VT Group Annual Report

Annual report and accounts 2008 VT Group Plc Annual Report & Accounts 2008

VT Group plc VT House Grange Drive, Hedge End Southampton SO30 2DQ T: +44 (0)23 8083 9001 F: +44 (0)23 8083 9002 E: vtgroup@vtplc.com w: www.vtplc.com

www.vtplc.com

www.vtplc.com

VT Group Plc Annual Report & Accounts 2008

Valuing Trust From the BBC World Service to the Metropolitan Police, from the Royal Navy to British Airways and from the US Government to Local Education Authorities, our clients trust VT Group to keep their business critical services and assets working.

Contents

Overview of the year

01

How we run the Group

37

Results summary

01

Board of Directors

38

Chairman’s statement

02

Corporate responsibility

40

Key risks and uncertainties

47

Corporate governance

49

Explaining the Group

05

The nature of our business

06

VT Group

14

Statutory information

53

What we do

14

Directors’ report

54

Outlook

16

Remuneration report

56

Financial performance

17

Statement of Directors’ responsibilities

64

Our business divisions

21

Auditor’s report

65

VT Communications

21

Financial statements

66

VT Education and Skills

24

VT Services Inc

27

VT Support Services

30

VT Shipbuilding

34

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Front cover: Aaron McNish, Cross Trade Technician at Royal Air Force 202 Squadron E Flight, Leconfield, which provides search and rescue services throughout North East England.

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Results Summary – Continuing Operations Financial Highlights The Group continues to make excellent progress with strong results shown by all our divisions. We have a well planned strategy to grow our business and can benefit from excellent visibility of earnings and a good order book.

2008

2007

Change

Turnover*

£1,201.0m

£1,004.6m

+20%

Revenue excluding joint ventures

£1,020.0m

£852.5m

+20%

Underlying profit before taxation**

£89.1m

£74.2m

+20%

Profit before taxation

£71.3m

£53.8m

+33%

Adjusted earnings per share (p)***

35.5p

30.9p

+15%

Basic earnings per share (p)

32.2p

25.4p

+27%

Full year dividend per share (p)

13.1p

11.9p

+11%

* Includes share of revenue from equity accounted joint ventures and associates. ** Excludes intangible amortisation arising from business combinations (£9.9m; 2007: £7.7m), share of joint venture taxation (£7.9m; 2007: £6.7m) and non-recurring charges in respect of exiting businesses (£nil; 2007: £6m). *** Before intangible amortisation arising from business combinations and non-recurring charges in respect of exiting businesses.

These definitions apply throughout this document.

Key performance indicators Turnover (£m)

Adjusted earnings per share (p)

2008

1,201.0 1,004.6

2007

0

600

800

1,000

1,200

60

20

80

40

4,900 3,685

2007 2,415

2006 70

30

2008

61.5 0

10

Order book (£m)

89.1

2006

0

1,400

74.2

2007

24.7

2006

Underlying profit before taxation (£m)

2008

35.5 30.9

2007

847.1

2006

2008

90

100

0

1,000

2,000

3,000

4,000

5,000

6,000

Overview of the Year

1

VT Group Plc Annual Report & Accounts 2008

VT Group Plc Annual Report & Accounts 2008

Chairman’s Statement Michael Jeffries Chairman We continue to be encouraged by the performance of the Group, the dedication and capability of its employees and the strong culture of working together that prevails across the Group and with our key customers.

The Group continues to make excellent progress with strong results shown by all our divisions.

Outlook Our strategy of focusing on developing engineering support businesses has seen us move into new sectors of high growth activity through nuclear services and waste management.

We continue to grow the order book and we have achieved significant milestones in aviation support with the signing of the Future Strategic Tanker Aircraft (FSTA) programme and UK Military Flying Training System.

BVT Surface Fleet Limited, our Joint Venture in shipbuilding and naval support with BAE Systems, is ready to be implemented following the Government’s recent confirmation of the placement of the manufacturing contract for the Royal Navy’s new aircraft carriers (CVF).

We have a well planned strategy to grow our engineering support services activities and we are also in a good position to benefit from excellent visibility of earnings, strong operating cash flow and good order pipeline.

The Board remains confident for the current year and beyond.

2008 performance This has been another successful year for the Group. We have enhanced the long-term visibility of our business and expanded the range of our engineering support services into new high growth sectors.

Turnover increased by 20 per cent to £1,201 million (2007: £1,005m). Underlying profit before taxation improved by 20 per cent to £89.1 million (2007: £74.2m) with the corresponding adjusted earnings per share improving by 15 per cent to 35.5p (2007: 30.9p).

Operating cash conversion during the period was 81 per cent. This performance has enabled the Board to recommend a final dividend of 9.55 pence, giving a total dividend for the year of 13.1p pence per share, an increase of 11 per cent over last year.

It is pleasing to note that of the 20 per cent increase in turnover achieved across all our divisions, over half was attributable to organic growth.

We continue to be encouraged by the performance of the Group, the dedication and capability of its employees and the strong culture of working together that prevails across the Group and with our key customers.

These are important strengths as we become involved in larger programmes and engage with new customers.

In our management teams, we have the experience and expertise to pursue our corporate strategy and to drive the business forward.

Our strategy will continue to concentrate upon engineering-based support services which utilise our technical and project management skills. Our focus on higher value services will remain an important driver as we continue to grow our existing business organically and identify further suitable acquisition targets.

All our divisions have made significant progress over the past year and we have plans to increase our presence in areas such as nuclear services and waste management.

The Group has won important roles in some of the largest defence Private Finance Initiative (PFI) and support services programmes placed by the Ministry of Defence, namely the Future Strategic Tanker Aircraft (FSTA) and UK Military Flying Training System (MFTS).

Our emphasis on engineering support services will increase when we form the shipbuilding and naval support Joint Venture with BAE Systems (BVT Surface Fleet Limited) following the signing of the transaction documents for the joint venture, which we announced on 11 June.

The formation of BVT will create a world class company that will serve the interests of the UK market and will successfully address overseas markets, securing the future for the industry and benefiting the UK. VT and BAE Systems are ready to implement the joint venture following the EGM of the Company which will take place on 30 June.

Our shipbuilding business continues to perform well. We will complete our contribution to the Type 45 destroyer programme on time by the end of this year and the export orders for Oman and Trinidad and Tobago provide us with a workload until 2011. We also have encouraging further export prospects.

Our support services businesses have all contributed to the progress of the Group with VT Communications maintaining good profit margins; VT Education and Skills showing marked improvement in underlying operating profit and margins; VT Support Services strengthening its position in key markets; and in the US we grew margins by developing higher value technical services.

Board and people In November last year, we were delighted to welcome Philip Harrison to the Board as Group Financial Director. Phil took over the financial reins from Chris Cundy, who had been temporarily fulfilling the role of Finance and Commercial Director. His arrival means that Chris is now free to concentrate on his

commercial role which has become increasingly important to the Group as we become involved in larger programmes.

In May 2008 David Thorpe stepped down as a non-executive director after five years serving VT Group. David has been a valued member of the board and we thank him for his important contribution to VT’s progress.

In his place we welcome Balfour Beatty Chief Executive Officer Ian Tyler. Ian joined Balfour Beatty as Finance Director in 1996.

He subsequently became Chief Operating Officer and took over as CEO in 2005.

Ian’s business knowledge and experience, especially in Balfour Beatty’s development as a major services provider, will be of great benefit as we continue to implement the Group strategy.

Peter McIntosh has rejoined VT after a two-year spell on secondment as Chief Executive of the Aircraft Carrier Alliance. Peter has returned to the Board and is responsible both for our shipbuilding business and for our new activities in the nuclear and waste sectors.

The continuing success of our business can only be achieved through our people: their drive and enthusiasm is fundamental to our unique VT culture. In our management teams, we have the experience and expertise to pursue our corporate strategy and to drive the business forward.

Prospects The progress of the Group and the growth of our order book to £4.9 billion reflect the continuing successful implementation of our corporate strategy. We intend to concentrate on the organic development of new business in engineering support services whilst maintaining a well planned acquisition policy.

The formation of BVT will provide us with a further opportunity to take the Group forward.

Our continuing development into a broader based support services group will capitalise on the engineering-based heritage that has been the foundation for VT’s success. We will continue to apply this expertise to markets which are critical to the success of our customers, primarily in Government sectors.

This model has been evident in our two most recent acquisitions, VT Aepco in the United States and VT Nuclear Services.

The Future Strategic Tanker Aircraft (FSTA) and the Military Flying Training System (MFTS) projects are good examples of our ability to augment our organic business by securing long-term programmes which provide excellent visibility of earnings. As pressure mounts on

Overview of the Year

3

VT Group Plc Annual Report & Accounts 2008

VT Group Plc Annual Report & Accounts 2008

Chairman’s Statement continued

The progress of the Group and the growth of our order book to £4.9 billion reflect the continuing successful implementation of our corporate strategy. We intend to concentrate on the organic development of new business in engineering support services whilst maintaining a well planned acquisition policy.

defence and other UK Government budgets, we believe that our position as a leading support services company will be enhanced as HM Government looks increasingly to the private sector to provide efficient, cost-effective support activities.

In the immediate future, we are competing for further programmes including Whole Fleet Management (WFM), New Dimensions and Search and Rescue (Helicopter) where our capability means that we are well placed to provide the solution which the customer is seeking.

Customer requirements for more efficient, more affordable support also place us in a good position to expand our role in new markets, including nuclear services and waste management. The £75 billion budget for decommissioning nuclear facilities that is projected until 2035 was an important factor in our acquisition of VT Nuclear Services, formerly British Nuclear Group Project Services, and this move has been further highlighted by the Government identifying nuclear power as a fundamental part of future energy requirements in the UK. Having achieved preferred bidder status in the competition to provide a Private Finance Initiative (PFI) waste management and recycling facility in the Metropolitan Borough of Wakefield, Yorkshire, several other opportunities have now emerged as local authorities look to reduce their dependence on landfill schemes to meet EU regulatory requirements.

Environmental services markets offer a considerable opportunity as we move towards becoming a broadly based engineering support services business.

VT Communications will benefit from providing information, communications and technology services to both the FSTA and MFTS programmes and the business continues to strengthen its position in the provision of new media distribution and digital transmission.

It has also secured business in relation to the television switchover from analogue to digital signalling. VTC’s organic growth is expected to be strengthened by the extension of its Government contract.

VT Education and Skills (VTE&S) has shown an improvement in profit. The division has expanded its work in providing education services and has also exploited an opportunity to strengthen its position in supplying engineering training for the automotive industry.

Further potential exists to improve our market share in this sector. VTE&S continues to address new Building Schools for the Future opportunities, concentrating on its role as a specialist provider of education services.

Education and skills remains a challenging market but we believe that VT is now recognised as a significant player in the sector and can leverage this position to further develop the business. The planned acquisition of the rest of Flagship Training, through the BVT JV agreement, will make VTE&S the UK’s biggest education and training provider.

The acquisition of VT Aepco in the US has strengthened our links with the US Army and the US Government. We have already seen the benefits of the acquisition through the continued improvement in margins of the US business and this strategy to increase returns from the activities of VT Services Inc. will continue.

VT Support Services continues to make good progress and the addition of FSTA and MFTS will provide further long-term organic growth.

With several major prospects, the division is set to maintain its role as a leading provider of support services in the defence, emergency services and commercial markets.

VT Shipbuilding continues to develop prospects for work overseas. We are working closely with our Greek partners, Elefsis Shipbuilding, to secure a further order from the Hellenic Navy for fast attack craft and prospects in Saudi Arabia and Libya are progressing.

Michael Jeffries

Explaining the Group and our 008 results From our roots in shipbuilding, we have built VT Group into a thriving company with five divisions. What characterises our business across all divisions is the nature of our projects, which are generally complex, engineering-led, availability-based contracts to manage business-critical assets for our customers. Success means our customers, largely government organisations, trusting us with their long-term contracts.

Explaining the Group The nature of our business Complex project Engineering-led

6 6 8

Availability-based

10

Business-critical

12

VT Group

14

What we do

14

Outlook

16

Financial performance

17

Our business divisions

21

VT Communications

21

VT Education and Skills

24

VT Services Inc

27

VT Support Services

30

VT Shipbuilding

34

Explaining the Group

5

VT Group Plc Annual Report & Accounts 2008

VT Group Plc Annual Report & Accounts 2008

Complex project VT Group’s focus is on high-value, long-term contracts. Even our smaller contracts generally involve a considerable amount of resources, time and cost management. In addition, much of what we do is finely tailored to our individual clients. No two projects are the same – most are completely new concepts.

Our project management skills ensure we can minimise risk whilst delivering what the customer needs.

Building School Services The best days of your life Complex project: Building new facilities on existing school sites safely and without impeding education.

Engineering-led: Aligning designers, builders, educationalists and FM and ICT specialists with school, local community and local authority stakeholders.

Availability-based: Payment based on delivery dates of the schools, the availability of classrooms and the reliability of ICT systems.

Business-critical: Supporting over 14,000 children in Lewisham’s secondary schools.

Lorna Sampson, BSF Operations Manager, VT Education and Skills.

7

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

VT Group Plc Annual Report & Accounts 2008

Engineering-led VT Group’s roots lie in shipbuilding.

As we have acquired new businesses and employed new people, our engineering skills have broadened to incorporate other engineering disciplines, from construction to electronics. Whatever the discipline though, the engineering mindset prevails.

There’s a desire to solve problems; a practical approach to getting the job done; and a willingness to adopt new ideas once we know they will work.

BBC World Service Putting the ‘World’ into BBC World Service Provision of global short-wave managed broadcast service.

Complex project: Helping to create a global satellite distribution system that distributes programmes to 1,200 partners in 150 countries.

Engineering-led: Developing new transmitters that use 25% less energy, saving the equivalent of 160 tonnes of CO2 per site.

Availability-based: Delivering over 750 hours of programmes a day, with 99.9% availability guaranteed.

Business-critical: Enabling the BBC to reach 183 million listeners in 33 different languages.

Steve Gray, Head of Site Operations, VT Communications.

9

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

10

VT Group Plc Annual Report & Accounts 2008

Availability-based The services we deliver are usually connected to providing and supporting facilities and equipment. We deliver these assets, guarantee their ongoing availability in line with the customer’s requirements and undertake to do whatever is necessary to ensure these requirements are met.

This means that the risks associated with owning and/or operating the asset are transferred from the customer to VT Group.

It also gives us an incentive to minimise costs while maintaining sufficient resources to meet our customer’s requirements.

Metropolitan Police Keeping the Met mobile Provision of fleet maintenance services.

Complex project: Managing a vehicle fleet spread across 246 police stations.

Engineering-led: Delivering 500 hours of maintenance a day.

Availability-based: Guaranteeing over 89% of vehicles are available every day.

Business-critical: Responsible for the management and maintenance of 3,600 Metropolitan Police vehicles across London.

Ben Roche, Mobile Technician, VT Critical Services.

11

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

12

VT Group Plc Annual Report & Accounts 2008

Business-critical The services we provide are characterised by being close to our customers’ core activities, with a direct impact on their own performance. This means that we must maintain very close relationships with our customers, have a thorough understanding of our customers’ business, and that high levels of trust must exist between the customer and VT.

NASA Our mission is to support theirs Provision of engineering and operations support to Wallops Flight Facility, Virginia.

Complex project Engineering-led: Maintaining over one million square feet of buildings and associated plant and equipment.

Availability-based Business-critical: Providing essential services in support of launches.

Greg Turner, Construction Manager, IDIQ Projects, VT Griffin Services.

13

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

14

VT Group Plc Annual Report & Accounts 2008

VT Group Paul Lester Chief Executive 2008 has been a good year for the Group and recent business successes have laid the foundations for future long‑term growth.

What we do

Strategy

VT Group is a leading defence and support services company, providing engineering and other support services to governments and large organisations around the world. Primarily based in the UK and US, we employ over 14,000 people. Over the past six years we have trebled in size, and now have a turnover of £1.2bn.

Our vision is to be the number one international government services group. What unites all our businesses is our focus on managing critical assets in partnership with our customers.

These long-term projects are invariably complex, predominately with an engineering focus, and require practical solutions, programme and project management and the excellent delivery of managed services using our broad range of capabilities. We refer to this as VT’s ‘Value Proposition’ (see diagram). We operate in the ‘top right corner’ for the majority of our contracts. However, we need to manage a small number of contracts at the other end of the scale when our existing customers require us to operate more straight-forward contracts as part of our wider relationship. Examples of such long-term projects include FSTA, our radio

VT operates in a wide range of markets, including defence, support services, logistics, communications, education and training and shipbuilding. Through our five business divisions – VT Communications, VT Education and Skills, VT Services Inc, VT Shipbuilding and VT Support Services – we provide services from designing, acquiring and then operating and maintaining facilities and assets, through to providing support and training – to everyone from firefighters to teachers, apprentices and pilots.

The VT Value Proposition

Capability

Long-term partner Higher added value Critical to success Managed service

Arms-length subcontractor Short-term prescriptive

Customer Engagement

15

VT Group Plc Annual Report & Accounts 2008

3. Apply VT’s ‘Value Proposition’ to appropriate commercial markets; 4. Maintain and build existing customer relationships; and

We plan to grow our business through a mixture of organic growth, acquisitions and by taking advantage of emerging markets.

5. Grow in the strategically significant nuclear and waste processing to energy markets.

Organic growth

We will achieve these objectives by adhering to our core values:

Organic growth, namely the development of new opportunities with existing or new customers or within existing or new markets, is key to growing shareholder value.

Business development in existing markets generates a diversified portfolio of opportunities of varying sizes across our core business sectors. We focus on those opportunities that best match our value proposition and gives added value to our customers. The combination of long-term contracts and recurring business gives us a high level of visibility of future revenues and sustainable growth.

Acquisition We maintain a focused acquisition policy that concentrates on adding business-critical engineering support companies to our portfolio.

We judge all potential acquisitions against strict criteria, seeking targets that fit with our strategy and complement our core competencies; that generate sustainable revenues and profits; that are attractively priced; and that can be acquired with limited competition. This acquisition policy has been evident in our two most recent acquisitions: in the UK, VT Nuclear Services has seen us increasing the addressable market for our critical engineering support capability, entering into a new market that offers the potential for significant growth; whilst in the US, VT Aepco has accelerated our margin growth and is moving VT Services Inc. further up the value chain.

Taking advantage of emerging markets The continued growth of the support services market and the development of government procurement strategies are opening up opportunities both in the UK and overseas.

