Final Results

28 February 2007

Excellent Year, Compelling Future

Serco Group plc - 2006 Preliminary Results

                                                  2006         2005            
                                                                               
Revenue                                      £2,548.2m    £2,260.3m  up 12.7%  
                                                                               
Profit before tax                              £107.4m       £77.9m  up 37.9%  
                                                                               
Earnings per share (EPS)                        16.62p       11.66p  up 42.5%  
                                                                               
Profit before tax, amortisation and gain       £112.2m       £91.5m  up 22.6%  
on sale                                                                        
                                                                               
EPS before amortisation and gain on sale        17.13p       14.09p  up 21.6%  
                                                                               
Dividend per share                               3.60p        2.97p  up 21.2%  
                                                                               
Group free cash flow                            £85.4m       £73.8m  up 15.7%  

Excellent performance

  * £3bn of business signed including Docklands Light Railway (£400m), Defence
    Science & Technology Laboratories (£500m), London Development Agency (£69m)
    and Acacia Prison (AUS$155m)
   
  * Appointed preferred bidder on £1.9bn of contracts, including Future
    Provision of Marine Services (£1bn) and Forth Valley Hospital (£450m)
   
  * Continued to win one in two new bids and maintained rebid win rate at more
    than 90%
   
  * Created strategic Private Finance Initiative (PFI) investment partnership.
    Sold six PFI investments for £76.5m with £11.4m gain on sale and retained
    associated operating contracts
   
  * PBTA margin before gain on sale of PFIs of 4.4%, up from 4.0% in 2005
   
  * Group EBITDA to cash conversion of 98% resulting in 15.7% increase in group
    free cash flow
   
Significant visibility of future growth

  * Forward contracted order book of £13.9bn at 31 December 2006
   
  * Contracts valued at an additional £3.5bn at preferred bidder stage
   
  * Visibility of 91% of planned revenue for 2007, 77% for 2008 and 64% for
    2009
   
  * £23bn of further opportunities identified
   
Continuing positive outlook

  * Unprecedented market opportunities driven by social demands for better
    public services and reduced tax burden, aligned with the impact of global
    challenges of security, migration and the environment
   
  * Increasing capacity to grow through deep relationships and capabilities
    allows us to be confident of double-digit growth
   
  * Continued focus on portfolio management, selective bidding and efficiency
    will contribute to rising margins
   
Kevin Beeston, Executive Chairman of Serco Group plc, said: "I am delighted
with the Company's performance in 2006. The strength of Serco's reputation and
our expertise and ability to deliver high-quality service have seen us deliver
tremendous outcomes for customers and excellent results for investors. I am
excited by our performance and by the range of opportunities available to us
that combined, position us for strong growth. We remain confident of
maintaining double-digit growth and improving margins."

Note: PBTA is profit before tax and intangible amortisation. Group EBITDA is
earnings from subsidiaries (excluding joint ventures) before interest, tax,
depreciation, intangible amortisation and other non cash items. Cash conversion
is the ratio of Group operating cash flow to Group EBITDA. Group free cash flow
is from subsidiaries and joint venture dividends and is reconciled in Section 4
of the Finance Review.

For further information please contact Serco Group plc: [phone]

Dominic Cheetham, Corporate Communications Director

www.serco.com

Presentation

A presentation for investors and analysts will be held at JP Morgan Cazenove &
Co, 20 Moorgate, London EC2R 6DA at 09:45am on Wednesday 28th February 2007.

A conference call for investors and analysts will be held today at 16.30 GMT.
Participants from the US should call:

Tel: [phone]. Participants from the UK and other locations should call:
[phone]. The passcode for the conference call is `Serco'.

Copies of the presentation slides will be available from 12.00 GMT UK time from
www.serco.com.

Overview

Excellent Year, Compelling Future

Building on very strong growth in 2005, Serco has delivered a strong
performance in 2006 and the company's prospects are equally compelling.

Revenue grew by 12.7% to £2,548.2m. Profit before tax increased 37.9% to £
107.4m and earnings per share grew 42.5% to 16.62p.

Profit before tax, amortisation and the gain on sale of PFI investments rose by
22.6% to £112.2m and earnings per share on the same basis grew 21.6% to 17.13p.
The corresponding margin increased from 4.0% to 4.4%, benefiting from our
portfolio management, higher value services and efficiency improvements.

Our focus on cash generation delivered excellent results once again, with Group
EBITDA to cash conversion of 98% (2005: 90%). Group free cash flow increased
15.7% to £85.4m (2005: £73.8m).

Our policy is to increase the total dividend each year broadly in line with the
increase in underlying earnings. The Board has proposed a final dividend of
2.55p per share, representing an increase on the 2005 final dividend of 23.8%.
The total dividend for the year is 3.60p, an increase of 21.2%. The final
dividend will be paid on 16 May to shareholders on the register on 9 March.

The strength of Serco's reputation and our ability to deliver high-quality
service were reflected in maintained win rates of more than 90% on rebids and
one in two on new bids. During the year, we signed £3bn of business which
include many contracts under £10m and we were appointed preferred bidder for
contracts valued at around £1.9bn.

We rebid two of our larger contracts; firstly, the renewed franchise with
Transport for London to operate, maintain and support the Docklands Light
Railway. The contract is valued at £400m over nine years and started in May
2006. In addition, a Serco-led joint venture was selected as preferred bidder
for the UK Ministry of Defence's Future Provision of Marine Services contract,
valued at £1bn over 15 years. The joint venture will deliver marine support at
major UK naval bases in Portsmouth, Devonport and The Clyde.

We also signed the £500m contract with the UK MoD's Defence Science and
Technology Laboratories for the design and build of new facilities and the
provision of support services.

The London Development Agency selected Serco to provide a new Business Link
service to London's 600,000 small and medium sized enterprises from April 2007.
The agreement is valued at £69m over three years, plus an option to renew for
two additional years, and draws on skills from across the Group.

In Australia we signed a five-year contract to manage and operate Acacia prison
for the Government of Western Australia's Department of Corrective Services.
The client has the option to extend the AUS$155m contract up to a further ten
years.

We created a strategic PFI investment partnership with Infrastructure Investors
Limited (I2) and sold equity and subordinated debt in six PFI projects to an I2
subsidiary. We received a cash consideration of £76.5m, resulting in a profit
on disposal of £11.4m. Under the partnership, I2 will be able to provide equity
investment for Serco's future PFI projects, giving us access to a large and
competitively priced source of capital and enhancing our ability to compete in
this market. Serco has retained the associated long-term operating contracts.

We are continuously working to deliver higher value services to clients,
reflecting the increasing skills and capabilities available across the Group.
We also rigorously analyse contracts and markets to ensure that conditions
exist for strong organic growth and appropriate returns. In addition, we
continue to improve our internal structures and systems by, where appropriate,
providing standardised systems and by streamlining management structures. As a
consequence of this approach, margins have improved and will improve further.

We regularly review the funding profile of our main Group defined benefit
pension scheme. As previously announced, £70m has been injected into the scheme
representing approximately half the deficit, with £19m added at the end of 2006
and £51m in early 2007. We also increased employer and employee contribution
rates from January 2007.

This, together with the sale of our investments in six PFI projects and the
corresponding removal of non recourse debt, has resulted in a significant
reduction in debt and simplification of the balance sheet.

At the year-end, our order book stood at a record £13.9bn and we were preferred
bidder on contracts valued at £3.5bn. We also had bids valued at £4.5bn for
which we had been shortlisted to the final two or three bidders. In addition,
we have identified a pipeline of further opportunities across our markets
estimated at £23bn.

The visibility of our future revenue remains significant. As at 31 December
2006, we had identified 91% of our planned revenue for 2007, 77% for 2008 and
64% for 2009.

Strong start to 2007

Serco has also enjoyed a strong start to 2007. The US Army selected our North
American business to provide cost analysis, logistics planning and supply chain
consulting services worldwide. The indefinite-delivery/indefinite-quantity
contract has a one-year base period, with four annual options and has a
potential value of $225m over five years. Other wins include a contract to
manage and operate Yarl's Wood Immigration Removal Centre on behalf of the UK
Home Office. The three-year contract starts in April 2007, with optional
extensions for a further five. Over the full eight years, the contract is
valued at around £85m. The UK's MoD also selected us as preferred bidder for a
five-year, Gibraltar-based support services contract valued at around £50m with
a further option for two years and the potential for additional work.

