 

9

----

 

•                                          leasescircuits on the local networks of other service providers to connect to itscustomer’s premises. Although this may reduce the operating margin on aparticular account, it requires significantly less capital expenditure than adirect connection, and can often be put in place relatively quickly and can bereplaced with a direct connection at a later date if traffic volumes justifyit; and

 

•                                          connectscustomers to its national telecommunications network via its extensive towerinfrastructure by implementing point-to-point microwave radio links betweentower sites and its customers.

 

***IT***

 

NTL outsources the management of the primary elements of its IT systemsto IBM, pursuant to an agreement with IBM which terminates in 2013. NTL retainscontrol of its IT activities that are fundamental to its competitive advantageand key to the development of its intellectual property. The services IBMprovides include:

 

•                                          managementof our mid-range IT equipment;

 

•                                          softwareapplication development;

 

•                                          softwareapplication maintenance and support;

 

•                                          managementof our internal voice and data network;

 

•                                          end-userhelp desk services; and

 

•                                          end-userdesk top and lap top computing support.

 

On September 30, 2003, NTL amended its agreement with IBM. Underthis amended agreement, prices for services previously provided to NTL by IBMwere renegotiated on terms more favorable to NTL. IBM will also provideadditional services to NTL. Under the amended agreement, annual service chargesmay be reduced if NTL successfully implements its integrated billing systemsand, as a result, achieves cost savings. Although this agreement terminates inaccordance with its terms in 2013, NTL has the right to terminate it, with orwithout cause, on or after May 23, 2006, subject to paying a terminationfee. If we terminate the contract on or before December 31, 2010, we mustpay a termination fee equal to £15 million. This fee decreases eachsubsequent year to approximately £5.0 million in 2013.

 

**Competition**

 

NTL faces significant competition from established and new competitorsin the areas of residential telephone services, business telecommunicationsservices, Internet and cable television.

 

***ntl:home***

 

NTL competes primarily with BT in providing telephone services toresidential customers in the UK. BT occupies an established market position andmanages fully built networks and has resources substantially greater thanNTL’s. In addition to BT, other telecommunications companies, like Alpha Telecom,One.Tel, Tesco and Carphone Warehouse, compete with NTL in the residentialtelecommunications market. In particular, carrier pre-selection may increasethe appeal of indirect access operators. These carriers offer discounted callcharges that may undercut NTL’s prices. BSkyB currently markets residentialtelecommunications services on an indirect access basis. Indirect accesstypically requires the customer to dial additional digits before entering theprimary telephone number. This diverts calls onto another operator’s network.

 

NTL also competes with mobile telephone networks that may threaten thecompetitive position of its networks, particularly if call charges are reducedfurther on the mobile networks. However, NTL expects that any decrease indemand for telephone services as a result of competition from mobile telephonenetworks may be at least partially offset by increased demand for its servicesto mobile telecommunications operators.

 

NTL’s cable television service competes with digital terrestrialtelevision services like Freeview, a service provided by DTV Services Limited,a joint venture between BSkyB, Crown Castle International Corp. and the BBC,digital satellite television services offered by BSkyB and satellite masterantenna systems. In addition, pay television and pay per view services offeredby NTL compete to varying degrees with other communications and entertainmentmedia, including home video, cinema exhibition of feature films, live theaterand newly emerging multimedia services. NTL expects that, in the future, it mayface competition from programming provided by video-on-demand services.

 

NTL’s Internet services compete with BT and resellers of BT’s Internetservices. Competition in the Internet services market has been increasing. Forexample, the launch by Freeserve of aggressive retail price discounts may, ifsuccessful, encourage other ISPs to also introduce discounted prices and othersimilar offers. NTL expects the level of competition in the Internet servicemarket to increase significantly.

 

10

----

 

NTL believes that it has a competitive advantage in the residentialmarket because it offers integrated telephone, cable television,telecommunications services, including Internet, interactive television andonline services, as well as multi-product packages designed to encouragecustomers to subscribe to multiple services. The packages NTL currently offersto the majority of its UK residential customers comprise telephone service, narrowbandInternet access service, broadband Internet access services, all of the currentterrestrial television channels and access to multi-channel television,including pay per view and interactive television services. NTL’s packaging andpricing are designed to encourage its customers to use multiple services fromNTL like dual telephone and broadband, dual telephone and narrowband, dualtelephone and television, or triple telephone, television and Internet access.Of NTL’s peers, only Telewest, which does not offer its services in NTL’sservice areas, is able to offer the full range of services NTL provides.

 

***ntl:business***

 

NTL faces a wide range of competitors in the UK market. The nature ofthis competition varies depending on geography, service offerings and size ofthe marketable area. Only BT and Telewest have both extensive local accessnetworks and a national backbone network. However, as Telewest’s local networksdo not overlap with NTL’s networks, NTL does not compete with Telewest to anymaterial extent. BT is a major competitor in almost all of NTL’s marketopportunities. Cable and Wireless plc, or C&W, and Energis own nationalbackbone networks and they tend to focus on the large enterprise/corporatemarkets. However, these companies do not own extensive local access networksand generally rely on wholesale arrangements to supply their customers.

 

COLT Telecom Group plc has an extensive network particularly in Londonand also focuses on large enterprise and corporate accounts. Thus Group plc hasits network in Scotland, principally in Edinburgh and Glasgow, and UnitedUtilities plc has its network in Manchester. NTL faces these competitors on alocal basis mainly in the medium to large end of the SME market and in themarket for larger corporate accounts and public sector organizations. Inaddition, for voice services NTL compete with a number of resellers whopurchase wholesale minutes from BT and others and compete aggressively in theretail market.

 

Although many customers have a dual supplier sourcing policy,competition remains based on price and quality of service. NTL expects pricecompetition to intensify as existing and other new entrants competeaggressively. Most of these competitors have substantial resources and NTLcannot assure you that these or other competitors will not expand theirbusinesses in its existing markets or that NTL will be able to continue tocompete successfully with these competitors in the business telecommunicationsmarket.

 

**Government Regulation**

 

***Regulationby the European Union***

 

The European Union, or EU, regulates NTL’s business through variouslegislative means. In February 2002, the EU adopted a package oflegislative measures, which set out a new framework for electroniccommunication to ensure that the legislation is more technology neutral. Thenew regulatory framework, or NRF, consists of:

 

•                                          fiveharmonization directives, including a framework directive and four specificdirectives on authorization, access and interconnection, universal service andusers’ rights, and data protection in telecommunications services;

 

•                                          aregulation on unbundling the local loop;

 

•                                          adraft liberalization directive; and

 

•                                          adecision on EU radio spectrum policy.

 

The UK government implemented these directives into law by the enactmentof the Communications Act 2003 and the Communications Regulations Act 2002. See“—Regulation in the UK”.

 

***Regulationin the UK***

 

NTL is subject to statutory regulation under the Communications Act2003 and the Broadcasting Acts 1990 and 1996.

 

Under the Communications Act 2003, companies intending to providedesignated electronic communications networks, or ECNs, or designatedelectronic communications services, or ECSs, are required to give priornotification of their intention to do so, in accordance with variousconditions. This notification procedure replaces the previous regime ofindividual licenses required by the Telecommunications Act 1984. As a priorholder of a public telecommunications operator license under theTelecommunications Act 1984, NTL is automatically deemed to operate under thenew regime. NTL’s entitlement to provide services extends throughout the UK.The UK regulatory regime was supervised and enforced by the UK Office of theDirector General of Telecommunications, OFTEL, until January 1, 2004, whenenforcement powers were transferred to the Office of Communications, or OFCOM.A breach of any conditions, which apply to NTL, can lead to fines andultimately to revocation of the right to provide a designated ECN or a

 

11

----

 

designated ECS.

 

NTL also holds a number of television licensable content servicelicenses to provide television content services under the Communications Act2003. These licenses are also supervised and enforced by OFCOM. Any breach ofconditions of these licenses, which apply to NTL, can lead to fines andultimately to revocation of the right to provide the service.

 

*SMP and market reviews*

 

The notification procedure contains certain conditions, which applyonly where a service provider has been found to have significant market power,or SMP, in a relevant market. SMP is similar to the competition law concept ofmarket dominance.

 

In 2003, OFTEL began a series of market reviews intended to identifywhich operators have SMP in a range of telecommunications and broadcastingmarkets. OFTEL’s provisional finding was that all fixed operators would haveSMP in relation to the termination of voice calls on their own network. Thisfinding is consistent with earlier findings that all mobile companies similarlyenjoy SMP in relation to the termination of calls on their networks. The OFTELfinding was based upon OFTEL’s determination that the charges related to thetermination of voice calls were not subject to competitive pressures becausethese charges are reflected on the bills of the calling parties who are not theoperators’ own customers.

 

In August 2003, OFTEL issued a statement confirming this finding.OFTEL set out the obligations that NTL and others would be expected to adhereto in light of this finding. A condition of the notification procedure willrequire NTL to offer a fair and reasonable rate to interconnecting operatorsfor the termination of calls on its network. OFTEL indicated that it wouldconsider a fair and reasonable rate to be one that was no higher than theregulated rate that BT must offer to terminate calls on its network. As NTLalready offered and received voice calls to BT and to other operators at a rateequivalent to the regulatory rate imposed on BT, it does not appear that thisruling has had a material effect on NTL.

 

With respect to all of NTL’s other voice, data and Internet markets,OFTEL’s conclusions, adopted by OFCOM, have been that NTL does not have SMP.

 

*Regulation of BT*

 

The regulation of BT is also key to NTL’s business in a number of ways.Because BT is the dominant provider of voice telephone services and NTL’s majorrival in broadband services with a continued monopoly of the DSL local loop, itis important to NTL that BT is subject to strict controls regardinganti-competitive behavior. However, regulation in the form of retail pricecontrols can also reduce pricing to unsustainable levels. Finally, “openaccess” regulation in either voice telephone services or data markets couldfacilitate entry by other providers, including service providers that do notown and run their own access infrastructure, intensifying the competitivethreat to NTL.

 

BT is subject to the same notification procedures as NTL and also tothe same process of market reviews to determine whether there is SMP. Thereviews completed to date have all concluded that BT has SMP in severalmarkets. The remaining reviews have made similar provisional findings. Theeffect of these reviews has been to subject BT to a large number of regulatoryrequirements at both the retail and wholesale levels.

 

BT will also be subject to a general presumption of market dominance inrelation to its commercial behavior in relevant markets where it holds SMP,which is likely to lead to restrictions on its ability to price and bundleservices.

 

OFTEL has stated that it intends to avoid retail price regulationwherever possible in favor of behavioral remedies, like fines for abusiveconduct, and measures that stimulate competitive entry, like unbundlingbroadband services and carrier pre-selection for voice telephone services.Regulation is unlikely to reduce price directly but NTL could face an increasein the number of competitors using BT’s access infrastructure.

 

*Other conditions of the General Authorization*

 

As an ECN, NTL must satisfy a number of conditions, including:

 

•                                          requirementsto offer outbound number portability to customers wishing to switch to anothernetwork, and to support inbound number portability when NTL acquires a customerfrom another network on reasonable terms, including charges. The numberportability requirements are specified in detail in a functional specificationthat is subject to periodic review and modification. As a result, numberportability requirements could become more onerous over time;

 

•                                          requirementsto offer directory inquiry services to subscribers of all networks. InSeptember 2001, OFTEL announced that the existing “192” directory inquirynumber would be withdrawn and replaced with a new structure in which customerswould have access to a range of service providers using different six-digitcodes. The “192” directory inquiry number was withdrawn on August 24,2003. NTL’s new directory inquiry number is 118 878;

 

•                                          requirementsto provide directory inquiry information to third parties. This necessitatessystems development costs to develop

 

12

----

 

intra-industry transfers of data;

 

•                                          requirementsto publish up-to-date price information;

 

•                                          powersto require operators to report and publish quality of service data; and

 

•                                          powersto enforce compliance with a recognized standard for auditing metering andbilling systems.

 

*Rights of way*

 

Under the Communications Act 2003, service providers are eligible forenhanced legal rights in respect of access to private land, exemption fromcertain requirements of general planning law and, under the ElectronicCommunications Code, the right to install equipment in the public highway. TheElectronic Communications Code therefore creates a legal framework for theinstallation and maintenance of a telecommunications network. These rights aresubject to certain conditions relating to the use of powers which may bespecified from time to time by the UK Department of Trade & Industry,or the DTI. Failure to adhere to these conditions could lead to fines orultimately to the revocation of rights under the Electronic CommunicationsCode.

