Final Results

Interior Services Group PLC

("ISG" or "the Group")

Preliminary Results for the Year ended 30 June 2010

Interior Services Group plc, the international construction services group, today announces its final results for the year ended 30 June 2010.

1 from continuing operations

2 adjusted for discontinued operations (£0.8m), exceptional items (£1.9m) and amortisation of intangible assets (£1.4m)

Group Highlights

·; A robust set of results, in line with management expectations and delivered against a challenging and competitive market

·; Diversification strategy continues to ensure the Group is not over exposed to any one particular market

·; Final dividend increased by 5% to 10.14p, bringing the total to 14.34p (2009: 13.66p)

·; Group order book at June was £742m (2009: £822m), of which £704m (2009: £686m) is for delivery in the current financial year

·; Order book weighted towards private sector 70% (2009: 68%)

·; Group remains financially strong with net cash as at 30 June 2010 of £31.0m and £10.0m of undrawn committed facilities in place through to mid 2013

Divisional Highlights

London Fit Out

·; Revenues increased by 4% indicating a stabilisation of the London fit out market

·; A robust performance in a challenging and highly competitive market, resulting in a decline in operating profit to £3.3m (2009: £4.3m) and margins to 1.9% (2009: 2.6%)

·; Continue to develop profile in the high end residential sector, including recruitment of former management team of Harry Neal

·; Order book of £122m (2009: £159m) with continuing signs of improvement in pipeline in the smaller end fit out market

London Construction

·; Operating profit increased 119% to £2.2m (2009: £1.0m) on revenue of £154m (2009: £217m)

·; Performance reflects tight management of costs, together with better buying margins and a different mix of work

·; Decline in order book to £114m (2009: £188m) reflects change in mix towards a higher proportion of smaller sized projects as Nido Spitalfields and Velodrome are completed

Regional Construction

·; Operating profit of £3.5m (2009: £3.0m) on revenue of £338m (2009: £367m)

·; 62% of revenue with public sector clients (2009: 59%); majority of activity in education sector and frameworks

·; Order book of £276m (2009: £286m), is holding up well, albeit we anticipate some softening in public sector work load post the government's spending review

Retail

·; Operating profit maintained at £6.7m (2009: £6.7m) on revenue of £192m (2009: £208m)

·; 49% of revenue in food sector and 36% in retail banking

·; Some early signs of an improvement in high street retail sector

·; Order book of £163m (2009: £135m) reflects strength of allocations under our food and banking frameworks

Europe

·; Operating loss of £0.2m (2009: profit £1.4m) with revenue increasing by 14% to £33m (2009: £29m) despite a strong recovery in the second half

·; Key multinational clients held back from significant investment until the last quarter

·; Continue to expand service offering across Europe with acquisition of a Moscow based fit out company

·; Record order book of £32m (2009: £6m)

Middle East

·; Joint venture business continued to make a small loss of £0.3m (2009: £0.4m), predominantly due to the poor performance of the joinery division

·; Since year end, terms agreed to sell joinery division to our joint venture partner and for ISG to acquire a 100% interest in the fit out division

·; Order book for the fit out division of £9m (2009: £6m)

Asia

·; Operating profit of £1.9m (2009: £2.2m) on revenue of £86m (2009: £60m)

·; Increased activity in Singapore and improving retail market in Hong Kong and China, albeit markets remain competitive

·; Order book of £26m (2009: £42m) more evenly spread over a wider range of smaller projects

David Lawther, Chief Executive, said:

"While there is little doubt that our markets will remain highly competitive over the coming year, we are seeing a recovery in the spending programmes of our private sector customers. Our results show the continued resilience of the Group and our strategy places us well to resume the growth path we demonstrated leading up to the global economic crisis."

8 September 2010

ENQUIRIES:

CHAIRMAN'S STATEMENT

Our consistent and robust performance during the financial year ended 30 June 2010 is particularly pleasing in light of the challenging economic environment and uncertainty affecting our sector. In line with our expectation, profit before tax from continuing operations before exceptional items and amortisation of intangible assets amounted to £12.0m (2009: £13.3m). Adjusted earnings per share1 amounted to 29.91p compared to 33.65p for the previous year. The Board remains confident that it has the right strategy for continued success. It is recommending a final dividend of 10.14p per share, resulting in dividends per share for the year as a whole totalling 14.34p compared to 13.66p for last year - an increase of 5%. Our business continues to be cash generative. At the year end net cash stood at £31.0m (2009: £32.1m) after reducing bank indebtedness by a further £5.6m.