Market Development

The world in which we operate is changing faster than ever. Governments,
communities and individuals are increasingly experiencing the same challenges:
dealing with climate change, declining energy reserves, increasing migration,
ageing populations and increasing health needs, the threat of terrorism and
challenge of congestion. These transformational issues are further influenced
by new technology, globalisation, increasing demands for better services,
increasing costs of service provision and citizens' unwillingness to accept
higher tax burdens.

Serco is ideally placed to help Governments resolve these challenges. Through a
combination of a deep public service ethos and commercial know-how, our teams
efficiently deliver service transformations that improve a wide variety of
public services around the world. We have grown strongly over the last 20
years, as successive UK governments have led the way in reforming public
services and enabling new models of service delivery. This has delivered a very
strong and highly visible forward order book and bid pipeline.

As governments around the world are dealing with the very same issues and
increasing the rate of reform of their public services, we are increasingly
seeing opportunities to transfer our experience to international markets.

What we were delivering for one government a few years ago, we are now
delivering for several.

The very nature of Serco's broad portfolio of skills, relationships, contracts,
markets and geographies, combined with our inherent ability to deliver through
change, means that we are very well placed to continue to grow. Ten years ago,
Serco's annual revenue was less than £500m and our businesses in home affairs,
transport and business process outsourcing were just developing. These have
become substantial businesses in the UK and are driving growth internationally.

Within Civil Government, our Home Affairs business is helping governments to
address common issues including reducing re-offending and the cost of crime,
managing increasing migration and tackling the increased threat of terrorism.
Serco is the only company competing in each of the market sub-sectors of civil
resilience/homeland security, migration control, offender management and law
enforcement. We expect more market growth both in the UK home affairs market -
already approaching £3bn per annum - and overseas, particularly in Australia
and the US.

In the UK local government market, the priority for councils is building better
and safer communities with particular focus on children and young people,
health, economic development and independent living.

To meet the needs in the local markets, we work in partnership with the
emergency, health and education services, utilities and private and voluntary
organisations. Serco is working across the whole local community to make
citizens' lives better, whether through running a Local Education Authority,
piloting telecare projects to enable independent living, working to reduce
re-offender levels or helping small businesses to grow. The skills, services
and support we provide aligns with the Gershon-related drive to improve
efficiency through joined-up government, and enables more to be spent on front
line services by increasing back office efficiency.

Within health, expansion of the UK publicly-funded health market is driven by
the demand for better health outcomes from finite resources. Our growing
presence in primary care and occupational health is complemented by an
established offering in hospital support services, all of which means we can
address a substantial part of this market.

In our education business, improving educational outcomes is driving new ways
of organising service delivery. The Children's Services Act requires those
working in social services, health and education to work together for the
benefit of children. Local authorities throughout England and Wales are using
our organisational design and IT transformation capabilities to manage this
change programme.

In Transport, better utilisation of existing road and rail infrastructure is
proving a more environmentally and economically attractive proposition. Issues
of congestion, carbon emissions, safety and journey reliability are being
addressed through innovative technology and improved transport integration.

Serco is at the forefront of technology and operational delivery to better
manage the movement of vehicles, such as through the UK's Active Traffic
Management scheme and England's National Traffic Control Centre.

International commitments have stretched defence budgets in the US and the UK.
Private sector provision of back office support releases uniformed troops for
frontline service, and can deliver significant cost efficiencies and
innovation. In the UK, the MoD's spend on services is expected to increase,
driven by integration across the armed forces on equipment procurement and
maintenance. This is evident from the merger of the Defence Logistics
Organisation with the Defence Procurement Organisation and the Defence Training
Review. This merger is integrating training, where appropriate, across the
armed forces. In the US, pressures on defence spending have delayed contracting
of some support services. However, significant opportunities remain in the US
and more opportunities are emerging in Australia.

An important new market in the UK is for the decommissioning of the country's
civil nuclear liabilities. This market is valued at around £70bn in total,
equating to an addressable market of more than £2bn per annum.

People

Around the world, people are experiencing a quality of service that makes a
difference to their lives. Expectations are met and often surpassed because
Serco enables those delivering the service to give their best.

More than 47,000 employees deliver critical services to government and private
clients in over 30 countries.

The Board thanks all of our employees for their ongoing dedication, hard work
and contribution to realising the strong results we have reported this year.

Board

After 21 years with the Group, including ten on the plc Board, Kevin Beeston
announced his intention to move to the role of Non-Executive Chairman from 1
September 2007.

With Serco performing strongly and well-positioned for future growth, and
having built a highly-capable management team at all levels, Kevin has decided
to diversify his business interests.

As Non-Executive Chairman, he will continue to provide guidance and support,
continue to chair the Board and oversee the Company's development on behalf of
shareholders. The Group has a high quality management team, led by Chief
Executive Chris Hyman, who will continue to deliver sustained success.

In April 2006, Leonard V. Broese van Groenou joined the Board as a
Non-Executive Director. Leonard is a member of the Remuneration, Audit,
Nomination and Training and Development Committees. Leonard was previously
Vice-President Human Resources and member of the corporate executive committee
of Air Products.

Continuing Positive Outlook

Governments increasingly face the same issues, driven by social demands for
better public services and reduced tax burden, aligned with the impact of
global challenges of security, migration and the environment. Our breadth and
depth of skills and relationships allows us to address new markets and
opportunities. Our identified pipeline of opportunities of £23bn and this,
together with our high visibility of revenues and opportunities, enables us to
be confident of continuing to deliver double-digit growth. At the same time,
our continued focus on proactively managing our contract portfolio, bidding
selectively and driving internal efficiency will allow us to further improve
margins.

Segmental Operating Review

Civil Government

Civil Government is our largest segment and includes home affairs, service
transformation, health, education, consulting, and our work in the private
sector.

Segmental revenue increased by 9% to £875m, representing 34% of Group revenue
(2005:36%).

Home Affairs

Home Affairs encompasses our work in offender management, law enforcement,
civil resilience and immigration control. Our Home Affairs teams have succeeded
in significantly growing existing services, extending into important new
markets and delivering quality services in complex environments.

We began our contract to provide electronic monitoring (EM) of offenders in
Scotland. Volumes in both this contract and our contracts in England and Wales
have increased as the benefits of EM have been rolled out.

The capacity constraints in the UK prison estate have led to the Home Office
ordering extensions to existing prisons and centres managed by us, valued at
more than £79m.

In the UK, the National Offender Management Service is the Government's new
body which is protecting the public and rehabilitating offenders in new ways,
in particular having prison and probations services working closer than ever
before and by using the best that the private and voluntary sector has to
offer.

In the first award of its kind in an emerging market, Serco and third-sector
bodies Turning Point and Rainer were chosen to provide employment and
rehabilitation support to offenders returning to the community. The contract,
with the East of England Regional Offender Management Pathfinder Project, is
valued at around £1.4m to Serco over 2 years.

Additionally in 2006 we created a strong foothold in the changing Australian
offender management market. We were selected by the Government of Western
Australia's Department of Corrections to manage and operate the medium security
Acacia Prison. The contract is valued at AUS$155m over five years with the
potential to extend by up to ten years. Serco's proven success of Home Affairs
prisoner rehabilitation and re-integration programs and the specific local
Indigenous Strategy were crucial elements to the successful awarding of the
contract.

Further home affairs service opportunities have been identified in Australia
including prison management, electronic monitoring provision, transport and
migration management.

Our successful operations at Colnbrook Immigration Removal Centre, near
Heathrow, were instrumental in securing the contract to run Yarl's Wood
Immigration Removal Centre. The contract starts in April 2007 for an initial
period of three years, with potential to extend for a further five years. Over
the full eight years the contract is valued at around £85m.

Together with our partners Raytheon, Accenture and Detica, we are part of the
Trusted Borders consortium, one of two consortia selected for the final stage
of the e-Borders procurement, a UK Home Office initiative to provide electronic
screening and tracking of travellers arriving and departing from the UK.