Where we believe that our value proposition fits, we analyse how we might enter an emerging market.

Strategic priorities Our strategic priorities are to: 1. Develop our position in the UK defence market through consolidation and acquisition where appropriate; 2. Strengthen our position in the US defense market by further developing our capabilities and achieving critical mass;

• Performance driven: striving for excellence and outstanding results through a ‘can do, will do’ approach with innovation and integrity; • Partnering with customers and suppliers: developing and maintaining positive relationships, working together to achieve common goals; and • Passionate about people: demonstrating commitment to people, enabling individuals to meet their full potential and share in the Group’s success.

Working closely with our customers and suppliers is fundamental to the success of our business. We are proud that in 2008, having reviewed Group performance over a number of contracts, the UK Ministry of Defence (MoD)’s Directorate of Supplier Relations rated VT Group as its top performing supplier.

Our customers frequently embed their contract teams within our organisation creating better lines of communication. Currently we have personnel from both the Coastguard of Trinidad and Tobago and the Royal Navy of Oman based at VT Shipbuilding.

Adopting a partnering approach has also secured new business. Our contract to provide equipment cabin infrastructure for the UK’s switchover to digital terrestrial television was won thanks to the strong relationship VT Communications has with its customer Arqiva.

Our partnering approach with suppliers is key to the successful delivery of our business strategy.

The extension to our ship manufacturing hall in Portsmouth Dockyard was completed early and under budget through our first full risk/reward partnering arrangement with Morgan Ashurst.

New markets VT Nuclear Services We acquired British Nuclear Group Project Services, now known as VT Nuclear Services, from BNFL in January 2008. Employing over 700 people and with a turnover in excess of £70m, VT Nuclear Services has over 40 years’ experience of operating and decommissioning nuclear plants, including the closure and clean-up of over 50 nuclear facilities in the UK, Europe and USA, and covers the entire decommissioning lifecycle.

Explaining the Group

broadcast contract with the BBC; the Lewisham Building Schools for the Future Programme; our contracts with the Metropolitan Police; and the proposed Wakefield Waste PFI.

16

VT Group Plc Annual Report & Accounts 2008

VT Group continued VT Nuclear Services has two main areas of business:

We have recently extended our engineering support approach to nuclear services and waste management.

• Core technical and engineering expertise to help safely accelerate the discharge of the UK Government’s nuclear responsibilities, in accordance with the Nuclear Decommissioning Authority’s requirements.

• Highly differentiated technical and engineering solutions to nuclear customers worldwide.

The business fits well with our value proposition, complementing our skills in critical engineering services and project management, and further expands our support services capability.

The market for nuclear decommissioning in the UK is currently worth around £1 billion per year.

However, the Government has stated that £75bn will need to be spent up to 2035. We aim to benefit from the Government’s intention to build new nuclear power plants in the UK by assisting nuclear contractors to understand UK and international regulatory requirements, manage waste, design for decommissioning and quantify decommissioning liabilities.

VT Environmental Engineering VT Environmental Engineering aims to take advantage of the drive towards processing waste rather than sending it to landfill. In the UK, as Government landfill taxes rise, local authorities are looking for the most efficient way to minimise their costs and maximise the amount of waste sent for recycling. We work with experienced technology partners and apply our project management and engineering expertise to bringing innovative solutions to this market. We have recently been named preferred bidder to build and manage municipal household waste facilities for Wakefield Metropolitan District Council, in a PFI deal worth nearly £700m over a 25-year period. The new facilities built will process over 200,000 tonnes of domestic waste per year.

This market offers major potential for VT Group to extend our range of engineering-based support services in line with our strategy.

Competitive and regulatory environments Each of our business divisions operates in a different competitive and regulatory environment.

Please see the reports from each business division on pages 21 to 35 for further details.

Corporate responsibility Business success requires us to demonstrate responsible behaviour, and this means not only ensuring compliance with our business principles, national and international laws, but also making certain that our activities, services and products are economically viable, environmentally sound and socially just.

We have made good progress this year, further integrating corporate responsibility performance as part of our overall company reporting, including business ethics, the environment, health and safety, our people, our customers and suppliers and investment in our communities.

You will find a full report on how we manage corporate responsibility and our performance this year in ‘How we run the Group’ on pages 37 to 52.

We have also launched a comprehensive section on corporate responsibility on our website, www.vtplc.com, where you will find more information, details of our policies, and related case studies.

Outlook 2008 has been another year of growth fuelled by new contract wins, acquisitions and moves into new markets.

As we look ahead: • Our order book stands at £4.9bn at the end of March 2008; • Negotiations remain at a very advanced stage with BAE Systems plc on the formation of the proposed shipbuilding and naval support joint venture on terms in line with those previously announced. We have received a signed commitment from the UK Government on the proposed Terms of Business Agreement, and are now waiting for a confirmed date of commencement for the Future Aircraft Carrier (CVF) programme before we sign the joint-venture agreement; • We are the preferred bidder for the UK MFTS and Wakefield Waste PFIs; • We are seeing new market opportunities in the UK and overseas with the evolution of the support services market and the development of Government procurement strategies.

Our strategy is serving us well. VT Group continues to expand organically while our recent acquisitions position us for further growth.

Governance and risk management You will find detailed reports on corporate governance and risk management in ‘How we run the Group’ on pages 37 to 52.

Paul Lester

17

VT Group Plc Annual Report & Accounts 2008

Philip Harrison Finance Director Another year of growth fuelled by new contract wins, acquisitions and moves into new markets.

Summary of financial results

008 performance To ensure we are building value for shareholders we focus on a number of key measures:

Profit before tax, has increased by 33% to £71.3m (2007: £53.8m), with each business division achieving an increase in reported profits for the year. Profit before tax in the prior year included a one-off charge in respect of exiting marine product businesses of £6m.

• Underlying operating profit, being profit before taxation, finance expenses, JV taxation, amortisation of intangibles arising from business acquisitions and non-recurring charges of exiting businesses;

Net finance costs for the year have increased to £9.9m (2007: £8.3m) as a result of further acquisitions, both in the UK and USA, with consideration of £74m paid during the current year.

• Profit before taxation, intangible amortisation arising from acquisitions and non-recurring charges of exiting businesses (underlying profit);

The effective tax rate on profit before taxation is 18.7% (2007: 14.3%). If the IFRS presentation relating to taxation on equity accounted investment profits was shown as taxation rather than share of post tax earnings of equity accounted investments, the effective tax rate would have been 26.8% (2007:23.7%).

Building value for shareholders Turnover (£m)

2008

1,201.0

2007

1,004.6 0

600

800

1,000

1,200

1,400

Underlying profit (£m)

2008

89.1

2007

74.2 0

60

70

80

90

100

Order book (£m)

2008

4,900

2007

3,685 0

2000

4000

6000

81

2007

• Underlying earnings per share.

173 0

50

• Order intake level; • Cash generation from operating activities;

Cash Convertion (%)

2008

100

150

Turnover growth in the business has continued with an increase of 20% to a total of £1.2bn. This growth has been achieved across all business units via a combination of organic growth (£111.2m) and a targeted acquisition strategy (£85.2m).

200

Underlying EPS (p)

2008

2008 £m

2007 £m

1,201.0

1,004.6

71.3

59.8

-

(6.0)

71.3

53.8

Taxation

(13.3)

(7.7)

Profit for the year

58.0

46.1

35.5

2007

30.9 0

10

20

30

Turnover (including Group share of equity accounted investments) 40

Profit before taxation – excluding non-recurring charges Non-recurring charges Total profit before taxation

Underlying profit The Group uses underlying profit before taxation (i.e. profit before taxation, amortisation of intangible assets arising from business combinations, JV taxation and non-recurring charges of exiting businesses) as a key measure of performance. The increase year on year was 20%.

Explaining the Group

Financial performance is measured under International Financial Reporting Standards (‘IFRS’).

18

VT Group Plc Annual Report & Accounts 2008

VT Group continued

VT continues to expand … while recent acquisitions position us for further growth.

2008 £m

2007 £m

Increase %

Profit before taxation as reported

71.3

53.8

33

Amortisation of intangible assets arising from business combinations

9.9

7.7

Taxation charge relating to equity accounted investments

7.9

6.7

-

6.0

89.1

74.2

Non-recurring charges of exiting businesses Underlying profit Underlying profit growth has been achieved across all business divisions, both via organic business growth and from acquisitions made in the current and prior year. The acquisitions have also contributed to the increase in the intangible amortisation charge to a total of £9.9m (2007: £7.7m).

Taxation charges in respect of equity accounted investments have increased to £7.9m (2007: £6.7m), an effective rate of 30% (2007: 30%) on the Group share of profits arising.

An analysis of underlying profit by business division is as follows:

20

Our Support Services business has built on the existing business and continues to take advantage of opportunities arising from prior year acquisitions. Within Support Services we have invested £1.5m in our waste and management business and acquired VT Nuclear Services for a consideration of £47.6m, which together form part of our expansion into engineering support services. The VT Nuclear Services business did not contribute profit to the Group in the current financial year as a restructuring exercise was commenced following acquisition at an estimated expense of £1m.

2008 £m

2007 £m

Increase %

Communications

17.7

15.7

13

Education & Skills

5.6

3.8

47

VT Services Inc

9.2

5.9

56

Support Services

50.2

44.0

14

Shipbuilding

16.3

13.1

24

99.0

82.5

Net finance costs

(9.9)

(8.3)

Underlying profit

89.1

74.2

The Communications division continues to build on the success of the significant MoD contracts, particularly the DHFCS contract for which the capital enhancement phase was completed during the current year.

Our Education and Skills division reports a significant increase in profit despite the prevailing challenging market conditions. This has been achieved in part from the benefits of the rationalisation performed during the prior year.

Our US business continues to show both improved overall profit along with increased operating margins, in line with our strategy to focus on higher value added services.

20

The Shipbuilding business had a strong year with contributions from the two recent export contracts from Oman and Trinidad and Tobago, adding to the existing Type 45 contract for the MoD.

Order book The closing order book of the Group, including share of work to be performed by equity accounted investments, has increased to £4.9bn (2007: £3.7bn), driven by key contract wins of FSTA, Lewisham Building Schools for the Future and the Trinidad and Tobago OPV contract, supplemented by current contract and scope amendments and renewals. The size and

19

VT Group Plc Annual Report & Accounts 2008

The proposed final dividend of 9.55p per share, coupled with the interim dividend of 3.55p per share paid in January 2008, gives a cumulative dividend for 2008 of 13.1p (2007: 11.85p), an increase of 11% on the prior year.

Cash and net debt The Group’s operating cash conversion of operating profit to operating cash was 81% (2007: 173%). The prior year conversion rate reflected significant advance payments received on shipbuilding contracts which were not repeated in the current year.

Overall the Group’s net debt position at 31 March 2008 was £144.9m (2007: £71.4m).

The increase noted is largely due to the acquisition of VT Aepco and VT Nuclear Services for net consideration of £74.3m.

The summary movement in net debt is as follows:

Underlying earnings per share Underlying earnings per share is calculated on profits before amortisation of intangible assets arising from business combinations and non-recurring charges of exiting businesses.

For the year ended 31 March 2008 the underlying earnings per share was 35.5p (2007: 30.9p) an increase of 15%. The average number of shares in issue during the year was 176.5m (2007: 174.9m).

Dividend The proposed final dividend of 9.55p per share, coupled with the interim dividend of 3.55p per share paid in January 2008, gives a cumulative dividend for 2008 of 13.1p (2007: 11.85p), an increase of 11% on the prior year. The total

2008 £m

2007 £m

Cash flow from operating activities

65.7

107.4

Tax paid

(11.4)

(12.9)

(9.8)

(8.0)

Net capital expenditure

(24.2)

(18.6)

Dividends paid

(23.4)

(19.6)

Purchase of businesses

(74.3)

(106.9)

3.9

2.5

(73.5)

(56.1)

Net interest paid

Other Movement in net debt The Group’s principal source of funding is a £305m revolving credit facility, of which £145m was utilised at 31 March 2008. £80m of this facility is available to the Group until September 2009 with the remainder available until November 2011.

The interest cover ratio in respect of servicing this debt stands at 9:1 (2007: 13:1), calculated as a percentage of EBITDA in accordance with bank covenant requirements.

Pensions VT Group has five pension schemes accounted for as defined benefit pension schemes with deficits, net of related deferred tax assets, of £7m (2007: £26.3 m) included within the consolidated balance sheet. The decrease in the year is largely due to changes in actuarial assumptions applied, predominantly an increase in the discount rate used to calculate scheme liabilities, which is driven by bond yields.

dividend is covered 2.7 times by earnings before intangible amortisation arising from business combinations and non-recurring charges of exiting businesses (2007: 2.7 times).

The increase in dividend for the year reflects the Board’s confidence in the future prospects of the Group and its strong financial position.

Subject to approval at the Annual General Meeting, VT Group plc will pay a final dividend of 9.55p per share for the year ended 31 March 2008 on 6 August 2008 to shareholders on the register at 20 June 2008.

Explaining the Group

long-term nature of the order book provides good visibility of future prospects.

20

VT Group Plc Annual Report & Accounts 2008

VT Group continued Critical accounting policies The Group’s main accounting policies are set out on pages 70 to 76. In order to prepare our financial statements in accordance with these policies, management has used various judgements and assumptions to estimate the amounts at which certain items are recorded.

Actual results may therefore differ from the estimates calculated using these judgements and assumptions.

The following are the policies considered to be critical as the judgements and assumptions made could have a significant impact on the Group’s results and financial condition.

Retirement benefits Accounting for pensions and other post‑retirement benefits involves judgement about certain events, including estimated retirement dates, salary levels at retirement, mortality rates, rates of return on plan assets and determination of discount rates for measuring plan obligations. Determination of the projected benefit obligations for the Group’s defined benefit pension plans impacts on the recorded amounts for such obligations on the balance sheet and to the amount of benefit expense in the income statement.

The assumptions used may vary from year to year, which will affect future results.

Any differences between these assumptions and the actual outcome may also affect future results.

Pension benefit assumptions are discussed and agreed with independent actuaries in March each year. These assumptions are used to determine the projected benefit obligation at the year end, hence the deficits recorded on the Group’s balance sheet, and the pension expense for the following year.

Taxation Provisions for tax contingencies require management to make judgements and estimates in relation to tax issues and exposures. Amounts provided are based on management’s interpretation of country-specific law and the likelihood of settlement. Tax benefits are not recognised unless the tax positions are likely to be sustained.

Goodwill and other intangible assets The Group has capitalised goodwill included on the balance sheet of £251m at 31 March 2008.

Goodwill is required to be tested for impairment at least annually or more frequently if changes in circumstances or the occurrence of events indicate potential impairment exists. The Group uses the present value of future cashflows to

determine implied fair value. In calculating the implied fair value, significant management judgement is required in forecasting cashflows of the reporting unit, in estimating terminal growth values and in selecting an appropriate discount rate. If different management judgements were adopted, then different impairment outcomes could result.

No impairment resulted from the annual impairment test in 2008.

Capital management The Group’s treasury function is responsible for managing the Group’s capital, including its exposure to finance risks and operates in line with policies set by the Board. The primary objectives are to: • maintain an optimal capital structure to reduce the cost of capital and safeguard the Group’s ability to continue as a going concern; • provide cash management; and • ensure the availability of cost-effective facilities to finance new investment, working capital and guarantees.

• manage interest rate and foreign currency exposure; The Board has a conservative policy towards the investment of cash. Treasury instruments are used only to reduce risk. Speculation is not permitted.

The Group finances activities with a combination of shareholders’ funds, bank loans, loan notes, finance leases and cash. Other financial assets and liabilities, such as trade debtors and trade creditors, arise directly from the Group’s operating activities. The Group also enters into derivative transactions, including principally interest rate swaps and foreign currency contracts. The purpose is to manage the interest rate and currency risks arising from the Group’s operations and sources of finance.

The main risks associated with the Group’s financial assets and liabilities are set out on pages 47 to 48.

Philip Harrison

1

VT Group Plc Annual Report & Accounts 2008

VT Communications Doug Umbers Managing Director The business continues to grow organically building on existing relationships, especially in Defence & Security.

Turnover (£m)

2008

107.2

2007

99.2 0

80

90

100

110

120

Underlying Operating Profit (£m)

2008

17.7

2007

15.7 0

5

10

15

20

25

Underlying Operating Profit Margin (%)

2008

16.5

2007

15.8 0

14

15

16

17

18

• specialist installation and vehicle/container engineering conversions

008 performance Turnover increased by 8% (2007 3%); underlying operating profit by 13% (2007 8%); and our operating margin was 16.5% (2007 15.8%).

2008 has been another excellent year for VT Communications. The business continues to grow organically building on existing relationships, especially in Defence & Security, where we are increasing our footprint. A major highlight was achieving the in-service date for the £220m MoD Defence High Frequency Communications Service (DHFCS) programme, six months early and on budget. VTC and the MoD were awarded the Minister (DES) Acquisition Award 2007 in recognition of the successful completion of this programme.

What we do

Underlying turnover continued to show good growth even though it was held back this year by the delay in the start of the Future Strategic Tanker Aircraft (FSTA) and Military Flying Training System (MFTS) contracts. We also had lower revenue this year from the Defence High Frequency Service (DHFCS) contract as the initial construction phase completed.

However the successful early completion of the project phase has enabled cashflow and margin to grow at a faster rate.

Strategy Our strategy is to:

VT Communications designs, builds, operates, maintains and supports business-critical communications infrastructure for some of the most demanding organisations in the world.

Among them are national governments, defence organisations, non government organisations and broadcasters, both public sector and commercial, national and international. We have two business units, Broadcast and Defence & Security.

• Broaden our portfolio of services for existing customers

Broadcast

Customers and markets

Through Broadcast we own and operate global broadcast infrastructure that transmits over 1,100 hours of short- and medium-wave broadcasts every day, linking broadcasters to their audiences worldwide. Our core capabilities include: • AM band radio network management • broadcast infrastructure • digital media services

Defence & Security (D&S) D&S offers extensive experience delivering diverse projects and services to military and commercial customers around the world.

Our core capabilities include: • radio frequency infrastructure and point communications solutions • information communications technology

• Ensure excellence in service delivery • Make VT Communications a great place to work • Take our existing capabilities to new customers • Enter adjacent or complementary markets where security and resilience are critical

Broadcast Our two largest customers are the BBC World Service and Deutsche Welle, both with contracts lasting until 2012. We are one of the largest commercial providers of AM band radio to international broadcasters. More broadcasters are investing in new media to deliver content, and we are addressing this growing demand through this year’s investment in a new media management centre.