 

*Universal service obligations*

 

The Communications Act 2003 introduced powers relating to universalservice obligations. Following a direction by OFTEL, BT and KingstonCommunications continued to be the only operators to be affected by universalservice obligations, except the obligations to provide:

 

•                                          atext relay service for the hard of hearing at reasonable cost;

 

•                                          braillebills to the blind; and

 

•                                          priorityfault repair to customers with disabilities.

 

However, OFTEL recommended that OFCOM should conduct a full review ofuniversal service in 2004, including a review of the funding of the provisionof universal services. This will form part of the strategic review oftelecommunications described below. It is possible that this might recommenduniversal service obligations be imposed on service providers including NTL.Although BT and, in the city of Hull, Kingston Communications would be theprimary obligated parties, other service providers could be required tocontribute to a universal service fund that would in part compensate BT andKingston Communications for the execution of their own universal serviceobligations.

 

*Strategic review of telecommunications*

 

OFCOM has decided that one of its first key tasks will be to review theUK telecommunications sector. The terms of reference are very wide and itsconclusions will shape the strategy through which OFCOM promotes competition inthe sector. The review is expected by the fall of 2004. However, OFCOM’ssubsequent actions will still need to fit within the New Regulatory Frameworkof the EU. See “—Regulation by the European Union” above. Within those parameters,it is possible that OFCOM’s conclusions might lead to the further relaxation ofregulation on BT; alternatively, they might recommend tighter regulation oreven structural reorganization of BT which could potentially benefit NTL.

 

*Competition Act 1998*

 

The Competition Act 1998, which came into force in March 2000,introduced a prohibition on the abuse of a dominant position and onanti-competitive agreements. It also introduced third party rights, strongerinvestigative powers, interim measures and enforcement powers. Theseenforcement powers include fines of up to 10% of annual UK revenues for eachyear of a breach, up to a maximum of three years. The Competition Act 1998 isenforced by the Office of Fair Trading, or OFT, and gives concurrent enforcementpowers to the sector regulator, OFCOM, and previously OFTEL. The Act alsoenables third parties to bring enforcement actions directly against persons,including telecommunications operators, who are in breach of the prohibitionsand seek damages, rather than have to wait for OFCOM to undertake enforcementaction.

 

In February 2000, OFTEL issued specific guidance on theapplication of the Competition Act 1998 in the telecommunications sector. Thisguidance stated that OFTEL would follow closely the general principles set outin the OFT’s guidance on the application of the Competition Act 1998 in itsapplication of those prohibitions. In addition, the regulators are notpermitted to reach decisions that are inconsistent with EU law.

 

The Competition Act 1998 limits the types of agreements andarrangements NTL can enter into. For example, NTL may be prohibited fromestablishing pricing arrangements or purchasing arrangements which have theeffect of reducing competition in the market or forcing companies to behave ina certain way dictated by NTL.

 

13

----

 

*Enterprise Act 2002*

 

The competition and consumer protection provisions of the EnterpriseAct 2002 came into force on June 20, 2003. These provisions introduced arange of measures to enhance business by strengthening the UK’s competition lawframework. The main reforms in the Enterprise Act are:

 

 *Competition.*  To alarge extent, independent competition bodies rather than the DTI will now makedecisions on merger and market investigations using competition-based tests. Inthe case of merger control, a competition-based test replaces the existingpublic interest test and will assess whether relevant mergers may lead to a“substantial lessening of competition.” In addition, a new jurisdictionalthreshold on revenues replaces the previous gross assets test. The acquisitionof a business with annual sales in the UK of £70 million or more willconstitute a merger that the OFT has a general duty, subject to certain exceptions,to refer for investigation by the Competition Commission if the OFT believesthe merger may be expected to result in a substantial lessening of competitionin the UK.

 

Under the new regime, the competition authorities are obliged toconsult on and give reasons for all significant decisions. There is a new rightof appeal to the Competition Appeal Tribunal, or CAT, in merger and marketinquiries. Inquiries have to be completed within statutory maximum timetables.Reforms to the Competition Commission’s procedures allow for a more transparentand better-informed remedy-setting phase following the publication ofprovisional competition findings.

 

Individuals who cause or encourage the making of agreements betweencompetitors designed to fix prices, share markets, limit supply or productionand rig bids within the UK, can be prosecuted and punished by imprisonment forup to 5 years and unlimited fines. The courts may also order thedisqualification for up to 15 years of directors whose companies havecommitted a breach of UK or EC competition law. Victims of anti-competitivebehavior will have greater opportunities to gain redress, and will now find iteasier to bring claims for damages for losses suffered owing toanti-competitive behavior. Where infringement has already been established bythe OFT, CAT or the European Commission, the CAT can award damages for thatinfringement. Where there have been no such prior findings of infringement,claims may still be pursued in the High Court, although the claimant itselfwill in these circumstances need to establish that there has been aninfringement.

 

 *Consumer Protection.* Stop now orders will now be available to protect consumers from traderswho do not meet their legal obligations. The new enforcement regime will applyto infringements of a wide range of legislation protecting the economicinterests of consumers, like failing to carry out a service to a reasonablestandard. This will also ensure that honest traders, especially smallbusinesses, do not face unfair competition from those who engage in unlawfulconduct.

 

Designated consumer bodies will be empowered to make “super-complaints”to the OFT about features of a market that are harming consumers. The aim is toaddress situations where markets have failed to work for consumers, rather thanthe conduct of particular companies. The OFT will be required to specify whataction it intends to take within 90 days of receiving a complaint.

 

**Research and Development**

 

NTL’s research and development activities involve the analysis oftechnological developments affecting its cable television, telephone andtelecommunications business, the evaluation of existing services and sales andmarketing techniques and the development of new services and techniques.

 

**Patents, Trademarks, Copyrights and Licenses**

 

NTL does not have any material patents or copyrights nor does itbelieve that patents play a material role in its business. NTL owns and has theright to use registered trademarks, which in some cases are, and in others may be,of material importance to its business, including the “ntl:” logo. In addition,NTL is substantially dependent on the authorizations granted by the legislativeagencies which regulate its various businesses. The loss of any one or more ofthose authorizations could have a material adverse effect on NTL’s business andfinancial condition.

 

**Customers**

 

No material part of our business is dependent upon a single customer ora few customers. We do not believe that the loss of any one customer would havea materially adverse effect on our results of operations.

 

**Employees**

 

As the management of our business is performed by NTL, we do not haveany employees on our payroll. At December 31, 2003, NTL had approximately13,650 employees, approximately 13,100 of whom are permanent and approximately550 of whom are temporary or contract employees. NTL believes that itsrelationship with its employees is generally good.

 

14

----

 

**Item 2.****    Properties**

 

We do not own or lease any properties. NTLSouth Herts owns a freehold property at 9 Greycaine Road, Watford for use asoffices and to house network equipment.

 

15

----

 

**Item 3.****    LegalProceedings**

 

We are from time to time subject to legal proceedingsand claims that arise in the ordinary course of our business. In the opinion ofthe management, the amount of ultimate liability with respect to these actionswill not materially affect our financial position, results of operations orliquidity.

 

16

----

 

**Item 4.****    Submission ofMatters to a Vote of Security Holders**

 

There were no matters that were submitted toa vote of the holders of our limited partnership interests during the quarterended December 31, 2003.

 

**PART II**

 

**Item 5.****    Market forthe Registrant’s Common Equity and Related Stockholder Matters**

 

While our interests are publicly held, thereis no established public market for the limited partnership interests, and itis not expected that such a market will develop in the future. As ofMarch 23, 2004, the approximate number of holders of our limitedpartnership interests was 5,500.

 

17

----

 

**Item 6.****  SelectedFinancial Data**

 

The following table sets forth certainfinancial data for the years ended December 31, 2003, 2002, 2001, 2000 and1999. This information should be read in conjunction with the consolidatedfinancial statements and notes and the information contained in our ManagementDiscussion and Analysis appearing elsewhere in this Annual Report. Historicalresults are not necessarily indicative of future results.

 
|                                                              |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                              |   | **2003**                          |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                              |   |                              |       |   |   |   |   |   |   |   |   |
| **Income Statement Data:**                                        |   |                              |       |   |   |   |   |   |   |   |   |
| Revenues                                                          |   | $                                 | 32,772,962 |   | $ | 29,552,065 |   | $ | 28,354,653 |   | $ | 26,310,898 |   | $ | 28,345,316 |   |
| Cost of Goods Sold                                                |   | (10,662,169                       | )          | (10,772,887 | ) | (12,277,725 | ) | (10,366,295 | ) | (10,837,197 | ) |
| Selling, General and Administrative  Expenses                     |   | (130,840                          | )          | (167,225 | ) | (277,224 | ) | (277,225 | ) | (245,974 | ) |
| Management Fees and Allocations from  General Partner             |   | (13,544,514                       | )          | (12,035,660 | ) | (11,901,237 | ) | (13,128,873 | ) | (10,447,802 | ) |
| Other charges                                                     |   | (220,329                          | )          | (1,488,502 | ) | (2,307,942 | ) | — |   | — |   |
| Depreciation                                                      |   | (7,460,577                        | )          | (7,595,523 | ) | (14,629,055 | ) | (4,759,437 | ) | (6,279,976 | ) |
| Operating Income (Loss)                                           |   | 754,533                           |       | (2,507,732 | ) | (13,038,530 | ) | (2,220,932 | ) | 534,367 |   |
| Interest Expense                                                  |   | (1,922,710                        | )          | (1,587,925 | ) | (1,577,428 | ) | (3,217,052 | ) | (3,322,569 | ) |
| Exchange (losses) gains                                           |   | (179,033                          | )          | (162,100 | ) | 23,590 |   | 177,333 |   | 21,763 |   |
| (Loss) before Minority Interests                                  |   | (1,347,210                        | )          | (4,257,757 | ) | (14,592,368 | ) | (5,260,651 | ) | (2,766,439 | ) |
| Minority Interests                                                |   | —                            |       | 768,837 |   | 4,723,504 |   | 1,665,805 |   | 797,107 |   |
| Net (Loss)                                                        |   | $                                 | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) | $ | (3,594,846 | ) | $ | (1,969,332 | ) |
|                                                              |   |                              |       |   |   |   |   |   |   |   |   |
| Net (Loss) per Limited Partnership Unit                           |   | $                                 | (23.43     | ) | $ | (60.67 | ) | $ | (171.60 | ) | $ | (62.51 | ) | $ | (34.24 | ) |
| Weighted Average Number of Limited  Partnership Units Outstanding |   | 56,935                            |       | 56,935 |   | 56,935 |   | 56,935 |   | 56,935 |   |

 
|                                                |   | **As of  December 31,** |       |
|-----------------------------------------------------|--------|------------------------------|------------|
|                                                |   | **2003**                     |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                |   |                         |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                             |   |                         |       |   |   |   |   |   |   |   |   |
| Total Assets                                        |   | $                            | 61,450,329 |   | $ | 58,973,664 |   | $ | 59,167,848 |   | $ | 70,366,262 |   | $ | 73,021,980 |   |
| Accounts Payable to Affiliates and Related  Parties |   | 66,757,685                   |       | 62,691,338 |   | 58,599,365 |   | 32,690,227 |   | 21,114,583 |   |
| Long Term Debt                                      |   | —                       |       | — |   | — |   | 21,618,413 |   | 29,014,559 |   |
| General Partner’s (Deficit)                    |   | (537,849                     | )          | (524,377 | ) | (489,488 | ) | (390,799 | ) | (354,851 | ) |
| Limited Partners’ Capital (Deficit)            |   | (4,246,895                   | )          | (2,913,157 | ) | 540,874 |   | 10,311,049 |   | 13,869,947 |   |
| Minority Interests                                  |   | —                       |       | — |   | 739,160 |   | 5,645,599 |   | 7,883,670 |   |
|                                                     |        |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7****.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

We are a Colorado limited partnership that was formed in December 1991pursuant to the public offering of our limited partnership interests for thepurpose of acquiring one or more cable television/telephone systems in theUnited Kingdom. Upon acquisition of our system, our primary investmentobjective was to obtain capital appreciation in the value of our investment inthe system over the term such investment is held by us.