The law enforcement market is developing in the UK, with proposals to merge
police forces being dropped in favour of greater collaboration between forces
and even the sharing of services in order to improve efficiency and improve
service.

IT services and BPO

Serco is benefiting from the skills and capabilities Solutions has brought to
the Group.

Building on the contract win in 2005 to run the UK Government's
Businesslink.gov web portal, the London Development Agency selected us to run
the Business Link service in London. The £69m, three-year agreement is focused
on helping the capital's 600,000 small and medium-sized enterprises to increase
their competitiveness, including regeneration opportunities created by the 2012
Olympics.

Serco was also successful in rebidding the Envirowise contract for the
Department of Environment, Food and Rural Affairs. This contract, in
conjunction with our partner Momenta, advises and supports UK businesses in
minimising waste and reducing environmental impact.

Additional business has been contracted over the year, with customers including
the London boroughs of Southwark and Enfield, Coventry and Cambridge city
councils.

We continue to invest in the business' capacity and capability and we have
implemented a planned restructuring to enhance Solutions' ability to grow and
we look forward to strong growth in this sector.

In other aspects of our local government business, we signed and started two
new streetscene services partnerships, with Welwyn Hatfield Council and
Restormel Borough Council in Cornwall valued at approximately £50m and £45m
respectively. Our services are key to helping councils meet climate change
related targets and frees up savings for reinvestment in a full range of local
improvements.

Amongst private sector clients,  MAN B&W extended its SAP FM Support contract
with Serco until the end of 2008 and awarded a separate contract to provide SAP
Application Support for the same period.  Red Bee Media selected us for an
IT-enabled change programme valued at £7.1m over five years.

Education

At Education Bradford and Education Walsall, pupils have achieved significantly
improved GCSE and

A' level results, exceeding the GCSE targets set by our customers. The UK
Department for Education and Skills has awarded a two-year contract to the
Together for Children partnership which is led by Serco. The contract, valued
at around £10m to Serco, supports the development of 3,500 children's centres
across England.

Health

Serco was appointed preferred bidder to provide support services for the new
NHS Forth Valley Acute Hospital, valued at around £450m over 30 years. We have
drawn on our healthcare experience to influence the design of the new hospital,
including the innovative use of robotics. In addition to providing health
services to the Serco-run prisons, our healthcare business is providing
services to Home Office-run prisons and we have been awarded three-year
contracts to supply medical services at Cardiff, Bullingdon and Leicester
prisons.

Consulting

New awards by our successful consulting business include work with the BBC, the
Home Office, HM Revenue & Customs, the Department for Environment, Food and
Rural Affairs, Carlisle City Council, and Cheshire Constabulary. Projects
underway include helping a consortium comprising the Cabinet Office, Department
for Education and Science and the Department of Health to manage the provision
of electronic government services through an external contractor. 

Defence

Revenue in Defence increased by 14% to £645m, representing 25% of Group revenue
(2005: 25%). Growth in the period benefited from the inclusion of the former
RCI business for the full 12 months. It was first consolidated from 21 March
2005.

Our defence customers operate in an increasingly pressurised environment
characterised by stringent budgetary constraints, operational complexity,
demanding performance measures and intense public scrutiny. We enable them to
succeed in this tough environment by designing, integrating and applying the
best possible combination of people, processes, resources and technology to
enhance their operations.

The Ministry of Defence's new Defence Industrial Strategy emphasises a shift
from new platform design and development to the upgrade and maintenance of
equipment. The aim is to enhance capability and availability of equipment
through its lifespan. To succeed, this requires a new way of working between
suppliers, and between Government and industry.

This is reflected in a number of contract wins in 2006. For example, we signed
a £125m 25-year manpower services contract with AgustaWestland under the
Integrated Merlin Operational Support (IMOS) programme. IMOS is transforming
logistics support for the MoD EH101 Merlin helicopter fleet while improving
availability and reducing through-life support costs for the platform.

In June, Rolls-Royce won a £110m contract to ensure engine availability for the
Hercules C-130 and engaged Serco to provide engineers for servicing work on the
fleet at RAF Lyneham. Serco and Rolls-Royce's relationship was further
strengthened through a Memorandum of Understanding signed to provide a joint
service offering in the defence sector.

Our selection as preferred bidder for the MoD's Future Provision of Marine
Services contract will enhance the operational capability of the Royal Navy at
Portsmouth, Devonport and the Clyde. The contract is valued at around £1bn over
15 years, a substantial increase from the previous contract, and will be
delivered by Serco Denholm, a joint venture between Serco and J&J Denholm.

In July we signed a strategic partnership with the UK Defence Science and
Technology Laboratories (Dstl), for which we were appointed preferred bidder in
2005. Under the £500m, 15-year contract we are managing the design and build of
new facilities and providing integrated support services across the Dstl
estate.

Our support for the Government's drive to transform through-life capability
management will continue throughout the coming year. We are developing the
technology that will enable the MoD to predict and plan for the cost of
equipment throughout its operational life. The whole-life costing and
optimisation (WLCO) model has the potential to deliver significant savings to
the MoD at the same time as enhancing the through-life availability and
capability of equipment to the front line.

In addition, our defence experts are working in close collaboration with
technical and security specialists in Serco Science and Serco Home Affairs to
explore the potential of the government's Defence Technology Strategy (DTS).
The DTS describes the technologies that the MoD regards as critical to
maintaining the UK's defence and security capabilities, playing to Serco's
strengths in defence technology, Chemical, Biological, Radiological and Nuclear
(CBRN) and homeland security.

Our contract to provide secure communications to the armed forces through the
Skynet 5 satellite programme was extended by the Defence Communications
Services Agency and the prime contractor, Paradigm Secure Communications. This
takes the contract to 2020, with a value of approximately £58m.

In North America, our solid reputation for providing key services to the
military meant we won contracts, including several for larger, longer and more
complex services, against a backdrop of reduced spending for non-combat
operations. In particular, the existing family support and personnel services
provided a platform to expand the reach of those services into other branches
of the military. We won a Military Family Support services contract for the
Navy valued at $28m over two years. This is the first such service we have
provided outside of the Army.

Our extensive experience in providing administration support to the Army and
Navy enabled us to win a two year, $6.5m contract with another new customer -
the Air National Guard - to provide administrative support services. We were
also selected by the Chief of the Naval Reserve Command for a $12m contract to
assist with their recruiting.

Other examples of expansion of our military services included a five-year
contract valued at a potential $34m for the US Army Military Personnel Division
(MPD) in Korea and a similar $12.8 million contract with the MPD for the Army
Reserve at Fort Dix.

Our San Diego-based engineering unit was included in a $56.6m multiple award to
provide systems development, engineering support, evaluation and logistics for
the submarine command in the U.S. Navy Space and Naval Warfare Systems Center
(SPAWAR). This win is a strategically important contract for us since it moves
us into an area of more complex and integrated services that allow us to
showcase our capabilities in a broader range of C4I services.

In Australia, we have succeeded in significantly expanding our presence in the
defence market. Our Serco Sodexho Defence Services (SSDS) 50:50 joint venture
now has a presence on every operational and training base in Australia after
being appointed to the Australian Defence Forces National Clothing Stores
contract. The contract is valued at up to AUS$60m to SSDS over six years and
presents considerable opportunities for organic growth.

SSDS has also been selected for two other major garrison support services
contracts on the east coast of Australia. These nine year contracts are valued
at more than AUS$400m.

Transport

Transport revenues grew by 14% to £626m, representing 25% of Group revenue
(2005: 24%).

Rail

Northern Rail and Merseyrail - our two joint ventures with NedRailways - have
grown passenger numbers on the back of rising levels of customer satisfaction.
At Northern Rail, train punctuality and reliability have been consistently
above target and Merseyrail continues to deliver the levels of service, which
has made it one of the UK's best performing franchises.

Both Northern and Merseyrail continue to deliver excellent safety performance
with Northern winning the prestigious Sir Robert Horton Award for Safety at the
2006 National Rail Awards.

With NedRailways, we are bidding to run the West Midlands train franchise from
November 2007.