Leveraging our broad expertise in wireless infrastructure, engineering and programme management, in 2007 we secured a major contract with broadcast and communications infrastructure provider, Arqiva, to source, deploy and commission digital terrestrial television cabin infrastructure at Arqiva’s relay transmission sites in the UK as part of the digital switchover.

Explaining the Group

Financial Highlights

• power generation and distribution

22

VT Group Plc Annual Report & Accounts 2008

VT Communications continued Defence & Security

We invest heavily in training for staff development.

Our programmes focused on management styles; project management; health and safety awareness; and customer relationship management.

VTC and the MoD receiving the recent Minister DES Acquisition Award 2007.

D&S is a strategic partner of the MoD for long-haul radio communications. This is underpinned by two long-term contracts, the DHFCS and the Very Low Frequency PFI. We are using our position with the MoD to grow our presence across the Command, Control, Communications, Computers, Information, Surveillance Target Acquisition and Reconnaissance (C4ISTAR) area for secure and resilient communications services.

Competitive and regulatory environments Our competitors are varied including service companies such as SERCO and prime systems integrators such as BT, Thales and EADS. VT Communications concentrates on specific market areas where it is either the market leader or near leader. This allows us to work very closely with our customers to develop longer-term relationships which we believe gives our business sustainable advantage for the long-term.

VT Communications operates within all rules and regulations of our international markets.

There have been no changes to our regulatory environment this year, and none are expected that will impact materially on our business.

Governance and risk management In line with overall Group corporate governance, VT Communications operates a governance process covering all activities of the business and, where appropriate, we have implemented formal processes.

We operate risk management and mitigation procedures across VT Communications.

Specifically this year we have implemented a project lifecycle framework for all capital projects which aims to ensure a consistent approach to risk.

Outlook We will be focusing on two areas: the successful delivery of recent new business wins, including the digital switchover; and the execution of our strategy. Through Broadcast we are pursuing opportunities to consolidate our core AM radio market, marketing our new media capabilities and expanding our presence in the broadcast infrastructure market in both the UK and overseas.

Through DNS we are building our presence in the national security market as well as continuing to broaden our UK MoD footprint.

We look forward with confidence to the coming year, supported by the signing in March of the FSTA contract for which we have a £132m sub contract.

3

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

Digital Switchover Partnering with Arqiva VT Communications partnering approach to project delivery is widely recognised and well established, delivering critical projects on schedule and within budget. In November 2007 VT Communications was chosen by Arqiva to be its delivery partner in the replacement of low-power TV relay cabins at over 500 sites in the UK, a key part of the UK Digital Switchover Programme.

24

VT Group Plc Annual Report & Accounts 2008

VT Education & Skills Simon Withey Managing Director We achieved solid overall performance with improved margins and significant contract wins.

Financial Highlights Turnover (£m)

2008

124.9

2007

112.1 0

100

110

120

130

140

8

10

Underlying Operating Profit (£m)

2008

5.6

2007

3.8 0

2

4

6

Underlying Operating Profit Margin (%)

2008

4.5

2007

3.4 0

1

2

3

4

5

Strategy

2008 has been a good year. We achieved solid overall performance with improved margins and significant contract wins. VT Education and Skills (VTE&S) has grown to be one of the largest companies in the UK Education and Skills sector, and, with the proposed integration of Flagship following the expected completion of the shipbuilding joint venture, it will become the clear market leader, positioning us well for further expansion.

What we do VTE&S employs over 2,000 people and has a unique breadth of capabilities encompassing education, training and guidance services.

In education we support over 500 schools providing school improvement, education consultancy, staff development, ICT solutions and facilities management. We also have two Building Schools for the Future (BSF) contracts which will, in due course, cover about 25 secondary schools.

In training we are one of the UK’s leading providers in work-based learning, offering vocational qualifications in engineering, automotive, hospitality, retail, care and leisure.

We typically have over 18,000 apprentices at any one time in a large number of locations across the UK. In guidance services this year we supported over 400,000 adults and young people across 19 local authorities with information, advice and guidance on careers and other key life decisions.

2008 performance Despite challenging market conditions and budgetary pressures suffered by our major customers, VTE&S achieved solid operating performance, increasing margin from 3.4% to 4.5% on a higher turnover. This was driven mainly by achieving financial close on the BSF contract in Lewisham, and improved efficiency, processes and controls across the rest of the business.

Our vision is to be the number one provider in the UK education and skills market. In line with the Group’s strategy to work in partnership with government customers to deliver businesscritical assets, our aim is to develop more long-term relationships, such as local authority school improvement contracts; and long-term customer training programmes within high technology environments such as engineering and automotive. Our increased use of IT to offer e-learning will provide a key differentiator for us.

Customers and markets Our major customers for our education and guidance services are local authorities and the Learning and Skills Council (LSC). Key local authorities are the London Boroughs of Greenwich and Lewisham for BSF; Surrey County Council and Waltham Forest for school support services; and East and West Sussex plus several London boroughs for our information, advice and guidance (IAG) work.

Until March 2008 our IAG services for young people were provided through the Connexions service but this has now been devolved to local authorities.

The major customer for our vocational training and assessment services is the LSC in England, but we also have similar services in Scotland, Wales and Northern Ireland. These services, which are predominantly Government-funded, are delivering apprenticeships at levels 2 and 3 to a wide range of UK-based employers. Our clients include many leading companies such as Whitbread, Sodexho, BAA, Compass and Virgin Mobile in the hospitality and retail sector; and Volkswagen and Subaru in the automotive sector. We also have a training contract with the British Army’s REME organisation which was successfully renewed last year.

Education Our key schools support contract across 400 schools in Surrey continues to progress well.

This is delivered through our joint venture with Surrey County Council, VT FourS. Against strong competition, VTE&S won the £30m contract for school support services for the London Borough of Waltham Forest.

The contract lasts four years and began on 1 April 2008.

5

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

Training tomorrow’s technicians Providing Volkwagen’s apprenticeship training in UK VT Training has recently won the contract to deliver apprenticeship training to the Volkswagen Group, which also includes marques such as Audi, SEAT and Skoda. This prestigious contract includes the provision of a dedicated training facility in Nottingham and VT training staff who will work with up to 900 learners at any one time to help them gain Level 3 NVQs.

26

VT Group Plc Annual Report & Accounts 2008

VT Education & Skills continued

The safety of our employees is our priority.

Personal safety is a key issue and now forms part of our business reporting.

VTE&S recently won the £30m contract for schools support services for the London Borough of Waltham Forest.

Building Schools for the Future

Training

In November 2007, Learning21, our joint venture with Costain plc, achieved financial close on the Lewisham Building Schools for the Future project, and work has started on two of the 12 schools.

As part of our strategy to grow our engineering training capability, we secured a major contract to run the airside training academy for BAA which complements our existing retail academy contract. We also secured new contracts with two automotive groups, Volkswagen and IM Group, which together cover apprenticeship training for engineers and other personnel at their dealer networks across the country.

On our Greenwich BSF project, where we act as the authority’s strategic partnering organisation, we are working towards placing the contracts for the first group of schools.

Guidance VTE&S secured contracts to provide careers services for East and West Sussex which were previously operated by the Connexions service.

We also secured an extension to our Surrey careers contract, by combining this careers advice and guidance service with our successful school support services joint venture with Surrey County Council. We have, however, lost several of our other Connexions contracts where a number have been taken in-house by the local authorities.

As part of the Shipbuilding joint venture, VT Group will acquire BAE System’s 50% shareholding in Flagship Training Limited.

Our planning for integrating Flagship into VTE&S is well underway. The combination of the businesses will create the largest skills business in the UK, and, because the businesses offer complementary strengths, we expect the benefits of integration to be high.

Competitive and regulatory environments The majority of VTE&S business is Government funded and thus we are regularly audited and reviewed in accordance with central and local government processes. All our employees undergo comprehensive checks including Criminal Records Bureau checks.

Our major competitors come from the public, private and charitable sectors, and include Prospects and Cf BT for guidance services; Cambridge Education, Serco and Capita on education services; and RM, Civica and Northgate on BSF ICT programmes.

Governance and risk management VTE&S has a rigorous and consistently applied system for identifying, analysing and managing risks. This process involves the regular monthly review of risks and issues in each area of the business and, where necessary, formulating mitigation plans with line management.

Outlook Skills are very high on the Government agenda and growth in expenditure on education is running at a higher rate than in most other Government departments. The Government’s commitment to substantial increases in apprenticeship training, ‘train‑to-gain’ initiatives, and the Building Schools for the Future programme all provide good opportunities for us. Our integration of Flagship will give us a major opportunity to enhance our technical and engineering training services for both Government and corporate customers.

We therefore view 2009 with confidence.

7

VT Group Plc Annual Report & Accounts 2008

VT Services Inc Ken Smith Managing Director 2008 proved a successful year for VT Services.

Turnover was up 36%, while underlying operating profit grew by 66%.

Financial Highlights Turnover (£m)

2008

241.4

2007

193.2 0

50

100

150

200

250

300

Underlying Operating Profit (£m)

2008

9.2

2007

5.9 0

2

4

6

8

10

Underlying Operating Profit Margin (%)

2008

3.8

2007

3.1 0

1

2

3

4

5

2008 proved a successful year for VT Services. Turnover was up 25%, while underlying operating profit grew by 56%.

In line with Group strategy, we are continuing our move into higher value-added services, characterised by the business-critical nature of our customers’ projects. We acquired Advanced Engineering and Planning Corp., Inc. (VT Aepco), a military aviation support specialist, during December 2007.

What we do VT Services, Inc., the US arm of VT Group, is a provider of integrated government support services for state and federal agencies, in particular the US Department of Defense (DoD). Our capabilities include facilities operations, maintenance and logistics management services, electronics engineering and communication systems installation and support. These are delivered through three businesses: • VT Aepco, based in Gaithersburg, Maryland, is a leading engineering and logistics firm providing life cycle support programs, primarily for US Army helicopters. VT Aepco has a significant presence on the Redstone Arsenal in Huntsville, Alabama, Headquarters of the US Army Material Command (AMC) and US Army Aviation and Missile Command (AMCOM).

• VT Griffin, based in Alpharetta, Georgia, is a premier services provider of facilities maintenance and operations, logistics, engineering and contingency support services, primarily for the US military and various federal government agencies.

• VT Milcom, based in Virginia Beach, Virginia, provides engineering, design, fabrication and installation of electronic and communication systems and equipment, primarily for the US military.

2008 performance include a full year of operations from both VT Milcom and VT Griffin and three months of operation from VT Aepco.

We continue to focus on improving the efficiency of the businesses and in the year we saw operating margins grow to 3.8% (3.1% 2007) due to a combination of reducing our reliance on lower margin base operation contracts and higher value services contracts from the three businesses.

Strategy Our strategy is to: • Grow organically, by expanding customer relationships; identifying and pursuing opportunities early; improving our proposal development process; and leveraging strategic alliances.

• Improve margins, by reducing reliance on low-margin Base Operations contracts and increasing on higher value services contracts from the three business.

• Improve cashflow, by improving our processes and systems across the businesses.

• Expand in adjacent Department of Defense market sectors.

• Focus our merger and acquisition activity on adjacent markets with higher value-added offerings.

Customers and markets VT Aepco Our main customer is the US Army.

Continuing military operations in Afghanistan and Iraq are sustaining demand for our services and we are the market leader in this field.

Should these operations scale down, we are likely to see continuing high levels of demand for our services as the US Army embarks on the lengthy process of restructuring its assets.

Our recent win of a $137million contract with US AMC positions us well with a customer set for significant growth and the ability to influence defence spending.

Explaining the Group

008 performance

28

VT Group Plc Annual Report & Accounts 2008

VT Services Inc continued VT Griffin

We continue to be confident that our strategy will enable us to achieve our goal of reaching turnover of $1billion+.

The priority for the year ahead is focus on organic growth within the three business units of VT Services.

US Army Installation Management Command (IMCOM) and US Navy Facilities Engineering Command (NAVFAC) remain our key customers.

Major contracts include facilities maintenance, public works and logistics, operations and maintenance contracts at Forts Stewart, McCoy and Huachuca, NASA/Wallops Flight Facility and Naval Submarine Base Kings Bay. VT Griffin was awarded the US Army’s Department of Public Works Contractor of the Year for its outstanding performance on Fort Stewart. Fort Stewart, the largest US Army installation east of the Mississippi at over 279,000 acres, is home to the Army’s 3rd Infantry Division.

Our traditional Base Operations Support market now offers fewer opportunities for growth due to the dominance of small businesses where contracts are set aside for such entities. We are therefore concentrating on larger opportunities with more diverse requirements and greater scale, including developing our relationship with the US Air Force and entering the Department of Energy (DoE) facilities management market.

VT Milcom VT Milcom is the market leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR), alteration and installation (AIT) for US Navy Space and Naval Warfare Systems (SPAWAR) Atlantic operations, and we are well positioned to take advantage of this growth market. US SPAWAR Charleston, the procurer and technical monitor of the Company’s $577million, five-year contract for C4ISR installation and integration services, continues to be our key customer. We are also pursuing opportunities with the US Army, the US Coast Guard (USCG) and the US Marine Corp.

Competitive and regulatory environments Industry consolidation continued with 99 acquisitions closed in the government services market during calendar year 2007, compared with 84 in 2006, 100 in 2005 and 106 in 2004. As the number of competitors declines, the level of competition between those that remain intensifies. Large, multi-award omnibus contracts magnify the importance of winning prime or large sub-contract positions.

The expansion of our skills and capabilities will position us better for such opportunities going forward.

The outcome of the 2008 US Presidential Elections is likely to affect the environment in which we operate, while increased reporting standards and closer scrutiny of compliance are characteristics of a sector experiencing moderate change from a regulatory perspective. The Department of Defense’s move away from the model of large Original Equipment Manufacturers (OEMs) filling the role of Lead Systems Integrator may provide additional opportunities for us to compete for unconsolidated or un-bundled contracts.

Governance and risk management The operations of VT Services, Inc. are governed by a Proxy Board. The Proxy Board comprises three proxy holders who serve as the directors of the US operation. The Proxy Board oversees the operation of the US entity and ensures that the US operations are compliant with all applicable US security regulations, since all three businesses operate with Top Secret facilities security clearances.

Outlook We continue to be confident that our strategy will enable us to achieve our goal of reaching turnover of over $1bn. The priority for the year ahead is to focus on organic growth within the three business units of VT Services.

Other priorities for the upcoming year include a review of the business to identify integration and consolidation opportunities, and investigating business opportunities that offer scope for a joint UK/US approach with other parts of the Group. We are looking to the logistics, communications/IT and intelligence markets where we see significant opportunities for additional acquisitive growth.

9

Explaining the Group

VT Group Plc Annual Report & Accounts 2008

Keeping the US Army airborne Providing logistic support to the US Army’s helicopter fleet In January 2008, VT Services acquired Maryland based, Advanced Engineering and Planning Corp, to create VT Aepco. One of the Company’s primary activities is managing life cycle support programmes, primarily for the US Army helicopters such as the Apache, Blackhawk, Chinook, and Cobra. Key services include life-cycle support for platforms, systems and equipment, integrated logistics, technical documentation and training. VT Aepco’s staff are deployed at the US Army’s Aviation and Missile Command’s largest logistic support contractor and was recently selected to provide logistic support services to the US Army Material Command.

30

VT Group Plc Annual Report & Accounts 2008

VT Support Services John Davies Managing Director An excellent year … with strong operational performance delivering growth.

Financial Highlights Turnover (£m)

2008

483.8

2007

436.1 0

100

200

300

400

500

600

Underlying Operating Profit (£m)

2008

begun work to put in place the infrastructure and support activities for the new A330 tanker aircraft.

This programme is expected to contribute over £1bn of revenue during its 27‑year life.

2008 has been an excellent year for VT Support Services with strong operational performance delivering significant margin growth. We also achieved good organic growth with several major contract wins during the year, and are well positioned to make good progress on key opportunities in 2009.

50.2

2007

What we do

44.0 0

10

20

30

40

50

60

Underlying Operating Profit Margin (%)

2008

10.4

2007

10.1 0

2

4

6

8

10

12

VT Support Services (VTSS) operates in the defence, emergency and commercial markets delivering business-critical services through the provision and support of aircraft, vehicles and ships. We provide services both in the UK and overseas through the following business units: • VT Aerospace delivers flying training and aircraft support to meet the high demands of air forces and military customers.

• VT Critical Services delivers operational capability to fire, police, marine and commercial airline customers.

• VT Land provides vehicles, engineering support and training to military customers.

• VT Naval Support undertakes through-life support for naval customers.

• Our joint ventures Flagship Training Ltd and Fleet Support deliver services to the Royal Navy and a range of military and commercial customers around the world.

• Our new markets – VT Nuclear Services and VT Environmental Engineering – provide complex engineering solutions in nuclear decomissioning and waste recycling.

2008 performance Growth in turnover and margin has been underpinned by strong operational performance across all business units and reflects the successful integration of the Lex business that we acquired in 2006.

We signed the Future Strategic Tanker Aircraft (FSTA) programme in March 2008 and have

VT Aerospace continued to deliver successfully on existing contracts during the year and has secured additional orders including an £8m, 10-year follow-on contract to continue delivering flying grading for the Royal Navy. VT Aerospace also secured the Sea King Integrated Operational Support (SKIOS) contract, valued at £39m over five years, transitioning the Search and Rescue sites round the UK and the Falkland Islands from military to contractor maintenance support.

VT Critical Services successfully completed the design, commissioning and transfer into a purpose-built workshop in support of British Airways’ new Terminal 5 operation. We also procured over £30m of new ground support equipment on behalf of British Airways which we delivered on time and within budget.

VT Land successfully secured a £40m, five-year contract with the British Army for Training, Maintenance and Support Services (TMASS) at Bovington which commenced on 1 April 2008 and involves the transfer of over 200 personnel into our business.

VT Naval Support has begun work on a logistics support package for the Royal Navy of Oman.

During the year we also began work on a £49m contract to provide comprehensive logistics support to three Offshore Patrol Vessels on an availability basis for the Government of the Republic of Trinidad and Tobago.

Our joint ventures both delivered performance in excess of target with FSL successfully renewing its partnering agreement with the Royal Navy.

Strategy VTSS aims to be the leading provider of business-critical asset availability and engineering support services to government and major commercial organisations.