The strength of the business is underpinned by its strategy to:

·; leverage our strong relationships with major UK and US-based customers by servicing their international growth plans for commercial offices;

·; further establish our UK and international presence in the retail fit out market of high street banks, food retail and global fashion brands;

·; focus the business on the private sector which currently accounts for 70% of the Group's revenue;

·; continue a geographic expansion in the UK of our construction business to strengthen the service offering to our core clients.

A feature of the year has been our involvement in large-scale and prestigious projects. A notable example is the Olympic Velodrome stadium where we have performed to time and cost and attracted favourable reviews. Other noteworthy projects include the fitting out of a 400,000 sq. ft. office building for KPMG in Canary Wharf and the completion of the hotel lobby and casino at the new Marina Bay Sands complex in Singapore. Of equal importance, in terms of revenues rather than project size, are our framework agreements with most of the UK supermarket groups and high street banks.

In our overseas markets our business comes predominantly from our multinational client base rather than national occupiers. While some of these clients have been cautious about the speed of their expansion in the current market, we are still winning significant new projects. For example, in addition to Marina Bay Sands in Singapore, we are fitting out a 70,000 sq. ft. office for Barclays in Geneva.

We have completed the integration of our recent acquisitions. They have successfully assimilated our culture and values and have adopted our more rigorous systems and controls. We have now consolidated our UK businesses into three distinct entities, namely Fit Out, Food Retail and Construction. Each has its own managing director and management board. This will provide greater focus to deliver the future growth of the business and also provide greater clarity for our customers. Our overseas businesses, based in Europe, Asia and the Middle East will largely face the market as before although we are taking a number of steps to strengthen their managements.

Our vision is to be a leading international brand, delivering exceptional service. We could not achieve this without the loyalty and hard work of our people, for which I thank them. Their commitment has seen the business continue to impress customers, win and deliver great projects, receive prestigious awards, while maintaining our exemplary health and safety record.

We can see signs of recovery in all our markets, except UK construction, but lead times are shorter. Thus whilst our order book at the year end at £742m is some £80m lower than last year, the amount due to be delivered in the current year is higher at £704m compared with £686m at this point last year. Margins however will remain under pressure and therefore an improvement in profitability will be dependent upon the early signs of a pick up in economic activity being sustained into the second half of the financial year.

In the longer term we still view the future with confidence, based on our reputation with our major clients and the success of our strategy of diversifying the business by activity, sector and geography. We will continue to explore opportunities to broaden further our business base.

Roy Dantzic

Chairman

8 September 2010

1 from continuing operations before exceptional items and amortisation of intangible assets

CHIEF EXECUTIVE'S STATEMENT

I am pleased to announce a robust set of results, in line with management expectations and delivered against a challenging and competitive market. Our strategy to be a diversified business has created a balanced and flexible portfolio where we are not over exposed to any sector or geography. In the past year, our UK businesses have performed strongly ahead of expectation and this has offset a delay in the expected pick up in international markets.

Key features of our business during the year included:

·; a private sector portfolio which accounted for circa 70% of our revenue, helping to ensure we are not over exposed to future UK public sector spending cuts;

·; continued strong allocations from our retail banking and food retail clients in the UK;

·; a slower start to the year overseas as our international clients delayed commitments, but a stronger performance in revenue and profit in the second half of the financial year;

·; closer customer relationships with multinationals, leading to more international opportunity;

·; an increase in our office network both within and outside the UK. Underpinning this has been our strategy to grow in line with customer demand through both organic growth and acquisition;

·; development of a high-end residential fit out activity in London to complement our commercial and retail fit out activities;

·; we have further embedded our visions and values throughout the organisation. It is this that keeps our brand strong and consistent as we continue to build our business across new geographies and sectors. Our vision is to be a leading international brand delivering exceptional service in fit out, construction and management services;

·; we have continued to embed our systems and processes in our recent acquisitions and completed their integration into the Group.

Results

For the year ended 30 June 2010, adjusted profit before tax1 was £12.0m (2009: £13.3m) on revenue2 of £972m (2009: £1,046m). Adjusted earnings per share1 amounted to 29.91p (2009: 33.65p).