In Australia, our new timetable for The Ghan commenced, with two weekly
services now undertaking the 2,000 mile continental crossing between Adelaide
and Darwin. We have also committed to a fleet expansion programme, currently in
the design phase, which will provide additional capacity and potential for
revenue growth from late 2007.

Urban Transportation

Key developments in the year included signing the new franchise agreement to
continue to operate, maintain and support the highly successful Docklands Light
Railway in London. The seven-year contract may be extended for a further two
years and is valued at around £400m over this extended period. The new
franchise further improves services through more frequent trains, enhanced
security and higher targets for punctuality, customer satisfaction and
availability of ticket machines, escalators and information displays. We are
also one of three companies bidding for the Dubai Metro project which will be
the world's largest driverless urban transport system.

We were disappointed not to renew the Manchester Metrolink contract at rebid.
We have been operating Metrolink for ten years, overseeing significant
extensions and improvements to the service; this contract will end in 2007. Our
contract to operate the Copenhagen Metro is also coming to an end this year.

Transportation Technologies

Serco operates the National Traffic Control Centre (NTCC) on behalf of the
Highways Agency. NTCC is a world-first facility, giving a real-time analysis of
what is happening across England's motorway and trunk road network and helping
drivers to plan their journeys better. While full implementation has taken
longer than expected, we were delighted that Transport Secretary Alistair
Darling officially opened the NTCC on 30 March 2006. We continue to work
closely with the Highways Agency to achieve formal completion.

Other developments in the traffic management sector include new pilots to
increase the capacity of motorways in England and motorway technology services.
The Highways Agency has selected Serco to develop and maintain a new control
system for the Active Traffic Management pilot scheme on the M42 to better
manage the roadspace and utilise the hardshoulder during periods of congestion.
This contract applies to a 17 km section of the motorway and is valued at £4.5m
up to 2010.

Our traffic management, experience is attracting interest from outside of the
UK and we have been selected to run traffic management systems in Sweden, Hong
Kong and China.

Air

In the United Arab Emirates, we successfully renewed our contract to provide
air traffic control and engineering services at the Emirates Area Control
Centre, based in Abu Dhabi. The new contract is valued at £11.5m over three
years, a substantial increase from the previous contract.

Science

Science revenues grew by 18% to £403m, representing 16% of Group revenue (2005:
15%).

Serco enhanced its position in 2006 as a leading partner in the practice and
management of science and knowledge transfer, and has continued to grow its
business in the UK civil and defence nuclear markets.

The National Physical Laboratory (NPL) has had a vital impact on industry and
society in 2006. In addition to NPL's focus on leading edge research in
biotechnology, nanotechnology and advanced materials, the laboratory has
established a national framework for training in measurement skills, in
partnership with Rolls Royce. NPL increased its commercial income by 18%,
including a £1.2m contract to run a knowledge transfer network for Government
and work worth £1.9m to provide equipment and expertise to the new micro and
nano manufacturing centre of excellence.

NPL has played a key role in addressing the global challenge of climate change.
Its measurement work monitoring emissions from power stations, airports and
industrial locations has enabled carbon pricing to be based on robust,
scientifically sound and internationally accepted measurements.

Our strong position in the civil and defence nuclear markets was further
enhanced during the year through our work at the Atomic Weapons Establishment
(AWE) and our technical assurance business.

2006 was another successful year for our work at the AWE, a facility we manage
and operate through a joint venture with Lockheed Martin and BNFL. This was the
first full year of the programme to upgrade skills and facilities. Within this
challenging programme, all major projects are on track and the key performance
indicators are showing record levels of performance in almost all areas of
activity.

Our Assurance business increased its presence in the civil nuclear market, with
contract awards from BNG to help with the clean up of the Sellafield site and
from British Energy and Magnox Electric in support of generating stations. In
addition, we are assisting the Ministry of Defence in a multi-million pound
study looking at future nuclear propulsion reactor designs.

Serco's expertise in the civil and defence nuclear fields is being brought to
bear on a developing UK market for the decommissioning of the country's civil
nuclear liabilities.

In 2006, Serco created a world-class consortium to address the Sellafield
decommissioning and operations opportunity. The consortium, called SBB Nuclear,
brings together three leading international companies - Serco, Bechtel and BWXT
- all with proven track records of service delivery, nuclear site management
and clean-up capability. SBB Nuclear is committed to the Nuclear
Decommissioning Agency's process of selecting a Parent Body Organisation for
the Sellafield Site Licence Company and to the safe, secure and environmentally
sensitive management of the site and to supporting the economic regeneration of
the surrounding community in West Cumbria.

The science business also combines the technical, financial and management
expertise to deliver some of the government's most ambitious science-based
programmes.

We have unrivalled experience in managing flagship government-owned,
contractor-operated (GOCO) facilities at NPL and AWE. Combined with our safety
and technical assurance expertise and track record in delivering big, complex
programmes on time and on budget, this puts Serco in a good position to help
the government achieve its National Nuclear Laboratory programme, and
potentially other science management programmes which are currently emerging in
the marketplace.

Finance Review

1. Financial performance

Serco's financial results for 2006 demonstrate the strong growth in the
business, a significant increase in margins and a good cash performance,
together with a simplified balance sheet.

Serco's income statement for 2006 is summarised in Figure 1 below. This
includes the results of joint ventures, which are proportionately consolidated.

Figure 1: Income statement

Year ended 31 December                          2006       2005  Increase  
                                                                           
                                                  £m         £m            
                                                                           
Revenue                                      2,548.2    2,260.3    12.7%   
                                                                           
Gross profit                                   365.7      325.0    12.5%   
                                                                           
Administrative expenses                      (235.7)    (214.3)            
                                                                           
Investment revenue and finance costs          (17.8)     (19.2)            
                                                                           
Profit before tax, amortisation and gain       112.2       91.5    22.6%   
on sale                                                                    
                                                                           
Gain on sale of PFI investments                 11.4          -            
                                                                           
Profit before tax and amortisation             123.6       91.5    35.1%   
                                                                           
Amortisation                                  (16.2)     (13.6)            
                                                                           
Profit before tax                              107.4       77.9    37.9%   
                                                                           
Tax                                           (27.9)     (23.5)            
                                                                           
Profit for the year                             79.5       54.4    46.1%   
                                                                           
Effective tax rate                             26.0%      30.2%            
                                                                           
Earnings per share                            16.62p     11.66p    42.5%   
                                                                           
Earnings per share before amortisation        17.13p     14.09p    21.6%   
and gain on sale of PFI investments                                        
                                                                           
Dividend per share                             3.60p      2.97p    21.2%   

2.1 Revenue

Revenue grew by 12.7% to £2,548.2m. Excluding revenue from Serco Solutions and
RCI, revenue growth was 11.4%.

Joint venture revenue increased by 20.0% to £643.3m. This increase was
primarily due to growth in our contract to operate the Atomic Weapons
Establishment.

During 2006, Serco Solutions contributed revenue of £216.2m (2005: £190.6m).
RCI contributed revenue of £185.8m (2005: £143.3m). These businesses were
acquired in February 2005 and March 2005 respectively.

2.2 Gross margin

Gross margin - the average contract margin across our portfolio - was 14.4% in
2006, consistent with the margin in 2005.

2.3 Investment revenue and finance costs

Investment revenue and finance costs totalled a net cost of £17.8m (2005: £
19.2m). The decrease was primarily due to lower net finance cost on the assets
and liabilities of our defined benefit pension schemes.

2.4 Profit before tax and amortisation (PBTA)

PBTA before the gain on sale of PFI investments was £112.2m in 2006 which was
an increase of 22.6% from 2005. This represented a margin of 4.4% in 2006, up
from 4.0% in 2005.

Serco Solutions contributed PBTA of £16.8m (2005: £14.3m), representing a PBTA
margin of 7.8% (2005: 7.5%), while RCI added £12.4m to PBTA (2005: £9.3m), at a
PBTA margin of 6.7% (2005: 6.5%).

Excluding the profits generated by Serco Solutions and RCI and their associated
funding costs and the gain on sale, growth in PBTA was 22.0%.

2.5 Intangible amortisation

The charge for intangible amortisation in the period was £16.2m (2005: £13.6m).
The increase resulted from a full year of the amortisation of intangible assets
arising on the acquisition of ITNET and RCI and increased amortisation of
software and development expenditure.

