Half-yearly Report

26th Aug 2009 07:00

26 August 2009

Record contract awards and strong financial performance

Serco Group plc - 2009 Half Year Results

6 months to 30 June 2009 2008 % change Revenue GBP1,950m GBP1,491m up 30.8% Adjusted operating profit GBP110.0m GBP76.8m up 43.2% Operating profit GBP101.1m GBP72.3m up 39.8% Profit before tax GBP83.4m GBP62.8m up 32.8%

Adjusted earnings per share 14.02p 10.18p up 37.7%

Earnings per share 12.62p 9.35p up 35.0% Dividend per share 1.85p 1.48p up 25.0% Group free cash flow GBP50.7m GBP33.0m up 53.6%

Increasing levels of activity in existing and new markets

Record level of contract awards: signed contracts valued at 2.1bn and appointed preferred bidder for 1.4bn of contracts

Excellent progress with SI acquisition integration: strong foundation for growth in US market

Win rates of one in two for new bids and 90% of rebids

Good start to the second half, with a further 0.5bn of contract awards

Strong financial performance

Revenue growth of 30.8%; 21.2% excluding currency; 10.8% excluding SI and currency

Adjusted operating profit margin growth of 49bps; 38bps excl. currency; 20bps excl. SI and currency

Group free cash flow increase of 53.6% to 50.7m

On track to deliver 2009 guidance

Growing order book supports excellent visibility

Order book of 16.7bn at 30 June 2009 ( 16.3bn at 31 Dec 2008)

Continued high visibility of planned revenue: 99% of 2009, 86% for 2010 and 72% for 2011

Demand for efficient delivery of essential services driven by global economic climate

Global economic environment driving demand for fundamental improvements in the delivery of essential services in existing and new markets

Substantial opportunities to address our customers' needs through our high quality service delivery and flexible and agile deployment of our increasing capabilities

Considerable opportunity pipeline of 27bn, and a disciplined and selective approach to bidding

Christopher Hyman, Chief Executive of Serco Group plc, said: "This has been astrong first half. We were awarded record level of contracts, entered a numberof important new markets, and delivered a strong financial performance. Giventhe economic challenges our customers are facing, they are makingtransformational changes and asking for our support in delivering high quality,essential services while improving productivity. These opportunities, acrossall our markets, and our growing capabilities, underpin our confidence in thefuture."Note: Adjusted operating profit and Adjusted earnings per share shown above arebefore amortisation of acquired intangibles as shown on the face of the Group'sincome statement and the accompanying notes. Group free cash flow is free cashflow from subsidiaries and dividends received from joint ventures and isreconciled in Section 3 of the Finance Review.

For further information please contact Serco Group plc: +44 (0) 1256 745 900

Charles King, Head of Investor Relations

Dominic Cheetham, Corporate Communications Director

www.serco.com

Presentation

A presentation for investors and analysts will be held at J.P. Morgan Cazenove, 20 Moorgate, London EC2R 6DA at 9.30 am today.

Financial Guidance

Our projections are that our revenue will increase to approximately 5bn andour Adjusted operating profit margin to approximately 6.3% by the end of 2012,excluding material acquisitions, disposals and currency effects. In 2009, weexpect to deliver double-digit revenue growth and a 30bps increase in ourAdjusted PBT margin, excluding SI International. The addition of SIInternational is anticipated to increase our 2009 revenue growth byapproximately 10%. Including the benefit of SI International, we expect ourAdjusted operating profit margin of 5.3% in 2008 to increase by approximately40bps in 2009. This 2009 guidance excludes material currency effects.

Performance excluding currency

Where performance has been stated as "excluding currency", the currency effecthas been calculated by translating non-Sterling revenue and earnings, includingthose of SI, for the six months ended 30 June 2009 into Sterling at the averageforeign exchange rates for the same period in 2008.

Overview

Record contract awards and strong financial performance

We enjoyed a sustained high level of activity in our business throughout thefirst half of 2009 across all our markets and regions. This included developingpotential opportunities, bidding and winning contracts, and starting up andtransitioning new contracts. We continued to see growth in our existingcontracts, were awarded a record level of new contracts, and opened a number ofsignificant new markets for the delivery of essential services which we expectto present substantial opportunities for growth. We have continued tostrengthen our capabilities and have made excellent progress with theintegration of SI International (SI). This activity has continued since thehalf year end and we have made a good start to the second half.We delivered a strong financial performance, which benefited from the inclusionof SI for the first time. Excluding currency effects, we grew revenue by 21.2%to 1,807.3m and Adjusted operating profit rose by 30.2% to 100.0m. Ourmargins increased, with Adjusted operating profit margin rising 38 basispoints, excluding currency effects. Excluding both SI and currency effects, wegrew revenue by 10.8% to 1,651.7m and Adjusted operating profit rose by 15.1%to 88.4m. Organic revenue growth, excluding currency, was 9.6%. Group freecash flow increased by 53.6% to 50.7m, and Group recourse net debt at the halfyear end was 459.8m, a decrease of 64.7m from the end of 2008.Our ability to enhance our position in existing markets and enter substantialnew markets was reflected in the record level of contract awards, totalling 3.5bn, in the first half of the year. These were across a wide range of marketsand regions, and comprised contract wins valued at 2.1bn, and preferred bidderappointments with a value of 1.4bn. Our win rates of 90% on rebids and one intwo new bids continued to reflect our track record of delivering high qualityservices for our customers.In line with our policy of increasing the total dividend each year broadly inline with the increase in underlying earnings, the Board has declared aninterim dividend of 1.85p per share, representing an increase on the 2008interim dividend of 25.0%. The interim dividend will be paid on 16 October 2009to shareholders on the register on 4 September 2009.

Growth in existing markets

In existing markets, we deepened our presence through a number of significantnew contract awards and by expanding the scope, scale and length of existingcontracts.Our home affairs business, where we see substantial opportunities for thefuture, has been particularly active in this half year. In the UK, ourconsortium was selected by the National Offender Management Service (NOMS) asthe preferred bidder to provide and operate two new prisons at Belmarsh West,London and Maghull, Liverpool. We will manage and operate the prisons, andthese contracts, which are due to be signed in the first half of 2010, areexpected to have a combined value to Serco of around 600m over 261/2 years.Building on expertise developed in the UK, we signed an important new contractwith the Australian Government Department of Immigration and Citizenship (DIAC)to transform its immigration detention centres across the country. The fiveyear contract is valued at around AUS$370m (approximately 180m), and may beextended for a further four years.Expanding the scope, scale and term of our existing contracts remains animportant driver of growth for Serco. The most notable example in the half yearwas in Middle East transport, where we renewed and expanded our contract withthe Dubai Airports Company for air traffic services at Dubai InternationalAirport. The new contract is valued at 245m over a longer period of ten years,and builds on the air traffic services that Serco has provided to Dubai formore than 40 years.

Opening significant new markets

In January we entered the important new pathology market by forming apartnership, GSTS Pathology LLP, with the Guy's & St Thomas' NHS FoundationTrust. We are now improving the Trust's pathology services, under a contractvalued at 250m over ten years to Serco, and targeting the pathology market inthe UK and overseas.In May, we were selected as preferred bidder for three contracts under the UKGovernment's Flexible New Deal initiative, our first contracts in what weexpect to be a significant new market for Serco in supporting jobseekers inreturning to and remaining in work. The contracts have a five year term and areexpected to have a value to Serco over their five year term of 400m- 500m.

Excellent progress on SI integration

We have continued to strengthen our capabilities and broaden our reach inexisting and new markets to address the considerable opportunities we see. Inthe US, we have made excellent progress with the integration of SI, followingcompletion of the acquisition at the end of last year. We have rebranded thebusiness as Serco, and have integrated it with our existing business andimplemented our plan for a new combined leadership team.We are also pleased with SI's financial performance, which was in line with ourexpectations. SI's revenue grew by 11.4% compared with the first half of 2008to US$308.9m. SI contributed Adjusted operating profit of US$23.1m, which wasgrowth of 29.8% compared with the first half of 2008, and represented a marginof 7.5%.

Good start to the second half

Following our strong first half performance, we have made a good start to thesecond half of the year, having signed or been appointed preferred bidder onaround 0.5bn of further contracts.In a further new market, we have been awarded a new contract by Transport forLondon to design, build and operate the new London Cycle Hire Scheme. This sixyear contract is valued at approximately 140m, and we will provide, operateand maintain 6,000 bicycles for hire in Central London and 400 docking stationsoffering over 10,000 docking points.In North America, we won a contract recompete with the US Department ofHomeland Security's US Citizenship and Immigration Services to provide recordsprocessing support at its National Benefits Center. We have supported theNational Benefits Center for the past seven years. This contract is for a oneyear base period with a further four one year option periods and is valued atapproximately US$190m over the full five years.We have also been appointed preferred bidder for two contracts that will expandour presence in two existing markets. The value and quality of our work insupporting small and medium-sized enterprises has been recognised in ourappointment as preferred bidder by the South East England Development Agency toprovide business link services in the South East, in a contract that is valuedaround 80m over three years, with the opportunity to extend for a further twoyears. We are also the preferred bidder to provide the London Borough of Bexleywith a full range of environmental services. The contract is for an initialterm of ten and a half years, with an option to extend for a further fiveyears, and is valued at around 170m over the full 151/2 years.

In existing contracts, we were pleased that our joint venture with Lockheed Martin and Jacobs Engineering to manage and operate the UK's Atomic Weapons Establishment (AWE) successfully concluded the periodic pricing review.

Outlook

Our customers, who are principally governments, are making the transformationalchanges that will enable them to continue to deliver high quality, essentialservices, whilst improving productivity. They are seeking to improve theposition of public finances by achieving significant productivity gains overthe medium term, while they continue to experience growing demand for qualityservices from their citizens. Our private sector customers are facing similarissues.Given the economic climate our customers face, they are increasingly asking forour support in existing markets, and we also see significant opportunities toextend our capabilities to new markets. We believe that our reputation fordelivering high quality, efficient services, together with our broad and deepcapabilities, will be increasingly attractive to our customers around theworld.