In support of this strategy, our key goals are to: • Win major UK Ministry of Defence (MoD) projects; • Consolidate in the defence sector through acquisition; • Build strategic relationships with equipment manufacturers and other service providers to enhance our capability to win complex projects;

VT Group Plc Annual Report & Accounts 2008

31

• Expand our Critical Services business in existing and new markets; • Deliver our services in new international territories; and • Build on our people strategy to further raise individual and business performance.

Customers and markets VT Aerospace Explaining the Group

VT Aerospace operates a number of long-term partnering contracts with the MoD with a primary focus on flying training, aircraft maintenance and logistics support.

These contracts include the Light Aircraft Flying Task, which provides up to 50,000 flying hours per year delivering initial pilot training to the Royal Air Force, using our fleet of 94 Grob aircraft. VT Aerospace also works extensively with the RAF on the Tucano Total Support Programme, delivering approximately 14,000 flying hours per year in support of basic fast jet training at RAF Linton-on-Ouse.

Overseas, 2009 will see our 50th anniversary of service to the Royal Air Force of Oman where we continue to provide aircraft maintenance across a range of rotary and fixed-wing aircraft.

VT Critical Services VT Critical Services delivers a wide range of support solutions to both government and commercial customers. Our two principal long-term contracts are with the Metropolitan Police and British Airways. We ensure the availability of Metropolitan Police vehicles in London and all British Airways’ ground support vehicles at Heathrow and Gatwick airports. We also provide asset support to government and commercial customers in the fire and marine sectors.

VT Land VT Land provides comprehensive logistics support, maintenance, repair and training for a wide range of assets, from Land Rovers to Challenger II tanks. Through our joint venture, ‘ALC’, we own and maintain the construction vehicle fleet used worldwide on the frontline by the British Armed Forces. The UK MoD also relies on us to supply over 14,000 non-military vehicles known as ‘White Fleet’. At Bovington, Bordon and Arborfield garrisons, VT Land delivers armoured fighting vehicle support to the British Army.

When every second counts Supporting the MoD’s search and rescue helicopters VT Aerospace is working with helicopter manufacturer Augusta Westland to provide maintenance and support at six search and rescue sites in the UK and overseas.

Over two-hundred engineers provide a 24/7 service to ensure that aircraft are always ready for some 1800 rescue operations that the service carries out each year.

32

VT Group Plc Annual Report & Accounts 2008

VT Support Services continued VT Naval Support

In 2008 all our business units began to record their energy, water and waste usage and have established key performance indicators to drive efficiency.

VT Naval Support delivers contractor logistics support on naval vessels and guarantees levels of availability on four River Class Offshore Patrol Vessels operated by the Royal Navy. We have similar support contracts on two Survey Vessels which are operated worldwide by the Royal Navy. We also provide ship support and modification services to the Royal Saudi Naval Force, and this capability is enhanced by a ship repair, upgrade and refit service provided by VT Fitzroy, in New Zealand.

Joint ventures

training and integrated support services to over 400 customers around the world, including overseas navies, maritime organisations and commercial customers.

Flagship delivered on all of its financial targets this year, including an exceptional year in prime contracting order (£50m) for the Royal Navy and other Government customers. £50m of further orders were secured for training and other service provision and the business won a long-term contract to manage the facilities of the Regional Fire Control centres across the UK. Flagship continues to deliver all existing contracts on time and within budget.

Fleet Support Limited

New markets

FSL continued to deliver strong operating performance with financial targets exceeded.

The Partnering contract, delivering services to support the Royal Navy in Portsmouth, was successfully re-bid in the year with prices agreed until 2013. FSL continue to share the benefit of the efficiencies being driven into the delivery of the Naval Base output of supporting the Fleet. Pay As You Dine was successfully introduced for RN personnel in Portsmouth.

During the year HMS Iron Duke completed a successful docking period. The regeneration of the last of the three T23s for Chile continues on schedule. There was further growth in the number of dockings of commercial vessels and in particular ferries.

During the year VT Group entered two new markets through the acquisition of VT Nuclear Services, and the waste management PFI with Wakefield Metropolitan Borough Council.

Implementation of the Health & Safety culture improvement programme remains a top priority within the business. Monitoring and reporting of incidents has improved and during the first three months of 2008 there has been a welcome reduction in reportable incidents.

Future prospects are encouraging as the Surface Ship Support Project has regained momentum with the MoD, FSL and Babcock working together to provide an industry led solution to improving surface ship support.

Flagship Training Ltd Flagship, our 50:50 joint venture with BAE Systems, has a long-term partnering arrangement with the Royal Navy which dates back to 1996. We deliver a wide range of training and support services across the naval training establishments, including training delivery, planning and support, facilities management, and prime contracting services.

Although Flagship’s principal customer is the Royal Navy, other customers include Network Rail and British Energy, with whom we have recently signed a contract. We also deliver

VT Group Plc Annual Report & Accounts 2008

Outlook During 2009, VTSS will focus on the successful implementation of recently-secured projects including FSTA, SKIOS and TMASS.

Governance and risk management

We anticipate that the multi-billion pound contract for UK Military Flying Training System (UKMFTS) will be signed in the near future, following which our joint venture with Lockheed Martin will begin work on the design and implementation of a new flying training system for the Army, Navy and Air Force.

Consistent with Group practice, we adopt a rigorous approach to project and business unit governance. This approach is underpinned by a regular detailed review of commercial, operational and environmental risk leading to mitigation strategies for all contracts, thus ensuring protection of the interests of shareholders, customers and staff.

We also anticipate further progress across the business in relation to many significant bid opportunities. These include Whole Fleet Management, which would ensure the availability of vehicles of all types for the MoD; Search and Rescue (Helicopter); and New Dimensions, providing support vehicles for national or local emergencies.

Explaining the Group

Over the next year VT Nuclear Services will focus on developing long-term relationships with key partners and customers; securing a sustainable, long-term order book through work with new build customers; and growing our defence and resilience business. We continue to look for further opportunities within the waste to recycling market where our complex project management skills will benefit the customer.

33

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VT Group Plc Annual Report & Accounts 2008

VT Shipbuilding Tony Belisario Managing Director 2008 has been a good year for VT Shipbuilding with work starting on our export contracts.

Financial Highlights Turnover (£m)

2008

243.7

2007

164.0 0

50

100

150

200

250

300

Underlying Operating Profit (£m)

2008

16.3

2007

13.1 0

5

10

15

20

25

The £10m extension to the Portsmouth Ship Assembly Hall was completed ahead of schedule, creating additional capacity for our current export contracts and the Future Aircraft Carrier.

2008 has been a good year for VT Shipbuilding (VTS) with turnover and underlying operating profit increasing by 49% and 24% respectively.

The Government of the Republic of Trinidad and Tobago (T&T) in April 2007 awarded a contract for three Offshore Patrol Vessels and two interim boats. Work on the Royal Navy Type 45 Destroyer continued at a significant pace, manufacturing commenced on both the Oman and T&T export contracts and the two interim vessels which we procured for T&T were delivered in the year.

What we do

Our composites business, VT Halmatic, has been restructured, including closure of parts of the site and integration into VTS, to refocus on military and paramilitary composite small boat products. There has been an increase in composite work for the oil and gas industry and we entered into new markets in the US and Far East.

This year also saw the integration of VT Naiad Marine, VT Maritime Dynamics and VT Marine Products into a Motion Control business group, which was transferred from VTS to VT Services Inc, effective from April 2008.

Strategy Our strategy is to: • Maintain VT Shipbuilding as a strategic partner for the UK MoD;

Underlying Operating Profit Margin (%)

2008

6.7

2007

8.0 0

2

4

6

8

10

VTS is a major supplier of ships to the Royal Navy and one of the UK’s leading exporters of naval vessels. Our services include advanced vessel design, systems integration, construction and programme management. We also design and manufacture small craft for the UK MoD and for customers overseas.

2008 performance Turnover increased by 48.5% (2007 -0.1%); profit by 24.4% (2007 13.8%), and our underlying operating margin was 6.7% (2007 8.0%). Our performance this year was underpinned by our success in delivering ships three and four for the Type 45 Destroyer programme.

Work on the Technology Transfer programme in Greece for five fast attack craft progressed well, with three ships in service and two nearing completion. We are working closely with our partners to secure a contract extension for a further two vessels.

The manufacturing phase of our Oman and Trinidad & Tobago contracts commenced this year, with completion of the first vessels expected in 2009.

• Continue to expand existing commercial innovations such as leasing, contracting for availability and technology transfer; • Continue to secure export business; • Partner with other shipyards across the world to offer potential cost savings and additional capacity; and • Further develop composite small boat products for military and Government customers worldwide.

Customers and markets VTS is currently involved in major programmes for the UK MoD including the Daring Class Type 45 Anti-Air Warfare Destroyer and the Future Aircraft Carrier (CVF) for the Royal Navy. The UK MoD is also the primary customer for the build and refit of small craft.

VTS pursues opportunities with navies and coastguards around the world.

Government customers overseas include Trinidad and Tobago, Oman and Greece.

VT Group Plc Annual Report & Accounts 2008

Our major customers are governments, and we are therefore subject to compliance with their regulations. When in overseas competition, we comply with the UK Government’s Export Control regulations, as well as being subject to the rules and regulations of the country of origin of the customer.

VTS competes with naval shipbuilders worldwide and is a market leader for offshore patrol vessels and fast attack craft.

Governance and risk management VTS operates within and adheres to VT Group’s risk management framework. Business risks are regularly reviewed and reported to the Group on a monthly basis. Bid and project teams maintain risk registers as a standard part of the management process.

Outlook Production of the Offshore Patrol Vessels for the Royal Navy of Oman and the Coastguard of Trinidad and Tobago will be our main activity in the coming year. We remain optimistic in being able to secure a further two Super Vita Fast Attack Craft for the Royal Hellenic Navy, and will continue to work on securing business with other foreign navies and coastguards around the world.

Of major significance is the UK Government’s recent confirmation of the manufacturing contract to build two Aircraft Carriers for the Royal Navy. The announcement of an order for the carriers will secure work well into the future and result in the creation of a joint venture company with BAE Systems to be known as BVT Surface Fleet Ltd. This joint venture will be the UK Government’s strategic partner for the design, manufacture and support of future warships and will also be well positioned to compete on the world stage to secure export sales.

Caribbean Coastal Protection Helping to make the Caribbean a safer place VT Shipbuilding is working in partnership with the Royal Navy to provide three 90m Offshore Patrol Vessels for the Government of Trinidad and Tobago. In addition to providing the ships, VT will deliver a comprehensive package of training and through life support on a contracting for availability basis that will guarantee that each vessel will be available for operations for at least 300 days every year. The ships’ advanced capabilities, coupled to their high levels of availability will significantly increase the Coastguards ability to protect the waters and coastline around the islands.

Explaining the Group

Competitive and regulatory environments

35

36

VT Group Plc Annual Report & Accounts 2008

VT is continuing to develop its corporate responsibility strategy.

Last year its training business Flagship, attained ISO14001 for improving its environmental auditing and reporting process at its fire training facilities in Portsmouth and Plymouth.

37

VT Group Plc Annual Report & Accounts 2008

How we run the Group Business success means creating long-term value, not just for our shareholders but for all our stakeholders and society. To achieve this, our Board ensures that, as a Group, we uphold the highest standards of corporate governance, and adhere to our core values in everything we do.

Board of Directors

38

Corporate responsibility

40

Key risks and uncertainties

47

Corporate governance

49

How we run the Group

How we run the Group

38

VT Group Plc Annual Report & Accounts 2008

Board of Directors at 31 March 2008

Michael Jeffries Chairman age 63

Paul Lester Chief Executive age 58

Chris Cundy Commercial Director age 47

Philip Harrison Finance Director age 47

Peter McIntosh Executive Director age 49

Member of Nomination and Remuneration Committees

Became Chief Executive of VT Group in July 2002 having been a non‑executive Board member since 1998.

Previously Paul was a Group Managing Director of Balfour Beatty plc.

A graduate mechanical engineer, he has held a number of board or senior management positions in engineering and support services companies in both the UK and the US. He is also currently a non-executive director of Chloride Group Plc. Paul is President of the Society of Maritime Industries.

Joined VT Group from KPMG in 1993 as Group Accountant; was appointed to the position of Finance Director in 1997 and subsequently became a Board member in 1999.

Chris was appointed to his current role of Commercial Director in January 2006.

He has no directorships outside the Group. He is a trustee of Action for ME.

Joined the Board in 2007 from Hewlett Packard where he was Vice President Finance, Europe, Middle East and Africa.

A Fellow of the Institute of Chartered Management Accountants, he was previously with Compaq and Rank Xerox. Philip has no directorships outside the Group.

Joined VT Group in 1992.

Became Managing Director of Fleet Support Limited in 1999. Appointed Managing Director of VT Shipbuilding and joined the Board in September 2003.

He resigned from the Board to take up a two‑year secondment with the MoD as Chief Executive of the Future Aircraft Carrier project, and returned to the Board in January 2008. His current role includes responsibility for the Group’s interests on the shipbuilding and naval support joint venture with BAE Systems, and for developing VT’s environmental services activities. He has no directorships outside the Group.

Appointed as a Non‑executive Director in May 2005 and became Chairman on 5 July 2005.

Michael was previously Chief Executive Officer of WS Atkins plc from 1995 to 2001 and Chairman from 2001 to 2005. He is currently Chairman of Wembley National Stadium Limited, Wyless plc and GVA Grimley.

Mr Ian Tyler was appointed to the Board on 12 May 2008.

Andrew Given Non-executive Director age 60

David Thorpe Non-executive Director age 58

David Barclay Non-executive Director age 54

Baroness Blackstone Non-executive Director age 65

Admiral the Lord Michael Boyce Non-executive Director age 64

Chairman of Audit Committee and member of Remuneration and Nomination Committees

Member of Remuneration Committee and Member of Audit Committee

Chairman of Remuneration Committee

Independent

Member of Remuneration Committee and member of Nomination Committee

Senior Independent Director

Appointed to the Board in January 2003 and retired on 12 May 2008.

In April 2003, David retired as President of EDS Europe having been with that organisation since 1994. Prior to that he held roles in the IT sector and IT/BPO outsourcing sector.

David is Non‑executive Chairman of Tunstall Ltd and CAS Services Ltd, a Non‑executive Director of The Innovation Group plc. He is also Chairman of the Racecourse Association Ltd. and a director of the British Horse Racing Authority and the Horseracing Betting and Levy Board.

Member of Nomination Committee and Member of Audit Committee

Member of Remuneration Committee and member of Nomination Committee Independent

Independent

Appointed to the Board in January 2004. After an academic career culminating in her appointment as Master of Birkbeck College, London (1987‑97), Baroness Blackstone served in the Labour Government successively as Minister of State for Education and Employment (1997‑2001) and Minister of State for the Arts (2001‑2003). She has now retired from active politics and has returned to the higher education sector as Vice Chancellor of the University of Greenwich.

She chairs the RIBA Trust.

Appointed to the VT Group Board in July 2004. After a long and distinguished career in the Royal Navy, culminating in his appointment as First Sea Lord in 1998, Lord Boyce was subsequently appointed Chief of Defence Staff in 2001.

He retired from the latter role in May 2003 and was appointed Lord Warden and Admiral of the Cinque Ports in July 2004. He is a non‑executive director of W S Atkins plc; Chairman of the White Ensign Association; Chairman Designate of the RNLI; an Elder Brother of Trinity House; and a Trustee of the National Maritime Museum.

Independent Appointed to the VT Group Board in September 2002. Andrew retired as Deputy Chief Executive of Logica plc in December 2002, having previously been its Finance Director since 1990. Prior to that he held roles in the telecommunications industry. He is a Non‑executive Director of Morgan Crucible plc.

Independent Appointed to the Board on 19 May 2003. David was Vice‑Chairman of Dresdner Kleinwort Wasserstein until March 2005. He is Non‑executive Deputy Chairman of the John Lewis Partnership plc and a Non‑executive Director of Wessex Water Services Limited.

How we run the Group

39

VT Group Plc Annual Report & Accounts 2008

40

VT Group Plc Annual Report & Accounts 2008

Corporate Responsibility Highlights “Corporate responsibility is a fundamental part of our business strategy. For us business success means creating long-term value, not just for our shareholders but all our stakeholders and society.”

Paul Lester Chief Executive

What we achieved

Next year we will

Business Ethics

Review code of ethics and export control procedures

Commitment to defence industry’s anti-corruption standards

Customers Rated UK MoD’s top performing supplier Implement a Group Vendor and Suppliers Management System Successful partnering relationship with Surrey County Council £527m procurement spend 7.4% increase in procurement savings People

£250K investment in coaching programme; 165 managers trained, providing over 800 hours of coaching to individuals 36,151 days training (2.6 days/employee) 16% women in senior management roles

Health and Safety

1,829 Audit days and over 4,000 H&Srelated training days undertaken 7% reduction in reportable accident rate 50% reduction in hand arm vibration cases

Environment

Assess employee engagement across Group Enhance data collection e.g. diversity, turnover etc.

Embed coaching practices Align US policies and data H&S improvement targets for executive safety training and reportable incident rates Occupational road incidents included in KPIs

76% of VT Group (96% UK only) turnover included in environmental reporting and including joint ventures

Establish a formal Environmental Strategy, including targets for energy, waste and water

Zero prosecutions, notices or significant spillages

Improve reporting from all relevant US operations Group-wide environmental conference

Community

£212K donated to charities

Increase charitable donations

Selection of three partnering charities

Further develop employee volunteering Improved data for non-financial investments

About this report Corporate responsibility performance is an integral part of our overall company reporting.

We measure our performance with regards to business ethics; our relationships with our people, our customers and our suppliers; our health and safety standards; our impact on the environment; and our investment in local communities. We include Joint Ventures in our reporting, and define our report content in the light of our stakeholder feedback, the Global Reporting Initiative guidelines (GRI3).

You can find more detailed information about our activities and performance, updated throughout the year, on our website www.vtplc.com, where we also invite feedback from all our stakeholders.

VT Group Plc Annual Report & Accounts 2008

Our response to the challenges of climate change is of fundamental importance to our stakeholders and will underpin our future reputation and commercial success.

For us business success means creating long-term value, not just for our shareholders but all our stakeholders and society.

We understand the need to demonstrate responsible behaviour and through our business principles, compliance with national and international laws aim to ensure that our products and services are sustainable: environmentally sound, socially just and economically viable.