2.6 Profit before tax

Profit before tax increased by 37.9% to £107.4m (2005: £77.9m).

2.7 Tax

The tax charge of £27.9m (2005: £23.5m) represents an effective rate of 26.0%,
compared with 30.2% in 2005. This decrease is principally due to the gain on
the sale of the PFI investments not being taxable.

2.8 Earnings per share (EPS)

EPS grew by 42.5% to 16.62p. EPS before amortisation and the gain on sale of
PFI investments rose by 21.6% to 17.13p.

EPS is calculated on an average share base of 471.2m during the period (2005:
458.1m). The increase resulted from a combination of share options issued in
the year and the full year effect of shares issued during the first half of
2005, in part consideration for the acquisition of ITNET.

3. Dividends

Serco's policy is to increase the total dividend per share each year broadly in
line with the underlying increase in earnings. The proposed final dividend of
2.55p per share represents a 23.8% increase on the final dividend of 2005. The
total dividend for 2006 is 3.60p per share, an increase of 21.2%. The final
dividend will be paid on 16 May 2007 to shareholders on the register at the
close of business on 9 March 2007.

4. Cash flow

The Group generated a free cash inflow of £85.4m, an increase of 15.7% compared
with 2005.

Figure 2 analyses the cash flow. As in previous periods, we have designed the
analysis to show the true cash performance of the Group - the cash flows
generated by subsidiaries plus the dividends received from joint ventures. It
therefore differs from the consolidated cash flow on page 26, which
proportionately consolidates the cash flows of joint ventures. The adjustment
line in Figure 2 reconciles the movement in Group cash to the consolidated cash
flow.

Figure 2: Cash flow

Year ended 31 December                              2006        2005
                                                                    
                                                      £m          £m
                                                                    
Operating profit excluding joint ventures           87.9        62.4
                                                                    
Non cash items                                      35.0        45.2
                                                                    
Group EBITDA                                       122.9       107.6
                                                                    
Working capital movement                           (2.1)      (11.2)
                                                                    
Group operating cash flow                          120.8        96.4
                                                                    
Interest                                          (10.6)      (15.7)
                                                                    
Tax                                                (6.7)       (1.0)
                                                                    
Expenditure on tangible and intangible assets     (47.7)      (31.6)
                                                                    
Dividends from joint ventures                       29.6        25.7
                                                                    
Group free cash flow                                85.4        73.8
                                                                    
Cash received on sale of PFI investments            76.5           -
                                                                    
Cash disposed of and transaction costs on         (58.3)           -
sale of PFI's                                                       
                                                                    
Acquisitions                                           -     (281.7)
                                                                    
Other financing                                   (98.6)       253.8
                                                                    
Special pension contribution                      (19.0)           -
                                                                    
Dividends paid                                    (14.5)      (12.5)
                                                                    
Group net (decrease)/increase in cash and         (28.5)        33.4
cash equivalents                                                    
                                                                    
Adjustment to include joint venture cash            10.3         4.1
impacts                                                             
                                                                    
Net (decrease)/increase in cash and cash          (18.2)        37.5
equivalents                                                         

Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures)
before interest, tax, depreciation, intangible amortisation and

other non cash items

4.1 Group operating cash flow

The Group operating cash inflow was £120.8m (2005: £96.4m), an increase of
25.3%. This represents a conversion of Group EBITDA into cash of 98% (2005:
90%). This EBITDA conversion and working capital performance is particularly
notable given the strong level of organic growth.

4.2 Interest

Net interest paid in 2006 was £10.6m, compared to £15.7m in 2005. The decrease
was principally due to the timing of the sale of the PFI investments.

4.3 Tax

Tax paid in 2006 excluding joint ventures was £6.7m compared to £1.0m in 2005.
This increase is primarily due to a tax refund received in 2005.

Cash tax is below the equivalent tax charge in the income statement. The
difference reflects timing differences, including a continued residual level of
accelerated capital allowances, and the availability of tax relief on the
special pension contribution.

4.3 Expenditure on tangible and intangible assets

Expenditure on tangible and intangible assets in the period was £47.7m (2005: £
31.6m). This represents 2.5% of revenue excluding joint ventures (2005: 1.8%).
The increase mainly resulted from expenditure on designing and building our new
SAP accounting system and shared service centre. The total cost of the initial
programme is estimated to be approximately £35m, of which £20m was incurred in
2006 and £7m in 2005.

4.4 Dividends from joint ventures

Dividends received from joint ventures totalled £29.6m (2005: £25.7m),
equivalent to 98% (2005: 101%) of joint ventures' profit after tax and minority
interest. The high level of conversion in both years reflects dividend payments
made by joint ventures from reserves retained in previous years.

4.5 Other financing

The movement in other financing is primarily as a result of repayments on our
loan facility.

5. Net debt

Serco's net debt has reduced significantly during 2006. Group recourse net debt
has decreased by £92.1m to £171.9m and total net debt has decreased by £389.3m
to £205.9m. Figure 3 analyses Serco's net debt at 31 December 2006 and 31
December 2005.

Figure 3: Net debt

At 31 December                                   2006            2005
                                                                     
                                                   £m              £m
                                                                     
Group - cash and cash equivalents               177.8           210.0
                                                                     
Group - loans                                 (334.4)         (453.1)
                                                                     
Group - obligations under finance              (15.3)          (20.9)
leases                                                               
                                                                     
Group recourse net debt                       (171.9)         (264.0)
                                                                     
Joint venture recourse net cash                  28.2            18.0
                                                                     
Total recourse net debt                       (143.7)         (246.0)
                                                                     
Group non recourse debt                        (62.2)         (326.8)
                                                                     
Joint venture non recourse debt                    --          (22.4)
                                                                     
Total non recourse debt                        (62.2)         (349.2)
                                                                     
Total net debt                                (205.9)         (595.2)

5.1 Group recourse net debt

Group recourse net debt reduced from £264.0m at 31 December 2005 to £171.9m at
31 December 2006.

Included within Group recourse net debt is £10.6m (2005: £22.7m) of encumbered
cash, comprising cash of PFI and other project companies securing credit
obligations and customer advance payments.

5.2 Group non recourse debt

The Group's debt is non recourse if no Group company other than the relevant
borrower - such as a special purpose company for a PFI has an obligation to
repay the debt under a guarantee or other arrangement. The debt is excluded
from all of our credit agreements and other covenant calculations, and
therefore has no impact on the Group's ability to borrow.

Group non recourse debt reduced by £264.6m to £62.2m during the year, primarily
as a result of the sale of the PFI investments (see section 7). At 31 December
2006 the remaining non recourse debt related to the Kilmarnock prison contract
and our Driver Examination Services contract in Canada.

5.3 Joint venture non recourse debt

The joint venture non recourse debt recorded in 2005 resulted from debt taken
on in the course of operating a contract where we have a right of full cost
reimbursement. A debtor equal to the value of this non recourse debt was
included in Serco's accounts to reflect this. During the first half of 2006, we
renegotiated certain terms of this loan. This allows us to offset the debtor
and non recourse debt in our accounts, thereby reflecting the economic reality
of the contract.

6. Pensions

At 31 December 2006, the net liability included in the balance sheet arising
from our defined benefit pension scheme obligations was £120.0m (2005: £
149.9m). Figure 4 provides further analysis.