Our strong performance in the first half of this year and the good start we have made to the second half supports our expectation in achieving our financial guidance for 2009 and beyond.

Operating Review

Civil Government

In Civil Government, our work encompasses sectors including home affairs,healthcare, local government, education and children's services and thecommercial sector, providing a broad range of integrated facilities management,IT and business process outsourcing (BPO) support and consulting services. Inthe US, the acquisition of SI has added new records management and ITcapabilities which we provide to a number of civil government agencies. Withthe start of our three contracts under the UK Government's Flexible New Dealinitiative later this year, we will also play an important role in supportingjobseekers in returning to and remaining in work.

Civil Government revenue grew by 49.1% to 809m, representing 41% of Group revenue (2008: 36%).

Home Affairs

In home affairs, our consortium has been selected by the UK Government'sNational Offender Management Service (NOMS) as the preferred bidder to provideand operate two new prisons at Belmarsh West, London and Maghull, Liverpool.Under the Design, Construct, Manage and Finance contracts, we will operate theprisons and these contracts are expected to have a combined value to us ofaround 600m over 261/2 years. It is anticipated that construction of theprisons, by our construction partner Skanska, will begin in the second half of2010, with completion expected in the second half of 2011. Equity and debtfinance will be provided by third parties. As well as ensuring a secure andsafe environment, we will use our operational expertise to ensure a highlyeffective and efficient prison design, to train and mentor new staff and todeliver a range of innovative services. In conjunction with our partnersTurning Point and Catch22, we will seek to create an environment for change inorder to discourage offenders from reoffending and prepare them for employmenton release, and will also support effective delivery of services such ashealthcare and education in conjunction with other providers.In Australia, we signed a new contract with the Australian GovernmentDepartment of Immigration and Citizenship (DIAC) to transform its immigrationdetention centres across the country. The five year contract is valued ataround AUS$370m (approximately 180m), and may be extended for a further fouryears. The transition from the existing service provider commenced in July, andis expected to be completed by November. Under the contract, we will manage andoperate seven adult immigration detention centres and provide national andinternational transport and escort services from Australia. Our new approachand improved services will create a comprehensive framework for qualityimprovement, introduce performance management systems and deliver value formoney.We also continue to see expansion in our other services in the home affairsmarket. In Electronic Monitoring, we were awarded a two year extension to ourcontract in England and Wales, extending the contract to March 2012 andsecuring additional revenue of around 70m. We also won a five year contractvalued at over 7m to provide electronic monitoring equipment into Poland,making Serco the sole provider of electronic monitoring equipment to Comp SafeSupport, Poland's selected prime contractor, and offering the potential forSerco to build further business in Poland and elsewhere in Eastern Europe.Our expertise in supporting border security and control was recognised in thishalf year with the signing of new contracts. We extended our contract, known asMycroft, to provide infrastructure and intelligence applications to the UKBorder Agency and other Home Office Agencies. Under this new contract, which isvalued at around 34m over its five year term, in addition to providing theexisting service, we will assist the Home Office in refreshing and enhancingthe desktop, server and application technologies over the next two years. Inour existing Cyclamen border security contract, whilst start-up has takenlonger than expected, we are now focused on the full roll-out of the nextstages of this leading edge programme. Similarly, as part of the TrustedBorders consortium, we have now successfully delivered the first capabilitypiece for e-Borders enabling the processing of over 250 million passengers

ayear.Welfare to WorkWe have been selected by the UK Department for Work and Pensions (DWP) as theprime contractor for three contracts under the Government's Flexible New Dealinitiative. These contracts are the first in a significant new market insupporting jobseekers in returning to and remaining in work. A number ofsimilar-sized opportunities in the UK are expected to be announced in the nexttwo years.Flexible New Deal is the Government's new initiative for individuals who havebeen claiming Jobseeker's Allowance for over twelve months. To support themback into work and to stay in work, our local networks of private, public andthird sector organisations will provide tailored, individual support includingcareer planning and job search advice and specialist services such as debtadvice, top-up training and confidence building.We are the preferred bidder for contracts for five year terms in three regions:North, Mid & South East Wales (North Wales); Coventry, Warwickshire,Staffordshire & The Marches (West Midlands); and Greater Manchester. The NorthWales and West Midlands contracts are each expected to have a value to Serco of 100m- 125m, and Greater Manchester 200m- 250m. Delivery of Flexible New Dealwill commence in October 2009.

As prime contractor, we will deliver an innovative programme of jobseeker support through a unique network of successful, established providers. The contracts will be funded through a combination of service fee and performance-based payments, with our providers paid on a similar basis.

Integrated services

We saw further growth in our integrated services business, driven by the requirement for our public and private sector customers to improve the quality of essential services and to increase efficiency.

In environmental services, we were awarded a new contract to provideenvironmental, recycling and streetscene services to Charnwood Borough Councilin Leicestershire. We have made a successful start to this contract, which isvalued at around 35m for a minimum period of seven years with potential fornegotiating an extension.We have also continued to expand our presence in the UK health market, with thesigning of a contract with the Plymouth Hospitals NHS Trust to developtechnology enabled solutions in partnership with the Trust to raise thestandards of cleanliness and catering, and to tailor them to meet the needs ofstaff and patients in each particular ward. The contract is for seven yearswith an option to extend for a further three, and is valued at around 140mover the full ten years.

We renewed and expanded our contract with Airbus for the management and provision of a range of integrated services in the UK. This contract now includes the Broughton site in addition to Filton, and brings together new services, almost doubling our business with Airbus. The contract includes the provision of fire and rescue, reception, security, cleaning, transport and waste management services, and is valued at around 40m over four years.

We were also appointed preferred bidder on a new four year contract valued at 24m with Babcock Marine to provide building and civil maintenance repairs andother services to the Devonport Naval Base, Devonport Royal Dockyard andassociated UK Ministry of Defence establishments.In Australia, we have been providing facilities management and maintenance forthe City of Melbourne Council parks and gardens since 1995. The contract hasnow been extended for another five years and expanded. We also won a new, fiveyear contract for the provision of open space facilities management services inDocklands, Melbourne, and have extended our grounds maintenance contract withthe University of Melbourne for a further two years. Together, these contractsare valued at approximately 12m.

Education and Children's Services

We extended our position as one of the leading private sector providers ofeducational services in the UK with the award of a contract from Ofsted to runinspections in the Midlands, covering the central region of England. Under thenew six year contract, which is valued at around 55m and which will start inSeptember, we will manage inspection services at a third of all education basedorganisations in England, delivering inspection services to schools, furthereducation colleges, and work-based learning organisations. We will bring ourcurrent practical experience to improve the delivery of inspection servicesand, in particular, we will draw from our wider Group and IT capability tointroduce innovative systems and processes to drive more effective inspections.We will also increase the use of current practitioners (existing and recentheadteachers and other senior educational staff), and an automated scheduler tomanage the process of inspections.The quality of the services we deliver under our existing contracts continuesto be recognised, both in external reports and through expansion of ourcontracts. In a joint area review published in January this year, inspectorspraised our team for leading "significant and rapid progress" and"accelerating" improvements in children's services at Stoke-on-Trent CityCouncil. We were also pleased to receive further funding of 1.3m in May forincreased support on short breaks and parent participation in our contractunder the Aiming High for Disabled Children programme (Together for DisabledChildren).IT & BPO

The current challenging economic environment has enhanced the focus on thesupport we provide for small and medium-sized enterprises. We are delightedthat the high quality of the services we provide has been recognised not onlyin our appointment as preferred bidder to provide Business Link services in theSouth East, in a contract that is valued at around 80m over three years, withthe opportunity to extend for a further two years, but also by furtherexpansion in one of our existing contracts with the award by the South West RDA(Regional Development Agency) of an additional 14m over five years. Thisenhanced funding is to enable us to lead on the delivery of enhanced BusinessLink services in the South West for all areas excluding Cornwall, which iscovered by a separate agreement. South West RDA has also awarded Serco threeadditional contracts worth approximately 5 million to provide advice forbusinesses in the rural economy.

In the US, we renewed a number of smaller training and technical support contracts with customers including the Pension Benefit Guaranty Corporation and the Department of Transportation, in total valued at approximately US$10m.

In Europe, we were selected for a number of contracts supporting space andresearch initiatives. We were selected by the European Space Agency to provideEngineering and Technical Management services for its Earth Observationprogramme, the Global Monitoring for Environment and Security (GMES). Under thecontract, which has an approved budget of Euro22m over five years, we willdefine and procure the ground systems used to process data generated by theinstruments on board the Sentinel satellites in the first three missions of theGMES programme.We also successfully renewed our Earth Observation support contract at ESRIN,the European Space Agency's European Space Research Institute. The contract hasa term of three years with an option to extend for a further two, which wouldbring the total contract value to approximately Euro13m.We were also selected for a contract for the Provision of Maintenance Servicesfor the Cryogenic Installations and Equipment at CERN. We have worked for CERNsince 1993 and currently provide IT Services, Industrial Support and CryogenicOperations Support and have more than 100 employees on site. CERN awarded thisservice contract for a firm initial period of three years with the potential offour, one year, extensions. The total value of this contract is Euro20m overthe full seven years.Defence

We are a major provider of operational support services to the armed forces ofthe UK, US, Canada, Germany and Australia. We provide training, engineering andoperational support, maintain strategic defence assets, and deliver costanalysis, human resources, systems engineering, safety assurance and riskmanagement services. We are well placed to help our customers to improveefficiency and reduce costs, through providing advice and consultancy toachieve greater efficiencies while improving operational availability, andimplementing the delivery of services to improve operational capability.

Defence revenue grew by 33.2% to 499m, representing 26% of Group revenue (2008: 25%).

United Kingdom and Europe

In the UK, the Ministry of Defence's focus on operational delivery and efficiency meant that our defence business delivered a good performance, underlining our critical role in supporting UK armed forces and improving military capability. We grew the scope and scale of existing contracts, and saw a number of smaller contract wins.