 

We hold 66.7% of the shares of NTL South Herts, which is principallyengaged in the development, construction, management and operation of broadbandcommunications networks for telephone, cable television and Internet servicesin the United Kingdom. As a result of our ownership of 66.7% of the shares ofNTL South Herts, for accounting purposes we have consolidated the results ofNTL South Herts with our results. NTL indirectly holds the remaining 33.3% ofthe shares of NTL South Herts. We are reliant on the support of NTL, theultimate parent company of the General Partner, to continue our operations as agoing concern.

 

18

----

 

**Selected Operating Data**

 

We set forth in the following table certain data concerning ourfranchise at December 31, 2003 and 2002:

 
|                            |   | **December  31  2003** |   | **December  31  2002** |   |
|---------------------------------|--------|------------------------|--------|------------------------|--------|
|                            |   |                   |   |                   |   |
| Homes passed(1)                 |   | 92,081                 |   | 91,749                 |   |
| Homes marketable(2)             |   | 92,081                 |   | 91,749                 |   |
| Total customers                 |   | 33,121                 |   | 32,018                 |   |
| Digital cable subscribers       |   | 20,780                 |   | 20,681                 |   |
| Analog cable subscribers        |   | 3,996                  |   | 5,023                  |   |
| Broadband internet subscribers  |   | 10,850                 |   | 5,741                  |   |
| Telephony subscribers           |   | 29,674                 |   | 29,069                 |   |
| Penetration (homes marketed)(3) |   | 36.0                   | %      | 34.9                   | %      |
| Annualized Churn(4)             |   | 12.6                   | %      | 12.9                   | %      |

 

----

(1)                                  Homes passed is thenumber of homes that have had ducting buried outside.

 

(2)                                  Homes marketablerefers to the number of homes within our service area that can potentially beserved by our network with minimal connection costs.

 

(3)                                  Penetration ratemeasures the number of subscribers for our services divided by the number ofmarketable homes that our services pass.

 

(4)                                  Churn rate iscalculated by dividing the number of customers lost in the most recent quarter,multiplied by four, by the average total number of customers serviced duringthat quarter.

 

**Critical Accounting Policies**

 

Our consolidated financial statements and related financial informationare based on the application of accounting principles generally accepted in theUnited States, or GAAP. GAAP requires the use of estimates, assumptions,judgements and subjective interpretations of accounting principles that have animpact on the assets, liabilities, revenues and expense amounts reported, aswell as disclosures about contingencies, risks and financial condition. Thefollowing critical accounting policies have the potential to have a moresignificant impact on our financial statements. An impact could occur becauseof the significance of the financial statement item to which these policiesrelate, or because these policies require more judgement and estimation thanother matters owing to the uncertainty related to measuring, at a specificpoint in time, transactions that are continuous in nature.

 

***ForeignCurrency Translation:***

 

Our principal operating functional currency is the UK pound sterling,while our reporting currency is the US dollar. The assets and liabilities ofour UK subsidiary have been translated using the exchange rates in effect atthe balance sheet dates, and revenues and expenses have been translated at theweighted average rates for the respective years. Exchange gains and losses ontranslation of our net equity investments in our subsidiaries are reported as aseparate component of accumulated other comprehensive income (loss) inpartners’ capital (deficit). Foreign currency transaction gains and losses arerecorded in the statements of operations.

 

***FixedAssets:***

 

•                                          Fixedassets, net, totaled $61.5 million and $58.9 million, representing100.0% and 99.8% of total assets at December 31, 2003 and 2002,respectively. Fixed assets, net are stated at cost less accumulateddepreciation.

 

•                                          Thecost of fixed assets includes amounts capitalized for labor and overheadexpended in connection with the design and installation of our operatingnetwork equipment and facilities. Costs associated with initial customerinstallations, additions of network equipment necessary to enable advancedservices, acquisition of additional fixed assets and replacement of existingfixed assets are capitalized. The costs of reconnecting the same service to apreviously installed premise are charged to expense in the period incurred.Costs for repairs and maintenance are charged to expense as incurred.

 

•                                          Weassign fixed assets and intangible assets useful lives that impact the annualdepreciation and amortization expense. The assignment of useful lives involvessignificant judgements and the use of estimates. Our managers use their experienceand expertise

 

19

----

 

in applying judgements about appropriate estimates. Changes intechnology or changes in intended use of these assets may cause the estimateduseful life to change, resulting in higher or lower depreciation charges orasset impairment charges.

 

***Revenue:***

 

We recognize revenue only when it is realized or realizable and earned.We recognize revenue when all of the following are present:

 

•                                          persuasiveevidence of an arrangement exists between us and our customers;

 

•                                          deliveryhas occurred or the services have been rendered;

 

•                                          theprice for the service is fixed or determinable; and

 

•                                          collectibilityis reasonably assured.

 

Revenues are invoiced and recorded as part of a periodic billing cycle,and are recognized as the services are provided. At the end of each period,adjustments are recorded to defer revenue relating to services billed inadvance and to accrue for earned but unbilled services.

 

•                                          *Telephone service and cable television revenues*are recognized as the services are provided to customers.

 

•                                          *Rental revenue* in respect of line rentalsand rental of equipment provided to customers is recognized on a straight-linebasis over the term of the rental agreement.

 

•                                          *Internet revenue* in respect of broadbandservices provided to customers is recognized as the service is provided.

 

•                                          *Bundled services revenue* is recognized atthe time the services are provided to the customer or the performance of all ofthe services have been completed. We apply the provisions of EITFNo. 00-21 “*Accounting for RevenueArrangements with Multiple Deliverables*” to assess whether thecomponents of the bundled services should be recognized separately.

 

•                                          *Installation revenues* are recognized atthe time the installation has been completed to the extent that those fees areless than direct selling costs. Installation fees in excess of direct sellingcosts are deferred and amortized over the expected life of the customer’sconnection. We apply the provisions of SFAS No. 51 “*Financial Reporting by Cable Television Companies*”in relation to connection and activation fees for telephone service andinternet services, as well as cable television services, on the basis that wemarket and maintain a unified fiber network through which we provide all ofthese services.

 

***OtherPolicies:***

 

•                                          Asubsidiary of NTL provides infrastructure and management support services tous. The related charges represent our portion of costs incurred by thesubsidiary of NTL for the benefit of all UK operations within NTL. The chargesare made on the basis of an allocation formula appropriate to each category ofcharge.

 

•                                          Wemaintain allowances for doubtful accounts and other receivables to reflectestimated losses resulting from the potential inability of our customers tomake payments. These allowances are estimated based on the current aging ofreceivables, prior collection experience and future expectations of conditionsthat might impact the collectibility. If the financial condition of our customerswere to deteriorate resulting in an impairment in their ability to makepayments, additions to the allowances may be required.

 

•                                          Ourdetermination of the treatment of contingent liabilities in the financialstatements is based on a view of the expected outcome of the applicablecontingency. We consult legal counsel on matters related to litigation. Weconsult both internal and external experts with respect to other matters thatarise in the ordinary course of business. Examples of these matters that arebased on assumptions, judgments and estimates include amounts to be paid toterminate some agreements included in restructuring charges and the amounts tobe paid to settle some other liabilities. A liability is accrued if thelikelihood of occurrence of an adverse outcome is probable and the amount iscapable of estimation.

 

•                                          Weincur interconnection and related costs from other carriers relating to theprovision of telephone services. These carriers can make retrospectiveadjustments to charges for these services which requires us to estimate certaincharges for a particular period. Actual charges may differ from thoseestimated.

 

These policies may need to be revised in the future in the event thatchanges to our business occur.

 

20

----

**Resultsof Operations**

 

We derive our revenue principally from monthly fees and usage charges.Our packaging of services and pricing are designed to encourage our customersto use multiple services like dual telephone and broadband, dual telephone andtelevision or triple telephone, television and Internet access.

 

The principal components of our expenses include payroll and otheremployee related costs; interconnection costs paid to other carriers related totelephone services; television programming costs; marketing and selling costs;repairs and maintenance; facility related costs, like rent, utilities andrates; and allowances for doubtful accounts. Our expenses include certain coststhat are charged by a subsidiary of NTL for the provision of network servicesand support, the use of NTL’s national backbone telephone network for carriageof our telephone traffic, as well as the provision of technical infrastructureand network capacity by NTL for our subscription Internet access service anddigital television services, the provision of corporate services, includingfinance, legal, human resources and facility services, and for the provision ofIT services, including our use of the related IT equipment.

 

***Factors affectingour business***

 

*Customer Churn.*  An increase in our customer churn can leadto increased costs and reduced revenues. We continue to focus on improving ourcustomer service and enhancing and expanding our service offerings to existingcustomers in an effort to manage our customer churn rate. Customer churn is ameasure of the number of customers who stop using our services. Our annualizedcustomer churn rate is calculated by dividing the number of customers lost inthe most recent quarter, multiplied by four, by the average total number of customerswe serviced during that quarter. Although our ability to reduce our customerchurn rate beyond a base level is limited by factors like customers movingoutside our network service area, in particular during the summer season,managing our customer churn rate is a significant component of our businessplan. To help meet these objectives, NTL needs to integrate its billing systemsand customer databases, including ours, across its entire network. Although NTLis in the process of integrating its billing systems and customer databases,including ours, there can be no assurance that it will be successful inreaching this goal. In addition, our customer churn rate may also increase ifwe are unable to deliver our services over our network without interruption.

 

*Competition.*  Our ability to acquire and retain customersand increase revenues depends on our competitive strength. There is significantcompetition in our markets through digital satellite offered by BSkyB anddigital terrestrial television offered by Freeview, as well as throughalternative Internet access services, like DSL, which is offered by BT. Ifcompetitive forces prevent us from charging the prices for these services thatwe plan to charge, or if our competition is able to attract our customers orpotential customers we are targeting, our results of operations will beadversely affected.

 

*Capital Expenditures.*  Our business requires substantial capitalexpenditures on a continuing basis for various purposes, including expandingand upgrading our network, investing in new customer acquisitions, and offeringnew services. If we do not continue to invest in our network, our ability toretain and acquire customers may be hindered. Therefore, our liquidity and theavailability of cash to fund capital projects are important drivers of ourrevenues. When our liquidity is restricted, so is our ability to meet ourcapital expenditure requirements. We believe that our cash from operations andcash from NTL, will be sufficient for our cash requirements in 2004. However,our cash requirements after that time may exceed, perhaps significantly, thesesources of cash.

 

*Seasonality.*  Certain revenue streams are subject toseasonal factors. For example, telephone usage revenues in ntl: home and ntl:business tend to be slightly lower during summer holiday months. Our customerchurn rates include persons who disconnect service owing to moves, resulting ina seasonal increase in our churn rates during the summer months when higherlevels of UK house moves occur and students leave their accommodations betweenschool years.

 

*Integration of Billing Systems.*  NTL is in the process of integrating itsvarious billing systems and customer databases, including ours, in an effort toimprove one of the main tools it uses to provide customer service. NTL hasnumerous billing systems and customer databases owing to the many acquisitionsit has made. NTL is seeking to complete this integration by late 2004. Thetotal project cost is estimated to be approximately £75 million of whichNTL incurred approximately £55 million through December 31, 2003.Approximately £33 million of this amount was incurred in 2003. If theintegration is not successful, we could experience an adverse effect on ourcustomer service, customer churn rate and costs of maintaining these systemsgoing forward. We could also experience operational failures related to billingand collecting revenues from our customers which, depending upon on theseverity of the failure, could have a material adverse effect on our business.