Figure 4: Defined benefit pension schemes

At 31 December                                  2006            2005
                                                                    
                                                  £m              £m
                                                                    
Group schemes - non contract                 (157.8)         (200.4)
specific                                                            
                                                                    
Contract specific schemes                                           
                                                                    
- reimbursable                                (67.6)          (84.9)
                                                                    
- not certain to be reimbursable              (23.9)          (21.3)
                                                                    
Net retirement benefit liabilities           (249.3)         (306.6)
                                                                    
Intangible assets arising from                  20.6            19.0
rights to operate franchises and                                    
contracts                                                           
                                                                    
Reimbursable rights debtors                     67.6            84.9
                                                                    
Deferred tax assets                             41.1            52.8
                                                                    
Net balance sheet liabilities                (120.0)         (149.9)

Serco has three main types of scheme which are accounted for as defined benefit
pension schemes. Each type has its own accounting treatment under IFRS. These
are:

  * Schemes which do not relate to specific contracts or franchises (non
    contract specific) - principally the Group scheme. For these schemes, we
    charge the actuarial gain or loss for the period to the consolidated
    statement of recognised income and expense (the SORIE), and
   
  * Schemes where we have a right of full cost reimbursement and therefore
    include both the pension scheme deficit and offsetting reimbursable rights
    debtor in the balance sheet (reimbursable), and
   
  * Schemes relating to specific contracts or franchises, where the deficit
    will pass back to the customer or to the next contractor at the end of the
    contract (not certain to be reimbursable). For these schemes, we charge the
    actuarial gain or loss on our share of the deficit for the period to the
    SORIE, recognise a recoverable intangible asset on the balance sheet at the
    start of the contract or franchise and amortise the intangible asset to the
    income statement over the contract or franchise life.
   
At 31 December 2006, the principal non contract specific scheme was the Serco
Pension and Life Assurance Scheme (SPLAS). This scheme was closed to new
members in 2001. Prior to the special pension contributions at the end of the
year, the scheme had a gross deficit of £136m. Following a detailed funding
review in the second half of 2006, we have made a special cash contribution of
£70m into the scheme. A payment of £19m was made in December 2006 and the
remaining £51m was paid in January 2007. We have agreed an increase in employer
and employee contributions from January 2007.

Figure 5 shows the sensitivity of the liabilities of our pension schemes to
changes in discount rates and to adjustments in the actuarial assumptions for
the rate of inflation, members' salary increases and life expectancies.

Figure 5: Pension assumption sensitivities

                          Change in assumption     Change in liability  
                                                                        
Discount rate                    +0.5%                    (9)%          
                                                                        
                                 (0.5)%                   +10%          
                                                                        
Price inflation                  +0.5%                     +7%          
                                                                        
                                 (0.5)%                   (7)%          
                                                                        
Salary                           +0.5%                     +3%          
                                                                        
                                 (0.5)%                   (3)%          
                                                                        
Longevity                 Increase by one year           +2.75%         

7. Private Finance Initiatives (PFIs)

 1. Sale of PFI investments
   
On 2 December 2006 Serco sold its equity investments relating to six PFI
projects to Infrastructure Investors Limited Partnership (I2). As part of this
transaction we retain the long term operating contracts associated with the
PFIs, as well as providing management services to I2, such as acting as the
day-to-day interface with the customer.

The investments were sold for a total cash consideration of £76.5m resulting in
a gain on sale of £11.4m. Net assets of £46.8m were disposed of, including cash
of £56.6m, PFI debtors of £329.8m and non recourse loans of £242.3m. The cash
disposed of was held in the special purpose companies primarily to honour
forthcoming debt repayments.

7.2 Remaining PFI portfolio

At 31 December 2006, Serco continued to hold a 100% equity investment in one
PFI special purpose company and a minority shareholding in two others. Serco
retains operating contracts in eleven PFI projects. We continue to recognise
our remaining PFI debtors at amortised cost, as defined by IAS 39, maintaining
an accounting treatment consistent with UK GAAP and existing IFRS. IFRIC 12
`Service Concession Arrangements' has been issued but is not mandatory until 1
January 2008. We will review the impact of the IFRIC during 2007.

8. Provisions


At 31 December 2006, the Group held provisions amounting to £22.3m (2005: £
26.3m). Provisions include amounts relating to long-term service awards,
terminal gratuities, property, contracts and restructuring. The decrease in
provisions includes a reduction as a result of the completion of a planned
restructuring in Serco Solutions.

9. Treasury

The Group's principal debt finance consists of a £400m bank credit facility
comprising a term loan facility and a revolving credit facility. At 31 December
2006 we had £163m (2005: £279m) outstanding on the term loans and the revolving
facility was undrawn. Interest is charged at a rate of 50 basis points over
LIBOR on borrowings under the facility. The facility is unsecured and matures
in December 2009.

Serco has also issued loan notes under two private placements. The first
private placement, for £43.2m, matures in December 2007 and the second, for £
117.0m, amortises evenly from 2011 to 2015.

At 31 December 2006, Serco also had £62.2m (2005: £349.2m) of non recourse debt
that is used to fund remaining PFI and similar activities. In all cases, no
entity other than the relevant borrower has an obligation, as a result of a
guarantee or other arrangement, to repay non recourse debt.

Consolidated income statement

For the year ended 31 December 2006

                                            Note            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Continuing operations                                                          
                                                                               
Revenue                                      2           2,548.2        2,260.3
                                                                               
Cost of sales                                          (2,182.5)      (1,935.3)
                                                                               
Gross profit                                               365.7          325.0
                                                                               
Administrative expenses                                  (235.7)        (214.3)
                                                                               
Other expenses - amortisation of                          (16.2)         (13.6)
intangibles                                                                    
                                                                               
Total administrative expenses                            (251.9)        (227.9)
                                                                               
Gain on sale of PFI investments              5              11.4              -
                                                                               
Operating profit                             2             125.2           97.1
                                                                               
Investment revenue                           3              31.7           33.6
                                                                               
Finance costs                                3            (49.5)         (52.8)
                                                                               
Profit before tax                                          107.4           77.9
                                                                               
Tax                                                       (27.9)         (23.5)
                                                                               
Profit for the year                                         79.5           54.4
                                                                               
Attributable to:                                                               
                                                                               
Equity holders of the parent                                78.3           53.4
                                                                               
Minority interest                                            1.2            1.0
                                                                               
Earnings per share (EPS)                                                       
                                                                               
Basic EPS                                    4            16.62p         11.66p
                                                                               
Diluted EPS                                  4            16.43p         11.46p

Consolidated statement of recognised income and expense

For the year ended 31 December 2006

                                            Note            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Net actuarial gain/(loss) on defined         8              78.9         (58.4)
benefit pension schemes                                                        
                                                                               
Actuarial (loss)/gain on reimbursable        8            (53.4)           35.6
rights                                                                         
                                                                               
Net exchange (loss)/gain on translation of   8            (12.3)            6.9
foreign operations                                                             
                                                                               
Fair value gain on cash flow hedges during   8               2.2            6.1
the year                                                                       
                                                                               
Tax (charge)/credit on items taken           8             (7.0)            2.0
directly to equity                                                             
                                                                               
Net income/(expense) recognised directly                     8.4          (7.8)
in equity                                                                      
                                                                               
Profit for the year                                         79.5           54.4
                                                                               
Total recognised income and expense for                     87.9           46.6
the year                                                                       
                                                                               
Attributable to:                                                               
                                                                               
Equity holders of the parent                                87.1           45.6
                                                                               
Minority interest                                            0.8            1.0
                                                                               

Consolidated balance sheet

At 31 December 2006

                                            Note            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Non-current assets                                                             
                                                                               
Goodwill                                                   528.5          544.5
                                                                               
Other intangible assets                                    126.1          107.8
                                                                               
Property, plant and equipment                               93.6          103.0
                                                                               
Trade and other receivables                                110.5          459.8
                                                                               
Deferred tax assets                                         73.7           91.2
                                                                               
                                                           932.4        1,306.3
                                                                               
Current assets                                                                 
                                                                               
Inventories                                                 51.7           36.4
                                                                               
Trade and other receivables                                463.3          528.8
                                                                               
Cash and cash equivalents                                  217.9          240.7
                                                                               
                                                           732.9          805.9
                                                                               
Total assets                                             1,665.3        2,112.2
                                                                               
Current liabilities                                                            
                                                                               
Trade and other payables                                 (541.9)        (531.1)
                                                                               
Current tax liabilities                                   (13.0)         (19.5)
                                                                               
Obligations under finance leases                           (8.3)          (8.2)
                                                                               
Loans                                                     (57.9)         (64.8)
                                                                               
Financial instruments                                     (10.6)          (4.9)
                                                                               
                                                         (631.7)        (628.5)
                                                                               
Non-current liabilities                                                        
                                                                               
Trade and other payables                                  (10.4)          (5.0)
                                                                               
Obligations under finance leases                          (11.5)         (18.2)
                                                                               