Growth in existing contracts included increased demand for our specialistsupport to British military helicopters, where we have secured additional workvalued at up to 17m in the half year. This includes our work at the RoyalNaval Air Stations Culdrose and Yeovilton, where we support the Royal Navy'sfleet of Merlin, Lynx and Sea King aircraft, at RAF Odiham in our Chinooksupport role, at the Wattisham Station of the Army Air Corps where we supportthe Apache Attack Helicopter, and at RAF Benson, where we train all of theRAF's helicopter crews on state of the art simulators.We have also been awarded an extension to our contract to support, operate andmaintain the UK Ministry of Defence's mobile underwater targets at the BritishUnderwater Test and Evaluation Centre, Kyle of Lochalsh, Scotland, andWeymouth, Dorset. Mobile underwater targets are used when training submarinecrews on the use of the Spearfish torpedo by simulating a realistic submarinetarget. The contract extension is valued at up to 7.3m over four and a halfyears.We were also successful in a number of contract rebids. Our contract to providethe Ministry of Defence with Air Surveillance and Control Systems was renewedfor a further five years with potential for a three year extension. Thecontract is valued at 25m over the full eight years. We also renewed ourcontract with the Ministry of Defence to provide nuclear propulsion support.Our contract to provide essential logistical support services to the US AirForce at three bases at Alconbury, Molesworth and Croughton, valued at 10mover five years, was also successfully renewed, and expanded to include medicaland mail delivery services.Our Germany defence business secured new contracts worth close to 6m. We wereawarded a new 3.1m systems integration contract by NATO's Consultation,Command and Control Agency. This will involve the provision of support toNATO's initiative to improve data and voice communications links betweenoperating units from the various member states, particularly important inenabling NATO to fulfil its mission in Afghanistan. In addition, we wereawarded contracts to provide a deployable prison for the Germany militarypolice and deliver the systems integration of deployable command and controlcontainers for close proximity defence systems at German MoD field camps. Thesecontracts are worth 1.5m and 1m respectively.

North America

In North America, we provide information services, technology and networksolutions, enterprise management, engineering, logistics, and human resourcesservices primarily to the US Government. The acquisition of SI at the end of2008 has significantly expanded our capabilities and broadened our customerbase, where we now serve all branches of the US armed forces, key federalcivilian agencies such as the Department of Homeland Security and Department ofState, and the intelligence community. We continue to see good organic growthin our existing contracts and excellent opportunities to expand our businessusing our enhanced capabilities across our enlarged customer base.We were awarded two substantial government-wide procurement programmes in thehalf year; GSA Alliant and STOC II. These appointments give us, as one of anumber of award winners, the opportunity to compete on task orders. Alliant isa multiple award, indefinite delivery/indefinite quantity (ID/IQ) contractvehicle through which Serco has the opportunity to provide integratedInformation Technology solutions. The contract has a ceiling value of US$50bnover a five year base period and one five year option period, and containsthree major components: Infrastructure, Application Services, and ITManagement. The US Army Program Executive Office for Simulation, Training andInstrumentation Omnibus Contract (STOC II) is a multiple award, ID/IQ contractvehicle, with Serco as one of a number of award winners, with a ceiling valueof US$17.5bn over a ten year period. This new contract provides support to theUS Army and other federal organisations using a wide range of advancedtechnology capabilities in the areas of simulation and training.In smaller contracts, we were awarded a new contract with the US Army ResearchLaboratory to provide automation, information, and technology services fortheir Program and Budget Office. This contract expands our IT capabilities withthe US Army and has a potential value of US$8m over a one year base period withfour one year options. We also renewed two further contracts in this period,including one to provide access card services for the US Army at around 70locations around the world, issuing approximately 1.1m identification andaccess cards annually. The contract, which Serco has held since 2001, is valuedat US$9.4m over one year. We also successfully rebid our contract to supportthe US Air Force as a subcontractor to BAE Systems in providing Command,Control, Communications, Computers, Intelligence, Surveillance, andReconnaissance (C4ISR) engineering to the intelligence community. The contractvalue for Serco is approximately US$8m over three years.

Transport

We are a major provider of transport services to the UK and markets inAustralia, the Middle East and US. We operate heavy and light rail systems, area leader in the development of integrated traffic management systems, and areone of the world's largest private sector suppliers of air traffic controlservices. We are broadening our capabilities into other modes of transport,including marine transportation services through our operation of the WoolwichFerry, and bicycles with our recently announced contract to operate the LondonCycle Hire Scheme.

Transport revenue grew by 13.2% to 346m, representing 18% of Group revenue (2008: 21%).

Heavy railNorthern Rail and Merseyrail, Serco's two joint ventures with NedRailways,continued to deliver good growth in the first half of 2009, supported byexcellent operational performance, new service initiatives, such as Northern'snew Nottingham to Leeds direct service launched in December 2008, and otherinnovations. These joint ventures have revenue or profit sharing agreements,and stable subsidies which account for over 60% of revenue.Northern achieved a major milestone in delivering a more punctual train servicefor its growing numbers of passengers, with more than 90% of trains running ontime in the last year (and a record 94% in May) making it one of the bestperforming franchises outside London. This compares to a punctuality of under84% prior to the start of the franchise. This performance has been achievedthrough several initiatives, including improving the reliability of its290-strong fleet of trains by 50% since the start of the franchise, and workingclosely with Network Rail to reduce infrastructure related delays and improvethe management of incidents through co-located control centres.Merseyrail's performance benefited from enhanced yield management, and furtherimprovements to its operational performance. In the past year, over 95% of itstrains ran on time, which was the second best performance of any franchise inthe UK. This strong operational performance was reflected in the spring 2009National Passenger Survey which showed another increase in the "overallsatisfaction" rating of Merseyrail to 91%, the joint highest rating in the UK.Our Australian rail operation, Great Southern Rail, is performing in line withour expectations. We have responded to challenging market conditions anddiscounting with the introduction of the Platinum service on The Ghan train inlate 2008, and innovative marketing and scheduling strategies, and as a resultbookings are in line with last year's levels.

Light rail

The operational phase of our 500m contract with the Dubai Government Roads andTransport Authority (RTA) to operate and maintain the first two lines of thenew Dubai Metro will commence this year, and we are fully prepared for theinauguration of this flagship project. We also continue to see furtheropportunities for our skills across a number of types of transport in Dubai andthe wider region.On the Docklands Light Railway (DLR), work continues to upgrade capacity andextend the network, including for the introduction of three-carriage trains inearly 2010. The Stratford International extension, which will bring five newstations to the network, is scheduled to open in summer 2010. Despitedisruption from these works, the DLR continues to perform well, withimprovements seen in service reliability and journey times.

Traffic management

We continue to see good demand for our innovative traffic management solutions, with a number of new contract wins, renewals and extensions in the half year.

In the UK, we have been appointed as preferred bidder for the Birmingham NECParking and Traffic Management improvement scheme, to improve parking andvehicle access/movement at the NEC using new technology and traffic managementsystems. The contract is for three years and has a value of 3m.Other wins in the half year, valued at over 10m in total, included anexpansion to our National Traffic Control Centre contract, and our appointmentas one of four suppliers for the Transport Scotland Consultancy Framework whichwill provide transport systems advice, design and support. We also extended ourcontract for the maintenance of Transport for London's Eastern Tunnelmanagement system to the end of September 2010, and were awarded a contract bythe Highways Agency covering software and systems work on the abnormal loadsmanagement and website booking system.

Civil Aviation

In addition to the successful renewal and expansion of our contract with theDubai Airports Company for air traffic services at Dubai International Airport,we have been awarded on rebid a contract for the provision of Air TrafficControl and Electronic Engineering services at Abu Dhabi International Airport,Al Ain International Airport, and City Airport at Bateen as well as twoadditional satellite airports in the Emirate of Abu Dhabi. Valued at over 24mfor two years, the contract commenced in April 2009. Serco has also beensuccessful in the rebid for the provision of Air Traffic Control services forRas Al Khaimah's International Airport, which has a value of over 1.5m for oneyear.ScienceSerco manages science-based organisations and develops and applies scientificknowledge for wealth creation. Technology, innovation and people management areat the heart of our offering in this market.

Science revenue grew by 10.5% to 295m, representing 15% of Group revenue (2008: 18%).

Our joint venture with Lockheed Martin and Jacobs Engineering to manage andoperate the UK's Atomic Weapons Establishment (AWE) performed well, and afterthe half year end we were pleased to successfully conclude the periodic pricingreview.AWE's health and safety achievements were again recognised in its winning theNational Defence Sector Award and the International Dilmun Environmental Awardfor the second year running in annual awards from the Royal Society for thePrevention of Accidents (RoSPA). This is the ninth successive year that AWE haswon RoSPA recognition. In other awards, the AWE Apprentice Academy was awardedBeacon status, the hallmark of a standard of excellence in learning providers,by the Learning and Skills Improvement Service.

A consortium of Serco, Battelle and The University of Manchester has been awarded a new contract to run the UK National Nuclear Laboratory (NNL). The objectives are for NNL to become an international centre of excellence in nuclear research, to play a central role in cleaning up the UK's nuclear waste legacy and to contribute to the programme of nuclear new build. The overall value of the contract will be determined by our management performance.

The National Physical Laboratory (NPL) continued to strengthen its third-partybusiness with around 5m of new business signed in the half year. NPL alsosigned an agreement, valued at approximately 1m to Serco, with the Universityof Surrey to collaborate on a programme to translate the results of researchinto innovation. Under the agreement, NPL will provide knowledge transferservices, and will focus on areas of technology that have the potential tocreate transformational benefits for the UK economy and society. NPL alsoopened its Knowledge and Innovation Centre, located in its new laboratorybuilding in Teddington. By the end of 2009, NPL is aiming to have established acommunity of businesses who will benefit from active collaboration with NPL.