There were two exceptional items in the year. The first exceptional item of £1.9m was recorded at 31 December 2009 and represents the Group's current estimate of fines and legal costs net of recoveries in respect of the Office of Fair Trading's cover pricing investigation of two subsidiaries, Propencity Group Limited and Pearce Construction (Midlands) Limited, prior to ISG's ownership. The Propencity Group Limited's fine of £0.1m has been settled. We have lodged an appeal against the fine imposed on Pearce Construction (Midlands) Limited which has been heard. We await the Competition Tribunal's findings.

The second exceptional item was the closure of our office in Japan, where we offered project management services only. With no sign of recovery in the investment plans of our multinational clients in the Japanese market, we decided to discontinue our operations at a total loss for the year of £0.8m.

Net cash as at 30 June 2010 of £31.0m was slightly behind prior year (2009: £32.1m). In the year there was net cash inflow from operating activities of £6.0m (2009: £6.9m) and the Group repaid £5.6m of bank borrowings. The Group continues to trade well within its banking covenants. In addition, the Group retains an undrawn working capital revolving credit facility of £10.0m which expires in 2013.

Dividends

An interim dividend of 4.20p was paid in April 2010. The Board has decided to recommend an increase for the final dividend of 5% to 10.14p, bringing the total to 14.34p (2009: 13.66p). Subject to shareholder approval at the AGM on 3 December 2010, the final dividend will be payable on 7 December 2010 to shareholders on the register on 5 November 2010. The ex-dividend date will be 3 November 2010. The closing date for elections for the Dividend Reinvestment Plan is 11 November 2010.

1 from continuing operations before exceptional items and amortisation of intangible assets

2 from continuing operations

Trading

Below is a summary of revenue and order book for each of the Group's business segments.

1 from continuing operations

* of the total order book, £704m (2009: £686m) relates to the current financial year

London Fit Out

After two years of decline, we predicted a stabilisation of the London fit out market. This has proved accurate, with revenue up by 4% to £170m (2009: £163m). However it continued to be both a challenging and highly competitive market. With operating margins decreasing to 1.9% (2009: 2.6%), total operating profit decreased by 24% to £3.3m (2009: £4.3m).

Notable successes over the year have included the fit out of KPMG's new UK headquarters in Canary Wharf, a 15-storey office building totalling 400,000 sq. ft. We also continue to develop our profile in the high-end residential sector with a number of prestigious wins in central London. To support this growth in high-end residential, we recruited the former management team from Harry Neal, a long established London residential construction company.

The current order book stands at £122m (2009: £159m) of which £118m is to be delivered in the current financial year (2009: £137m). Significant contract awards for delivery in the current financial year include: Riverbank House for Man Group, The Ark, Hammersmith, for GE Capital Real Estate and 30 Crown Place, for Pinsent Masons.

Currently we are seeing an upturn in the smaller-end fit out market and together with our focus on high-end residential, we anticipate revenue being ahead in the current financial year, although margins are likely to continue to be competitive.

London Construction

We expected that revenue would continue to decrease from the private sector London construction market. This is proving to be the case, with commercial developers only now starting to return to the market. In line with this, we anticipate seeing an upturn in London construction activity levels but not until the second half of 2011. This upturn will be partly fuelled by those 25-year leases from the 1980s and 15-year leases from the 1990s expiring, leading to a demand from new occupiers seeking modern, high-quality commercial space.

During the year, we worked on some high-profile projects such as the Olympic Velodrome, where our advice and methodologies have attracted positive media coverage for their delivery of cost and time benefits. Additionally we worked on two large-scale student accommodation schemes - Nido Spitalfields and Nido Notting Hill - for Blackstone and also a significant mixed-use scheme for Marshall Street Regeneration Limited.

Within London Construction we have launched a new unit called London Building. London Building is a dedicated business unit, established to focus on smaller spend projects within London and the South East.

Despite a decline in revenue of 29% to £154m (2009: £217m), the operating margin on revenue increased to 1.4% (2009: 0.5%) resulting in operating profit increasing by 119%, to £2.2m (2009: £1.0m). This reflects tight management of costs, together with better buying margins and a different mix of work.

In London, our construction portfolio is heavily weighted towards the private sector, so public sector cuts should have a negligible effect on our revenues. However, project sizes have reduced, and we are therefore anticipating a 10% decline in revenue in this financial year. The current order book stands at £114m (2009: £188m) of which £103m is to be delivered in the current financial year (2009: £140m).