Loans                                                    (346.1)        (744.7)
                                                                               
Financial instruments                                     (14.2)         (30.8)
                                                                               
Retirement benefit obligations                           (249.3)        (306.6)
                                                                               
Provisions                                                (22.3)         (26.3)
                                                                               
Deferred tax liabilities                                  (19.9)         (92.1)
                                                                               
                                                         (673.7)      (1,223.7)
                                                                               
Total liabilities                                      (1,305.4)      (1,852.2)
                                                                               
Net assets                                                 359.9          260.0
                                                                               
Equity                                                                         
                                                                               
Share capital                                8               9.5            9.4
                                                                               
Share premium account                        8             283.5          269.5
                                                                               
Capital redemption reserve                                   0.1            0.1
                                                                               
Retained earnings                            8             196.6          132.8
                                                                               
Retirement benefit obligations reserve       8           (119.5)        (139.0)
                                                                               
Share-based payment reserve                  8              25.5           16.6
                                                                               
Own shares reserve                                        (16.4)         (16.4)
                                                                               
Hedging and translation reserve              8            (21.3)         (15.1)
                                                                               
Equity attributable to equity holders of                   358.0          257.9
the parent                                                                     
                                                                               
Minority interest                                            1.9            2.1
                                                                               
Total equity                                               359.9          260.0

Consolidated cash flow statement

For the year ended 31 December 2006

                                            Note            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Net cash inflow from operating activities    6             159.5          140.8
                                                                               
Investing activities                                                           
                                                                               
Interest received                                           32.4           32.8
                                                                               
Disposal of subsidiary and business          5              18.2              -
undertakings                                                                   
                                                                               
Proceeds from disposal of property, plant                    1.4            0.4
and equipment                                                                  
                                                                               
Acquisition of subsidiaries, net of cash                       -        (281.7)
acquired                                                                       
                                                                               
Purchase of other intangible assets                       (30.4)         (13.1)
                                                                               
Purchase of property, plant and equipment                 (27.8)         (22.3)
                                                                               
Net cash outflow from investing activities                 (6.2)        (283.9)
                                                                               
Financing activities                                                           
                                                                               
Interest paid                                             (42.2)         (47.6)
                                                                               
Dividends paid                                            (14.5)         (12.5)
                                                                               
Dividend paid to minority interest                         (1.0)              -
                                                                               
Repayment of borrowings                                  (103.4)          (5.8)
                                                                               
New loan advances                                            9.4          272.0
                                                                               
Capital element of finance lease                           (8.6)          (8.4)
repayments                                                                     
                                                                               
Proceeds from issue of share capital                        14.1            4.4
                                                                               
Decrease in non recourse loans                            (25.3)         (21.5)
                                                                               
Net cash (outflow)/inflow from financing                 (171.5)          180.6
activities                                                                     
                                                                               
Net (decrease)/increase in cash and cash                  (18.2)           37.5
equivalents                                                                    
                                                                               
Cash and cash equivalents at beginning of                  240.7          200.5
year                                                                           
                                                                               
Net exchange (loss)/gain                                   (4.6)            2.7
                                                                               
Cash and cash equivalents at end of year     7             217.9          240.7

Notes to the preliminary announcement

 1. General Information
   
The basis of preparation of this preliminary announcement is set out below.

The financial information in this announcement, which was approved by the Board
of Directors on 28 February 2007, does not constitute the Company's statutory
accounts for the years ended

31 December 2006 or 2005, but is derived from these accounts.

Statutory accounts for 2005 have been delivered to the Register of Companies
and those for 2006 will be delivered following the Company's annual general
meeting. The auditors have reported on these accounts; their reports were
unqualified and did not contain statements under S237 (2) or (3) of the
Companies Act 1985.

The preliminary announcement has been prepared in accordance with International
Financial Reporting Standards (IFRS) adopted for use in the European Union.

The financial statements have been prepared on the historical cost basis.

Interest paid within the cash flow statement has been re-presented and is shown
within financing activities in accordance with latest guidance (interest paid
was previously shown within investing activities).

 2. Segmental Information
   
The Group manages its business on a market segment basis and these segments are
the basis on which the Group reports its primary segment information.

Market segments

Year ended 31 December            Civil  Defence  Transport  Science      Total
2006                         government                                        
                                              £m         £m       £m         £m
                                     £m                                        
                                                                               
Revenue                           875.0    644.8      625.7    402.7    2,548.2
                                                                               
Result                                                                         
                                                                               
Segment result                     42.0     41.2       26.7     36.9      146.8
                                                                               
Unallocated expenses                                                     (33.0)
                                                                               
Gain on sale of PFI                                                        11.4
investments (note 5)                                                           
                                                                               
Operating profit                                                          125.2
                                                                               
Investment revenue                                                         31.7
                                                                               
Finance costs                                                            (49.5)
                                                                               
Profit before tax                                                         107.4
                                                                               
Tax                                                                      (27.9)
                                                                               
Profit for the year                                                        79.5

Year ended 31 December            Civil  Defence  Transport  Science      Total
2005                         government                                        
                                              £m         £m       £m         £m
                                     £m                                        
                                                                               
Revenue                           803.6    565.6      548.7    342.4    2,260.3
                                                                               
Result                                                                         
                                                                               
Segment result                     37.5     33.3       25.0     31.4      127.2
                                                                               
Unallocated expenses                                                     (30.1)
                                                                               
Operating profit                                                           97.1
                                                                               
Investment revenue                                                         33.6
                                                                               
Finance costs                                                            (52.8)
                                                                               
Profit before tax                                                          77.9
                                                                               
Tax                                                                      (23.5)
                                                                               
Profit for the year                                                        54.4

Geographical segments          United    North    Europe and     Asia     Total
                           Kingdom £m   America       Middle  Pacific          
Year ended 31 December                                  East                 £m
2006                                           £m                  £m          
                                                          £m                   
                                                                               
Revenue                       1,886.5       295.3      213.4    153.0   2,548.2

Year ended 31 December         United       North Europe and     Asia     Total
2005                          Kingdom     America     Middle  Pacific          
                                                        East                 £m
                                   £m          £m                  £m          
                                                          £m                   
                                                                               
Revenue                       1,661.7       254.5      205.2    138.9   2,260.3

 3. Investment revenue and finance costs
   
                                                            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Interest receivable by PFI companies                        25.6           26.7
                                                                               
Interest receivable on other loans and deposits              6.1            6.9
                                                                               
Investment revenue                                          31.7           33.6
                                                                               
Interest payable on non recourse loans                    (18.0)         (19.9)
                                                                               
Interest payable on obligations under finance              (0.6)          (0.8)
leases                                                                         
                                                                               
Fair value adjustment on fair value hedges and             (0.5)            0.4
non IAS 39 designated hedges                                                   
                                                                               
Interest payable on other loans                           (28.5)         (27.8)
                                                                               
Net interest payable on retirement benefit                 (1.9)          (4.7)
obligations                                                                    
                                                                               
Finance costs                                             (49.5)         (52.8)

 4. Earnings per share
   
Basic and diluted earnings per share (EPS) have been calculated in accordance
with IAS 33 `Earnings Per Share'. EPS is shown both before and after
amortisation of intangible assets and the gain on sale of PFI investments to
assist in the understanding of the impact of the underlying performance of the
business.