Market opportunities

The financial crisis and subsequent economic slowdown means that governmentsaround the world are contending with increasing demand for high qualityservices whilst also facing a sharp deterioration in public finances. Theycontinue to experience growing demand for quality services from their citizens.In addition, they are also addressing challenges in economic development,congestion, security, ageing populations and population growth, and climatechange. This has accelerated the pace of change in governments seeking greaterefficiency in the delivery of high quality services. Our private sectorcustomers are facing similar productivity imperatives in their drive to enhanceshareholder value.The scale of the productivity improvements required, and the fact that theywill need to be delivered over a longer period than in previous downturns,means that our customers now have an increasing need to make more fundamentalchanges than before, and to address some of the largest areas of their spend.As well as resulting in the cancellation of certain programmes, particularlylarge capital projects, in the shorter term, we believe this is also leading toa greater acceptance of innovative ways of achieving these changes, a broaderrange of markets to be addressed, and an increase in the size and term ofchange programmes in order to achieve the scale of efficiencies required.Given these challenges faced by our customers around the world, our reputationfor delivering high quality services is becoming increasingly attractive tothem. We are well placed to help them maintain and improve levels of servicewhile achieving greater efficiency, given the breadth and depth of ourcapabilities across a wide range of markets, and the flexibility and agility wehave within our business to apply these skills to create innovative solutionstargeted at their needs.The trends towards larger, longer-term and more fundamental change programmesacross a broader range of markets are being borne out in developments in ourexisting markets and in the development of new markets.In home affairs, both in the UK and Australia, we continue to see strongopportunities driven by rising prison populations and border security issues,but also new developments to increase efficiency in the existing estate. In theUK, the Ministry of Justice has confirmed its intention for the private sectorto build and operate five new prisons by 2014, and also, for the first time,for poorly performing public sector prisons to be market tested. In the UK,this will be initially on two prisons at Birmingham and Wellingborough, and inAustralia, the only other country to have adopted this approach, we have bid tooperate an existing prison at Parklea in New South Wales.In the UK, we are now supporting government in two of the largest areas of itsspend, benefits and the National Health Service. We expect further Flexible NewDeal contracts to support jobseekers to be tendered next year, and see goodopportunities to broaden our presence in the pathology market, where our sharedservices approach is expected to lead to significant productivity gains.

We also anticipate further opportunities to address employment and encourage entrepreneurship through the support we provide to smaller and medium-sized enterprises in our business link contracts.

The requirement for local authorities to deliver productivity improvementscontinues to provide opportunities, driving the need for transformation and theefficient delivery of core services. The UK's Local Government Association hassaid that the "tough economic outlook is forcing councils to take a look atalmost every aspect of their finances". It estimates that low interest ratesand depressed property prices alone have resulted in a 4bn deficit in incomefor councils over the last two years, at a time when they have continued tomake significant investments in helping people and businesses through therecession. We are engaged with a number of local authorities intransformational opportunities, and in areas such as environmental serviceswhere we see a strong pipeline.

In UK education, our capabilities now include education and children's services, and advisory and inspection services. We expect to see further inspection and advisory opportunities, as well as expansion of successful central government programmes such as Together for Children and Together for Disabled Children.

We continue to see opportunities for growth in India, both in BPO as an increasingly wealthy population drives demand for services, and in public services where we have been encouraged by the initial progress we have made in the market.

In defence, we are in active dialogue with our customers at all levels in boththe UK and internationally to help them address the challenge of therequirement to deliver battle-winning front-line services while achievinggreater efficiency. In the UK, while we expect a strategic defence review toset the framework in the medium-term, we believe that the Ministry of Defencewill be seeking to deliver efficiencies ahead of the outcome of any reviewgiven the budgetary pressures it is facing.The integration of our strong customer relationships, in particular with theintelligence agencies, with our skills in information assurance, networksolutions and enterprise architecture gives us a significant opportunity tohelp government address growing cybersecurity challenges, both in stand-aloneprogrammes and as adjuncts to existing business.We have also been selected to compete for two major contracts to be awardedbetween 2011 and 2012. The first of these is the 'Fleet Outsourced ActivitiesProject' to provide comprehensive training services to the Royal Navy. This tenyear contract is designed to replace the current arrangement of skills-basedtraining and training support, equipping naval recruits for life on board ship.We have also been shortlisted, as part of the Prospector Group consortium withLogica and the AMV Group, for the Armed Forces Recruiting Partnering Project(RPP) to support Army recruitment at every stage, from initial marketing towhen a recruit starts training.In the US, where we support the government in a number of key areas includingprogram and human capital management, enterprise architecture and ITmodernisation, we now have a strong foundation for growth in the world'slargest government services market with the integration of SI. We are achievinggood recognition from our customers for our enhanced capabilities, and we seestrong potential across our larger customer base and especially in focus areassuch as cyber security and healthcare.Our capabilities across a number of different modes of transport are giving usstrong opportunities for growth in many of our regions, including in light railand marine operations in Europe, the Middle East and Australasia. We also seegood potential to expand our cycle scheme technology both in London and inother cities.In science, we expect opportunities for growth to be driven by the challenge ofachieving a low carbon economy, and the role scientific establishments andinnovation can play in wealth creation and supporting economic recovery. Ournuclear safety expertise, our skills in environmental measurement and ourevolving expertise in renewable energy, waste management and energy efficiency,position us well to play a key role in achieving a low carbon economy.

People

The commitment of our people to the consistent delivery of high quality services for our customers is critical for our business to prosper.

During the half year, we once again conducted our "Viewpoint" survey, whichmeasures our people's engagement with and commitment to our business. We werepleased that over three-quarters of employees completed the questionnaire, animprovement of around 10% since the last survey at the end of 2007, and to findworld-class levels of commitment and discretionary effort on the part of ourpeople. We also found an open culture, and a culture of respect, in terms oftheir working relationships. The ambition of our people to excel and to havethe opportunity to develop further within Serco was also clear, and we will beincreasing our focus in these areas in the future.Our people's commitment was also recognised in this half year, not only in thenumber of contract wins, renewals and extensions in the period, but alsothrough a large number of awards across our business. Of particular note wasthe recognition we received for our outstanding safety performance at theannual awards presented by the Royal Society for the Prevention of Accidents(RoSPA). In total, we were recognised with 29 different awards, including thehighest accolade, the Sir George Earle trophy, which was won by Northern Rail,with the National Physical Laboratory as the other finalist. Within our 29awards, we won three of RoSPA's six major awards and three of the awards forindustry sectors.We were also recognised for our responsible business practices and the positiveimpact we make on society by Business in the Community with a Gold rating forthe third year running in the UK and the second year running in Australia.

Risk Management

The directors have considered the principal risks and uncertainties affectingthe Group and its performance in 2009, and determined that those discussed inthe Group's published accounts for the year ended 31 December 2008 remainrelevant.

Our business, results and financial condition could be affected by a broad range of risks and uncertainties. The Group risk register identifies the principal risks facing the business, including those that are managed directly at a Group level. The Group risk register is updated at least quarterly, reviewed six-monthly by the Risk Oversight Group and discussed at quarterly Board meetings.

The risk management process is now incorporated in an over-arching resiliencemanagement framework that incorporates risk, security, business continuity andcrisis management. The resilience management framework is supported by a set oftop-level requirements, more detailed process descriptions and guidance andtools to support the implementation of the framework across the Group.

Active risks are ranked by importance and grouped under the following six headings:

Strategic - covering threats to the long-term deliverability of the Group's strategy. Principal risks include loss of competitive position and risks associated with acquisitions.

Financial/Commercial - covering threats to the short- to medium-termperformance. Principal risks include the loss of key contracts, failure to meetfinancial business plans, availability of funding, pension fund liabilities anddelays or cost over-runs in major transition programmes.Compliance - covering compliance with all relevant legislation and regulations.Principal risks include legal action resulting from compliance failures, lossor compromise of personal data and unethical behaviour by Directors or membersof staff.Safety and Security - covering threats to the safety of staff, sub-contractors,members of the public and the environment and the security of the Group'sassets and staff. Risks include the responsibility for a major accident orincident where public safety is concerned, environmental pollution, assaults onstaff in the course of their duties, loss of sensitive information and crime,fraud and terrorism.

Operational - covering threats to the continuity of business operations. Principal risks include the failure of information systems, loss of key infrastructure, the recruitment and retention of key staff and the impact of pandemic influenza.

Management - covering possible internal failures of managers or management systems. Principal risks include failures of internal controls and management systems.

For the Group, the most significant risks relate to the strategy and safety areas. Social, environmental and ethical issues, while recognised within a number of the Group's risks, do not represent significant threats to the Group's strategy at present. Reputational and emerging risks are kept under active review and the Board informed of changes. Emerging risks cover longer-term risks that could represent a threat to the Group's activities but which are not yet sufficiently defined to be included as active risks.

Finance Review

Overview

The business had a strong first half delivering growth rates of 30.8% forrevenue and 43.2% for Adjusted operating profit. We have benefited from theeffects of the acquisition of SI and currency; excluding currency, revenuegrowth was 21.2% (10.8% excluding SI) and Adjusted operating profit growth was30.2% (15.1% excluding SI). This equates to a 38 basis point improvement (20basis points excluding SI) in Adjusted operating profit margin (see Figure 2).Free cash flow grew by over 50% to 50.7m and Group recourse net debt reducedby 64.7m to 459.8m from the 2008 year end position.