Regional Construction

The UK construction market outside London has declined as expected at a rate of around 10%. Revenue in the period decreased by 8% to £338m (2009: £367m). However, margins increased to 1.0% (2009: 0.8%) resulting in operating profit increasing by 17% to £3.5m (2009: £3.0m), mainly as a result of better buying margins. This is the Group's one division with significant exposure to the public sector although we have been careful to ensure that our public sector portfolio is broadly spread across sectors, including work in education, defence, the Home Office, health departments and social housing. In addition, we continue to target the business towards smaller projects which we believe will be more resilient to the coming UK public sector cuts.

We continue to win work under a number of public sector frameworks including Ministry of Justice - Custodial Property framework, Aspire Defence's PFI framework, Manchester City Council framework, Sovereign Housing Group framework, Swann Housing Group framework and during the year we were appointed to the Construction Framework South West, as the Sole Framework Contractor for Smaller Projects for Cardiff City Council, and to Sheffield Teaching Hospitals NHS Foundation Trust framework.

Olympic Games related development has also featured in the regions, including Garon's Olympic Diving Pool in Southend and a national rowing facility in Durham. While commercial activity remains slow, there are now some tentative signs of recovery in the residential sector.

During the year, we worked on 72 education projects (2009: 56) with a total revenue of £114m (2009: £118m) including completing the Suffolk Sixth Form Centre in Ipswich and St John's School in Marlborough. We have an education order book of £99m as at the end of June 2010 (2009: £108m), which includes The Manchester College, Millwood Special Education Needs School, North Warwickshire College Hinckley and Newcastle University Translational Research Building.

We have continued to spread our geographical reach across the UK in order to be positioned locally wherever there is market demand. In line with this, we are strengthening our UK office network with a larger office in Birmingham and new offices in Exeter and Cardiff, both of which have already started to also support ISG Pearce's food retail expansion plans. As at 30 June 2010, the total order book for Regional Construction stands at £276m (2009: £286m). Of this, £253m will be delivered in the current financial year (2009: £223m). Despite the in year order book being ahead of prior year, we anticipate a tougher second half of the year and a decline in revenue for the year as a whole of 10%.

Retail

Our UK retail operations continue to be provided by ISG Pearce and ISG Cathedral, with ISG Pearce focusing on major food retail customers and larger format high street retailers and ISG Cathedral working with the retail banking sector and smaller format high street retail customers.

Retail - ISG Cathedral

The market for the financial services sector has continued to grow, in particular, our work under frameworks. Current clients include Barclays, Lloyds Banking Group, RBS and HSBC, the latter choosing ISG to deliver their Premier Concept Branch in Kings Road, London. This increased activity from the banking sector has offset challenges presented by the high street retail sector. However, there are encouraging signs that the high street retail sector is improving with recent wins from existing clients Monsoon and The Carphone Warehouse and, in addition, we have attracted new clients including Mulberry and Oliver Sweeney.

ISG Cathedral's reputation for excellence in fit out services to the retail and leisure industry has been recognised at this year's global RLI Awards. The company not only won Shopfitter of the Year, but its project for the Doyle Collection's London's Kensington Hotel was also presented with the Award for Interior Excellence.

The order book for ISG Cathedral at the end of the financial year is in line with the prior year at £50m (2009: £51m).

Retail - ISG Pearce

Although the capital spend of key clients on refurbishment programmes decreased during the year, ISG Pearce was able to increase its market share with more turnover for new build and extension work, with increased work coming from major retailers including Tesco, Asda, Sainsbury's, Marks & Spencer and Morrisons where we are a key strategic partner on their frameworks. During the year the business built its first new build supermarket for Tesco, with three more currently under construction. During the last quarter we have continued to receive strong allocations with an order book at the end of the financial year of £113m (2009: £84m).

Overall, in UK retail, revenue decreased by 8% to £192m (2009: £208m). The operating margin increased to 3.5% (2009: 3.2%) resulting in operating profit being maintained at £6.7m (2009: £6.7m). With the potential growth from high street retailers and a continued strong allocation from food and banking frameworks, we anticipate increased revenue in the current year.