The calculation of the basic and diluted EPS is based on the following data:

Number of shares

                                                            2006           2005
                                                                               
                                                        millions       millions
                                                                               
Weighted average number of ordinary shares for             471.2          458.1
the purpose of basic EPS                                                       
                                                                               
Effect of dilutive potential ordinary shares:                5.5            8.0
share options                                                                  
                                                                               
Weighted average number of ordinary shares for             476.7          466.1
the purpose of diluted EPS                                                     

Earnings                                    2006                  2005         
                                                                               
                                      Earnings  Per share   Earnings  Per share
                                                   amount                amount
                                            £m                    £m           
                                                    Pence                 Pence
                                                                               
Earnings for the purpose of basic         78.3      16.62       53.4      11.66
EPS being net profit                                                           
                                                                               
attributable to the equity holders                                             
of the parent                                                                  
                                                                               
Less:                                                                          
                                                                               
Gain on sale of PFI investments         (11.4)     (2.42)          -          -
                                                                               
Add back:                                                                      
                                                                               
Amortisation of intangible assets,        13.8       2.93       11.2       2.43
net of tax of £2.4m (2005 - £2.4m)                                             
                                                                               
Basic earnings before amortisation        80.7      17.13       64.6      14.09
of intangible assets and gain on                                               
sale of PFI investments                                                        
                                                                               
Earnings for the purpose of basic         78.3      16.62       53.4      11.66
EPS                                                                            
                                                                               
Effect of dilutive potential                 -     (0.19)          -     (0.20)
ordinary shares                                                                
                                                                               
Diluted EPS                               78.3      16.43       53.4      11.46

 5. Disposals
   
On 2 December 2006, the Group sold its investments in ten wholly-owned
subsidiaries which carried out six Private Finance Initiatives (PFI) projects.
The subsidiaries were sold to Infrastructure Investors Limited (I2) for a cash
consideration of £76.5m resulting in a gain on sale of £11.4m.

The subsidiaries disposed of were as follows:

Defence Management (Holdings) Limited

Defence Management (Watchfield) Limited

Traffic Information Services (TIS) Holdings Limited

Traffic Information Services (TIS) Limited

Premier Custodial Investments Limited

Premier Custodial Finance Limited

Pucklechurch Custodial Services Limited

Lowdham Grange Prison Services Limited

Medomsley Training Services Limited

Moreton Prison Services Limited

Net assets disposed of were:                        £m
                                                      
Intangible assets                                  0.2
                                                      
PFI debtor                                       329.8
                                                      
Other debtors                                     11.1
                                                      
Cash                                              56.6
                                                      
Creditors                                       (22.2)
                                                      
Non recourse loans                             (242.3)
                                                      
Financial instruments                           (16.5)
                                                      
Tax                                             (69.9)
                                                      
Net assets disposed of                            46.8
                                                      
The gain on sale is calculated as follows:          £m
                                                      
Cash consideration                                76.5
                                                      
Less:                                                 
                                                      
Net assets disposed of                          (46.8)
                                                      
Transaction and other costs                      (7.0)
                                                      
Amounts transferred from hedging and             (9.0)
translation reserve in relation to                    
financial instruments disposed of                     
                                                      
Recognition of financial instrument on           (2.3)
sale                                                  
                                                      
Gain on sale of PFI investments                   11.4


Transaction and other costs includes liabilities triggered by the disposal.

The net cash inflow arising on disposal is as follows:

                                                    £m
                                                      
Cash consideration received                       76.5
                                                      
Less:                                                 
                                                      
Cash disposed of                                (56.6)
                                                      
Transaction costs paid during the year           (1.7)
                                                      
Net cash inflow                                   18.2

 6. Reconciliation of operating profit to net cash inflow from operating
    activities
   
                                                            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Operating profit for the year                              125.2           97.1
                                                                               
Adjustments for:                                                               
                                                                               
Share-based payment expense                                  4.8            5.7
                                                                               
Depreciation of property, plant and equipment               30.0           30.3
                                                                               
Amortisation of intangible assets                           16.2           13.6
                                                                               
Loss on disposal of property, plant and equipment            1.1            0.4
                                                                               
Loss on disposal of intangible assets                          -            0.1
                                                                               
Gain on sale of PFI investments                           (11.4)              -
                                                                               
Operating cash inflow before movements in working          165.9          147.2
capital                                                                        
                                                                               
Increase in inventories                                   (13.9)          (1.9)
                                                                               
Decrease/(increase) in receivables                          10.7         (47.2)
                                                                               
Increase in payables                                        21.8           51.0
                                                                               
Movement in provisions                                     (4.5)          (6.4)
                                                                               
Special contribution to defined benefit pension           (19.0)              -
scheme                                                                         
                                                                               
Cash generated by operations before PFI asset              161.0          142.7
expenditure                                                                    
                                                                               
Movement on PFI debtor                                      17.4           15.3
                                                                               
Expenditure on PFI assets in the course of                     -          (7.8)
construction                                                                   
                                                                               
Cash generated by operations after PFI asset               178.4          150.2
expenditure                                                                    
                                                                               
Tax paid                                                  (18.9)          (9.4)
                                                                               
Net cash inflow from operating activities                  159.5          140.8

 7. Analysis of net debt
   
                             At   Cash  Disposals    Exchange  Non cash    At 31
                                  flow            differences movements December
                              1                                             2006
                        January                                                 
                           2006                                                 
                                                                                
                             £m     £m         £m          £m        £m       £m
                                                                                
Cash and cash             240.7 (36.4)       18.2       (4.6)         -    217.9
equivalents                                                                     
                                                                                
Non recourse loans      (278.2)   19.7      242.3           -     (8.6)   (24.8)
(related to PFI assets)                                                         
                                                                                
Other non recourse       (71.0)    5.6          -         5.6      22.4   (37.4)
loans                                                                           
                                                                                
Other loans             (460.3)   94.0          -        18.1       6.4  (341.8)
                                                                                
Obligations under        (26.4)    8.6          -         0.3     (2.3)   (19.8)
finance leases                                                                  
                                                                                
                        (595.2)   91.5      260.5        19.4      17.9  (205.9)

Non cash movements primarily relate to a joint venture non recourse debt.
Certain terms of this debt were renegotiated in 2006 and this allows us to
offset a related debtor and the non recourse debt in our accounts, thereby
reflecting the economic reality of the contract.

8. Reserves

                        Share   Share Retained  Retirement Share-based Hedging and
                      capital premium earnings     benefit     payment translation
                              account          obligations     reserve     reserve
                                                   reserve                        
                                                                                  
                           £m      £m       £m          £m          £m          £m
                                                                                  
At 1 January 2006         9.4   269.5    132.8     (139.0)        16.6      (15.1)
                                                                                  
Shares issued             0.1       -        -           -           -           -
                                                                                  
Premium on shares           -    14.0        -           -           -           -
issued                                                                            
                                                                                  
Profit for the year         -       -     78.3           -           -           -
attributable to                                                                   
equity holders of the                                                             
parent                                                                            
                                                                                  
Dividends paid              -       -   (14.5)           -           -           -
                                                                                  
Net actuarial gain on       -       -        -        78.9           -           -
defined benefit                                                                   
pension schemes                                                                   
                                                                                  
Actuarial loss on           -       -        -      (53.4)           -           -
reimbursable rights                                                               
                                                                                  
Credit in relation to       -       -        -           -         4.8           -
share-based payment                                                               
expense                                                                           
                                                                                  
Net exchange loss on        -       -        -           -           -      (12.3)
translation of                                                                    
foreign operations                                                                
                                                                                  
Amounts transferred         -       -        -           -           -         9.0
to income statement                                                               
in relation to sale                                                               
of PFI investments                                                                
(note 5)                                                                          
                                                                                  
Fair value gain on          -       -        -           -           -         2.2
cash flow hedges                                                                  
during the year                                                                   
                                                                                  
Tax charge on cash          -       -        -           -           -      *(5.0)
flow hedges                                                                       
                                                                                  
Tax (charge)/credit         -       -        -      *(6.0)        *4.1      *(0.1)
on items taken                                                                    
directly to equity                                                                
                                                                                  
At 31 December 2006       9.5   283.5    196.6     (119.5)        25.5      (21.3)

* £(7.0)m tax charge as shown in the SORIE

9. Joint ventures

The Group's interests in joint ventures are reported in the consolidated
financial statements using the proportionate consolidation method. The effect
of the Group's joint ventures on the consolidated income statement is as
follows:

                                                            2006           2005
                                                                               
                                                              £m             £m
                                                                               
Revenue                                                    643.3          536.1
                                                                               
Operating profit                                            37.3           34.7
                                                                               
Profit before tax                                           39.3           36.4
                                                                               
Tax                                                        (8.6)         (10.4)
                                                                               
Profit for the year                                         30.7           26.0
                                                                               
Minority interest                                          (0.6)          (0.5)
                                                                               
Share of post-tax results of joint ventures                 30.1           25.5

Operating profit is after £4.0m (2005 - £6.6m) of costs incurred by Group.