1. Income statement

The income statement for the period is summarised in Figure 1 below. Thisincludes the results of joint ventures which are proportionately consolidated.Figure 1: Income statementSix months ended 30 June 2009 2008 Increase GBPm GBPm Revenue 1,949.8 1,490.5 30.8% Gross profit 285.7 217.6 31.3% Administrative expenses (175.7) (140.8) 24.8% Adjusted operating profit 110.0 76.8 43.2%

Investment revenue and finance costs (17.7) (9.5) Adjusted profit before tax 92.3 67.3 37.1% Amortisation of acquired intangibles (8.9) (4.5)

Profit before tax 83.4 62.8 32.8% Tax (22.0) (16.9) 30.2% Profit for the period 61.4 45.9 33.8% Effective tax rate 26.4% 26.9% Adjusted earnings per share 14.02p 10.18p 37.7% Earnings per share 12.62p 9.35p 35.0% Dividend per share 1.85p 1.48p 25.0% 1.1 Currency translationThe increase in the size of overseas operations with earnings not denominatedin Sterling, principally as a result of the acquisition of SI International(SI) at the end of 2008, and changes in currency exchange rates over the lasttwelve months, have benefited Serco's reported results. In order to moreaccurately present the growth of the business in the period, the effect ofcurrency exchange rate changes on revenue, Adjusted operating profit,Investment revenue and finance costs, Adjusted profit before tax and Grouprecourse net debt are included below. The currency effect has been calculatedby translating non-Sterling earnings, including those of SI, for the six monthsended 30 June 2009 into Sterling at the average foreign exchange rates for thesame period in 2008.

Figure 2: Income statement bridge

Six months ended 30 June Revenue Revenue Adjusted Adjusted growth operating operating profit margin GBPm % GBPm % 2008 Group 1,490.5 - 76.8 5.15% 2009 Group excluding SI and 161.2 10.8% 11.6 0.20% currency 1,651.7 88.4 SI 155.6 10.4% 11.6 0.18% Group including SI 1,807.3 21.2% 100.0 5.53% Currency effects 142.5 9.6% 10.0 0.11% Total 1,949.8 30.8% 110.0 5.64% 1.2 RevenueRevenue grew by 30.8% to 1,949.8m. Revenue growth, excluding SI and currencyeffects, was 10.8%. Organic revenue growth, excluding currency, was 9.6%. SI,which contributed to revenue for the first time in this period, had revenue ofUS$308.9m ( 155.6m excluding currency effects), adding 10.4% to revenue growth.SI's revenue grew 11.4% when compared to the same period in 2008. Currencyeffects added a further 142.5m (9.6%) to Group revenue.

1.3 Gross margin

Gross margin - the average contract margin across our portfolio - was 14.7%, a small increase on the first half of 2008.

1.4 Adjusted operating profit

Adjusted operating profit increased by 43.2% to 110.0m representing anAdjusted operating profit margin of 5.6%. Adjusted operating profit marginincreased by 49 basis points of which 38 basis points relates to the groupincluding SI but excluding currency effects. The table in Figure 2 illustratesthe Adjusted operating profit resulting from the group excluding SI, SI, andcurrency effects.

1.5 Investment revenue and finance costs

Investment revenue and finance costs totalled a net cost of 17.7m (2008: 9.5m), an increase of 8.2m. The increase, excluding currency effects, was 6.3m. Borrowing costs to fund the SI acquisition and an increase in the netpension funding cost of 3.1m charged to the income statement were theprincipal reasons for this increase.

1.6 Adjusted profit before tax

Adjusted profit before tax was 92.3m, an increase of 37.1%. Excluding SI and currency effects, the Adjusted profit before tax margin was 4.7%.

1.7 Tax

The tax charge of 22.0m (2008: 16.9m) represents an effective rate of 26.4%, compared with 26.9% in the first half of 2008. The reduction principally reflects the fall in the UK corporation tax rate from the blended UK corporation tax rate of 28.5% in 2008 to 28% in 2009.

1.8 Earnings per share (EPS)

Adjusted EPS rose by 37.7% to 14.02p. EPS grew by 35.0% to 12.62p.

EPS and Adjusted EPS are calculated on an average share base of 486.6m duringthe period (2008: 487.1m). The decrease in the average share base resultedprincipally from the purchase of shares for the ESOP trust in the second halfof 2008 partially offset by the exercise of employees' share options.

2. Dividend

Serco's policy is to increase the total dividend each year broadly in line withthe increase in underlying earnings. The Board has declared an interim dividendof 1.85p per share, representing an increase on the 2008 interim dividend of25.0%. The interim dividend will be paid on 16 October 2009 to shareholders onthe register on 4 September 2009.

3. Cash flow

The Group generated a free cash inflow of 50.7m (2008: 33.0m), an increase of 53.6%.

Figure 3 analyses the cash flow. As in previous years, we have designed theanalysis to show the true cash performance of the Group - the cash flowsgenerated by subsidiaries plus the dividends received from joint ventures. Ittherefore differs from the consolidated cash flow, which proportionatelyconsolidates the cash flows of joint ventures. The adjustment line in Figure 3reconciles the movement in Group cash to the consolidated cash flow.Figure 3: Cash flowSix months ended 30 June 2009 2008 GBPm GBPm

Operating profit excluding joint ventures 73.0 48.8

Non cash items 38.5 23.2 Group EBITDA 111.5 72.0 Working capital movement (31.3) (24.2) Group operating cash flow 80.2 47.8 Interest (18.0) (12.4) Tax (8.4) (3.1)

Expenditure on tangible and intangible assets (22.5) (19.1)

Dividends from joint ventures 19.4 19.8 Group free cash flow 50.7 33.0 Disposal of subsidiaries - 1.6 Acquisition of subsidiaries and business (15.4) (21.3) undertakings Other financing (32.9) 12.5 Dividends paid (16.9) (14.5)

Group net (decrease)/increase in cash and (14.5) 11.3 cash equivalents

Adjustment to include joint venture cash 14.1 15.1 impacts

Net (decrease)/increase in cash and cash (0.4) 26.4 equivalents

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

other non cash items.

3.1 Group operating cash flow

Group operating cash flow of 80.2m (2008: 47.8m) reflects a conversion ofGroup EBITDA into cash of 72% (2008: 66%). The increase in working capitalmovement from 24.2m to 31.3m was driven by the significant number of contractstart ups and transitions.3.2 Interest

Net interest paid was 18.0m, compared to 12.4m in 2008, reflecting the increase in borrowings resulting from the acquisition of SI in 2008.

3.3 Tax

Tax paid was 8.4m (2008: 3.1m). Cash tax is below the equivalent charge inthe income statement as a result of accelerated capital allowances and othertiming differences.

3.4 Expenditure on tangible and intangible assets

Expenditure on tangible and intangible assets in the period was 22.5m (2008: 19.1m). This represents 1.4% of group revenue excluding joint ventures (2008:1.7%).

3.5 Dividends from joint ventures

Dividends received from joint ventures totalled 19.4m (2008: 19.8m), a conversion rate of 81% (2008: 93%) of joint ventures' profit after tax and minority interest, excluding costs allocated by Group.

3.6 Acquisition of subsidiaries and business undertakings

To effect the partnership arrangement between Serco and Guy's & St Thomas' NHSFoundation Trust announced on 30 January, in February 2009, Serco Group plcacquired a 50% interest in GSTS Pathology LLP. The joint venture arrangementwith Guy's & St Thomas' NHS Foundation Trust will provide improved pathologyservices to the Trust and target the significant national and internationalpathology market. Total cash outflows associated with this transaction were 5.5m including directly attributable costs. Other acquisition costs includedthe acquisition of Sandrunner Limited, a UK based specialist consultancyprovider, for 0.3m in January 2009, and further payments in relation to theacquisition of InfoVision and SI in December 2008 of 3.7m and 5.9mrespectively.

3.7 Other financing

The movement in other financing resulted primarily from repayments on our committed facility and non recourse debt.

4. Net debtFigure 4 analyses net debt.Figure 4: Net debtAt 30 June 2009 31 December 2008 GBPm GBPm Group - cash and cash equivalents 172.3 199.8 Group - loans (611.7) (708.8) Group - obligations under finance (20.4) (15.5) leases Group recourse net debt (459.8) (524.5) Joint venture recourse net cash 55.7 44.5 Total recourse net debt (404.1) (480.0) Group non recourse debt (28.9) (34.1) Total net debt (433.0) (514.1) 4.1 Group recourse net debt

Group recourse net debt decreased by 64.7m to 459.8m. This principallyreflects the changes in currency exchange rates which reduced net debt by 56m.Cash and cash equivalents includes encumbered cash of 12.3m (31 December 2008: 10.4m). This is cash securing credit obligations and customer advancepayments.

4.2 Group non recourse debt

The Group's debt is non recourse if no Group company other than the relevantborrower has an obligation to repay the debt under a guarantee or otherarrangement. The debt is excluded from all of our credit agreements and othercovenant calculations, and therefore has no impact on the Group's ability toborrow.Group non recourse debt reduced by 5.2m to 28.9m during the first halfprimarily as a result of the payments made in line with the debt repaymentschedule. Non recourse debt relates to our Driver Examination Services contractin Canada.5. PensionsAt 30 June 2009, the net liability included in the balance sheet arising fromour defined benefit pension scheme obligations was 73.8m (31 December 2008: 20.5m), on a pension scheme asset base of 1.2bn.

Figure 6: Defined benefit pension schemes

At 30 June 2009 31 December 2008 GBPm GBPm Group schemes - non contract (73.8) (0.7) specific Contract specific schemes - reimbursable (110.5) (89.6)

- not certain to be reimbursable (25.7) (24.4)

Net retirement benefit liabilities (210.0) (114.7)

Intangible assets arising from 12.9 14.4 rights to operate franchises and contracts Reimbursable rights debtor 110.5 89.6 Deferred tax assets/(liabilities) 12.8 (9.8)

Net balance sheet liabilities (73.8) (20.5)

Serco has three main types of scheme which are accounted for as defined benefitpension schemes. Each type has its own accounting treatment under InternationalFinancial Reporting Standards. These are:

- Non contract specific - schemes which do not relate to specific contracts or franchises. For these schemes, we charge the actuarial gain or loss for the period to the consolidated Statement of Comprehensive Income (the SOCI);

- Reimbursable - schemes where we have a right of full cost reimbursement andtherefore include both the pension scheme deficit and offsetting reimbursablerights debtor in the balance sheet; and- Not certain to be reimbursable - schemes relating to specific contracts orfranchises, where the deficit will pass back to the customer or on to the nextcontractor at the end of the contract. For these schemes, we charge theactuarial gain or loss on our share of the deficit for the period to the SOCI,recognise a recoverable intangible asset on the balance sheet at the start ofthe contract or franchise and amortise the intangible asset to the incomestatement over the contract or franchise life.Serco has limited commercial risk in relation to the contract specific schemes,due to either the right of cost reimbursement or because the deficit will, ingeneral, pass back to the customer or on to the next contractor at the end ofthe contract. Among our non contract specific schemes, the largest is the SercoPension and Life Assurance Scheme (SPLAS). At 30 June 2009, SPLAS had a deficitof 12.4m (31 December 2008: surplus of 62.4m). The deficit reflects theeffect of the market conditions on investment returns in the period and anincrease in inflation assumptions since the year end.