Today’s challenges The challenges posed by climate change and sustainability are among the most difficult issues facing society, and we recognise that our response as a company is of fundamental importance to our customers, employees and local communities. How we react underpins our reputation, provides commercial advantage and helps recruit and retain talent. While we feel the impacts of these issues through, for example, increased energy prices, operations affected by flooding and escalating waste disposal costs, we also recognise that they present us with opportunities for commercial advantage such as the move into new sectors such as waste.

Review of the year We made good progress integrating sustainability into our risk management and decision-making processes, specifically in our commercial activities, the development of new products and services and supply chain management. We have carried out briefings for the Board and health and safety and corporate responsibility issues have been a consistent agenda item at senior management meetings.

We have maintained a strong focus on safety and are pleased to report a 7% improvement in accident performance. This has been underpinned by the formalisation and communication of our H&S strategy, improved governance, as well as personal safety commitments by our executives which has raised the profile of health and safety issues across the business.

We are progressing well in our management of environmental issues – our data is considerably more robust in this second year of assessment and reliably underpins our KPIs and targets to reduce our carbon footprint. We have much improved understanding of our key impacts, and the areas where we can focus effort to make material improvement, in particular through our service offering to our customers.

We are also pleased to sign-post you to our new and comprehensive corporate responsibility web pages www.vtplc.com where there is more information, details of our policies and case studies.

drive to improve the accuracy and timeliness of our reporting.

We will continue to ensure our processes deliver the level of assurance commensurate with our business risk and take the opportunity to review our codes for Export Control Compliance and Business Ethics.

We will further seek the views of our stakeholders, on what they consider to be important in terms of corporate responsibility issues and link this feedback to drive sustainability performance within our operations. We have set some challenging health and safety targets for next year and with training and the benefits of our coaching skills aim to further develop our safety culture and leadership programmes.

Business Ethics Our policies and procedures ensure our business is conducted to the highest ethical standards.

Honesty and integrity are fundamental to VT Group’s business principles and we have rigorous policies and procedures in place to ensure that the Company operates ethically. We consider bribery and other corrupt practices to be not only illegal, but essentially wrong, and are committed to conducting our business to the highest ethical standards. We were a founder member of the UK Defence Industry Anti-corruption Forum, and have made a statement of adherence to the Aerospace and Defence Industries Association of Europe’s Common Industry Standards for prohibiting corruption.

Code of Ethics Our Code of Ethics provides a framework for all employees, to assist them in maintaining the Company’s high standards.

It provides guidance on issues such as conflicts of interest; out of hours’ activities; conduct at work and with colleagues; and conduct with other organisations, customers and the public. Next year we will review this Code and its application within the business units, including necessary training for employees and key functions.

Anti-corruption Policy VT Group does not tolerate corruption in any form, no matter where we operate. Our Anti-corruption Policy applies to all VT businesses, joint ventures and employees, and covers the following issues: • Proper and accurate recording of all financial transactions and open inspection of records by the Board; • Strict procedures for the appointment of agents which are overseen by the VT Group Compliance Officer and the Compliance Committee and receive where necessary approval by the Board; • Application of our principles when acting as a sub-contractor and through our supply chain to our contractors, suppliers and agents;

The year ahead

• Declaration of gifts, entertainment and hospitality;

Next year our senior executive led Corporate Responsibility Taskforce will continue to monitor and drive performance improvement, challenge our objectives, and raise the bar on our future aspirations. While we have made good progress to date we will further refine our key performance indicators and

• Approval of charitable donations; • Prohibition of facilitation payments; and • Protection of our employees from risks of extortion or physical threats.

How we run the Group

Chief Executive’s overview

41

42

VT Group Plc Annual Report & Accounts 2008

Corporate Responsibility continued Political donations Political donations are strictly prohibited and it is our policy to maintain a position of impartiality with respect to party politics.

We do not make cash donations to any political party, politician or candidate for public office. The Group does occasionally undertake activities such as sponsorship of receptions at party conferences and attendance at party events and dinners for the purpose of better understanding the implications of public policy development on business operations. These occasions also present significant opportunities to represent our views to politicians from across the political spectrum, but are not designed to support or influence support for any political party. During the financial year ended 31 March 2008 the Group spent a total of £19,750 undertaking such activities.

Export Control Compliance We operate a comprehensive procedure that aims to ensure full understanding and compliance of export licensing requirements by our operations. The Group Commercial Director has overall responsibility for export control matters and is supported by Export Control Coordinators within each of the business units. Next year we will review again our export control procedures which were last updated in 2004.

based at VT Shipbuilding which creates good working relationships and good lines of communication between parties.

Supply Chain Performance In 2008 the Group’s procurement spend was £527m of which £420m was under control of the Supply Chain teams; an increase of 18% from 2007.

We have rationalised the Group’s supplier base to 12,500 (28,000 in 2007) and made an 8% reduction in the number of suppliers we use regularly, from a monthly average of up to 4,500 (4,900 in 2007).

During the year we improved our processes for managing sustainability issues in our supply chain and published the VT Group Procurement Manual. We also delivered training for the procurement team including CIPS training (Chartered Institute of Purchase and Supply).

Creditor performance We continue to monitor supplier payment terms at both Group and division level. Where we find discrepancies we do our best to ensure that they are rectified promptly.

Whistleblowers’ line

Creditor days at year end

VT employees are required and encouraged to report breaches of any of the Groups Policies companies without fear of recrimination.

We offer an independently managed, free and confidential whistleblowers’ phone line but received no calls that required investigation in 2008 (1 in 2007).

2005

44

2006

47

2007

45

2008

33

Customers and suppliers Strategic partnering delivers long-term relationships where risk and reward can be shared.

We continue in our commitment to develop strong relationships with our customers and suppliers, recognising the increased efficiencies and benefits this delivers. We run regular partnering workshops, supplier conferences and proactively seek feedback.

We are proud that, having reviewed Group performance over a number of contracts, the UK Ministry of Defence (MoD)’s Directorate of Supplier Relations rated VT Group as its top performing supplier.

Where appropriate, we share risk and reward with customers and suppliers and last year identified 30 strategic suppliers with whom we will concentrate on developing long-term relationships.

Gainshare is a key component of our Building Schools for the Future project in Lewisham where efficiencies identified and implemented within the contract will be shared between the customer and contractor. VT has also won several education contracts outside of Surrey through the capabilities of VT Four S, and is now sharing the results of this with Surrey County Council, our joint venture partner.

We encourage our customers to embed their contract teams within our organisation. For example, we have personnel from both the Coastguard of Trinidad and Tobago and the Royal Navy of Oman

Priorities for next year Next year we will continue to rationalise our supply base, concentrating on our strategic commodity areas. We will drive efficiency and assurance improvements in the selection of our suppliers and improve our processes through introduction of the Group wide Vendor Management System.

People Recruiting and retaining a talented and diverse workforce, supporting and motivating them to be ‘the best that they can be’.

At 31 March 2008 VT employed 14,112 people. We know that the success of our business depends on the continuing high levels of performance by our employees. We aim to recruit, train, motivate, and retain a talented and diverse workforce and encourage and support our employees to be ‘the best that they can be’.

We have made progress in managing returns to work after absence, including training for our HR teams, but recognise that there is scope for improvement. Our long-term sickness absence rate in 2007/8 ranged between 0.7 and 2.3% of working time.

Our externally managed and confidential Employee Assistance Programme is provided via a free-phone helpline to our employees and their families. Last year 104 calls were taken (82 in 2007; re-stated) and 68 cases were referred to 1:1 counselling.

VT Group Plc Annual Report & Accounts 2008

Diversity and Inclusion

Training and development

We regularly review and update our policies and processes to ensure they encourage diversity; respecting and harnessing employees from different backgrounds, skills and capabilities.

In 2008 16% of senior management positions were women and 13% of employees were in part time roles.

We aspire to ensure all our employees are provided with opportunities for continuous learning and the development of lifelong skills. Last year we invested in 36,151 training days representing 2.6 days/employee (2.5 in 2007).

Our data on ethnicity and diversity is much improved but still incomplete.

Pay and benefits We are continually reviewing our reward packages to ensure we share success fairly and appropriately across the Group. Benefits currently include our employee Share Incentive Plan, share save and pension schemes and voluntary flexible benefits options.

People in VT

43

In 2008 we reviewed the potential of our top 70 executives across the business, using the information to develop individual learning plans, help manage the careers of our top talent, enable more cross-business transfers, and assist in succession planning.

Coaching Last year we invested over £250k in our coaching programme.

45 senior executives completed our accredited Henley coaching programme and a further 120 managers completed our VT Roffey Park coaching course, a shorter, more practical programme for operational managers.

Since the introduction of our programme VT coaches have delivered 578 hours coaching within VT and 228 hours coaching external personnel including Metropolitan Police and Royal Navy.

Core Capabilities

Developing skills

VT Communications

VT Education and Skills

VT Group Services

VT Nuclear Services

VT Services Inc

VT Support Services

VT Shipbuilding

FSL (JV 50%)

Flagship (JV 50%)

We strongly support the Governments initiative led by Lord Leitch to address the UK’s urgent need to raise skills at all levels.

Supported by the Confederation of Shipbuilding and Engineering Unions (CSEU) we have signed the ‘Skills Pledge’ committing to delivering in-house work based learning programmes, including apprenticeships, NVQs and basic skills training.

Human rights VT Group operates mainly in countries where human rights are enshrined in the law. We uphold and respect these laws, but also recognise that we have small numbers of employees in locations where these rights are not so clear, and where local legislation is weak or non-existent. In these instances UK legislation is followed and we have processes in place to manage these issues.

Countries of operation

We aim to deliver similar benefits given to UK staff, with alternative compensation where this is not possible – as with share incentive plans, for example. Pay reviews consider local conditions however central guidance is given to ensure that countries take account of UK practice.

Employee relations and consultation We recognise and encourage open communication and feedback at all levels, including the use of employee surveys.

UK

USA

Europe

Middle East

Asia Pacific

Other

We uphold the right of our employees to freely associate and join trade unions and seek to develop positive and constructive relationships with the unions that represent our employees.

Our policy is to consult with employees within specified time frames on organisational changes that affect their position and ensure processes are in place at all locations to equitably address any issues.

How we run the Group

Project Management, Commercial and Supply Chain management are core organisational capabilities which support continued business growth. Our aim is to grow and consolidate these and we have partnered with external suppliers to run bespoke development programs and aim to raise the performance of our specialists.

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VT Group Plc Annual Report & Accounts 2008

Corporate Responsibility continued

Priorities for next year Next year we will further improve our data collection, aligning our US operations, so we can accurately report diversity, turnover and short-term sickness absence in the short-term future. Building on the work of our business units we will investigate gathering business-critical feedback from our employees. We will also work to embed coaching into our day-to-day processes.

Health and safety

The Health and Safety Forum, made up of our heads of function from across the business including the US, provides an overseeing role and advises the Board on H&S performance and standards.

Our line managers are responsible for implementing safety procedures and are supported by advisers and specialists according to their business specific risks. Our objective is to continually build safety competencies, embed learning and to share best practices.

MAT RIDDOR Reportable Accident Rate

2500 Rate/100,000 employees

Many of our employees drive on company business and are 2000 exposed to the risks of road safety. Tragically, in 2008, one of our US employees died in a road traffic accident.

1500

We are also responsible for the safety of our products and services and have improved rigour for management of health and safety 0 risks throughVTmandatory gateways in our project management UK Support Joint United VT Group Shipbuiding Services extend Ventures States (excl. and US) processes.

Our responsibilities beyond our employees we measure the safety performance for all agency and third party 2006/07 2007/08 individuals. We made good progress in the year improving our processes for the evaluation of H&S through our supply chain.

1150 Rate/100,000 employees

Good health and safety performance is essential to the success of our business and we continually drive improvement in this area.

The law is our minimum standard for compliance and the VT Board sets the Group’s standards through our health and safety strategy (revised in 2007). Accountability for performance rests with the Chief Executive and at divisional level with the business division managing directors.

MAT Reportable Incident Rate

1100 1050 1000 950 900 Mar 07

May 07

Jul 07

Sep 07

Nov 07

Jan 08

Mar 08

Health We have seen a reduction in occupational disease with 32 cases in 2008 (66 in 2006/7). Health screening increased to 2,852 screening events (2,213 in 2006/7). Active programmes exist for hand arm vibration.

2000 1500

Priorities for next year

1000

We have set some challenging improvement targets for next year for all of our operating divisions;

500 0 VT Shipbuiding

UK Support Services 2006/07

Joint Ventures

United States

VT Group (excl. US)

2007/08

Consideration of health and safety performance in embedded into1150 our business reviews and is supported by detailed six monthly review with the Chief Executive and Director of Health and1100 Safety. We have introduced standardised divisional reporting to improve the understanding of risk profile including process safety, 1050 the effectiveness of our controls and progress against improvement plans. ate/100,000 employees

We made good progress in 2007/8 towards our objective; to achieve industry leading performance. We are pleased to report a 7% improvement in reportable incident rate, corresponding to 2,161 days lost as a result of accidents (1,975 in 2006/7). We received one 3000 fine of $1,400 in our US operation for unguarded machinery and a prosecution for an accident that occurred in 2007.

2500

500

How we manage health and safety

1000

Performance

We seek the persistent challenge of external benchmarking and 1000 to drive for continued improvement and ensure we learn continue by the comparison of performance across our operations.

Solid progress in health and safety performance.

3000

Auditing is key to managing and improving performance. In 2008 we invested 1,361 days on internal audit and 468 days of external audit and certification. We continue to employ external auditors for independent verification of our performance.

Rate/100,000 employees

Across our locations we have a mix of collective and individually regulated employment arrangements and common-law contracts.

While collective bargaining is not universally practised across our operations, this does not affect the rights of employees to choose to belong to trade unions. Prospective employees are made aware of employment arrangements prior to joining the Company.

• Demonstration of an improving moving annual total (MAT) RIDDOR rate per 100,000 employees, with a stretch target of a 10% reduction in the MAT RIDDOR accident rate by March 2009; • 1 day leadership safety training for 75% of leadership team

by March 2009; • No new cases of work related occupation disease resulting from newly exposed populations; • Enhance the practical management of contractor operations; and • Include road risk as a key performance indicator. Implement methodologies to improve the assessment and management of driving risk and provide training support.

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VT Group Plc Annual Report & Accounts 2008

Achieving high standards of health and safety requires a culture of safety throughout the business with visible leadership by our executives and managers, adopted and supported by every employee. Our priority is to engage our employees with safety issues by raising awareness and encouraging performance.

We monitor employees’ views through surveys and undertook a safety maturity survey of our leadership team.

We have carried out safety briefings for the Board and executive teams and initiated Group-wide safety training for our leadership teams. Our executives are regularly involved in site safety visits and we see our investment in coaching as supporting the resulting safety conversations.

Our businesses manage health and safety training according to their own risk base and last year we invested 39,545 hours of safety related training.

Environmental commitment Substantial improvements to the robustness and completeness of our data.

sustainability is considered in the development of our products and services and increasing the rigour of our assessment and auditing of suppliers. Our policy is to purchase timber from certified and FSC (Forest Stewardship Council) sources.

Data collection This is our second year of publicly reporting environmental performance and we have substantially improved the robustness and completeness of data. The complex relationships we have with many of our public sector customers means that often we have little direct influence on environmental impacts, and access to some data is difficult. We now have a much better understanding of the boundaries of our reporting, and have this year included data from our Joint Ventures and many of our overseas operations resulting in a completeness of environmental data for 76% of turnover (63% in 2006/7). However, we do recognise that we need to work harder in some areas next year, in particular our US operations which account for the majority of the missing data.

We continue to align data disclosure with DEFRA (Department of the Environment, Food and Rural Affairs) and GRI (Global Reporting Initiative) guidelines and participate in the public disclosure of performance through the Carbon Disclosure Project.

Managing environmental impacts

Energy

Accountability for environmental performance rests with the Chief Executive and the Board. Our business divisions’ management systems are aligned with ISO14001, and a number of our operations have made excellent progress towards achieving external verification for our operations and on behalf of our customers.

All business divisions have relevant permits and monitoring in place.

Reporting against key impacts, objectives and KPIs are now firmly embedded in our business reporting and review processes.

In this our second year of comprehensive data gathering the increase in our carbon footprint reflects our considerably improved capture of emissions data.

We have aimed to improve environmental awareness and in 2008 delivered briefings to the Board and management teams. Overall we delivered 92 training days in the UK exclusively on environmental issues in addition to training carried out during employee inductions and site management procedures.

We recognise our responsibilities for the environmentally sensitive sites and buildings of architectural or historical value that 15 of our sites operate on or adjacent to and ensue that the relevant businesses have management systems in place to ensure their long-term protection.

In 2008 we are pleased to report zero prosecutions, notices and significant spillages. We received one environmental complaint in respect of RF interference. Immediate investigation was implemented and pro-active monitoring continues to provide assurance.

Auditing, both internal and external, continues to be important for verifying performance. In 2008 we undertook 68 days of internal audit and 45 days of external audit within our operations.

We employed independent audit to carry out environmental audits at 17 of our sites which provided valuable feedback on compliance and recommendations that will ensure continuous improvement.

We will continue to implement an independent external validation and certification as appropriate.

Supply chain We have made good progress embedding life cycle analysis into our purchasing and project management processes ensuring that

Reducing carbon dioxide emissions is a priority for all of our businesses. In 2008 we continued to work to improve our understanding of emissions and energy consumption. We also reviewed emissions relating to business travel and, with the help of the Energy Saving Trust, reviewed our company fleet, which as well as identifying many areas of good practice, gave us a good sound basis for improvement.

Fleet Support assisted the MoD at the Portsmouth Naval Base via the EU Emissions Trading Scheme to cut emissions by 19% over the last 12 months resulting in a 50% total reduction over the allocation set in 2003.

Team Portsmouth EU Emissions Trading Scheme Baseline 2003

33,919

Allocation

28,351

Tonnes CO2 emitted

2005/06

2006/07

2007/08

20,110

17,350

14,096

* including GHC emissions

We undertook an assessment of the Group to improve our understanding of the risks and opportunities posed by climate change; we demonstrate our commitment by public disclosure via the Carbon Disclosure Project, and are a member of the Business in the Community May Day Network. By doing so, we pledge to measure and disclose emissions, raise staff awareness, and tackle climate change issues with our supply chain.