 

***Yearsended December 31, 2003 and 2002***

 

We present below summarized consolidated financial information for theyears ended December 31, 2003 and 2002:

 
|                                        |   | **Year ended  December 31,** |       | **Increase  (decrease)** |   |
|---------------------------------------------|--------|-----------------------------------|------------|--------------------------|--------|
|                                        |   | **2003**                          |       | **2002**                 |   | **$** |   | **%** |   |
|                                        |   |                              |       |                     |   |   |   |   |   |
| Revenues                                    |   | $                                 | 32,772,962 |                     | $      | 29,552,065 |   | 3,220,897 |   | 10.9 |   |
| Cost of goods sold                          |   | (10,662,169                       | )          | (10,772,887              | )      | (110,718 | ) | (1.0 | ) |
| Selling, general and adminstrative expenses |   | (130,840                          | )          | (167,225                 | )      | (36,385 | ) | (21.8 | ) |
| Management fees and allocated overhead      |   | (13,544,514                       | )          | (12,035,660              | )      | 1,508,854 |   | 12.5 |   |
| Other charges                               |   | (220,329                          | )          | (1,488,502               | )      | (1,268,173 | ) | (85.2 | ) |
| Depreciation                                |   | (7,460,577                        | )          | (7,595,523               | )      | (134,946 | ) | (1.8 | ) |
| Operating income (loss)                     |   | 754,533                           |       | (2,507,732               | )      | (3,262,265 | ) | (130.1 | ) |
| Interest expense                            |   | (1,824,622                        | )          | (1,497,775               | )      | 326,847 |   | 21.8 |   |
| Other interest                              |   | (98,088                           | )          | (90,150                  | )      | 7,938 |   | 8.8 |   |
| Exchange losses                             |   | (179,033                          | )          | (162,100                 | )      | 16,933 |   | 10.4 |   |
| Loss before minority interests              |   | (1,347,210                        | )          | (4,257,757               | )      | (2,910,547 | ) | (68.4 | ) |
| Minority interests                          |   | —                            |       | 768,837                  |   | (768,837 | ) | (100.0 | ) |
| Net loss                                    |   | $                                 | (1,347,210 | )                        | $      | (3,488,920 | ) | (2,141,710 | ) | (61.4 | ) |

 

21

----

 

*Revenues*

* *

For the year ended December 31, 2003, revenues increased by 10.9%to $32.8 million from $29.6 million in 2002 primarily owing toforeign exchange movements. Revenue expressed in UK pounds sterling increasedby 1.9% to £20.0 million in 3003 from £19.7 million in 2002. We haveincreased our revenues through price rises and more broadband customers servedby the South Herts System. At December 31, 2003, we served 10,850broadband customers compared with 5,741 at December 31, 2002. We expectrevenue increases in the future to be achieved by further growth in servicessuch as digital television and broadband services.

 

*Expenses*

* *

*Costs of goods sold.*  For the year ended December 31, 2003,costs of goods sold decreased by 1.0% to $10.7 million from$10.8 million in 2002. Cost of goods sold expressed in UK pounds sterlingdecreased by 9.0% to £6.5 million in 2003 from £7.2 million in 2002.Costs of goods sold as a percentage of revenues declined to 32.5% for the yearended December 31, 2003, from 36.5% for 2002. We have benefited from theefficiencies that NTL has gained in the negotiated reductions in the costs oftelevision programming and reductions in the costs of interconnection owing tothe more effective routing of outbound traffic. In addition, we have alsobenefited from a release of certain accruals in respect of favorableresolutions by NTL of billing matters with certain providers of interconnectrelated services.

 

*Selling, general and administrative expenses.*  For the year ended December 31, 2003,selling, general and administrative expenses decreased by 21.8% to $130,840from $167,225 in 2002. We have made savings in selling, general andadministrative costs through negotiated reductions in investor relations’ costsand insurance.

 

*Management fees and allocated overhead.*  For the year ended December 31, 2003,management fees and allocated overhead increased by 12.5% to $13.5 millionfrom $12.0 million in 2002 primarily owing to foreign exchange movements.Management fees and allocated overhead expressed in UK pounds sterlingincreased by 2.0% to £8.3 million in 2003 from £8.1 million in 2002.The increase in the amounts charged to us resulted from more marketing andselling activities in 2003, together with higher employee related costsassociated with incentive compensation plans. These increases have been partlyoffset by further operational savings.

 

*Other charges.*  For the year ended December 31, 2003,other charges decreased by 85.2% to $220,329 from $1.5 million in 2002.Other charges include restructuring costs allocated to us by a subsidiary ofNTL. These costs are for employee severance and related costs. Chargesallocated to us by a subsidiary of NTL are made on the basis of an allocationformula appropriate to each category of charge that is based on management’sjudgement of a reasonable methodology given the facts and circumstances.

 

*Depreciation expense*

* *

For the year ended December 31, 2003, depreciation expensedecreased to $7.5 million from $7.6 million in 2002. During 2003, weevaluated the remaining useful economic lives of our fixed assets. As ofJanuary 1, 2004, we adopted new useful economic lives. We estimate thatthe impact on the annual depreciation expense upon the adoption of new lives in2004 not to be significant.

 

*Interest expense*

* *

For the year ended December 31, 2003, interest expense increasedto $1.8 million from $1.5 million in 2002. We incur interest onmanagement fees paid on our behalf by the General Partner. The increase ininterest expense is owing to the increase in the level of these unpaid fees aswell as foreign exchange movements.

 

We paid no cash interest for the year ended December 31, 2003, and2002.

 

22

----

 

*Exchange gains (losses)*

 

For the year ended December 31, 2003, foreign currency exchangelosses were $179,033 as compared with losses of $162,100 for 2002. The changein exchange losses is primarily attributable to fluctuations in the valuationof the US Dollar on certain of our assets and transactions, which aredenominated in UK Pounds Sterling. Our results of operations will continue tobe affected by foreign exchange rate fluctuations.

 

*Minority interests*

* *

In 2003, we recorded no minority interests. At December 31, 2003NTL South Herts’ liabilities exceeded its assets. We have not recognized theresulting minority interest asset since such an asset is not recoverable. UnderUK law, the shareholders of a UK limited company are protected from thecompany’s liabilities.

 

*Net loss*

* *

For the year ended December 31, 2003, net loss was$1.3 million as compared with a net loss of $3.5 million in 2002.This change was primarily a result of improvement in operating performance.

 

***YearsEnded December 31, 2002 and 2001***

 

We present below summarized consolidated financial information for theyears ended December 31, 2002 and 2001:

 
|                                        |   | **Year ended  December 31,** |       | **Increase  (decrease)** |   |
|---------------------------------------------|--------|-----------------------------------|------------|--------------------------|--------|
|                                        |   | **2002**                          |       | **2001**                 |   | **$** |   | **%** |   |
|                                        |   |                              |       |                     |   |   |   |   |   |
| Revenues                                    |   | $                                 | 29,552,065 |                     | $      | 28,354,653 |   | 1,197,412 |   | 4.2 |   |
| Cost of goods sold                          |   | (10,772,887                       | )          | (12,277,725              | )      | (1,504,838 | ) | (12.3 | ) |
| Selling, general and adminstrative expenses |   | (167,225                          | )          | (277,224                 | )      | (109,999 | ) | (39.7 | ) |
| Management fees and allocated overhead      |   | (12,035,660                       | )          | (11,901,237              | )      | 134,423 |   | 1.1 |   |
| Other charges                               |   | (1,488,502                        | )          | (2,307,942               | )      | (819,440 | ) | (35.5 | ) |
| Depreciation                                |   | (7,595,523                        | )          | (14,629,055              | )      | (7,033,532 | ) | (48.1 | ) |
| Operating income (loss)                     |   | (2,507,732                        | )          | (13,038,530              | )      | (10,530,798 | ) | (80.8 | ) |
| Interest expense                            |   | (1,497,775                        | )          | (1,228,360               | )      | 269,415 |   | 21.9 |   |
| Other interest                              |   | (90,150                           | )          | (349,068                 | )      | (258,918 | ) | (74.2 | ) |
| Exchange (losses) gains                     |   | (162,100                          | )          | 23,590                   |   | (185,690 | ) | (787.2 | ) |
| Loss before minority interests              |   | (4,257,757                        | )          | (14,592,368              | )      | (10,334,611 | ) | (70.8 | ) |
| Minority interests                          |   | 768,837                           |       | 4,723,504                |   | (3,954,667 | ) | (83.7 | ) |
| Net loss                                    |   | $                                 | (3,488,920 | )                        | $      | (9,868,864 | ) | (6,379,944 | ) | (64.6 | ) |

 

*Revenues*

* *

For the year ended December 31, 2002, revenues increased by 4.2%to $29.6 million from $28.4 million for 2001. The increase is mainlyowing to more customers taking broadband Internet services. In 2002, the numberof broadband customers rose by 5,619 from 122 as of December 2001 to 5,741as of December 2002. This increase was offset by a fall in the number ofcable television and telephone customers. The South Herts System servedapproximately 25,704 basic cable television customers and 29,069 residentialtelephone lines as of December 31, 2002, compared to 27,231 basic cabletelevision customers and 30,198 residential telephone lines as ofDecember 31, 2001.

 

*Expenses*

* *

*Costs of goods sold.*  For the year ended December 31, 2002,costs of goods sold decreased by 12.3% to $10.8 million from$12.3 million in 2001. Costs of goods sold as a percentage of revenuesdeclined to 36.5% for the year ended December 31, 2002, from 43.3% for2001. The decrease in cost of goods sold is owing primarily to efficiencies andcost savings generated by NTL and partially to fewer customers.

 

*Selling, general and administrative expenses.*  For the year ended December 31, 2002,selling, general and administrative expenses decreased by 39.7% to $167,225from $277,224 in 2001. We have made savings in selling, general andadministrative costs through negotiated reductions in investor relations’ costsand insurance.

 

*Management fees and allocated overhead.*  For the year ended December 31, 2002,management fees and allocated overhead increased by 1.1% to $12.0 millionfrom $11.9 million in 2001. The business of NTL South Herts is managed asan integral part of NTL. The combined costs of managing the

 

23

----

 

larger group are allocated to each entity with the NTL group, includingNTL South Herts, on a consistent and proportional basis according to the levelof trading in that entity. The General Partner considers this to be a fair andreasonable method as management as an integral part of a larger group to reapbenefits of synergy maximizes returns. Management fees and allocated overhead increasedduring the year despite the allocation to NTL South Herts of the net decreasein NTL’s costs resulting from the following:

 

•                                          Asa result of capital constraints imposed on its business, NTL reduced itsexpenditure in a number of areas, including those related to expanding itscustomer base, and those related to service arrangements with third partiesthat provide capital improvements as part of their services. These measures, aswell as the significant restructuring of NTL’s business in 2002 in terms ofheadcount reduction and departmental reorganization, have caused NTL toreassess whether for some 2002 expenditures, assumptions and estimates relatingto the allocation of those costs between capital and operating expense need tobe revised. The result of this reassessment was to increase our costs byapproximately $568,000, for the year ended December 31, 2002.

 

•                                          Duringthe year NTL undertook a review of certain balance sheet accounts whichidentified that there were accruals that were no longer necessary in light ofthe resolution of the issues and other liabilities that such accruals sought toaddress. The review resulted in a decrease in our costs by approximately$620,000, for the year ended December 31, 2002.

 

*Other charges.*

 

For the year ended December 31, 2003, other charges decreased by35.5% to $1.5 million from $2.3 million in 2001. Other chargesinclude restructuring costs allocated to us by a subsidiary of NTL. These costsare for employee severance and related costs.

 

*Depreciation*

 

Depreciation expense decreased to $7.6 million in 2002 from$14.6 million in 2001. Following the acquisition by NTL of CWC ConsumerCo(which included NTL South Herts), the General Partner reviewed the book valueand useful economic lives of the assets of NTL South Herts. This resulted in achange to the book value and useful economic lives of customer installationcosts and cable converter costs. Previously, these costs had been depreciatedover varying lives of between 7 and 40 years. Customer installation andcable converter costs were depreciated over three years being the GeneralPartner’s estimate of the average life of customer connection. This representsa change in accounting estimate and resulted in an adjustment of$8 million in 2001 relating to those costs that would have been fullydepreciated under the revised policy. The net book value of customer connectioncosts and cable converters acquired in the three years prior to May 2000are being depreciated over the remainder of their revised useful economiclives.

 

In the fourth quarter of 2002, we reviewed our fixed assets inaccordance with SFAS No. 144 in light of the lower valuation of the NTLgroup. We determined that no write down was required as a result of thisassessment.

 

*Interest expense*

 

For the year ended December 31, 2002, interest expense increasedto $1.5 million from $1.2 million in 2001. We incur interest ondeferred charges paid on our behalf by the General Partner. The increase ininterest expense is owing to the increase in the level of unpaid management feeas well as foreign exchange movements.

 

We paid no cash interest for the year ended December 31, 2002, and$261,886 for the year ended December 31, 2001.

 

*Exchange gains (losses)*

 

Foreign currency exchange losses were $162,100 in the year endedDecember 31, 2002 compared with gains of $23,590 in the year endedDecember 31, 2001. The change in exchange losses is primarily attributableto fluctuations in the valuation of the US Dollar on certain of our assets andtransactions, which are denominated in UK Pounds Sterling. Our results ofoperations will continue to be affected by foreign exchange rate fluctuations.