Figure 6 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. Assumptions in the period are disclosed in note 13 to the condensed set of financial statements.

Figure 6: 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 +3% 6. TreasuryThe Group's principal debt finance comprises a 400m bank revolving facilitywhich matures in September 2013 together with a term loan and bilateralfacility totalling US$550m to fund the acquisition of SI International, Inc.The term loan and bilateral facility are repayable between September 2010 andSeptember 2013. The facilities, which are syndicated with a group of 13 banks,are unsecured. As at 30 June 2009 461m had been drawn down on these facilities(31 December 2008: 560m). Excluding the effects of currency on the US$denominated debt, the equivalent drawn down would have been 528m.

Serco has also issued loan notes under a private placement of 117m, which will be repaid evenly from 2011 to 2015.

Responsibility statement

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 `Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board,Christopher HymanChief ExecutiveAndrew JennerFinance Director25 August 2009

INDEPENDENT REVIEW REPORT TO SERCO GROUP PLC

We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2009 which comprises the condensed consolidated income statement, the condensedconsolidated statement of comprehensive income, the condensed consolidatedstatement of changes in equity, the condensed consolidated balance sheet, thecondensed consolidated cash flow statement and related notes 1 to 13. We haveread the other information contained in the half-yearly financial report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements.This report is made solely to the company in accordance with InternationalStandard on Review Engagements (UK and Ireland) 2410 issued by the AuditingPractices Board. Our work has been undertaken so that we might state to thecompany those matters we are required to state to them in an independent reviewreport and for no other purpose. To the fullest extent permitted by law, we donot accept or assume responsibility to anyone other than the company, for ourreview work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the Group areprepared in accordance with International Financial Reporting Standards (IFRSs)as adopted by the European Union. The condensed set of financial statementsincluded in this half-yearly financial report has been prepared in accordancewith International Accounting Standard 34, "Interim Financial Reporting," asadopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview.Scope of Review

We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2009 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditors

London, United Kingdom

25 August 2009

Condensed consolidated income statement

For the six months ended 30 June 2009

Note 6 months to 6 months to Year ended 31 December 30 June 30 June 2008 2009 2008 GBPm GBPm GBPm (audited) (unaudited) (unaudited) Continuing operations Revenue 3 1,949.8 1,490.5 3,123.5 Cost of sales (1,664.1) (1,272.9) (2,666.7) Gross profit 285.7 217.6 456.8 Administrative expenses (175.7) (140.8) (291.6)

Other expenses - amortisation of (8.9) (4.5) (9.2) intangibles arising on

acquisition

Total administrative expenses (184.6) (145.3) (300.8)

Operating profit 3 101.1 72.3 156.0 Investment revenue 2 1.3 4.6 8.2 Finance costs 2 (19.0) (14.1) (28.1) Profit before tax 83.4 62.8 136.1 Tax (22.0) (16.9) (36.5) Profit for the period 61.4 45.9 99.6 Attributable to:

Equity holders of the parent 61.4 45.5 99.5

Minority interest - 0.4 0.1 Earnings per share (EPS) Basic EPS 5 12.62p 9.35p 20.49p Diluted EPS 5 12.46p 9.23p 20.18p

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2009

Note 6 months to 6 months to Year ended 31 December 30 June 30 June 2008 2009 2008 GBPm GBPm GBPm (audited) (unaudited) (unaudited) Profit for the period 61.4 45.9 99.6

Other comprehensive income for the

period:

Net actuarial (loss)/gain on defined 13 (148.6) (153.7) 8.7

benefit pension schemes1

Actuarial gain on reimbursable rights1 13 60.8 86.8 50.6

Net exchange (loss)/gain on (28.4) 9.7 54.1

translation of foreign operations2 Fair value (loss)/gain on cash flow (5.9) 10.5 14.2

hedges during the period2

Tax credit/(charge) on items taken 23.2 14.1 (21.3)

directly to equity3

Recycling of cumulative net hedging 0.1 (0.7) (0.7)

reserve2

Total comprehensive (expense)/income (37.4) 12.6 205.2

for the period Attributable to:

Equity holders of the parent (37.4) 12.2 205.1

Minority interest - 0.4 0.1

1 Taken to Retirement benefit obligations reserve in condensed consolidated statement of changes in equity.

2 Taken to Hedging and translation reserve in condensed consolidated statement of changes in equity.

3 Of the tax credit, 22.6m (30 June 2008: 16.8m, 31 December 2008; debit of 16.8m) was taken to the Retirement benefit obligations reserve; 1.6m (30 June2008; debit of 2.9m, 31 December 2008; debit of 3.9m) was taken to theHedging and translation reserve; a debit of 1.0m (30 June 2008; credit of 0.2m, 31 December 2008; debit of 0.6m) was taken to the Share based paymentreserve.

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2009

Share Share Capital Retained Retirement Share-based

Own Hedging and Total Minority

capital premium redemption earnings benefit payment

shares translation equity interest

account reserve obligations reserve reserve reserve reserve GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm At 1 January 9.7 299.3 0.1 260.6 (90.2) 34.6 (15.1) (1.8) 497.2 1.3 2008 (audited) Total - - - 45.5 (50.1) 0.2 - 16.6 12.2 0.2 comprehensive income for the period Shares - 0.7 - - - (0.2) 2.6 - 3.1 - transferred to option holders on exercise of share options Dividends - - - (14.5) - - - - (14.5) - paid Credit in - - - - - 3.0 - - 3.0 - relation to share-based payment At 1 July 9.7 300.0 0.1 291.6 (140.3) 37.6 (12.5) 14.8 501.0 1.5 2008 (unaudited) Total - - - 54.0 92.6 (0.8) - 47.1 192.9 (0.1) comprehensive income for the period Shares - 1.1 - - - (0.8) 2.0 - 2.3 - transferred to option holders on exercise of share options Dividends - - - (7.1) - - - - (7.1) - paid Credit in - - - - - 4.0 - - 4.0 - relation to share-based payment Purchase of - - - - - - (9.2) - (9.2) - own shares for employee benefit trust (ESOP) Acquisition - - - 1.3 - - - - 1.3 (1.3) of minority interest by joint venture At 1 January 9.7 301.1 0.1 339.8 (47.7) 40.0 (19.7) 61.9 685.2 0.1 2009 (audited) Total - - - 61.4 (65.2) (1.0) - (32.6) (37.4) - comprehensive income for the period Shares - 0.6 - - - (0.6) 2.4 - 2.4 - transferred to option holders on exercise of share options Dividends - - - (16.9) - - - - (16.9) - paid Credit in - - - - - 4.0 - - 4.0 - relation to share-based payment At 30 June 9.7 301.7 0.1 384.3 (112.9) 42.4 (17.3) 29.3 637.3 0.1 2009 (unaudited)

Condensed consolidated balance sheet

At 30 June 2009 Note At 30 June At 30 June At 31 2009 2008 December 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited) Non-current assets Goodwill 901.8 566.6 964.7 Other intangible assets 170.6 135.4 191.3

Property, plant and equipment 117.5 100.5 115.4

Trade and other receivables 141.1 118.0 121.1 Retirement benefit assets 13 - - 62.4 Deferred tax assets 42.4 65.7 19.6

Derivative financial instruments 3.9 6.2 5.6

1,377.3 992.4 1,480.1 Current assets Inventories 54.4 50.2 50.2 Trade and other receivables 712.6 571.1 719.5 Cash and cash equivalents 237.2 215.6 250.8

Derivative financial instruments 0.8 4.3 5.0

1,005.0 841.2 1,025.5 Total assets 2,382.3 1,833.6 2,505.6 Current liabilities Trade and other payables (745.3) (682.8) (754.7) Current tax liabilities (24.5) (19.3) (19.5)

Obligations under finance leases (5.1) (4.2) (4.5)

Loans (42.2) (7.8) (36.8)

Derivative financial instruments (8.6) (1.6) (4.2)

(825.7) (715.7) (819.7) Non-current liabilities Trade and other payables (28.7) (12.3) (35.5)

Obligations under finance leases (17.1) (10.5) (12.7)

Loans (605.8) (313.4) (710.9)

Derivative financial instruments (2.4) (8.1) (0.4) Retirement benefit obligations 13 (210.0) (243.4) (177.1) Provisions 9 (33.7) (12.7) (38.1) Deferred tax liabilities (21.5) (15.0) (25.9) (919.2) (615.4) (1,000.6) Total liabilities (1,744.9) (1,331.1) (1,820.3) Net assets 637.4 502.5 685.3 Equity Share capital 9.7 9.7 9.7 Share premium account 301.7 300.0 301.1 Capital redemption reserve 0.1 0.1 0.1 Retained earnings 384.3 291.6 339.8

Retirement benefit obligations reserve (112.9) (140.3) (47.7)

Share-based payment reserve 42.4 37.6 40.0 Own shares reserve (17.3) (12.5) (19.7)

Hedging and translation reserve 29.3 14.8 61.9 Equity attributable to equity holders 637.3 501.0 685.2

of the parent Minority interest 0.1 1.5 0.1 Total equity 637.4 502.5 685.3

Condensed consolidated cash flow statement

For the six months ended 30 June 2009

Note 6 months to 6 months to Year ended 31 December 30 June 30 June 2008 2009 2008 GBPm GBPm GBPm (audited) (unaudited) (unaudited)