How we run the Group

Engaging employees and leading safety

46

VT Group Plc Annual Report & Accounts 2008

Corporate Responsibility continued

Energy Use

2007/8 2006/7 ktonnes eq. CO2 GWh GWh

Electricity

2007/8 MWh per £m NSV

2006/7 MWh per £m NSV

76

146.7

126

164

210

Gas

3.05

16.5

4.5

18.5

7

Fuel/Oil

18.8

76

68

85.2

113

98

238

199

267

331

Total Absolute Tonnes Equivalent CO2

2007/8

2006/7

Kilotonnes Equivalent CO2

98

72

Tonnes Equivalent CO2 per £m NSV

110

120

Total Energy Consumption

Waste We report increased figures for waste compared to previous years, a reflection of a much more complete capture of data including our Joint Ventures and some overseas operations.

In the light of our changing business and recent acquisitions, in 2008 we reviewed our obligations under the Packaging Waste Regulations and established that we fall beneath the scope of these requirements.

Waste Hazardous

tonnes 2007/8 2006/7

m3 per £m NSV 2007/8 2006/7

291

180

0.3

0.3

General

4190

2178

4.7

3.6

Recycling

2056

1212

We aim to be a responsible contributor to our local communities, by investing time, money and resources and in a way that makes a tangible difference. During the year we reviewed our strategy for community investment to ensure our contributions achieve most impact for both our communities and are aligned with the VT business strategy and values.

Our community investment programme focuses on three areas; • Three partnering charities; Local Employment Access Project (LEAP), SSAFA Forces Help and Action for ME

• Supporting fundraising and volunteering by our employees including matching donations

We monitor water usage carefully and conserve and recycle as priorities. Our increased reported usage figures this year of 111 thousand m3 compared with 58 thousand m3 last year, reflect our success in improving the capture of data, and provides a base on which we can now make improvement targets.

Water 2007/8 2006/7 111

58

Licensed Abstraction m3

1050

500

Operational & Site Usage

94%

87%

Office Use

Community investment

• Initiatives and organisations in the communities close to our sites

Water

Total Usage, Thousand m3

of servers that reduce power and Webex to reduce the need to travel will also form part of the review of our IT technical strategy.

We will also consider the recommendations of our green fleet review that was undertaken by the Energy Saving Trust.

7%

m3 per £m NSV 2007/8 2006/7 124.4

96

13%

Priorities for next year Next year we will formalise our environmental strategy and communicate this throughout our business and supply chain.

While our objectives to date have been centred on improving the accuracy of data collection, the substantial increase in completeness of our data means that next year we will utilise this as a baseline for setting future performance targets and KPIs. We will continue with energy efficiency assessments and our work with the Carbon Trust. Energy considerations such as virtualisation

Charitable donations Charitable donations are approved by the Group’s Charity Committees. Last year we donated a total of £168k (£93k in 2006/7). Next year we plan to broaden the membership of the VT Group Committee and will review our processes to improve the capture of non-monetary data. We have also made a commitment to increase our financial contributions to charities next year.

Employee volunteering We have much more to offer our local communities than purely financial donations. Through investing time and resources including coaching, volunteering, fundraising and mentoring, we can make a bigger difference to our communities, while also generating positive team building and interaction amongst employees, and giving them the opportunity to develop new skills. In 2008 we provided mentoring to pupils at Oaklands Community School in Southampton, mentoring and coaching for employees within the Safer London Foundation of which VT Support Services is a trustee member and coaching to the Metropolitan Police.

VT senior executives also sit as trustees on a number of charities.

Next year we will investigate options for further developing employee volunteering.

For more information on our approach to Corporate Responsibility, including examples of how we put it into practise, please visit www.vtplc.com/cr

VT Group Plc Annual Report & Accounts 2008

47

Key Risks and Uncertainties

The Group’s management operates a risk management process which identifies the key risks facing each business. The process is based on each business unit producing a risk register which identifies the potential key risks to the individual business unit, the potential impact should they occur and the action being taken to sufficiently manage those risks or where further mitigating actions are required. Business unit risk registers are reviewed by the Audit Committee at least twice during the year and more frequently if required.

The internal audit team independently reviews the Group’s risk and control processes and reports its findings periodically to the Audit Committee. The Committee reviews and challenges the assurance procedures, ensuring that an appropriate mix of techniques is used to obtain the level of assurances required by the Board. The audit committee presents its findings to the Board on a six monthly basis or more frequently if required.

Contract management The Group’s largest operational risk remains the management of ongoing long-term contracts to customer satisfaction. This is managed via regular project appraisals and continued dialogue with the customers as programmes progress. All major contracts in all business units have a live risk register and significant risks are considered for inclusion in divisional risk registers.

New business and major bid pricing Given the long-term nature of contracts that the Group enters into, there is a risk that unfavourable terms could be negotiated at inception leading to less than expected returns. The Group manages this risk via a rigorous bid acceptance process, ultimately involving main board approval for major bids. Key risks involved in new markets and bids are considered as part of the Group’s bid approval process.

• Risk registers are presented and reviewed as part of the contract/ business approval process.

• A significant number of VT’s contracts with customers and renewals and extensions of previous contracts are awarded pursuant to competitive tender prices. Such processes require the commitment of considerable time, effort, resources and other costs.

• The Group’s expansion encompasses organic growth, acquisitions and potentially entering into new market opportunities. Both acquisitions and the entry into new markets bring with them an extra element of risk as these may involve activities not currently carried out by the Group. All such activities require main board approval, after having carefully considered the Group’s ability to manage and fund any new activities arising.

Changes in laws and regulations VT is subject to various laws and regulations in different jurisdictions, including state aid, procurement, export control, taxation and environmental and health and safety laws. These laws and regulations are complex, are subject to change and can vary from country to country. Group compliance policies are in place to reduce the risk of breach of any of these obligations.

Political risk Given that a large proportion of the Group’s activities are derived from government authorities, the Group’s business is susceptible to changes in government policy, budget allocations and the changing political environment, both in the UK and worldwide. The Group has sought to mitigate this risk in recent years by diversifying the service offering from a largely UK based defence orientated business to provision of a broader range of services on an international basis.

Joint ventures The Group has a number of joint ventures with the most significant being ALC, Fleet Support Limited and Flagship Training Limited.

Given their importance to the Group, executive directors and members of the GEC are responsible for representing the Group’s interests on their respective boards. A regular report on the joint ventures is made to the Group Board.

Environmental and health and safety liabilities VT businesses are exposed to risks associated with the contamination of their sites and former sites, non-compliance with environmental, health and safety law and personal injury claims resulting from injuries sustained at work, including historical exposures to asbestos containing materials. A framework of Groupwide policies and procedures is in place to minimise these risks.

Insurance policies The Group maintains insurance policies to provide protection from losses arising from claims from third parties. The adequacy of the Group’s insurance cover is reviewed annually by the Board.

Dependence on key people The success of the Group is dependent on recruiting, retaining and developing highly skilled, competent people at all levels. We are aiming to build our employee brand to improve our attractiveness in the marketplace. We have significantly improved our Graduate scheme offering in the past few years which is reflected in the calibre of graduates who we now bring in to the Company each year and then move into management positions.

Pensions VT participates in certain defined benefit pension schemes. As at 31 March 2008 these schemes had deficits, net of related deferred tax assets, of £7 million. The Group is making contributions to make good these deficits over a period of years.

How we run the Group

The Board is committed to ensuring that high quality risk management systems are in place across the Group. The objective is to safeguard the interests of shareholders, customers and staff through effective management of corporate and operational risk.

48

VT Group Plc Annual Report & Accounts 2008

Key Risks and Uncertainties continued Financial risk

Credit risk

The following policies have been agreed by the Board to manage the Group’s financial risk.

The risk of financial loss due to a counterparty’s failure to honour its obligations arises principally in relation to transactions where the Group provides goods and services on deferred terms, enters into derivative contracts requiring settlement by the other party and invests or deposits surplus cash.

Foreign currency risk The Group has invested in operations outside the United Kingdom and also buys and sells goods and services denominated in currencies other than sterling. As a result the value of the Group’s non-sterling revenues, purchases, financial assets and liabilities and cash flows can be affected significantly by movements in exchange rates, particularly in the US Dollar and Euro.

VT Group policy is to finance, so far as practicable, the costs of acquisition and new business opportunities by matching borrowings in the local currency in order to eliminate foreign exchange transaction exposure, provided that the benefits are not outweighed by the overall cost of the borrowing.

The Group’s transactional currency exposure arises from sales or purchases by certain operating units in currencies other than its functional currency. It is the Group’s policy not to enter into forward contracts for purchases until there is a high degree of certainty. In addition, the Group treasury policy is to hedge if and when a significant exposure is recognised, through the use of Fx instruments to manage the currency exposures on any individual transactions for which payment is anticipated.

Interest rate risk Our policy is to manage the cost of borrowing using a mix of fixed and variable rate debt. Whilst fixed rate interest bearing debt is not exposed to cash flow interest rate risk, there is no opportunity for the Group to enjoy a reduction in borrowing costs in markets where rates are falling. In addition, the fair value risk inherent in fixed rate borrowing means that the Group is exposed to unplanned costs should debt be restructured or repaid early. In contrast, whilst floating rate borrowings are not exposed to changes in fair value, the Group is exposed to cash flow risk as costs increase if market rates rise.

We have no absolute policy towards either fixed rate finance or floating rate finance. The proportions of interest rate exposure that should be fixed and the proportion that should be floating, will be dictated by the nature and terms of the underlying asset(s) and contract(s) being funded. The exact proportion will be determined by current economic conditions, the currency in which the debt is denominated and the purposes and duration of the debt.

The Group uses interest rate swaps agreed with other parties to generate the desired interest profile, agreeing to exchange, at specified intervals, the difference between fixed rate and variable interest amounts calculated by reference to an agreed-upon notional principal. At the year end, 11% (2007: 19%) of the Group’s borrowings were at fixed rates after taking account of interest rate swaps.

Group policies are aimed at minimising such losses, and require that deferred terms are granted only to customers who demonstrate an appropriate payment history and satisfy creditworthiness procedures. Individual exposures are monitored with customers subject to credit limits to ensure that the Group’s exposure to bad debts is not significant.

Group policies also restrict the counterparties with which derivative transactions can be contracted and funds may be invested to those approved by the treasury team and approved by the Board, comprising banks and financial institutions with a high credit rating. The treasury team ensures that exposure is spread across a number of approved financial institutions.

Liquidity risk The Group aims to mitigate liquidity risk by managing cash generation by its operations, applying cash collection targets to all business divisions. Investment of surplus funds is carefully controlled with defined policies in place over institutions within which investments can be placed. Authorisation procedures for investment are in place across the Group and where necessary are elevated to Board level.

In its funding strategy, the Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts, bank loans, loan notes and finance leases. To meet this objective, the Group’s policy is to ensure that adequate unutilised committed funding facilities are available to cover authorised capital expenditure commitments and debt due for repayment within one year.

Surplus cash is only invested in high credit rated financial institutions and in financial instruments exposed to insignificant risk of changes in market value, with not less than 50% of surplus funds available invested with maturities of three months or less.

Funds may not be invested for periods of greater than one year.

Excess cash used in managing liquidity is only invested in financial instruments exposed to insignificant risk of changes in market value, being placed on interest-bearing deposit with maturities fixed at no more than six months. Short-term flexibility is achieved by overdraft facilities.

Price risk It is, and has been throughout the period under review, the Group’s policy that no trading in derivative financial instruments shall be undertaken.

49

VT Group Plc Annual Report & Accounts 2008

Corporate Governance Report 2008 for the year ended 31 March 2008 Compliance with the Combined Code

At 12 May 2008, the Board comprised Mike Jeffries, Chairman; Paul Lester, Chief Executive; five independent non-executive directors; and three executive directors. Andrew Given is the Senior Independent Director. Biographies of the directors, giving details of their experience and main commitments, are set out on pages 38 to 39.

The Code requires listed companies to report how the main and supporting principles of the Code have been applied, giving sufficient detail to enable shareholders to evaluate the report, and to state whether there has been compliance with the provisions of the Code and providing an explanation for any points of non-compliance.

The Board The Code requires the Company to have an effective board whose role is to provide leadership within a framework of controls which allows risk to be assessed and managed. The Board sets strategic aims, defines the Company’s values, and ensures that obligations to shareholders are met. The role of non-executive directors includes developing corporate strategy; scrutinising management; and ensuring the integrity of financial information and risk management systems. The Board believes it has met these requirements.

The composition of the Board during the year has changed as follows: Chris Rickard resigned on 24 April 2007; Philip Harrison was appointed as Finance Director on 19 November 2007; and Peter McIntosh was appointed as Executive Director on 22 January 2008. David Thorpe resigned on 12 May 2008 and after the year end. Ian Tyler was appointed on 12 May 2008.

Director

Board

Mr M M E Jeffries

6(7)

Mr D M Barclay

7(7)

Baroness Blackstone

Audit

The Board holds full meetings at least seven times a year, spread across the full calendar year. In addition there is a separate meeting each year to discuss the strategic plan. The directors believe that these meetings enable the Board to exercise control over the Group and remain fully conversant with its activities. There is a formal schedule of matters reserved for the Board which only the Board itself can change. These matters include the acquisition and disposal of businesses, significant contractual commitments, and a review of risk management processes.

The Chairman meets with the non-executives directors without the executive directors present at least once a year.

Directors and officers of the Group have the benefit of a directors’ and officers’ liability insurance policy. The Company has agreed to indemnify each director through a Deed of Indemnity in respect of certain liabilities to third parties which may be incurred as a result of discharging his or her duties as a director. A copy is available from the Company Secretary for inspection.

The number of full scheduled Board and committee meetings attended by each director was as follows:

Remuneration

Nomination

2(2)

1(1)

4(4)

1(1)

7(7)

4(4)

1(1)

Lord Boyce

7(7)

3(4)

1(1)

Mr C J Cundy

7(7)

Mr P J Harrison

4(4)

Mr A F Given

7(7)

4(4)

4(4)

1(1)

Mr P J Lester

7(7)

Mr P J McIntosh

2(2)

Mr C J Rickard

0(0)

Mr D A Thorpe

5(7)

3(4)

3(3)

4(4)

How we run the Group

Throughout the period of this report, the Board has been in compliance with the Combined Code on Corporate Governance as applicable under the Listing Rules of the UK Listing Authority.

50

VT Group Plc Annual Report & Accounts 2008

Corporate Governance Report 2008 for the year ended 31 March 2008 continued Roles of the Chairman and Chief Executive The Code requires that there should be a clear division of responsibilities between the running of the Board and executive responsibility for the running of the business so that no one person has unrestricted power.

The Board has met this requirement by establishing clearly defined roles for the Chairman and Chief Executive. This division of responsibilities is set down in writing and agreed by the Board.

The Chairman is responsible for the leadership of the Board, ensuring its effectiveness and setting its agenda. Once strategic and financial objectives have been agreed by the Board as a whole, it is the Chief Executive’s responsibility to ensure their delivery. The Chief Executive is obliged to comply with a practical schedule of matters requiring Board approval before implementation; this schedule is reviewed at least annually.

The current commitments of Mr Jeffries outside VT Group are: chairman of Wembley National Stadium Limited; chairman of Wyless Plc; and GVA Grimley.

Board balance and independence The Company complies with the requirements of the Code that there should be a balance of executive and non-executive directors so that no individual or small group can dominate decision making. The Board has met the requirement that at least 50% of its members should be independent throughout the year.

In deciding the chairmanship and membership of Board committees, both the need to refresh membership and the skills of the individuals are taken into account.

All non-executive directors are considered by the Board to be independent. Non-executive directors are not eligible to participate in the Company’s share, bonus or pension schemes.

At the time of his appointment as Chairman, and in compliance with the Code, Mr Michael Jeffries was considered to be independent.

Processes are in place to ensure that, in the event of a conflict of interest, this is reported to the Board and the director involved takes no part in the relevant discussion. A resolution will be put to this year’s AGM amending the Company’s Articles to give the Board the power to authorise directors’ conflicts of interest in line with changes to the law introduced by the Companies Act 2006.

Appointments to the Board There is a rigorous and transparent procedure for the appointment of new directors. Appointments are made on merit and against objective criteria. The Miles Partnership was retained as a consultant for the appointment of Philip Harrison and Odgers Ray & Berndtson for Ian Tyler. The Company has a talent management and succession planning process.

Information and professional development A main principle of the Code is that information of sufficient quality is supplied to the Board in a timely manner. The Board is supplied with detailed information several days prior to its meetings.

The agenda for each meeting includes substantial reports on all

aspects of the Group’s business, and ad hoc reports are circulated if decisions are required between formally arranged meetings.

Non-executive directors have ready access to executive directors.

Board meetings are held at different Company locations during the year as well as at the head office, enabling directors to make site visits. Non-executive directors make site visits during the year and executive directors carry out regular business reviews at different locations throughout the year.

All newly appointed directors are provided with a structured induction programme which includes meetings both internally and externally with those principally involved with the business.

Ongoing training is provided for all directors to ensure that they are aware of their responsibilities.

All directors have access to the advice and services of the Company Secretary and are able to take independent professional advice at the Company’s expense.

Performance evaluation The Code requires the Board to undertake a formal and rigorous evaluation of its own performance annually and that of its committees and the directors.

A formal evaluation was conducted by means of detailed questionnaires completed by each director. The answers formed the basis of a review by the whole Board led by the Chairman.

Comments were invited on a wide range of issues including Board and Board Committee skill and balance; frequency of meetings; access to management other than executive directors; sufficiency of information; achievement of objectives; operational issues and monitoring; dialogue with shareholders; rigour of meetings; and working relationships. The Chairman has discussed the results with each director and provided feedback to the full Board.

The performance of the Chairman has been subject to appraisal by the Board led by the senior independent director. The Board is considering whether for next year evaluation should be carried out by an external assessor.

Re-election Under the Code, directors should offer themselves for re-election at regular intervals, and all the directors submit themselves for re-election at least every three years. Directors stand for reappointment by the shareholders at the first annual general meeting following their appointment, and subsequently at least every three years.

Non-executive directors are appointed for a term of three years and may be reappointed for a further term of three years by agreement of the Board. On appointment each non-executive director receives a letter setting out the terms of his or her appointment. The terms and conditions are available for inspection from the Company Secretary. Non-executive directors are not employees and do not participate in the daily business of the Group.

Remuneration Information on the Remuneration Committee is set out below, and the Directors’ Remuneration report is on pages 58 to 63.