 

*Net loss*

 

Net loss was $3.5 million in the year ended December 31, 2002and $9.9 million in the year ended December 31, 2001. This change wasthe result of the factors discussed above.

 

**Statement of Cash Flows**

 

***YearEnded December 31, 2003 and 2002***

 

For the year ended December 31, 2003, cash provided by operatingactivities decreased to $1.5 million from $1.9 million in 2002, owingto the higher repayment of accounts payable to affiliates and related partiesoffsetting the increase from the improvement in our operating performance.

 

24

----

 

For the year ended December 31, 2003, purchase of fixed assetsdecreased to $1.5 million from $1.9 million in 2002. Purchase offixed assets relate primarily to customer installations. During 2003, wecontinued to restrict purchase of fixed assets in an effort to conserve cash.

 

***YearEnded December 31, 2002 and 2001***

 

For the year ended December 31, 2002, cash provided by operatingactivities decreased to $1.9 million from $26.3 million in 2001. Cashinflow from operating activities in 2001 includes an increase of$26.2 million in accounts payable to affiliates and related parties, whichwas used to repay bank loan finance.

 

For the year ended December 31, 2002, purchase of fixed assetsdecreased to $1.9 million from $5.4 million in 2001. In 2002, werestricted purchases of fixed assets in an effort to conserve cash.

 

For the year ended December 31, 2001, we repaid our loan andreplaced it with financing from NTL.

 

**Liquidity and Capital Resources**

** **

***Outstandingindebtedness***

 

We have no financing independent of NTL. We are reliant upon thesupport of NTL to continue our operations. As of December 31, 2003 we hadconsolidated current liabilities of $66.8 million due to NTL Groupcompanies.

 

Historically, our source of cash had been the net proceeds of ourofferings of limited partnership interests and our principal uses of cash havebeen capital contributions to NTL South Herts in order to fund ourproportionate share of the construction costs of the South Herts System.

 

Accordingly, until such time as NTL South Herts begins to pay dividendson its ordinary shares (which is not expected in the foreseeable future) wewill be required to fund our administrative expenses by additional issuances oflimited partnership interests or from borrowings. It is unlikely that we willbe able to sell debt or equity securities in the public markets at least in theshort term or to obtain financing from commercial banks. Accordingly, we aredependent on NTL for funds to cover operating expenses, and will continue to bedependent upon NTL to meet our liquidity requirements for the foreseeablefuture. We expect that cash from our operations in 2004 will be utilized fullyfor the purchase of fixed assets including connecting new customers to ournetworks.

 

***NTL’sCompleted Restructuring***

 

On May 8, 2002, NTL (then known as NTL Communications Corp.), theultimate parent company of our General Partner, NTL Europe (then known as NTLIncorporated and the former parent company of NTL Communications Corp.) andcertain of their subsidiaries filed a pre-arranged joint reorganization plan underChapter 11 of the US Bankruptcy Code. We were not included in the Chapter 11filing. The Plan became effective on January 10, 2003, at which time NTLemerged from Chapter 11 reorganization.

 

Pursuant to the Plan, NTL Europe and its subsidiaries and affiliateswere split into two separate groups, and NTL and NTL Europe each emerged asindependent public companies. NTL became the holding company for NTL Europe’sprincipal UK and Ireland assets and the ultimate parent company of our GeneralPartner, and NTL Europe became the holding company for its continental Europeanand certain other assets. We are no longer affiliated to NTL Europe.

 

**Contractual Obligations and CommercialCommitments**

 

We have no significant contractualobligations and commercial commitments as of December 31, 2003.

 

**Item 7A****.    Quantitativeand Qualitative Disclosures About Market Risk**

 

The functional currency of NTL South Herts isUK pounds sterling and all revenue and significantly all costs are incurred inUK pounds sterling. We report in US dollars. Therefore, we are exposed tofluctuations in the UK sterling US dollar exchange rate.

 

The aggregate potential loss from a hypothetical one-percent fall inthe UK £/ US $ exchange rate is $8,329 for the year ended December 31,2003.

 

We have no debt other than amounts due to affiliates. As ofDecember 31, 2003, we had approximately $66.8 million in amounts dueto NTL. Consequently, we have little interest rate risk.

 

25

----

 

**Item 8.****    FinancialStatements and Supplementary Data**

 

Our consolidated financial statements, thenotes thereto and the report of the independent auditors are on pages F-1 toF-12 of this Annual Report and are incorporated by reference. The following isa summary of the quarterly results of operations for the years endedDecember 31, 2003 and 2002.

 
|                                    |   | **2003**                |      |
|-----------------------------------------|--------|-------------------------|-----------|
|                                    |   | **Three  Months Ended** |      |
|                                    |   | **March 31**            |      | **June 30** |   | **September  30** |   | **December  31** |   |
|                                    |   |                    |      |   |   |   |   |   |   |
| Revenues                                |   | $                       | 7,842,694 |   | $ | 8,087,525 |   | $ | 8,205,910 |   | $ | 8,636,833 |   |
| Operating (loss) income                 |   | (156,702                | )         | 13,176 |   | 375,834 |   | 522,225 |   |
| Net (loss)                              |   | (583,914                | )         | (533,509 | ) | (111,285 | ) | (118,502 | ) |
| Net (loss) per limited partnership unit |   | (10.15                  | )         | (9.28 | ) | (1.94 | ) | (2.06 | ) |
|                                         |        |                         |           |  |  |  |  |  |  |  |  |  |  |

 
|                                    |   | **2002**                |      |
|-----------------------------------------|--------|-------------------------|-----------|
|                                    |   | **Three  Months Ended** |      |
|                                    |   | **March 31**            |      | **June 30** |   | **September  30** |   | **December  31(1)** |   |
|                                    |   |                    |      |   |   |   |   |   |   |
| Revenues                                |   | $                       | 7,198,950 |   | $ | 7,212,269 |   | $ | 7,516,867 |   | $ | 7,623,979 |   |
| Operating (loss)                        |   | (502,622                | )         | (308,371 | ) | (596,316 | ) | (1,100,423 | ) |
| Net (loss)                              |   | (596,267                | )         | (578,575 | ) | (927,024 | ) | (1,387,054 | ) |
| Net (loss) per limited partnership unit |   | (10.37                  | )         | (10.06 | ) | (16.12 | ) | (24.12 | ) |
|                                         |        |                         |           |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  During the fourthquarter of 2002, NTL South Herts was charged $1.5 million by an affiliateof NTL in relation to NTL’s business rationalization program and itsrecapitalization process.

 

26

----

 

**Item 9.****    Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

** **

None.

 

**Item9A****.    Controls and Procedures**

 

(a)** Evaluation of Disclosure Controls and Procedures.**  Our management, with the participation ofthe Chief Executive Officer and Chief Financial Officer of NTL *, haveconducted an evaluation of the effectiveness of our disclosure controls andprocedures, as this term is defined in Rule 13a-14(c) andRule 15d-14(c) under the Securities Exchange Act of 1934, as amended, orthe Exchange Act, as of the end of the period covered by this Annual Report.Based on that evaluation, NTL’s Chief Executive Officer and Chief FinancialOfficer have concluded that, as of the end of the period covered by this AnnualReport, our disclosure controls and procedures are adequately designed toensure that the information required to be included in this Report has beenrecorded, processed, summarized and reported in a timely basis.

 

(b)** Changes in Internal Controls.**  Since the end of the period covered by this Annual Report, therehave been no changes in our internal controls that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting covered by this Report.

 

----

*                                         We have noChief Executive Officer or Chief Financial Officer. Robert Mackenzie andScott E. Schubert are Directors of Fawnspring Limited, our GeneralPartner, and the latter is Chief Financial Officer of NTL Incorporated, theindirect parent of Fawnspring Limited.

 

27

----

 

**PARTIII**

 

**Item 10****. Directors andExecutive Officers of the Registrant**

** **

We have no officers or directors. Certaininformation concerning directors and executive officers of our General Partneris set forth below.

 
| **Name**          |   | **Age** |   | **Title**              |
|-------------------|--------|---------|--------|------------------------|
|              |   |    |   |                   |
| Robert Mackenzie  |   | 42      |   | Director and Secretary |
| Scott E. Schubert |   | 50      |   | Director               |

 

*Robert Mackenzie*

* *

Mr. Mackenzie has been the Secretary and Director of our GeneralPartner since May 30, 2000. He joined International CableTel Incorporatedin 1993, to establish the legal department in the UK and act as CompanySecretary for the newly formed CableTel, subsequently renamed NTL. From 1988 to1993, Mr. Mackenzie worked for Theodore Goddard as a Solicitor in the CorporateFinance department advising public and private companies on corporate finance,takeovers, domestic and international mergers and acquisitions. He wasadditionally seconded to corporate brokers Phoenix Securities Ltd. asMergers & Acquisition Manager. Previously he worked for Mischon deReya, handling High Court commercial litigation. He was admitted as a Solicitorin 1987, and graduated in law from King’s College, University of London. LawSociety Finals were taken at College of Law, London.

 

*Scott E. Schubert*

* *

Mr. Schubert is NTL’s chief financial officer and a director ofour General Partner. He joined NTL in March 2003. From June 1999 toMarch 2003, Mr. Schubert held a number of positions with WilTelCommunications, including his last position as chief financial and corporateservices officer. Prior to joining WilTel, from 1976 to June 1999,Mr. Schubert held various positions at Amoco Corporation, includinginternational controller of exploration and production and vice president ofWorldwide Financial Services. Following the merger of BP and Amoco in 1998, hewas appointed vice president and head of BP Amoco’s Global Financial Services.

 

In April 2002, Williams CommunicationsGroup Inc. filed a petition for relief under Chapter 11 of the US BankruptcyCode and emerged in October 2002 as WilTel Communications Group.

 

**Item11****.  Executive Compensation**

 

We have no employees; however, variouspersonnel are required to operate our network. Personnel are employed by NTLand its affiliates and, pursuant to the terms of our Partnership Agreement; NTLand its affiliates charge the cost of such employment to us as a directreimbursement item. See Item “Certain Relationships and Related Transactions”for a description of the relationship between us and NTL.

 

**Item12****.  Security Ownership of Certain BeneficialOwners and Management**

 

Our General Partner purchasedone of our partnership interests by contributing $1,000 to our capital.

 

No person or entity known to us owns more than 5% of our limitedpartnership interests. No directors or executive officers of our GeneralPartner beneficially own any of our limited partnership interests.

 

28

----

 

**Item 13.****  CertainRelationships and Related Transactions**

 

Our General Partner and its affiliates engagein certain transactions with us as contemplated by our Partnership Agreementand as disclosed in the prospectuses for our public offerings. Our GeneralPartner believes that the terms of such transactions, which are subject to ourPartnership Agreement, are generally as favorable as those that we could haveobtained from unaffiliated parties. This determination has been made by ourGeneral Partner in good faith, but none of the terms were or will be negotiatedat arm’s-length and there can be no assurance that the terms of suchtransactions have been or will be as favorable as those that we could haveobtained from unaffiliated parties.

 

An affiliate of our General Partner is entitled to be paid a consultingfee by NTL South Herts. During the construction phases of the cabletelevision/telephone system, this consulting fee was 2% of construction costs.After completion of construction of each portion of the system, the consultingfee for the completed portion is 5% of gross revenues, excluding revenues fromthe sale of cable television/telephone systems. Consulting fees paid or payableby us to NTL for the year ended December 31, 2003 totaled $1,638,649.

 

Our General Partner and its affiliates are entitled to reimbursementfrom NTL South Herts for direct and indirect expenses allocable to theoperation of its network and from us for direct and indirect expenses allocableto our operation, which include but are not limited to rent, supplies,telephone, travel, copying charges and salaries of any full or part timeemployees.

 

Our General Partner and its affiliates may make advances to, and defercollection of fees and allocated expenses owed by, us, although they are notrequired to do so. We will be charged interest on such advances and deferredamounts. Interest charges incurred by us for the year ended December 31,2003 amounted to $138,338.