Net cash inflow from operating 7 104.2 84.5 162.6

activities Investing activities Interest received 1.2 4.4 7.3

Proceeds from disposal of subsidiary - 1.6 1.9

and business undertakings

Proceeds from disposal of property, 3.4 3.0 17.5

plant and equipment

Acquisition of subsidiaries and 6 (14.7) (21.3) (322.2) business undertakings, net of cash

acquired

Purchase of other intangible assets (8.1) (10.1) (20.4) Purchase of property, plant and (17.4) (14.3) (32.6)

equipment Net cash outflow from investing (35.6) (36.7) (348.5) activities Financing activities Interest paid (19.1) (15.4) (30.3) Dividends paid (16.9) (14.5) (21.6) Repayment of borrowings (59.5) (6.5) (78.6) New loan advances 30.8 22.7 397.4

Purchase of own shares for employee - - (9.2)

benefit (ESOP)

Capital element of finance lease (3.1) (6.3) (8.6)

repayments

Proceeds from issue of share capital 2.4 3.1 5.4

Other financing - - (17.0)

Repayment of non recourse loans (3.6) (4.5) (7.5) Net cash (outflow)/inflow from (69.0) (21.4) 230.0

financing activities

Net (decrease)/increase in cash and (0.4) 26.4 44.1

cash equivalents

Cash and cash equivalents at beginning 250.8 185.0 185.0

of period Net exchange (loss)/gain (13.2) 4.2 21.7

Cash and cash equivalents at end of 237.2 215.6 250.8 period

Notes to the Condensed set of financial statements

For the six months ended 30 June 2009

General information, going concern and accounting policies

The information for the year ended 31 December 2008 does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. A copyof the statutory accounts for that year has been delivered to the Register ofCompanies. The auditors' report on those accounts was not qualified and did notcontain statements made under s237(2) or (3) of the Companies Act 1985.The annual financial statements of Serco Group plc are prepared in accordancewith IFRSs as adopted by the European Union. The condensed set of financialstatements included in this half-yearly financial report has been prepared inaccordance with International Accounting Standards 34 `Interim FinancialReporting', as adopted by the European Union.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operating Review. The Finance Review includes a summary of the Group's financial position, its cash flows and borrowing facilities.

The Group's revenues are largely derived from long-term contracts withgovernments which, historically, have been largely unaffected by changes in thegeneral economy. The contract portfolio is spread across a number of markets,sectors and geographies such that a downturn in any one segment is highlyunlikely to affect the Group as a whole. In addition, with an order book of 16.7bn and high visibility of future revenue streams, the Group is well placedto manage its business risks despite the current economic climate.During 2008, the Group secured medium-term financing by entering into afive-year revolving credit facility and bilateral facilities. Including theterm loan and US private placements, the Group has committed funding of 860mSterling equivalent. As at 30 June 2009, the headroom on the facilities was inexcess of 350m.After making enquiries, the Directors have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. Accordingly, they continue to adopt the going concern basisin preparing the half-yearly condensed financial statements.The same accounting policies, presentation and methods of computation arefollowed in the condensed set of financial statements as applied in the Group'slatest annual audited financial statements except for as described below. Thecondensed set of financial statements includes the results of subsidiaries andjoint ventures. Joint ventures have been proportionally consolidated.

Changes in accounting policy

In the current financial year, the Group has adopted International FinancialReporting Standard 8 `Operating Segments' and International Accounting Standard1 `Presentation of Financial Statements' (revised 2007).IFRS 8 requires operating segments to be identified on the basis of internalreports about components of the Group that are regularly reviewed by the ChiefExecutive and Executive Board in order to allocate resources to the segmentsand to assess their performance. The information previously disclosed under thepredecessor standard (IAS 14 `Segment Reporting') required the Group toidentify two sets of segments (business and geographical), using a risks andrewards approach. The Directors have reviewed the business segments identifiedunder IAS 14 and consider that these segments are appropriate under IFRS 8.IAS 1 (revised) requires the presentation of a statement of changes in equityas a primary statement, separate from the income statement and statement ofcomprehensive income. As a result, a condensed consolidated statement ofchanges in equity has been included in the primary statements, showing changesin each component or equity for each period presented.

Investment revenue and finance costs

6 months to 6 months to Year ended 31 30 June 30 June December 2009 2008 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited)

Interest receivable by PFI companies - 1.0 1.0 Interest receivable on other loans and 1.3 3.2 6.9

deposits

Net interest receivable on retirement - 0.1 -

benefit obligations

Fair value adjustment on derivative - 0.3 0.3

financial instruments Investment revenue 1.3 4.6 8.2

Interest payable on non recourse loans (0.8) (1.8) (2.7) Interest payable on other loans (14.4) (11.8) (23.5) Interest payable on obligations under (0.7) (0.5) (1.3)

finance leases

Net interest payable on retirement benefit (3.1) - (0.6)

obligations Finance costs (19.0) (14.1) (28.1) 3. Segmental information

Information reported to the Chief Executive and Executive Board for the purposes of resource allocation and assessment of segment performance focuses on the categories of customer identified using their respective markets. Details of the different products and services provided to each operating segment are provided in the Operating Review section of this report. The Group's reportable and operating segments under IFRS 8 are:

Reportable Segments - Operating Segments

Civil Government - home affairs, healthcare, integrated services, IT and BPO, education and children's services and consulting

Defence - provision of operational support services to the armed forces of the UK, the US, Canada, Germany and Australia

Transport - provision of transport services in the UK, Australia, the Middle East and the US

Science - science-based business including scientific research and nuclear industries

The following is an analysis of the Group's revenue and results by operatingsegment in the six months ended 30 June 2009. The accounting policies of thereportable segments are the same as those described in the summary of thesignificant accounting policies which are described in the Group's latestannual financial statements.Reportable segments Civil Defence Transport Science Total Government 6 months to 30 June 2009 (unaudited) GBPm GBPm GBPm GBPm GBPm Revenue External Sales 809.2 499.2 346.0 295.4 1,949.8 Result Segment result 38.3 37.2 16.7 28.2 120.4 Corporate expenses (19.3) Operating profit 101.1 Investment revenue 1.3 Finance costs (19.0) Profit before tax 83.4 Tax (22.0) Profit after tax 61.4 6 months to 30 June 2008 Civil Defence Transport Science Total (unaudited) Government GBPm GBPm GBPm GBPm GBPm Revenue External Sales 542.7 374.8 305.7 267.3 1,490.5 Result Segment result 25.9 27.0 13.0 25.3 91.2 Corporate expenses (18.9) Operating profit 72.3 Investment revenue 4.6 Finance costs (14.1) Profit before tax 62.8 Tax (16.9) Profit after tax 45.9 Year ended 31 December 2008 Civil Defence Transport Science Total (audited) Government GBPm GBPm GBPm GBPm GBPm Revenue External Sales 1,127.3 785.8 670.8 539.6 3,123.5 Result Segment result 55.2 59.1 29.7 51.6 195.6 Corporate expenses (39.6) Operating profit 156.0 Investment revenue 8.2 Finance costs (28.1) Profit before tax 136.1 Tax (36.5) Profit after tax 99.6 Segment assets 6 months to 6 months to Year ended 31 December 30 June 2009 30 June 2008 2008 GBPm GBPm GBPm (unaudited) (audited) (unaudited) Civil Government 1,110.5 776.2 1,138.2 Defence 471.4 285.8 585.6 Transport 153.2 130.6 168.5 Science 275.7 265.4 260.2 Total segmental assets 2,010.8 1,458.0 2,152.5 Unallocated assets 86.3 83.8 67.6

Consolidated segmental assets 2,097.1 1,541.8 2,220.1

Segmental assets reviewed exclude all derivative financial instruments, current and deferred taxation receivables and cash.

Segment liabilities 6 months to 6 months to Year ended 31 December 30 June 2009 30 June 2008 2008 GBPm GBPm GBPm (unaudited) (audited) (unaudited) Civil Government (368.2) (313.9) (382.0) Defence (153.8) (143.4) (175.7) Transport (141.1) (112.1) (141.2) Science (246.7) (222.5) (249.9) Total segmental liabilities (909.8) (791.9) (948.8) Unallocated liabilities (74.2) (146.6) (18.5)

Consolidated segmental liabilities (984.0) (938.5) (967.3)

Segmental liabilities consist of all trade and other payables and retirement benefit obligations.

Geographical analysis 6 months to 30 June 6 months to 30 June Year ended 2009 2008 31 December 2008 Revenue Assets Revenue Assets Revenue Assets GBPm GBPm GBPm GBPm GBPm GBPm (unaudited) (unaudited) (unaudited) (unaudited)

(audited) (audited) United Kingdom 1,244.0 1,163.2 1,121.2 1,132.4 2,334.6 1,202.3 North America 447.4 636.1 170.8 206.0 369.9 731.0 Europe & Middle 150.4 160.5 111.0 124.4 237.2 153.1 East Asia Pacific and 108.0 137.3 87.5 79.0 181.8 133.7 India Total 1,949.8 2,097.1 1,490.5 1,541.8 3,123.5 2,220.1 Dividends 6 months to 6 months to Year ended 31 December 30 June 2009 30 June 2008 2008 GBPm GBPm GBPm (unaudited) (audited) (unaudited)

Amounts recognised as distributions to

equity holders in the period:

Final dividend for the year ended 31 16.9 - - December 2008 of 3.52p per share on 481.1

million ordinary shares

Final dividend for the year ended 31 - 14.5 14.5 December 2007 of 3.02p per share on 480.2

million ordinary shares

Interim dividend for the year ended 31 - - 7.1 December 2008 of 1.48p per share on 480.3

million ordinary shares 16.9 14.5 21.6

The proposed interim dividend for the year ending 31 December 2009 is 1.85p per ordinary share on 483.9 million shares ( 9.0m) (30 June 2008: 1.48p per ordinary share on 480.2 million shares ( 7.1m)).