Europe

In mainland Europe our multinational clients held back from significantly investing in the first half of the year, recovering only in the last quarter of the year. This, despite a positive result in the second half of the year, has led to an overall operating loss of £0.2m (2009: operating profit £1.4m). We continued to grow the business with revenue increasing by 14% to £33m (2009: £29m). Highlights have included project wins for clients such as Barclays, Pfizer and Standard Chartered Bank. In particular, our appointment to the Exxon framework has led to projects for them in Belgium and Germany, with Rome and Egypt scheduled for the year ahead. On the back of customer demand, we continue to develop our network of offices in the region, with a new office in Geneva opened during the year and our acquisition of Olson in Russia. Olson, rebranded ISG Olson, is a specialist fit out company based in Moscow, with a strong track record of servicing multinational clients and it will further strengthen our European capability. Our confidence in the future in mainland Europe is demonstrated by a record order book at the year end of £32m in Europe (2009: £6m).

Middle East

In the Middle East, where we offer fit out and joinery services, the joint venture business continued to make a small loss of £0.3m (2009: £0.4m) which was predominantly due to the poor performance of the joinery division. However the fit out side of the business made a profit, delivering projects such as the Abu Dhabi football stadium, a cinema complex for Cinestar and a commercial office for ExxonMobil. We have continued to invest in the build up of our capability in the region and are targeting to open a permanent office in Abu Dhabi in the current financial year.

Since the year end, we have agreed terms to dispose of our interest in the joinery division to our joint venture partner, Al Habtoor Leighton, and to acquire a 100% interest in the fit out division. The order book for the fit out division at the end of the financial year is £9m (2009: £6m).

Asia

Our Asia operations experienced significant margin pressure and a weighting in volumes to the second half of the year. Overall the business continues to grow.

Revenue from continuing operations increased by 44% to £86m (2009: £60m) but with operating margins decreasing to 2.2% (2009: 3.7%). Operating profit from continuing operations decreased by 16% to £1.9m (2009: £2.2m).

Highlights in the year include our work for major clients such as Marina Bay Sands Casinos, a 225,000 sq. ft. office for Standard Chartered Bank (SCB) in Singapore and the project management of the Saudi Arabia Pavilion at the Shanghai Expo. We were also appointed to the Goldman Sachs project management framework for China. After the year end, we were appointed by SCB to provide project management services in Asia under a two-year contract. Additionally, ISG's design team hub in China was awarded a global two-year agreement to provide technical production design services for SCB internationally.

We have continued to progress in the retail sector, particularly in Hong Kong and China, working with clients such as Ralph Lauren, Apple, Citibank, Bohai Bank, UGG and Giorgio Armani on their international roll out programmes.

The year ahead is likely to be characterised by maintained volumes consolidating last year's significant growth and a continued recovery in margins. We expect our profit contribution within Asia to be more evenly spread than last year. To support our future in the region we will be looking to continue to develop our people and we have appointed Peter K Yam as a non-executive director of ISG Asia. Peter has extensive business experience in the region and was previously President of Emerson Greater China - Peter's focus will be to advise on our Greater China strategy and also to help us develop our leadership capability in the region.

Last year's order book was heavily weighted to Singapore with the large Marina Bay Sands casino projects (£21m). The order book at the end of the financial year of £26m (2009: £42m) is more evenly spread and focused on smaller projects.

We anticipate continued investment from our retail clients and we are now starting to see the recovery of the financial sector and an increase in commercial office activity. For example, since the year end we have been appointed to project manage the 350,000 sq. ft. Credit Suisse relocation to Kowloon.

Structure

As of 1 July 2010 we have reorganised to face the market with three distinct offers:

·; For multinational corporate office and retail fit out customers the Group provides a broad range of services internationally;

·; For national food retail customers the Group provides a comprehensive range of services in the UK extending from large and small fit out to refurbishment and new build;

·; For UK construction customers the Group provides a full network of regionally based construction businesses operating on a nationally coordinated basis across England and Wales.

This change to our structure, which includes the refocusing of our management teams on the three offers, will be reflected in the reporting of our numbers in future. The change is part of our ongoing development of the ISG brand, designed to make it easier for customers to engage with the right part of the business. It is reflected in our new corporate website, launched in June 2010.

Outlook

At the end of June 2010 our total order book was £742m (2009: £822m), of which £704m (2009: £686m) is for delivery in the current year and £38m (2009: £122m) for the next financial year.

Across the Group, we will continue to focus on growing and developing our relationships with national and international customers. This, alongside our strengthened office network and further appointments to frameworks, will form the backbone of our strategy.

The London fit out market is likely to be stable over the coming year, with a greater number of smaller projects and an increase in activity in high-end residential refurbishment. For London and Regional Construction, with public sector cuts and waiting for the return of the private sector, the market is likely to decline overall in the second half of the financial year.