 

29

----

 

**Item 14.****  PrincipalAccountants’ Fees and Services**

 

Ernst & Young LLP are our principalaccountants. We are not billed directly by Ernst & Young for services,but are allocated a proportion of the fees charged to NTL by Ernst &Young. We provide in the table below an analysis of the fees charged to NTL byErnst & Young and allocated to us in the each of the two years endedDecember 31, 2003 and 2002.

 
|               |   | **Year ended  December 31,** |   |
|--------------------|--------|-----------------------------------|--------|
|               |   | **2003**                          |   | **2002** |   |
|               |   |                              |   |   |   |
| Audit fees         |   | $                                 | 32,739 |   | $ | 30,324 |   |
| Audit-Related fees |   | 1,545                             |   | 35,827 |   |
| Tax fees           |   | 41,964                            |   | 46,117 |   |
| All other fees     |   | —                            |   | — |   |
|               |   | $                                 | 76,248 |   | $ | 112,268 |   |

 

*Audit fees.*         Auditfees represent the aggregate services provided by Ernst & Young forprofessional services rendered for the audit of our annual financial statementsand review of financial statements included in our Form 10-K, includingaccounting consultations on matters addressed during the audit and interimreviews. These fees also include services that are provided in connection withour statutory and regulatory filings.

 

*Audit-Related fees.      *Audit-Relatedfees represent the aggregate fees charged for assurance and related services byErnst & Young that are related to the audit or review of our financialstatements, including other accounting consultations. Audit-Related servicesinclude advice relating to the Sarbanes-Oxley Act of 2002 including advice onreporting on internal controls under Section 404.

 

*Tax fees.*     Taxfees represent the aggregate fees charged for professional services rendered byErnst & Young for tax compliance, tax advice and tax planning. Taxservices included compliance work regarding the preparation and filing of ourUS and UK tax returns.

 

*All other fees.*      All other fees represent the aggregate fees charged forproducts and services provided by Ernst & Young.

 

**Audit Committee’s pre-approval policies andprocedures**

 

We have no Audit Committee. The Audit Committee of the board ofdirectors of NTL reviews, acts on and reports to the board of directors of NTLwith respect to various auditing and accounting matters. In this capacity, theAudit Committee acts on our behalf as necessary. The current members of NTL’sAudit Committee are Edwin M. Banks, who is its chairman, David Elstein, CharlesK. Gallagher, who the board of directors has determined to be an auditcommittee financial expert, and George R. Zoffinger. The members of NTL’s AuditCommittee are independent within the meaning of the Nasdaq National Marketslisting standards currently applicable to NTL. Immediately following NTL’s 2004annual stockholders’ meeting, Mr. Gallagher will become chairman of NTL’sAudit Committee and Mr. Banks will no longer serve as a member of NTL’sAudit Committee.

 

NTL’s Audit Committee’s policy on pre-approval requirements for auditand other services provided to NTL and us by Ernst & Young is asfollows:

 

•                                          Annually,NTL’s Audit Committee agrees the terms, including fees, of the engagement forthe services to be provided by Ernst & Young as part of the recurringannual audit.

 

•                                          Quarterly,NTL’s Audit Committee pre-approves the Audit-Related fees, Tax fees and Otherfees for services to be provided by Ernst & Young to us in respect ofservices that are either a continuation of services already pre-approved, orservices which are expected to commence during the following three months.These limits represent amounts that may not be exceeded without approval by theAudit Committee.

 

•                                          Betweenmeetings, the Chairman of the Audit Committee has delegated authority toapprove services on an ad-hoc basis to meet specific needs up to £100,000 perengagement.

 

30

----

 

**PARTIV**

 

**Item15.****  Exhibits, Financial Statement Schedules andReports on Form 8-K**

 
| (a)    |   | (1)                                                                                                          |   | *Financial Statements*—See  Index to Financial Statements on page F-1. |
|--------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                                                         |   |                                                                        |
|   |   | (2)                                                                                                          |   | *Financial Statement Schedules*—None                                   |
|   |   |                                                                                                         |   |                                                                        |
|   |   | (3)                                                                                                          |   | *Exhibits*—See  Exhibit Index on page 32.                              |
|   |
| (b)    |   | The Registrant did not file a report on Form 8-K during the  quarter ended December 31, 2003. |
|   |
| (c)    |   | *Exhibits*—See  Exhibit Index on page 32.                                                               |
|   |
| (d)    |   | *Financial Statement Schedules*—None                                                                    |

 

31

----

 

**EXHIBIT INDEX**

 
| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                        |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                        |
| 3.1              |   | Certificate of Limited Partnership dated December 31, 1991  (Incorporated by reference to Exhibit 3.1 to the Registrant’s  Form 10-K for the year ended December 31, 1994, filed on  March 31, 1995, File No. 0-19889)                   |
|             |   |                                                                                                                                                                                                                                                                        |
| 3.2              |   | Amendment to the Certificate of Limited Partnership dated  January 31, 1995 (Incorporated by reference to Exhibit 3.2 to the  Registrant’s Form 10-K for the year ended December 31, 1994, filed  on March 31, 1995, File No. 0-19889)   |
|             |   |                                                                                                                                                                                                                                                                        |
| 4.1              |   | Limited Partnership Agreement dated December 31, 1991  (Incorporated by reference to the Registrant’s Post-Effective Amendment  No. 2 to Form S-1, filed on May 6, 1993, File  No. 33-48400)                                                  |
|             |   |                                                                                                                                                                                                                                                                        |
| 4.2              |   | Amendment No. 1 to Limited Partnership Agreement dated  October 20, 1992 (Incorporated by reference to Exhibit 4.2 to the  Registrant’s Form 10-K for the year ended December 31, 1994, filed  on March 31, 1995, File No. 0-19889) |
|             |   |                                                                                                                                                                                                                                                                        |
| 21*              |   | List of Subsidiaries of South Hertfordshire United Kingdom Fund, Ltd.                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                        |
| 31.1*            |   | Certification of Chief Executive Officer, pursuant to Rule  13(a)-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as  amended, or Exchange Act                                                                                                             |
| 31.2*            |   | Certification of Chief Financial Officer, pursuant to Rule  13(a)-14(a) and Rule 15d-14(a) of the Exchange Act                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                        |
| 32.1*            |   | Certification of Chief Executive Officer and Chief Financial Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                  |

 

----

*                                         Filedherewith.

 

32

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: March 29, 2004

 
|   | SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.  a Colorado limited partnership                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                         |   |
|   | By:                                                                                                                          | Fawnspring Limited,  its General Partner |
|   |                                                                                                                         |   |
|   |                                                                                                                         |   |
|   | By:                                                                                                                          | /s/ ROBERT MACKENZIE |
|   | Robert Mackenzie*Director of Fawnspring Limited  the General Partner of South Hertfordshire  United Kingdom Fund, Ltd.* |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Name**              |   | **Title**                                                                                              |                | **Date** |
|-----------------------|--------|--------------------------------------------------------------------------------------------------------|---------------------|----------|
|                  |   |                                                                                                   |                |     |
| /s/ ROBERT MACKENZIE  |   | Director of Fawnspring Limited, the General Partner of South  Hertfordshire United Kingdom Fund, Ltd.* |                |     |
| Robert Mackenzie      |   |                                                                                                   | March 29, 2004 |
|                  |   |                                                                                                   |                |     |
| /s/ SCOTT E. SCHUBERT |   | Director of Fawnspring Limited, the General Partner of South  Hertfordshire United Kingdom Fund, Ltd.* |                |     |
| Scott E. Schubert     |   |                                                                                                   | March 29, 2004 |

 

----

*                                         ThePartnership has no Chief Executive Officer or Chief Financial Officer. RobertMackenzie and Scott E. Schubert are Directors of Fawnspring Limited, the generalpartner of the Partnership, and the latter is Chief Financial Officer of NTLIncorporated, the indirect parent of Fawnspring Limited.

 

33

----

 

**FORM 10K—ITEM 15(a)(1)**

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

**As of December 31, 2003, and 2002and for the Years Ended December 31, 2003, 2002, and 2001**

** **

The following consolidated financialstatements of South Hertfordshire United Kingdom Fund, Ltd. are includedin Item 8:

 

**INDEX**

 
| Report  of Independent Auditors                               |   | F-2 |
|---------------------------------------------------------------|--------|-----|
| Consolidated  Balance Sheets                                  |   | F-3 |
| Consolidated  Statements of Operations                        |   | F-4 |
| Consolidated  Statements of Comprehensive Loss                |   | F-5 |
| Consolidated  Statements of Partners’ Capital /(Deficit) |   | F-6 |
| Consolidated  Statements of Cash Flows                        |   | F-7 |
| Notes  to Consolidated Financial Statements                   |   | F-8 |

 

F-1

----

 

**REPORTOF INDEPENDENT AUDITORS**

** **

The Partners

South Hertfordshire United Kingdom Fund, Ltd.

 

We have audited the accompanying consolidated balance sheets of SouthHertfordshire United Kingdom Fund, Ltd. (a Colorado limited partnership)and its subsidiary as of December 31, 2003 and 2002, and the related consolidatedstatements of operations, comprehensive loss, partners’ capital (deficit) andcash flows for each of the three years in the period ended December 31,2003. These financial statements are the responsibility of the GeneralPartner’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of SouthHertfordshire United Kingdom Fund, Ltd. and its subsidiary atDecember 31, 2003 and 2002, and the consolidated results of their operationsand their consolidated cash flows for each of the three years in the periodended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America.

 
| Ernst & Young LLP |
|----------------------------|
| London, England            |
| March 26, 2004             |

 

F-2

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                      |   | **December  31,  2003** |       | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|--------|
|                                                                                                      |   |                    |       |                    |   |
| **Assets**                                                                                                |   |                    |       |                    |   |
| Fixed assets, net                                                                                         |   | $                       | 61,450,329 |                    | $      | 58,877,094 |   |
| Other assets                                                                                              |   | —                  |       | 96,570                  |   |
| **Total assets**                                                                                          |   | $                       | 61,450,329 |                    | $      | 58,973,664 |   |
|                                                                                                      |   |                    |       |                    |   |
| **Liabilities and Partners’ Deficit**                                                                |   |                    |       |                    |   |
| Current liabilities                                                                                       |   |                    |       |                    |   |
| Accounts payable to affiliates and related  parties                                                       |   | $                       | 66,757,685 |                    | $      | 62,691,338 |   |
| Total liabilities                                                                                         |   | 66,757,685              |       | 62,691,338              |   |
|                                                                                                      |   |                    |       |                    |   |
| **Partners’ Capital (Deficit)**                                                                      |   |                    |       |                    |   |
| General Partner Contributed capital                                                                       |   | 1,000                   |       | 1,000                   |   |
| Accumulated deficit                                                                                       |   | (538,849                | )          | (525,377                | )      |
|                                                                                                      |   | (537,849                | )          | (524,377                | )      |
|                                                                                                      |   |                    |       |                    |   |
| Limited Partners                                                                                          |   |                    |       |                    |   |
| Contributed capital, net (56,935 units  outstanding at December 31, 2003 and December 31, 2002) |   | 48,817,997              |       | 48,817,997              |   |
| Accumulated deficit                                                                                       |   | (53,064,892             | )          | (51,731,154             | )      |
|                                                                                                      |   | (4,246,895              | )          | (2,913,157              | )      |
| Accumulated comprehensive loss                                                                            |   | (522,612                | )          | (280,140                | )      |
| Total Partners’ deficit                                                                              |   | (5,307,356              | )          | (3,717,674              | )      |
| **Total liabilities and Partners’ deficit**                                                          |   | $                       | 61,450,329 |                    | $      | 58,973,664 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)CONSOLIDATED STATEMENTS OFOPERATIONS**

 
|                                                                  |   | **Year ended  December 31,** |       |
|-----------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                  |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                                  |   |                         |       |   |   |   |   |
| **Revenues**                                                          |   | $                            | 32,772,962 |   | $ | 29,552,065 |   | $ | 28,354,653 |   |
| **Costs and expenses**                                                |   |                         |       |   |   |   |   |
| Cost of goods sold (exclusive of items  shown below)                  |   | (10,662,169                  | )          | (10,772,887 | ) | (12,277,725 | ) |
| Selling, general and administrative  expenses                         |   | (130,840                     | )          | (167,225 | ) | (277,224 | ) |
| Management fees and allocated overhead from  the General Partner      |   | (13,544,514                  | )          | (12,035,660 | ) | (11,901,237 | ) |
| Other charges                                                         |   | (220,329                     | )          | (1,488,502 | ) | (2,307,942 | ) |
| Depreciation                                                          |   | (7,460,577                   | )          | (7,595,523 | ) | (14,629,055 | ) |
| **Operating income (loss)**                                           |   | 754,533                      |       | (2,507,732 | ) | (13,038,530 | ) |
| **Other expenses**                                                    |   |                         |       |   |   |   |   |
| Interest payable to general partner and  affiliates                   |   | (1,824,622                   | )          | (1,497,775 | ) | (1,228,360 | ) |
| Other interest charges                                                |   | (98,088                      | )          | (90,150 | ) | (349,068 | ) |
| Exchange (losses) gains                                               |   | (179,033                     | )          | (162,100 | ) | 23,590 |   |
| **Net loss before minority interests**                                |   | (1,347,210                   | )          | (4,257,757 | ) | (14,592,368 | ) |
| Minority interests                                                    |   | —                       |       | 768,837 |   | 4,723,504 |   |
| **Net loss**                                                          |   | $                            | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) |
|                                                                  |   |                         |       |   |   |   |   |
| **Allocation of net loss**                                            |   |                         |       |   |   |   |   |
| General Partner                                                       |   | $                            | (13,472    | ) | $ | (34,889 | ) | $ | (98,689 | ) |
| Limited Partners                                                      |   | (1,333,738                   | )          | (3,454,031 | ) | (9,770,175 | ) |
|                                                                  |   |                         |       |   |   |   |   |
| **Net loss**                                                          |   | $                            | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) |
|                                                                  |   |                         |       |   |   |   |   |
| **Net loss per Limited Partnership unit**                             |   | $                            | (23.43     | ) | $ | (60.67 | ) | $ | (171.60 | ) |
|                                                                  |   |                         |       |   |   |   |   |
| **Weighted average number of Limited  Partnership units outstanding** |   | 56,935                       |       | 56,935 |   | 56,935 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-4