The proposed interim dividend was approved by the Board on 21 August 2009 and has not been included as a liability as at 30 June 2009.

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 arising on acquisition to assist in the understanding of the underlying performance of the business.

The calculation of the basic and diluted EPS is based on the following data:Number of shares 6 months to 6 months to Year ended 31 December 30 June 2009 30 June 2008 2008 Millions Millions Millions (unaudited) (audited) (unaudited)

Weighted average number of ordinary shares 486.6 487.1 485.7

for the purpose of basic EPS

Effect of dilutive potential ordinary 6.2 6.4 7.3

shares: share options

Weighted average number of ordinary shares 492.8 493.5 493.0 for the purpose of diluted EPS

Earnings 6 months to 30 June 6 months to 30 June Year ended 2009 2008 31 December 2008 Earnings Per share Earnings Per share Earnings Per share amount amount amount GBPm GBPm GBPm Pence Pence Pence (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited) Earnings for the 61.4 12.62 45.5 9.35 99.5 20.49 purpose of basic EPS being net profit attributable to the equity holders of the parent Add back: Amortisation of 6.8 1.40 4.1 0.83 8.3 1.71 intangible assets arising on acquisition, net of tax 2.1m (30 June 2008: 0.4m, 31 December 2008: 0.9m) Adjusted earnings 68.2 14.02 49.6 10.18 107.8 22.20 before amortisation of intangible assets arising on acquisition, net of tax Earnings for the 61.4 12.62 45.5 9.35 99.5 20.49 purpose of basic EPS Effect of dilutive - (0.16) - (0.12) - (0.31) potential ordinary shares Diluted EPS 61.4 12.46 45.5 9.23 99.5 20.18 Acquisitions

During the period, the Group paid 5.9m and 3.7m of acquisition related costsand deferred purchase consideration in relation to its acquisitions in December2008 of SI International and InfoVision, respectively.

During the period, the Group acquired share holdings in two companies;

a) On 28 January 2009, the Group acquired 100% of the share capital in Sandrunner Limited for consideration of 0.3m recognising 0.3m of goodwill. Sandrunner Limited is a management consultancy based in the UK.

b) On 2 February 2009, the Group acquired a 50% interest in GSTS Pathology LLP(`GSTS') from Pathology Services Limited, a subsidiary of the Guy's & StThomas' NHS Foundation Trust (`the Trust'). GSTS provides pathology services tothe Trust and various third parties. Related net cash outflows on acquisitionwere 4.8m consisting of 5.5m consideration (including directly attributablecosts) and 0.7m of cash acquired. Net assets acquired total 0.4m. 5.1m ofgoodwill has been recognised relating to future opportunities in pathologyservices.

These transactions have been accounted for in accordance with IFRS 3 `Business Combinations'.

Reconciliation of operating profit to net cash inflow from operating activities 6 months to 6 months to Year ended 30 June 31 2009 30 June 2008 December GBPm 2008 GBPm (unaudited) GBPm (unaudited) (audited)

Operating profit for the period 101.1 72.3 156.0

Adjustments for: Share-based payment expense 4.0 3.0 7.0

Depreciation of property, plant and 17.8 12.7 26.0 equipment Amortisation of intangible assets 20.3 13.8 29.3 Profit on disposal of property, plant - (0.9) (4.6) and equipment Profit on disposal of business - (2.7) (2.7)

undertakings Movement in provisions (0.7) (6.2) (9.0)

Operating cash inflow before movements 142.5 92.0 202.0 in working capital (Increase)/decrease in inventories (5.5) (2.3) 0.9 (Increase)/decrease in receivables (16.9) 3.0 11.0 (Decrease)/increase in payables (1.7) 2.5 (26.4)

Cash generated by operations 118.4 95.2 187.5 Tax paid (14.2) (10.7) (24.9)

Net cash inflow from operating 104.2 84.5 162.6

activities Analysis of net debt At 30 June At 30 June At 31 December 2009 2008 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited) Cash and cash equivalents 237.2 215.6 250.8 Other non recourse loans (28.9) (32.9) (34.1) Other loans (619.1) (288.3) (713.6)

Obligations under finance leases (22.2) (14.7) (17.2) Total net debt (433.0) (120.3) (514.1) Provisions Employee Property Contract Other Total related GBPm GBPm GBPm GBPm GBPm At 1 January 2008 9.0 4.7 4.7 0.2 18.6 (audited) Charged to income - - - 0.2 0.2 statement Released to income (2.8) (2.9) (0.5) - (6.2) statement Utilised during the (0.1) - - (0.1) (0.2) year Exchange differences 0.3 - - - 0.3 At 30 June 2008 6.4 1.8 4.2 0.3 12.7 (unaudited) Arising from - 9.3 7.4 10.6 27.3 acquisitions Charged to income 0.6 - - 0.1 0.7 statement Released to income (0.9) (1.4) (0.5) - (2.8) statement Utilised during the (0.6) (0.1) - - (0.7) period Exchange differences 0.4 0.2 0.1 0.2 0.9 At 31 December 2008 5.9 9.8 11.2 11.2 38.1 (audited) Charged to income 0.9 - - 0.9 1.8 statement Released to income - - (0.5) - (0.5) statement Utilised during the (0.3) (0.6) (0.3) (0.8) (2.0) period Exchange differences (0.3) (1.1) (0.9) (1.4) (3.7) At 30 June 2009 6.2 8.1 9.5 9.9 33.7 (unaudited) 10. Joint venturesThe Group's interest in joint ventures is reported in the condensedconsolidated financial statements using the proportionate consolidation method.The effect of the Group's joint ventures on the condensed consolidated incomestatement is as follows: 6 months to 6 months to Year ended 31 30 June 2009 30 June 2008 December 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited) Revenue 378.1 354.1 719.7 Operating profit* 28.1 23.5 48.3 Profit before tax 28.4 25.8 52.7 Tax (5.9) (6.8) (13.2) Profit for the period 22.5 19.0 39.5 Minority interest - (0.4) - Share of post-tax results of 22.5 18.6 39.5 joint ventures

* Operating profit is after allocating 1.4m of costs incurred by Group (30 June 2008: 2.7m, 31 December 2008: 4.7m).

11. Related party transactions

Transactions between the Company and its wholly owned subsidiaries, which arerelated parties, have been eliminated on consolidation and are not disclosed inthis note. Transactions between the Group and its joint venture undertakingsare disclosed below, with the relevant portion being eliminated onconsolidation. 6 months to 6 months to Year ended 31 30 June 2009 30 June 2008 December 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited)

Royalties and management fees 0.1 0.7 1.4

receivable Dividends receivable 19.4 19.8 37.2 19.5 20.5 38.6

The following receivable balances relating to the joint ventures were included in the condensed consolidated balance sheet:

At 30 June At 30 June At 31 December 2009 2008 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited) Current: Loans 1.4 1.0 1.2 Non-current: Loans 6.1 0.5 0.7 12. Share-based paymentsIn accordance with IFRS 2, a charge of 4.0m (30 June 2008: 3.0m, 31 December2008: 7.0m) relating to the fair value of share-based schemes granted since 2November 2002, has been charged to the income statement.

13. Defined benefit schemes

The Group operates defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. In addition, the Group has interests in joint ventures, which operate defined benefit schemes for qualifying employees.

The assets of the funded plans are held independently of the Group's assets inseparate trustee administered funds. The Group's major plans are valued byindependent actuaries annually using the projected unit credit method. Ananalysis of the Group's net pension liability and related assets together withthe amounts included within the SOCI are presented in the tables below. At 30 June At 30 June At 31 December 2009 2008 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited) Net pension liabilities: Group scheme - non contract (73.8) (122.7) (0.7) specific Contract schemes specific: Reimbursable (110.5) (96.5) (89.6)

Not certain to be reimbursable (25.7) (24.2) (24.4)

(210.0) (243.4) (114.7) Analysed as: Net retirement benefit (210.0) (243.4) (177.1) liabilities

Net retirement benefit assets - - 62.4

Related assets:

Intangible assets arising from 12.9 15.9 14.4

rights to operate franchises and contracts Reimbursable rights debtor 110.5 96.5 89.6 123.4 112.4 104.0 At 30 June At 30 June At 31 December 2009 2008 2008 GBPm GBPm GBPm (unaudited) (unaudited) (audited)

Actual return on scheme assets (33.6) (72.5) (175.7) Less: expected return on scheme (34.3) (44.7) (88.0)

assets (67.9) (117.2) (263.7)

Other actuarial gains and losses (80.7) (36.5) 272.4

Actuarial (losses)/gains (148.6) (153.7) 8.7 recognised in the SOCI Pension deficit recognised on - (4.7) - adoption of IFRIC 14

Change in paragraph 58(b) limit (2.4) (1.5) (1.7) Change in franchise adjustment 27.3 31.9 (1.3)

Change in members' share 12.8 25.3 21.7

Movement in reimbursable rights 23.1 35.8 31.9 Actuarial gains on reimbursable 60.8 86.8 50.6

rights Total pension (cost)/credit (87.8) (66.9) 59.3 recognised in the SOCI

The net pension liability at 30 June 2009 has been calculated on a year to date basis. The main assumptions adopted in valuing the schemes are as follows.

At 30 June At 30 June At 31 December 2009 2008 2008 % % % (unaudited) (unaudited) (audited) Rate of salary increases 2.75-3.70 3.00-4.70 3.10

Rate of increase in pensions in 3.20 3.70 2.60

payment Rate of increase in deferred 3.20 3.70 2.60 pensions Inflation assumption 3.20 3.70 2.60 Discount rate 6.40 6.00 6.00 At 30 June At 30 June At 31 December 2009 2008 2008 Years Years Years Post retirement mortality:

Current pensioners at 65 - male 20.3 20.3 20.3

Current pensioners at 65 - 23.2 23.1 23.2 female

Future pensioners at 65 - male 21.6 21.6 21.6

Future pensioners at 65 - 24.4 24.3 24.4 female

vendor

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Related Shares:

Serco