VT Group Plc Annual Report & Accounts 2008

The Board has three standing committees, audit, remuneration and nomination. Each has its own terms of reference which are available on our website, www.vtplc.com, or on request from the Company Secretary. The Company Secretary is secretary to each committee.

Audit Committee Members during the year were: Mr A Given (chairman); Mr D Barclay; and Mr D Thorpe. The Finance Director and representatives of the Group’s external auditor attend by invitation. The Committee meets at least twice a year and at least once a year there is an opportunity for the external auditor to discuss matters with the committee without the executive directors being present.

The Board has determined that the Committee members have sufficient skills and experience to contribute meaningfully to the Committee’s discussions. The chairman of the Committee has the required experience in accounting and financial management.

The Committee takes account of the guidance in the Combined Code on audit committees.

The Committee has set parameters so that the independence of the external auditor is not prejudiced when undertaking non-audit work. Depending on the nature of the work it is either prohibited or, unless below a de minimis threshold, requires prior approval from the Group Finance Director and, for larger projects, the Committee. Non audit work includes tax advice, due diligence and other transaction related services the Company has appointed a different firm of accountants from its auditor as its principal tax advisor. The cost effectiveness and impact on any corporate relationship with its auditors are considered when awarding non-audit work. In turn, the external auditor has in place processes to ensure that its independence is maintained. Fees paid to the auditor, in respect of the year ended 31 March 2008 totalled £2.0m, including £0.77m for the audit of the Company and its subsidiaries and £1.3m for other services (primarily due diligence and work relating to public documents) relating to the Group’s proposed Shipbuilding Joint Venture.

See note 7 to the financial statements for further details.

During the year the committee has considered, among other items, the effectiveness of the internal audit function, the Group’s risk management processes and matters raised by the auditors.

Remuneration Committee Members during the year were: Mr D Thorpe (chairman until 31 January 2008); Mr D Barclay (chairman from 31 January 2008); Baroness Blackstone; Lord Boyce; and Mr A Given.

The Committee comprises exclusively non-executive directors.

The Chairman, Chief Executive and Group HR Director attend the Committee, by invitation, when appropriate. No executive is present when the Committee considers matters relating to him or herself. Mr Jeffries is absent when his remuneration as Chairman is under consideration. The Committee meets periodically when required but not less than twice a year.

The Committee’s responsibilities are described in the Directors’ Remuneration report on page 56.

The Committee has access to information and advice both from within the Group and externally, at the cost of the Company, as it deems necessary. It is responsible for appointing any consultants in respect of executive remuneration.

During the year the committee considered, among other matters, provisions for employees transferring to the proposed shipbuilding joint venture and senior and executive staff remuneration and incentivisation.

Nomination Committee Members during the year were: Mr M Jeffries; Baroness Blackstone; Lord Boyce; Mr D Barclay; Mr A Given; and Mr D Thorpe (until 31 January 2008).

All directors’ appointments are considered before formal approval by the Board and the Committee aims to maintain a proper balance between executive and non-executive directors in accordance with the Code.

The Committee leads the process for identifying and recommending candidates for appointment as directors, giving full consideration to succession planning and the needs of the Group, including qualifications and the expertise necessary to guide the Group’s strategy. Before concluding arrangements with any preferred candidate for appointment to the Board, the Committee satisfies itself that the candidate’s other commitments are not such that they would adversely affect the candidate’s ability to devote adequate time to the position.

The Committee reviews the structure, size and composition of the Board. It also makes recommendations to the Board on the composition of its committees. The Committee meets when required. No-one other than members of the Committee is entitled to be present at its meetings but non-executive directors are invited to attend.

The Committee has access to such information and advice as it may require both from within the Group and externally at the cost of the Group. This may include the appointment of external search consultants.

The committee met during the year to consider the appointment of Mr Ian Tyler to the Board.

Group Executive Committee The Group Executive Committee (GEC) is the Chief Executive’s committee and is responsible for managing the business.

Its members are the executive directors together with the managing directors of the business divisions, the Group HR Director, and the Company Secretary. It meets fortnightly throughout the year. Members who are not Board directors are invited to make presentations to the Board during the year. The GEC focuses on operational performance and decision making.

How we run the Group

Board committees

51

52

VT Group Plc Annual Report & Accounts 2008

Corporate Governance Report 2008 for the year ended 31 March 2008 continued Accountability and audit Financial reporting The Board is required to present a balanced and comprehensible assessment of the Group’s position and prospects and is satisfied that it has met this obligation. A summary of the directors’ responsibilities for the financial statements is set out on page 64.

Organisation

The Board has reviewed the effectiveness of the system of internal controls in the year including via the following: • annual budgets are prepared for each operating business and compared with monthly management reporting, which focuses on actual performance against these budgets; • management reports, internal and external audit reports on the system of internal controls, and any material control weaknesses that are identified;

The Group has a defined structure in which operational management has detailed responsibilities and levels of authorisation. The Group has a Code of Business Ethics setting out principles to be followed by all employees in the course of business. A confidential telephone line is available for staff to report concerns with regard to conduct.

• discussions with management including discussions on the actions taken on problem areas identified by Board members or in the internal or external audit reports;

Ethical trading

• review of the adequacy of the level of experienced and professional staff throughout the business and the expertise of individual staff members so that they are capable of carrying out their respective responsibilities;

Further information on the Group’s ethical trading policies is given in the Corporate responsibility report on page 41.

Internal controls Following the publication of guidance for directors ‘Internal Control: Guidance for Directors on the Combined Code’ (the Turnbull guidance), the Board confirms that the Group has established processes and procedures for identifying, evaluating and managing the significant risks faced by the Group. The processes have been embedded into the fabric of the Group and have been in place for the year under review and up to the date of approval of this annual report and financial statements. The processes and procedures are regularly reviewed by the Board.

The Board is ultimately responsible for the Group’s system of internal controls and for reviewing its effectiveness. The role of management is to implement Board policies on risk and control.

The system of internal controls is designed to manage rather than eliminate the risk of failure of the achievement of business objectives. In pursuing these objectives, internal controls can only provide reasonable and not absolute assurance against material misstatement or loss.

A process of control self-assessment and hierarchical reporting has been established which provides for a documented and auditable trail of accountability. These procedures are relevant across all Group operations; they provide for successive assurances to be given at increasingly higher levels of management and, finally, to the Board. This process is facilitated by the Group’s internal audit function, which also provides a degree of assurance as to the operation and validity of the system of internal controls. The internal audit function ensures that corrective action is taken to rectify any weaknesses.

• policies and procedures for matters such as the delegation of authorities, capital expenditure and treasury management, as well as regular updates;

• review of major tenders which are specifically approved by the Board, and contract performance, which is regularly reviewed and compared against estimates drawn up at the time of original tender; and • review of the external and internal audit work plans.

The Group’s risk management process is described on pages 47 to 48.

Going concern After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing these financial statements.

53

VT Group Plc Annual Report & Accounts 2008

Statutory information Our aim is to provide investors and other stakeholders with clear and comprehensive information.

In this section you will find our full financial statements for the year ended March 2008, along with other statutory information.

Directors’ report

54

Remuneration report

56

Statement of Directors’ responsibilities

64

Auditor’s report

65

Financial statements

66

Statutory Information

Statutory information

54

VT Group Plc Annual Report & Accounts 2008

Directors’ Report for the year ended 31 March 2008 The directors present their annual report and the audited financial statements for the year ended 31 March 2008.

Principal activities The principal activities of the Company and its subsidiaries are: • provision of critical communications services in the broadcast, defence, space, emergency services and security sectors worldwide

Research and development The Group continued to maintain its levels of research and development relating to composite materials, shipbuilding, broadcasting and waste recycling.

Directors The names of the current directors together with brief biographical details are shown on pages 38 and 39.

• provision of supporting services to schools, LEAs and Central Government, including careers guidance and provision of vocational work based training

Philip Harrison was appointed to the Board on 19 November 2007, Peter McIntosh on 22 January 2008 and Ian Tyler on 12 May 2008.

Each offers himself for re-appointment at the forthcoming AGM.

• provision of base operations and facilities management activities, IT and communications installations and integration services, primarily for the US Department of Defense, operating across the US

Michael Jeffries and Chris Cundy retire by rotation and, being eligible, offer themselves for re-appointment.

• design and construction of advanced naval vessels for the Royal Navy and Navies worldwide, including the design and manufacture of high quality smaller craft and equipment for the marine, offshore and aerospace markets • provision of technical services, logistics and training for commercial customers and all three armed services in the UK and around the world. Activities include facilities management, operation and maintenance of assets, provision of specialist manpower and supply chain management Developments affecting the Group during the year and its prospects for the future are evaluated in the Chairman’s Statement and in the Business Review on pages 2 to 35.

Results and Dividends The Group profit for the year available to ordinary shareholders after tax amounted to £56,800,000 (2007: £44,430,000).

The directors recommend the payment of a final dividend of 9.55p (2007: 8.6p) per ordinary share, amounting to £17,000,000 (2007: £15,092,000) which together with the interim dividend of 3.55p (2007: 3.25p) makes a total of 13.1p or £23,300,000 (2007: 11.85p or £20,786,000) for the year.

If approved, the final dividend will be paid on 6 August 2008 to ordinary shareholders on the register at the close of business on 20 June 2008.

Each of Baroness Blackstone, Lord Boyce, David Barclay, Andrew Given and Ian Tyler has a service contract for a three year period but which may be terminated by either party on one months’ notice.

Directors’ interests in the shares of the Company are disclosed in the Remuneration report on page 61.

Acquisitions and disposals On 18 December 2007 the Group purchased Advanced Engineering and Planning Corporation Inc (AEPCO) from its management for $70m.

On 17 January 2008 the Group purchased the share capital of British Nuclear Group Project Services Limited from British Nuclear Group plc for £47.6m.

Fixed assets In the opinion of the directors, the market value of the Group’s properties at 31 March 2008 is not significantly different from the book value shown in the financial statements.

Equal opportunities All employment policies include a commitment to equal opportunities regardless of sex, race, colour, nationality, ethnic origin, religion, age or disability, subject only to considerations of national security. The Group’s policy is to provide, wherever possible, employment opportunities for disabled people and to ensure that disabled people joining the Group and employees who become disabled whilst in our employment benefit from training and career development opportunities.

55

VT Group Plc Annual Report & Accounts 2008

Substantial interests in shares Details of substantial holdings in the issued ordinary share capital of the Company notified as at 12 May 2008 were:

Number of Shares

% of Total

10,191,394

5.73

Legal & General Inv. Mgt

8,210,422

4.62

Newton Investment Mgt

6,986,380

3.93

Co-operative Insurance Society

6,603,447

3.71

Threadneedle Asset Mgt

5,729,081

3.22

William Blair LLC

5,597,273

3.15

Fidelity International

Corporate responsibility

Auditors

The Corporate responsibility report is on pages 40 to 46.

KPMG Audit Plc have indicated their willingness to continue in office and a resolution for their re-appointment as auditors of the Company will be proposed at the forthcoming Annual General Meeting.

The Corporate governance statement is set out on pages 49 to 52.

Change of control Certain of the Group’s funding and training contracts contain provisions entitling the counter parties to other similar rights in the event of a change of control of the Company.

In addition, the Company’s share plans to retain provisions, as a result of which, options and awards may vest and become exercisable on change of control of the Company.

Annual General Meeting The Annual General Meeting of the Company will be held on Wednesday 23 July 2008. Details of the resolutions to be proposed, together with appropriate explanations, are set out in the separate Notice of Annual General Meeting enclosed with this report. Special business includes authority to allot shares, the disapplication of pre-emption rights under section 89 of the Companies Act 1985. The Company plans to introduce a new sharesave scheme for its employees. The Company also proposes to amend its articles of association in line with the provisions of the Companies Act 2006. The Company wishes to have authority to purchase shares to place in Treasury. The Company will be adopting the ICSA’s guidance on treatment of votes cast through pooled accounts. All proxy votes cast will be counted and the results shown on the Company’s website after the AGM.

Directors’ confirmation The directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

By order of the Board

M P Jowett Secretary 12 May 2008

Statutory Information

Corporate governance

56

VT Group Plc Annual Report & Accounts 2008

Remuneration Report for the year ended 31 March 2008 This report has been prepared in accordance with Schedule 7A to the Companies Act 1985 (as amended by the Directors’ Remuneration Report Regulations 2002). It also describes the Group’s compliance with the Combined Code on Corporate Governance in relation to remuneration for the current and forthcoming financial years. The report has been approved by the Board for submission to shareholders at the forthcoming Annual General Meeting (AGM). The Company’s auditor has audited the report to the extent required by the relevant legislation.

The chairman of the Remuneration Committee will attend the AGM and will be available to answer shareholders’ questions regarding the contents of this report.

Remuneration Committee In accordance with the Combined Code, the remuneration of the executive directors is determined by the Remuneration Committee on behalf of the Board. The Committee also reviews and monitors remuneration for other senior executives below the Board and oversees the operation of the Company’s share schemes as they apply to our executives. The Committee’s terms of reference are available on the Company’s website, www.vtplc.com.

The following now comprise the principal elements of executive directors’ remuneration: • base salary; • benefits, including pension, company car and fuel, healthcare and private telephone costs; • participation in the annual performance-related bonus plan; and • participation in the Company’s Deferred Annual Bonus Scheme (DABS) and Performance Share Plan (PSP) as described below, under which awards vest subject to the satisfaction of performance conditions set by the Remuneration Committee with the primary aim of encouraging the generation of returns to shareholders.

Base salary Base salaries for executive directors are reviewed annually, usually in April. When conducting the most recent review of base salaries, the Remuneration Committee considered (as it has done in previous years) salary levels for executive directors in companies of a similar size and within similar industries to the Company, as well as the director’s personal experience and performance.

Details of the composition of the Committee during the year can be found in the Corporate governance report on page 51.

The revised salaries of the executive directors employed at the time of publication (effective for the year beginning on 1 April 2008) are:

By invitation, Remuneration Committee meetings are also attended by the Chairman, the Chief Executive and the Group HR Director.

No person is present during any discussion relating to his or her own remuneration.

• P J Lester

£500,000 (15% increase on 2007)

• C J Cundy

£250,000 (8% increase on 2007)

• P J Harrison

£300,000

The Remuneration Committee has appointed Hewitt New Bridge Street Consultants LLP (HNBSC) as its independent adviser.

HNBSC does not provide any other services to the Company.

A description of the relationship between the Company and HNBSC are available on the Company’s website, www.vtplc.com.

The Committee also received advice during the year from Hymans Robertson (for UK pensions) and Advaita Consulting (for US pensions).

• P J McIntosh

£237,000

Remuneration policy The Company’s policy continues to be to provide for each of its executive directors a remuneration package which is adequate to attract, retain and motivate individuals of the appropriate calibre, whilst at the same time not paying more than is necessary for this purpose. The Company’s policy is regularly reviewed to ensure that it remains appropriate to the Company’s circumstances and prospects. The remuneration package for executive directors and other senior executives is structured to ensure that a significant proportion of total remuneration is payable only subject to the achievement of challenging targets which are designed to improve shareholder value.

When setting remuneration for executive directors, regard is paid to the pay policy throughout the Group.

Annual bonus Executive directors, in common with other executives in the Company, are eligible to participate in the annual bonus plan. The level of bonus paid is determined annually by the Remuneration Committee and depends on the achievement of a combination of challenging profit, cashflow and strategic and personal targets set by the committee.

In 2008 executive directors had the opportunity to earn up to 100% of salary in annual bonus. A bonus of up to 75% of salary was determined by the achievement of financial targets, and 40% of the amount awarded under this heading had to be compulsorily deferred under the Deferred Annual Bonus Scheme (see below).

The payment of any bonus in excess of 75% of salary required the achievement of more stretching targets, and any such additional bonus was payable only in cash, i.e. it was not eligible to be deferred under the DABS. From April 2008 executive directors retain the opportunity to earn up to 100% of salary in annual bonus. The bonus will be split into two elements with a maximum of 70% based on financial targets and upto 30% based on exceptional divisional or corporate financial performance (in excess of stretch targets) and individual performance against specified personal objectives. The first element will be subject to a 40% compulsory deferral under DABS. The second element will be payable only in cash and will not be eligible to be deferred under DABS.

57

VT Group Plc Annual Report & Accounts 2008

Under the DABS, approved by shareholders at the 2005 AGM, executive directors and other members of the Group Executive Committee are required to defer 40% of any eligible bonus payment into VT Group shares for a period of three years.

Individual executive directors may also elect to defer a further 35% of eligible bonus under the same arrangement. At the end of the three-year period, matching shares will be awarded subject to continued employment, depending on the extent to which earnings per share (EPS) targets have been achieved over the three-year period as shown below.

EPS growth over 3 years

No. of matching shares awarded

Less than RPI + 5% p.a.

Nil

RPI + 5% p.a.

1:1

RPI + 7% p.a.

2:1

RPI + 12% p.a.

3:1

Between the above points

Straight line

Other long-term incentive plans Prior to 2007, the Company’s policy was to make awards to executive directors under the Long-Term Incentive Plan (LTIP) and two share option plans (approved and unapproved). Following a review of the long-term incentive provision conducted by the Remuneration Committee, the executive share option and LTIP plans were replaced by a single Performance Share Plan.

These plans are explained in greater detail below.

LTIP The LTIP, approved by shareholders in 2003, provided annual conditional awards made over VT Group shares worth up to 50% of base salary. The executives, except Mr P J Harrison, still hold conditional awards under this plan that have yet to complete the vesting period. The shares are held in trust and are released after three years subject to the extent to which a total shareholder return (TSR) performance target is met over the vesting period, with TSR chosen to encourage the delivery of above market returns to shareholders. The comparator group for measuring performance has been the FTSE 250 (excluding Investment Trusts). If the Company is ranked at the median at the end of the performance period, 50% of shares will be released, with full vesting for upper quartile performance or above. No shares will vest if the Company is ranked below the median. No awards were made in 2008 and no further awards will be made under the LTIP.

Share option plans Until 2006, the Company operated two share option plans, (a UK Inland Revenue approved plan and an unapproved plan) approved by shareholders in 1999 and 1996 respectively, under which directors and other executives were eligible to participate

at the discretion of the Remuneration Committee. Options were granted at market value, determined immediately before the grant.

Annual awards did not normally exceed one times base salary.

Options under the Company’s schemes can normally be exercised only on the achievement of an EPS performance condition. For the most recent awards, the performance condition applying is real growth in adjusted earnings per share of at least the Retail Prices Index (RPI) plus 3% per annum over three consecutive years. If this target is not met at the end of the three-year period, the options lapse (i.e. there is no “re-testing” facility).