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)CONSOLIDATED STATEMENTS OFCOMPREHENSIVE LOSS**

 
|                                     |   | **Years  ended December 31,** |       |
|------------------------------------------|--------|------------------------------------|------------|
|                                     |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                     |   |                               |       |   |   |   |   |
| Net loss                                 |   | $                                  | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) |
| Foreign currency translation adjustments |   | (242,472                           | )          | (58,077 | ) | (351,711 | ) |
| Comprehensive loss                       |   | $                                  | (1,589,682 | ) | $ | (3,546,997 | ) | $ | (10,220,575 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)CONSOLIDATED STATEMENTS OF PARTNERS’CAPITAL (DEFICIT)**

 
|                                   |   | **Years  ended December 31,** |       |
|----------------------------------------|--------|------------------------------------|------------|
|                                   |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                   |   |                               |       |   |   |   |   |
| General Partner:                       |   |                               |       |   |   |   |   |
| Balance, beginning of year             |   | $                                  | (524,377   | ) | $ | (489,488 | ) | $ | (390,799 | ) |
| Net loss for the year                  |   | (13,472                            | )          | (34,889 | ) | (98,689 | ) |
| Balance, end of the year               |   | $                                  | (537,849   | ) | $ | (524,377 | ) | $ | (489,488 | ) |
|                                   |   |                               |       |   |   |   |   |
| Limited Partners:                      |   |                               |       |   |   |   |   |
| Balance, beginning of year             |   | $                                  | (2,913,157 | ) | $ | 540,874 |   | $ | 10,311,049 |   |
| Net loss for the year                  |   | (1,333,738                         | )          | (3,454,031 | ) | (9,770,175 | ) |
| Balance, end of year                   |   | $                                  | (4,246,895 | ) | $ | (2,913,157 | ) | $ | 540,874 |   |
|                                   |   |                               |       |   |   |   |   |
| Accumulated comprehensive (loss)       |   | (522,612                           | )          | (280,140 | ) | (222,063 | ) |
|                                   |   |                               |       |   |   |   |   |
| Total Partners’ capital (deficit) |   | $                                  | (5,307,356 | ) | $ | (3,717,674 | ) | $ | (170,677 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **Years  ended December 31,** |       |
|---------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                  |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                                                                  |   |                               |       |   |   |   |   |
| **Cash flows from operating activities**                                              |   |                               |       |   |   |   |   |
| Net loss                                                                              |   | $                                  | (1,347,210 | ) | $ | (3,488,920 | ) | $ | (9,868,864 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:      |   |                               |       |   |   |   |   |
| Minority interests                                                                    |   | —                             |       | (768,837 | ) | (4,723,504 | ) |
| Depreciation                                                                          |   | 7,460,577                          |       | 7,595,523 |   | 14,629,055 |   |
| Change in operating assets and liabilities:                                           |   |                               |       |   |   |   |   |
| Decrease in other assets                                                              |   | 98,088                             |       | 121,400 |   | 94,314 |   |
| (Decrease) increase in accounts payable to  affiliates and related parties            |   | (4,691,449                         | )          | (1,580,721 | ) | 26,200,073 |   |
| **Net cash provided by operating activities**                                         |   | 1,520,006                          |       | 1,878,445 |   | 26,331,074 |   |
| **Cash flows from investing activities**                                              |   |                               |       |   |   |   |   |
| Purchase of fixed assets                                                              |   | (1,520,006                         | )          | (1,878,445 | ) | (5,398,631 | ) |
| **Net cash used in investing activities**                                             |   | (1,520,006                         | )          | (1,878,445 | ) | (5,398,631 | ) |
| **Cash flows from financing activities**                                              |   |                               |       |   |   |   |   |
| Decrease in loans                                                                     |   | —                             |       | — |   | (20,919,270 | ) |
| Principal payments under capital leases                                               |   | —                             |       | — |   | — |   |
| **Net cash used in financing activities**                                             |   | —                             |       | — |   | (20,919,270 | ) |
| Increase (decrease) in cash and cash  equivalents before exhange rate changes on cash |   | —                             |       | — |   | 13,173 |   |
| Effect of exchange rate changes on cash                                               |   | —                             |       | — |   | (13,173 | ) |
| Net decrease (increase) in cash and cash  equivalents                                 |   | —                             |       | — |   | — |   |
| Cash and cash equivalents, beginning of  year                                         |   | —                             |       | — |   | — |   |
| Cash and cash equivalents, end of year                                                |   | —                             |       | — |   | — |   |
|                                                                                  |   |                               |       |   |   |   |   |
| **Supplemental disclosure of cash flow  information**                                 |   |                               |       |   |   |   |   |
| Cash paid during the period for interest                                              |   | $                                  | —     |   | $ | — |   | $ | 261,886 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-7

----

 

**SOUTH HERTFORDSHIRE UNITED KINGDOM FUND, LTD.**

**(ALimited Partnership)NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.             Organizationand Partners’ Interests**

 

***Formationand Business***

 

South Hertfordshire United Kingdom Fund, Ltd. (the “Partnership”),a Colorado limited partnership, was formed on December 23, 1991, inconnection with a public offering of its limited partnership interests. ThePartnership was formed to acquire, construct, develop, own and operate cabletelevision/telephone systems in the UK. Fawnspring Limited, a UK corporation(“Fawnspring”), a subsidiary of NTL Incorporated, or NTL, is the generalpartner (the “General Partner”) of the Partnership.

 

The General Partner has the authority to manage the business,properties and activities of the Partnership. This includes the ability tooperate and maintain cable television and telephone properties, and to purchaseor lease property at the expense of the Partnership, the ability to make onbehalf of the Partnership all payments required of the Partnership for alldirect and indirect costs incurred in the conduct of its business, the abilityto borrow money in the name of the Partnership, and the obligation to maintainaccurate financial records and to prepare and file the reports required underapplicable regulations.

 

***ContributedCapital***

*** ***

The capitalization of the Partnership is set forth in the accompanyingConsolidated Statements of Partners’ Capital (Deficit). No existing partner isobligated to make any additional contributions to partnership capital.

 

The General Partner purchased its interest in the Partnership bycontributing $1,000 to partnership capital.

 

Profits, losses and distributions of the Partnership are currentlyallocated 99% to the limited partners and 1% to the General Partner until thelimited partners have received distributions equal to 100% of their capitalcontributions plus an annual return thereon of 12%, cumulative and non-compounded.Thereafter, profits and distributions will generally be allocated 75% to thelimited partners and 25% to the General Partner. Interest income earned priorto the formation of the Partnership was allocated 100% to the limited partners.

 

The profits allocated to the limited partners and General Partner isthe net profit or loss rather than the comprehensive income. The net profit orloss does not take account of any foreign currency translation adjustments asthese are unrealized. The net profit or loss per limited partner unit iscalculated after allocating 1% of the net profit or loss to the GeneralPartner. For the year ended December 31, 2003 the loss per limitedpartnership unit amounted to $23.43.

 

***NTL(South Hertfordshire) Limited***

*** ***

NTL (South Hertfordshire) Limited (formerly C&W Comms (South Herts)Limited) (“NTL South Herts”) is a UK corporation originally owned by JonesGlobal Funds, Inc. (the previous general partner) and Jones CableGroup, Ltd., an affiliate of the previous general partner. NTL South Hertsis the holder of a franchise to own and operate a cable television/telephonesystem in the South Hertfordshire franchise area, located adjacent to thenorthwest perimeter of Greater London, England (the “South Herts System”).

 

NTL South Herts is owned 66.7% by the Partnership and 33.3% by NTL. NTLalso owns the General Partner. The General Partner provides consulting servicesto the Partnership and may delegate some or all of the consulting services toNTL or to other affiliates.

 

**2.             Summaryof Significant Accounting Policies**

** **

***Basisof Presentation***

*** ***

The accompanying consolidated financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates.

 

***Useof Estimates***

*** ***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Such estimates and assumptions impact, amongothers, the following: the amounts charged to NTL South Herts by a subsidiaryof NTL for infrastructure and management support services to NTL South Herts,the amount to be paid to terminate certain agreements included in restructuringcosts, the amount to be paid for other liabilities, estimated costs forinterconnection, estimates related to the amount of costs to be capitalized inconnection with the construction and installation of NTL South Herts’ network.Actual results could differ from those estimates.

 

F-8

----

 

***Principlesof Consolidation***

*** ***

The consolidated financial statements include the accounts of thePartnership, its subsidiaries and entities where the Partnership’s interest isgreater than 50%. Significant intercompany accounts and transactions have beeneliminated in consolidation.

 

***Reclassifications***

*** ***

Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

 

***ForeignCurrency Translation***

*** ***

The functional currency of the Partnership’s principal operatingsubsidiary is the UK Pound Sterling, while its reporting currency is the UnitedStates Dollar. The assets and liabilities of the Partnership’s UK subsidiaryhave been translated using the exchange rates in effect at the balance sheetdates, and revenues and expenses are translated at the average rates for therespective years. Exchange gains and losses on translation of the Partnership’snet equity investment in the subsidiary is reported as a separate component ofaccumulated other comprehensive income (loss) in the statement of partners’capital (deficit). Foreign currency transaction gains and losses are recordedin the statements of operations.

 

***Currentassets and liabilities***

*** ***

Since May 2000, the current assets and liabilities of NTL SouthHerts have been managed by NTL. Books and records related to accountsreceivable, accounts payable and deferred revenue are maintained by NTL.Pursuant to the arrangement between NTL and NTL South Herts contained in theletter of appointment and agreement, NTL South Herts has the legal right tooffset amounts receivable from NTL against amounts payable to NTL.Consequently, the net balance payable by NTL South Herts to NTL is disclosedunder accounts payable to affiliates and related parties in the accompanyingfinancial statements. Effective from June 2000, the bank accountsmaintained by NTL South Herts were closed and a bank account maintained by NTLis used for cash transactions. Accordingly the net result from cashtransactions is also included in accounts payable to affiliates and relatedparties.

 

***FixedAssets***

*** ***

Fixed assets, net are stated at cost less accumulated depreciation.

 

The cost of fixed assets includes amounts capitalized for labor andoverhead expended in connection with the design and installation of NTL SouthHerts’ operating network equipment and facilities. Costs associated withinitial customer installations, additions of network equipment necessary toenable enhanced services, acquisition of additional fixed assets andreplacement of existing fixed assets are capitalized. The costs of reconnectingthe same service to a previously installed premise are charged to expense inthe period incurred. Costs for repairs and maintenance are charged to expenseas incurred.

 

Depreciation is provided on fixed assets at rates that are intended towrite off the cost of the assets over their estimated useful lives. Effect isgiven to commercial and technical obsolescence. Depreciation is provided on astraight-line basis over 3-40 years for the cable network and otherelectronic equipment, 40 years for buildings and 3-10 years foroffice and other equipment. Depreciation of the capitalized construction costsbegins from the time of receiving the first revenues from subscribers. Repairsand maintenance costs are charged to expense when incurred.