In UK retail, with continued strong investment by the banks and food retailers and the return of the high street, we expect volumes in the retail market to be moderately higher than the last financial year.

In Europe, we expect to see continued progress in the next 12 months particularly in respect of the opportunities presented by the expansion plans of our multinational clients and we will also commence offering retail fit out.

In Asia, similarly with the return of finance sector clients to augment our strong activity with retail customers, we expect to see continued progress and benefit from the recovery of the Asian economy.

While there is little doubt that overall our markets will remain highly competitive over the coming year, we are seeing a recovery in the spending programmes of our private sector customers. Our results show the continued resilience of the Group and our strategy places us well to resume the growth path we demonstrated leading up to the global economic crisis.

David Lawther

Chief Executive

8 September 2010

CONSOLIDATED STATEMENT OF comprehensive INCOME

Year ended 30 June 2010

AUDITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Audited

1. BASIS OF ACCOUNTING AND SIGNIFICANT ACCOUNTING POLICIES

The financial information set out above does not constitute the company's statutory accounts for the years ended 30 June 2010 or 2009, but is derived from those accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

The information has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS). This announcement does not contain sufficient information to comply with all the disclosure requirements of IFRS.

The preliminary announcement for the year ended 30 June 2010 has been prepared in accordance with the accounting policies as disclosed in the 2009 Annual Report, as updated to take effect of any new accounting standards applicable for 2010 as set out in the 2009 Interim Report.

Certain balances have been reclassified to conform to the current year's presentation of the discontinued operations.

The directors have prepared cash flow forecasts for the Group for a period in excess of twelve months from the date of approval of these consolidated financial statements. These forecasts are based on the Group's existing order book and reflect an assessment of current and future market conditions, their impact on the Group's trading performance and the actions taken by management in response to the challenging market conditions. The forecasts completed on this basis demonstrate that the Group will be able to operate within the current committed debt facilities and show continued compliance with the financial covenants. In addition, management has considered various mitigating actions that could be taken in the event that future market conditions deteriorate beyond their current assessment. Such measures include further improvements in working capital within management's control, further reductions in costs and capital expenditure and use of the Group's undrawn credit facilities.

On the basis of the exercise described above, the directors have a reasonable expectation that the Group and company have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements of the Group and the company.

2. SEGMENTAL INFORMATION

For management purposes, the Group is organised into operating divisions on both a geographic and product perspective. The performances of these divisions are considered by the Board when making strategic decisions. Geographically, UK, Europe, Middle East and Asia are considered. The UK is further segregated by product into London Fit Out, London Construction, Regional Construction and Retail.

Although the Europe, Middle East and Asia segments do not meet the quantitative thresholds required by IFRS 8 'Operating Segments', management has concluded that these segments should be reported. All are closely monitored by the Board as potential growth regions and are expected to materially contribute to Group revenue in the future.

The principal activities of each of these divisions are as follows:

The segmental information provided to the Board for the reportable segments for the years ended 30 June 2010 and 30 June 2009 is as follows:

Revenue and profit analysis

The revenue disclosed is from external customers and is reported to the Board in a manner consistent with that in the income statement.

3. Exceptional items

As reported in last year's financial statements, two of ISG's subsidiaries, Propencity Group Limited and Pearce Construction (Midlands) Limited, a dormant subsidiary of ISG Pearce Limited, were investigated by the Office of Fair Trading (OFT) for technical breaches of competition law in earlier years prior to ISG's ownership.

Propencity Group Limited entered into a leniency agreement with the OFT in respect of the alleged infringements and submitted a response to the OFT's Statement of Objections. Pearce Construction (Midlands) Limited was issued with a Statement of Objections and has been defending its position. ISG has a £2.0m cash backed indemnity from the vendors of ISG Pearce Holdings Limited, being cash of £1.0m held in an escrow bank account and the remainder being the outstanding deferred consideration from the original acquisition of ISG Pearce Holdings Limited.

On 20 September 2009, the OFT published a list of fines for 103 UK construction companies, including Propencity Group Limited and Pearce Construction (Midlands) Limited.

The fine for Propencity Group Limited was abated due to its full co-operation with the OFT during its investigation and the fine of £98,042 has been paid.