 

Following the acquisition by NTL of CWC ConsumerCo (which included NTLSouth Herts), the General Partner reviewed the book value and useful economiclives of the assets of NTL South Herts. This resulted in a change to the bookvalue and useful economic lives of customer installation costs and cableconverter costs. Previously, these costs had been amortized over varying livesof between 5 and 40 years. Customer installation and cable converter costswere depreciated over three years being the General Partner’s estimate of theaverage life of consumer connection. This represents a change in accountingestimate and resulted in an adjustment of $8 million in 2001 relating tothose costs that would have been fully amortized under the revised policy. Thenet book value of customer connection costs and cable converters acquired inthe three years prior to May 2000 are being amortized over the remainderof their revised useful economic lives.

 

During 2003, the General Partner evaluated the remaining usefuleconomic lives of NTL South Herts’ fixed assets. As of January 1, 2004,the Partnership adopted new useful economic lives as follows: operatingequipment—5 to 30 years and other equipment—5 to 30 years. The impacton the annual depreciation expense upon the adoption of new lives is estimatednot to be significant.

 

The assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. If thesum of the expected future undiscounted cash flows is less than the carryingamount of the asset, a loss is recognized for the difference between the fairvalue and the carrying amount of the asset. The fair value of the asset isdetermined by the higher of the discounted cash flows and the net realizablevalue upon sale.

 

F-9

----

 

***Assetretirement obligations***

*** ***

As of January 1, 2003, the Partnership adopted Statement ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations*(“SFAS 143”).  SFAS 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the related asset retirement costs. The adoption ofSFAS 143 did not result in any recognition of liabilities during itsfiscal year ended December 31, 2003.

 

The Partnership accrues for the liability in respect of dilapidationson its leasehold properties over the term of the lease in accordance with SFASNo. 13 “*Accounting for Leases”*.

 

***RestructuringCosts***

*** ***

As of January 1, 2003, the Partnership adopted SFAS 146 “*Accounting for Costs Associated with Exit or DisposalActivities*” and recognizes a liability for costs associated withrestructuring activities when the liability is incurred. The adoption ofSFAS 146 did not have a significant effect on the results of operations,financial condition or cash flows of the Partnership.

 

Prior to 2003, the Partnership recognized a liability for costs associatedwith restructuring activities at the time of a commitment to restructure wasgiven in accordance with EITF 94-3 “*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)*”.

 

***RevenueRecognition***

*** ***

The Partnership recognizes revenue only when it is realized orrealizable and earned. The Partnership recognizes revenue when all of thefollowing are present:

 

•                                          Persuasiveevidence of an arrangement exists between the Partnership and its customers;

 

•                                          Deliveryhas occurred or the services have been rendered;

 

•                                          Theprice for the service is fixed or determinable; and

 

•                                          Collectibilityis reasonably assured.

 

Revenues are invoiced and recorded as part of a periodic billing cycle,and are recognized as the services are provided. At the end of each period,adjustments are recorded to defer revenue relating to services billed inadvance and to accrue for earned but unbilled services.

 

•                                          *Telephone services and cable television revenues*are recognized as the services are provided to customers.

 

•                                          *Rental revenue* in respect of line rentalsand rental of equipment provided to customers is recognized on a straight-linebasis over the term of the rental agreement.

 

•                                          *Internet revenue* in respect of broadbandservices provided to customers is recognized as the service is provided.

 

•                                          *Bundled services revenue* is recognized atthe time the services are provided to the customer or the performance of all ofthe services have been completed. The Partnership applies the provisions ofEITF No. 00-21 “Accounting for Revenue Arrangements with MultipleDeliverables” to assess whether the components of the bundled services shouldbe recognized separately.

 

•                                          *Installation revenues* are recognized atthe time the installation has been completed to the extent that those fees areless than direct selling costs. Installation fees in excess of direct sellingcosts are deferred and amortized over the expected life of the customer’sconnection. The Partnership applies the provisions of SFAS No. 51 “*Financial Reporting by Cable Television Companies*”in relation to connection and activation fees for telephone services andinternet services, as well as cable television services, on the basis that thePartnership markets and maintains a unified fiber network through which thePartnership provides all of these services.

 

***Advertisingcosts***

*** ***

Advertising costs are expensed as incurred. Advertising costs allocatedto NTL South Herts were $551,581, $295,853 and $774,835 in 2003, 2002 and 2001,respectively.

 

F-10

----

 

**3.             Transactionswith the General Partner and Affiliated Entities**

 

***Consultingand Management Fees***

 

An affiliate of the General Partner is entitled to be paid a consultingfee by NTL South Herts. During the construction phases of the South HertsSystem, this consulting fee was 2% of construction costs. Since completion ofconstruction of each portion of the system, the consulting fee for thecompleted portion has been 5% of the gross revenues, excluding revenues fromthe sale of cable television/telephone systems. The consulting fee iscalculated and payable monthly. Consulting fees paid or payable by NTL SouthHerts for the years ended December 31, 2003, 2002 and 2001 were$1,638,649, $1,477,606 and $1,528,773, respectively. These amounts wereexpensed in the Consolidated Statements of Operations each year.

 

***DistributionRatios and Reimbursement***

 

Any Partnership distributions made from cash flow (defined as cashreceipts derived from routine operations, less debt principal and interestpayments and cash expenses) are allocated 99% to the limited partners and 1% tothe General Partner. Any distributions other than interest income on limitedpartner subscriptions earned prior to the acquisition of the Partnership’sfirst cable television system or from cash flow, such as from the sale orrefinancing of a system or upon dissolution of the Partnership, will be made asfollows: 99% to the limited partners and 1% to the General Partner until anynegative balances in the limited partners’ capital accounts are reduced tozero; 100% to the General Partner until any negative balance in its capitalaccount is reduced to zero; 99% to the limited partners and 1% to the GeneralPartner until the balance in the limited partners’ capital accounts is equal totheir adjusted capital contribution plus a 12% return; 100% to the GeneralPartner until the balance in its capital account is equal to its adjustedcapital contribution, and any remaining income or gain shall be allocated 75%to the limited partners and 25% to the General Partner.

 

The General Partner and its affiliates are entitled to reimbursementfrom NTL South Herts for direct and indirect expenses allocable to the operationof the South Herts System, and from the Partnership for direct and indirectexpenses allocable to the operation of the Partnership which include but arenot limited to, rent, supplies, telephone, travel, copying charges and salariesof any full or part-time employees. The General Partner believes that themethodology used in allocating these expenses is fair and reasonable. Duringthe years ended December 31, 2003, 2002 and 2001, reimbursement made byNTL South Herts and the partnership to the General Partner or its affiliatesfor any allocable direct and indirect expenses totaled $12,126,194, $10,558,055and $10,766,997, respectively.

 

The General Partner and its affiliates may make advances to, and defercollection of fees and allocated expenses owed by, the Partnership, althoughthey are not required to do so. The Partnership is charged interest on suchadvances and deferred amounts at a rate equal to the General Partner’s orcertain affiliates’ weighted average cost of all debt financing from unaffiliatedentities. For the years ended December 31, 2003, 2002 and 2001, intereston deferred fees of $1,686,284, $1,380,944 and $1,126,261, respectively, wascharged by an affiliate of the General Partner, and interest on advances of$138,338, $116,831 and $102,099, respectively, was charged by the GeneralPartner.

 

**4.             OtherCharges**

** **

Other charges in each of the years ended December 31, 2003 and2002, relates to the NTL’s announcements that it was taking additional actionsto reorganize, re-size and reduce operating costs and create greater efficiencyin various areas. The charge allocated to NTL South Herts in 2003 includesemployee severance and related costs of $0.2 million. The charge allocatedto NTL South Herts in 2002 includes employee severance and related costs of$0.7 million, professional fees of $0.3 million and $0.5 millionof contract termination and exit costs.

 

**5.             FixedAssets**

** **

Fixed assets consists of:

 

 
|                                          |   | **Estimated  useful lives** |   | **December 31,** |        |
|-----------------------------------------------|--------|-----------------------------|--------|-----------------------|-------------|
| **2003**                                      |   | **2002**                    |
|                                          |   |                        |   |                  |        |   |   |
| Cable network and other electrical  equipment |   | 3-40 years                  |   | $                     | 134,343,235 |   | $ | 116,110,470 |   |
| Building and other equipment                  |   | 3-40 years                  |   | 7,647,713             |        | 6,978,493 |   |
| Construction in progress                      |   |                        |   | —                |        | 1,129,834 |   |
|                                          |   |                        |   | 141,990,948           |        | 124,218,797 |   |
| Accumulated depreciation                      |   |                        |   | (80,540,619           | )           | (65,341,704 | ) |
|                                          |   |                        |   | $                     | 61,450,329  |   | $ | 58,877,093 |   |

 

F-11

----

 

**6.             Financing**

 

***NTLSouth Herts***

 

On April 18, 1995, NTL South Herts entered into an agreement withtwo major banks to provide a £25,000,000 revolving and term loan creditfacility agreement maturing on December 31, 2003 (the “South Herts CreditAgreement”). On October 18, 1996, £5,000,000 was cancelled and thefacility reduced to £20,000,000.

 

The credit facility was structured as a revolving facility throughDecember 31, 1997, at which time the facility was converted into a termloan. The facility was divided into two tranches, denoted Facility A andFacility B, and the aggregate amount drawn down under both tranches would notexceed £20,000,000. Amounts drawn down under Facility A bore interest atsterling LIBOR plus a margin of 2.5%. The availability of Facility B of£20,000,000 was subject to certain conditions and amounts drawn down underFacility B bore interest at sterling LIBOR plus a margin ranging from 0.75% to2.0% depending on the bank debt ratio (the ratio of bank debt to annualizedoperating cash flow) of NTL South Herts. The amount outstanding under thefacility at December 31, 2000 was £14,475,500 and this amount was alldrawn under Facility B.

 

The facility was repaid in full with funding from NTL onFebruary 21, 2001. Thereafter, NTL South Herts is reliant upon the supportof NTL to continue its operations as a going concern.

 

**7.             IncomeTaxes**

 

Income taxes have not been recorded in the accompanying consolidatedfinancial statements because net income and losses of the Partnership accruedirectly to the partners, and its UK subsidiary, NTL South Herts, has incurrednet operating losses. The Partnership’s tax returns, the qualification of thePartnership as such for tax purposes, and the amount of distributablePartnership income or loss are subject to examination by Federal and statetaxing authorities. If such examinations result in changes with respect to thePartnership’s qualification as such, or in changes with respect to thePartnership’s recorded income or loss, the tax liability of the general andlimited partners would likely be changed accordingly.

 

The tax basis in the Partnership’s assets and liabilities isapproximately $8 million higher than its book basis in its assets andliabilities for financial reporting purposes.

 

UK profits (comprising income and gains) of NTL South Herts will besubject to UK corporation tax. However, corporations are able to carry forwardlosses from operations to be offset against subsequent profits of the sameoperations.

 

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of deferred tax liabilities and assets related to NTLSouth Herts are as follows:

 
|                            |   | **December 31,** |   |
|---------------------------------|--------|-----------------------|--------|
|                            |   | **2003**              |   | **2002** |   |
|                            |   |                  |   |   |   |
| Deferred tax liabilities:       |   |                  |   |   |   |
| Depreciation                    |   | $                     | — |   | $ | 1,372,405 |   |
| Total deferred tax liabilities  |   | —                |   | 1,372,405 |   |
| Deferred tax assets:            |   |                  |   |   |   |
| Depreciation                    |   | 22,576                |   | — |   |
| Net operating loss carryforward |   | 9,208,471             |   | 1,466,686 |   |
| Total deferred tax assets       |   | 9,231,047             |   | 1,466,686 |   |
| Valuation allowance             |   | (9,231,047            | )      | (94,281 | ) |
| Net deferred tax assets         |   | —                |   | 1,372,405 |   |
| Net deferred tax liabilities    |   | $                     | — |   | $ | — |   |

 

At December 31, 2003 NTL South Herts has UK net operating losscarry forwards of approximately $30.7 million. The UK net operating losscarry forwards are available for utilization in future years and do not expire.Management has established a valuation allowance against the net operating losscarry forwards on the basis that it was not more likely than not that suchassets would be realized in the future.

 

F-12

----