The OFT has fined Pearce Construction (Midlands) Limited £5.2m of which £4.4m is on a joint and several basis with the company's former owner, Crest Nicholson plc. Appeals were submitted to the Competition Appeal Tribunal on 24 November 2009 in respect of the quantum of fine imposed, the methodology upon which the fine was calculated, and the inclusion of ISG Pearce Limited as an entity responsible for the infringement. Crest Nicholson plc has also lodged an appeal. As a result, the fine has not been paid and an application has been made to pay any resultant fine due over a three year period. The appeals were heard by the Competition Appeal Tribunal in July 2010 and we await their findings.

As at the date of issuing these accounts, no agreement has been reached with Crest Nicholson plc over the apportionment of the fine and the results of the various appeals to the OFT are not known.

The Board has considered all the information available and assessed potential outcomes relating to the above fines, the joint and several liability with Crest Nicholson plc and estimated legal costs of the appeal, and a provision has been made in these accounts.

Given the nature of this item, the Board has considered that it should be treated as an exceptional item in accordance with the Group's accounting policies.

4. FINANCE INCOME

5. Finance costs

6. TAX ON PROFIT ON ORDINARY ACTIVITIES

a. Taxation charge

b. Taxation reconciliation

The charge for the year can be reconciled to the profit per the income statement as follows:

7. discontinued operations

In April 2010, the Group decided to close its Japanese operation and it has been classified as a discontinued operation for the year ended 30 June 2010, and the results for the year ended 30 June 2009 restated for the presentation of the Japanese operations as a discontinued operation.

The 2010 results include a charge to the income statement in respect of the discontinued operations of £768,000. The Directors consider that the restatement of the income statement has no impact on the Group's reported balance sheet at 30 June 2009 and consequently no comparative balance sheet for the year ended 30June 2008 has been presented in these statements.

The results of the Group's discontinued operations in 2010 are presented below together with the comparative information for 2009 and arise solely from the Japanese operations in respect of Japan.

8. DIVIDENDS

In accordance with IAS 10 'Events after the Reporting Date', dividends are accounted for in the period in which they are paid and approved by the shareholders. Accordingly the final dividend proposed in respect of the year ended 30 June 2010 has not been included as a liability as at 30 June 2010.

9. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares during the period, determined in accordance with the provisions of IAS 33 'Earnings per Share'.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive potential ordinary shares. The Group has only one category of dilutive potential ordinary shares, being share options granted where the exercise price is less than the average price of the company's ordinary shares during the period.

Adjusted basic earnings per share is calculated by dividing the earnings attributed from continuing operations to ordinary shareholders, before exceptional items and amortisation of intangible assets, by the weighted average number of ordinary shares during the period. The Group believes that this measure of earnings from continuing operations before exceptional items is more reflective of the ongoing trading of the Group.

A total of 3,033,458 share options that could potentially dilute earnings per share in the future were excluded from the below calculations because they were anti-dilutive at 30 June 2010 (2009: 4,182,609).

10. GOODWILL

Goodwill has been allocated for impairment testing purposes to six groups of cash-generating units (CGUs) identified according to operating segments, being London Fit Out, London Construction, Regional Construction, Retail, Europe and Asia, as disclosed in Note 2. The allocation of goodwill is dependent on the CGU that is expected to benefit from the business combination.

The Group tests goodwill bi-annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates and growth rates for the period. The Board estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the business, giving a pre-tax discount rate of 11.1% (2009: 10.5%). The Group discount rate is applied to all CGUs, on a pre-tax basis. The long term growth rate of 2.25% is based on the estimated industry growth forecasts and long-term growth in gross domestic product.

The Group prepares cash flow forecasts derived from the most recent financial forecasts approved by the Board for the next two years and extrapolates cash flows for the following three years based on the estimated growth rate of 2.25% and thereafter applied into perpetuity.

At 30 June 2010 and 30 June 2009, the carrying amounts of goodwill for CGUs were tested for impairment and deemed not to be impaired.

The Group's impairment review is sensitive to changes in the key assumptions used. The major assumptions that result in significant sensitivities are the growth rate and the discount rate.

A reasonably possible change in a single assumption will not cause impairment in any of the Group's CGU. However, a significant adverse change in the key assumptions would result in an impairment in the Regional Construction CGU as its fair value currently exceeds its carrying value by approximately 10% and in the Europe CGU as its fair value currently exceeds its varying value by approximately 24%. The carrying value of the goodwill of Regional Construction CGU is £29m and of Europe CGU £11m.

11. OTHER INTANGIBLE ASSETS