No share option awards were made in 2008 and no further awards will be made.

Performance Share Plan The VT Group 2007 Performance Share Plan (PSP), approved by shareholders in 2007, provides for annual awards of conditional shares to be made to executive directors and other eligible executives worth up to a maximum of 100% of salary.

These awards will vest after three years subject to the satisfaction of performance targets based on EPS growth (50% of awards) and relative TSR performance (50% of awards), thereby providing a balanced incentive to senior executives to deliver both outstanding returns to shareholders and strong earnings growth. The vesting schedule that will apply to awards is as follows:

TSR performance relative to the FTSE 250 (excluding investment trusts)

EPS growth over 3 years

No. of PSP shares vesting

Below median

Less than RPI + 5% p.a.

Nil

Median

RPI + 5% p.a.

30%

Upper quartile

RPI + 12% p.a.

100%

Between the above points

Between the above points

Straight line

Assessing performance under long-term incentive plans Performance under the TSR targets in the LTIP and PSP are independently calculated by Hewitt New Bridge Street Consultants on behalf of the Remuneration Committee.

Under the DABS and share option plans, the Remuneration Committee will obtain external guidance concerning the extent to which the EPS targets are satisfied. Where outstanding awards straddle the transition from UK GAAP to International Accounting Standards, the Committee will continue to ensure that EPS is calculated on a consistent basis.

Share ownership guidelines Executive directors are encouraged to build a shareholding in VT Group worth 100% of salary.

Statutory Information

Deferred Annual Bonus Scheme

58

VT Group Plc Annual Report & Accounts 2008

Remuneration Report for the year ended 31 March 2008 continued Directors’ service agreements All executive directors’ service contracts are of no fixed term and are subject to 12 months’ notice of termination from the Company.

Non-executive directors are normally appointed for a three-year term which can be extended at the Board’s discretion. All appointees are subject to regular re-appointment by shareholders.

Directors’ contracts

Executive directors

Date of contract

Notice period

P J Lester

14 May 2002

12 months

C J Cundy

5 January 2004

12 months

P J Harrison (1)

19 November 2007

12 months

P J McIntosh (2)

19 May 2003

12 months

Notes 1 Appointed 19 November 2007 2 Appointed 22 January 2008

Non-executive directors

Date of letter of appointment

Period of appointment

Notice period

M M E Jeffries

16 May 2005

To AGM 2008

3 months

D M Barclay

26 July 2006

To AGM 2009

1 month

Baroness Blackstone

25 July 2007

To AGM 2009

1 month

Lord Boyce

25 July 2007

To AGM 2009

1 month

A F Given

26 July 2006

To AGM 2008

1 month

D A Thorpe

26 July 2006

To AGM 2009

1 month

Non-executive directors’ fees The fees of the non-executive directors (other than the Chairman whose fees are set by the Remuneration Committee) are set by the Board on the recommendation of the executive directors and reviewed annually. Non-executive directors are not eligible to participate in any of the Company’s bonus or share option schemes, nor do they receive a pension.

All the non-executive directors receive an annual base fee of £36,000 with additional fees of £6,000 for chairing the Audit and Remuneration Committees. From November 2006, the senior independent non-executive director received an additional fee of £5,000.

The Chairman’s fees are £150,000 per year with effect from 1 November 2006.

59

VT Group Plc Annual Report & Accounts 2008

Policy on external appointments for executive directors Executive directors may hold one non-executive directorship of a listed company.

Mr P J Lester is a non-executive director of Chloride Group plc. Mr Lester takes holiday when meetings occur and retains the fees of £24,000.

Performance graph As the Company is a constituent of the FTSE 250, the FTSE 250 index provides an appropriate indication of market movements against which to benchmark the Company’s performance for these purposes. The chart below shows the Company’s TSR performance against the FTSE 250 index less investment trusts over the five years ended 31 March 2008.

400

Total shareholder return Source: Thomson Financial

350 300 250 200

This graph shows the value, by 31 March 2008, of £100 invested in VT Group on 31 March 2003 compared with £100 invested in the FTSE 250 Index (excluding investment trusts).

The other points plotted are the values at intervening financial year-ends.

150 100 50 0 31 Mar 2004

VT Group

31 Mar 2005

31 Mar 2006

31 Mar 2007

31 Mar 2008

FTSE 250 (excluding investment trusts)

Statutory Information

31 Mar 2003

60

VT Group Plc Annual Report & Accounts 2008

Remuneration Report for the year ended 31 March 2008 continued The auditor is required to report on the information contained in the following sections of this report.

Directors’ emoluments Remuneration table The various elements of remuneration (excluding employer pension contributions) received by each director were as follows:

Salary & fees

Benefits

Annual Bonus

Total

2008 £000

2007 £000

2008 £000

2007 £000

2008 £000

2007 £000

2008 £000

2007 £000

Executive P J Lester C J Cundy C J Rickard (1) S E Tarrant (2) P J Harrison (3) P J McIntosh (4)

435 232 83 - 343 41

406 218 188 208 - -

32 12 - - 4 4

26 12 9 15 - -

412 220 - - 113 51

289 156 - 148 - -

879 464 83 - 460 96

721 386 197 371 -

1,134

1,020

52

62

796

593

1,982

1,675

Non-executive M M E Jeffries D Barclay Baroness Blackstone Lord Boyce A F Given D A Thorpe

150 37 36 36 57 41

141 33 33 33 43 38

3 - - - - -

- - - - - -

- - - - - -

- - - - - -

153 37 36 36 57 41

141 33 33 33 43 38

Sub total

357

321

3

-

-

-

360

321

1,491

1,341

55

62

796

593

2,342

1,996

Sub total

TOTAL

Notes 1 Resigned from the Board 23 April 2007 2 Resigned from the Board 31 March 2007 3 Appointed to the Board 19 November 2007 4 Appointed to the Board 22 January 2008 Benefits include the provision of company car and fuel, healthcare and personal telephone costs, all of which are taxable.

The annual bonus is payable under the Deferred Annual Bonus Scheme approved at the Annual General Meeting in July 2005 and is split between cash and shares. 40% of any bonus paid up to 75% of salary bonus must be deferred under the scheme into shares with each participant having the option to defer a further 35% of salary if he or she so wishes. The figures listed in table above as annual bonus include both share and cash elements of scheme.

Mr S E Tarrant retired from the Board on 31 March 2007. As previously reported he continued to work for the Company as an employee on a part-time basis, committing at least four days per month to the Company. He is engaged in assisting with specific strategic projects for the Group. In respect of these services Mr Tarrant received fees totalling £45,000 in the year ended 31 March 2008, based on time spent on VT Group matters.

Mr P J Harrison received £237,000 to compensate deferred remuneration from previous employment (contained in the above figure).

The Committee believes this was a fair value of the awards that he was foregoing on leaving.

Mr C J Rickard received three months’ salary (contained in the above figure) as compensation for loss of office during the year. All LTIP and share options lapsed on leaving the Company.

Mr A F Given received an additional £10,000 (contained in the above figure) for the period in which he acted as Chairman of the Company.

The highest paid director was Mr P J Lester.

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VT Group Plc Annual Report & Accounts 2008

Pension benefits With the exception of Mr P J Harrison, the executive directors are members of the Group’s contributory pension scheme which entitles them to a pension on retirement of two-thirds of pensionable salary after twenty years’ service; details of accrued benefits are set out below. No elements of remuneration apart from salary are pensionable. The normal retirement age for directors is 60.

Mr P J Lester and Mr C J Cundy’s pensionable salaries within the Group’s contributory pension scheme are capped by a notional earnings cap of £112,600. Mr P J Lester and Mr C J Cundy received a pension supplement of 55% and 65% respectively of salary above the cap.

Mr P J McIntosh received a pension supplement of 16% of salary.

As with Mr C J Rickard, Mr P J Harrison does not participate in the defined benefit scheme, being closed to new members. Instead, he participates in the SIPS money purchase scheme with an employer contribution of 20% of salary.

Total accrued Total accrued pension at pension at 1 April 2007 1 April 2008 £ £

Change in accrued benefi ts £

21,620 52,219 50,410

4,425 4,613 400

Director P J Lester C J Cundy P J McIntosh

17,195 47,606 50,010

Transfer value Transfer value

Increase in of accrued of accrued Member’s transfer value pension as at pension as at contributions less member 1 April 2007 1 April 2008 over the year contributions £ £ £ £

344,672 604,542 755,668

471,124 745,533 784,909

9,588 9,588 1,598

116,864 131,403 27,643

i)

The total accrued pension shown is that which would be paid annually on retirement based on service to the end of the year.

ii)

The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11.

iii) Members of the Scheme have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table. iv) The Remuneration Committee has determined that no special arrangements will be made for executives who are affected by the lifetime allowance.

Directors’ interests in shares At 31 March 2008

At 31 March 2007

Ordinary shares

Benefi cial

Non-Benefi cial

Benefi cial

Non-Benefi cial

D M Barclay Baroness Blackstone Lord Boyce C J Cundy A F Given P J Harrison* M M E Jeffries P J Lester P J McIntosh* C J Rickard* S E Tarrant* D A Thorpe

10,000 4,297 1,200 32,491 3,000 - 50,000 96,048 - - 18,456 5,000

- - - - - - - - - - - -

10,000 6,942 1,200 78,517 3,000 4,573 50,000 198,318 2,727 - - 5,000

-

*At date of appointment, resignation or retirement, as appropriate

During the year none of the directors had an interest in the share capital of any of the Company’s subsidiaries. There have been no changes in the above holdings between 31 March 2008 and 12 May 2008.

Statutory Information

62

VT Group Plc Annual Report & Accounts 2008

Remuneration Report for the year ended 31 March 2008 continued Share options The following figures relate to participation in the Group’s executive share option schemes. The middle market value of the Company’s ordinary shares on 31 March 2008 was 657p and the range during the year was 481p to 709p.

No of options

At 1.4.2007 or date of appointment

Granted during the year

Exercised and sold during year

At 31.3.2008 Or date of resignation/ retirement

Exercise price p

Gain on exercise price p

Date from which exercisable

Expiry date

P J Lester

250,000* 12,195+ 264,227* 178,462*

- - -

250,000 - 50,000

- 12,195 214,227 178,462

260 246 246 455

330 - 344 -

05.07.05 08.07.06 08.07.06 25.05.09

04.07.12 07.07.13 07.07.13 24.05.16

C J Cundy

60,277* 9,259+ 58,148*

- - -

- - -

60,277 9,259 58,148

216 324 324

- - -

18.12.05 19.12.08 19.12.08

17.12.12 18.12.15 18.12.15

P J McIntosh

12,396* 49,587+ 56,790+

- - -

- - -

12,396 49,587 56,790

242 242 324

- - -

14.11.06 14.11.06 19.05.08

13.11.13 13.11.13 18.05.15

* The Vosper Thornycroft Executive Share Option Plan 1996 + The Vosper Thornycroft Approved Share Option Plan 1999

Share options granted prior to June 2005 have a performance target where the increase in normalised earnings per ordinary share of the Company has exceeded the growth in the Retail Prices Index (RPI) by an average of at least 2% per annum and for those granted after June 2005 the target is 3% over RPI. There is no re-testing.

No executive directors have interests in either the Company’s sharesave schemes or the share incentive plan.

LTIP This table sets out the shares provisionally allocated under the LTIP.

Date of allocation

Allocated#

Retained shares*

Matching shares

Allocated shares released

Retained & matching shares released

Share price on date of release

Earliest date for release

Value of shares on date of allocation+

P J Lester

16.06.04 27.07.05 14.07.06

69,288 58,418 41,916

- - -

- - -

58,132 - -

- - -

617p - -

16.06.07 27.07.08 14.07.09

267.0p 334.1p 484.3p

C J Cundy

16.06.04 27.07.05 14.07.06

39,325 32,684 22,548

3,893 3,237 -

3,893 3,237 -

32,993 - -

7,786 - -

617p - -

16.06.07 27.07.08 14.07.09

267.0p 334.1p 484.3p

P J McIntosh

16.06.04 27.07.05

28,089 27,536

2,781 2,727

2,781 2,727

23,566 -

5,562 -

617p -

16.06.07 27.07.08

267.0p 334.1p

# This represents the maximum allocation, subject to the achievement of the performance target * The purchase of the retained shares has been funded by subscription from the individual directors and the share numbers are included in the table on page 61 + This figure is used to calculate the number of shares originally allocated

The vesting of all awards made under the LTIP is as described above on page 57.

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VT Group Plc Annual Report & Accounts 2008

DABS This table sets out the shares granted under the DABS.

Date of grant

Number of deferred shares awarded(1)

Number of matching shares conditionally awarded(2)

Share price on grant date

Earliest release date

P J Lester

16.05.06 21.05.07

24,145 19,993

72,435 59,979

460.75p 578.75p

16.05.09 21.05.10

C J Cundy

16.05.06 21.05.07

13,509 10,754

40,527 32,262

460.75p 578.75p

16.05.09 21.05.10

P J McIntosh

-

-

-

-

-

P J Harrison

-

-

-

-

-

(1) Deferred shares are awarded in respect of bonus deferred under the terms of the DABS outlined in detail above. The shares vest three years after grant subject to continued employment.

(2) Matching shares will vest three years after grant subject to the satisfaction of EPS performance targets as outlined on page 57 and continued employment.

PSP This table sets out the shares granted under the PSP.

P J Lester C J Cundy P J Harrison

Date of grant

Allocated#

Allocated shares released

Share price on date of release

Earliest date for release

Value of shares on date of allocation+

05.09.07 05.09.07 22.11.07

72,925 38,810 23,889

- - -

- - -

05.09.10 05.09.10 22.11.10

569.5p 569.5p 613.0p

# This represents the maximum allocation, subject to the achievement of the performance target + This figure is used to calculate the number of shares originally allocated

Dilution limits The Company’s share incentive schemes, including the sharesave scheme, operate within the ABI’s dilution limit of 5% in 10 years for executive schemes, and all its plans operate within the 10% in 10 years limit for all schemes. Shares under DABS, PSP and LTIP are purchased in the market.

By order of the Board

Statutory Information

D M Barclay Chairman of the Remuneration Committee

64

VT Group Plc Annual Report & Accounts 2008

Statement of Directors’ Responsibilities in respect of the annual report and the financial statements The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The Group financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and the performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.

In preparing each of the Group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors’ report, Directors’ Remuneration report and Corporate Governance statement that comply with that law and those regulations.

Statement of disclosure of information to auditors The directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each director has taken all the steps that he ought to have taken to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

We the directors of the Company, confirm that to the best of our knowledge: a) the financial statements of the Group have been prepared in accordance with IFRS’s as adopted by the EU, and for the Company under UK GAAP, in accordance with applicable United Kingdom law and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and b) the Directors’ Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that face the Group.

By order of the Board

P J Lester Chief Executive

P J Harrison Finance Director

VT Group Plc Annual Report & Accounts 2008

65

Independent Auditor’s Report to the members of VT Group plc

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985.

Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU, and for preparing the parent company financial statements and the Directors’ Remuneration Report in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities on page 64.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited.

It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.

Opinion In our opinion:

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

• the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 March 2008 and of its profit for the year then ended;

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements.

• the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation;

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

• the parent company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the parent company’s affairs as at 31 March 2008; • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors’ Report is consistent with the financial statements.

KPMG Audit Plc Chartered Accountants Registered Auditor 8 Salisbury Square, London 12 May 2008

Statutory Information

We have audited the Group and parent company financial statements (the ‘financial statements’) of VT Group plc for the year ended 31 March 2008 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Recognised Income and Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

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VT Group Plc Annual Report & Accounts 2008

Consolidated Income Statement For the year ended 31 March 2008

Notes

Before Non-recurring non-recurring costs of costs of exiting exiting

business business 2007 2007 2008 £m £m £m

Combined sales of Group and share of equity accounted investments

Less: adjustment for share of equity accounted investments

3,4 18

1,201.0 (181.0)

1,004.6 (152.1)

- -

1,004.6 (152.1)

Total 2007 £m

Revenue – continuing operations Cost of sales

1,020.0 (856.2)

852.5 (706.1)

- (5.0)

852.5 (711.1)

Gross profit – continuing operations Administrative expenses

163.8 (100.7)

146.4 (93.8)

(5.0) (1.0)

141.4 (94.8)

4

63.1

52.6

(6.0)

46.6

18

18.1

15.5

-

15.5

18

99.0 (9.9) (7.9)

82.5 (7.7) (6.7)

(6.0) - -

76.5 (7.7) (6.7)

4,5

9 10

81.2

6.1 (16.0)

68.1

(6.0)

62.1

4.8 (13.1)

- -

4.8 (13.1)

Group operating profit – continuing operations

Share of results of equity accounted investments

Operating profit before amortisation of intangible assets arising from business combinations and taxation expense of equity accounted investments

Amortisation of intangible assets arising from business combinations Taxation expense of equity accounted investments

Operating profit – continuing operations

Finance income

Finance expenses

Net financing costs

(9.9)

(8.3)

-

(8.3)

Profit from continuing operations before taxation Income tax expense

11

71.3 (13.3)

59.8 (9.5)

(6.0) 1.8

53.8 (7.7)

Profit for the year

58.0

50.3

(4.2)

46.1

Attributable to: Equity holders of the parent Minority interest

56.8 1.2

48.6 1.7

(4.2) -

44.4 1.7

58.0

50.3

(4.2)

46.1

Basic earnings per share Diluted earnings per share

12 12

32.2p 31.4p

25.4p 24.8p

67

VT Group Plc Annual Report & Accounts 2008

Notes

2008 £m

2007 £m

Profit for the year

58.0

46.1

36 11 11

0.5 (1.4) 22.1 2.8 (4.1)

(4.3) 0.5 23.2 (5.8)

Other recognised income and expense for the year: Exchange differences on retranslation of foreign operations Derivative fi nancial instruments – effective cash fl ow hedges Actuarial gains arising on Group pension obligations

Current tax on items taken directly to equity

Deferred tax on items taken directly to equity

Other recognised income and expense for the year in respect of joint ventures and associates Actuarial (loss) / gain on share of pension obligations Tax on (loss) / gain on share of pension obligations Effective cash fl ow hedges – net of deferred tax

19.9

13.6

18 18 18

(1.5) 0.4 (0.3)

2.7 (0.8) -

Net income recognised directly in equity

18.5

15.5

Total recognised income and expense for the year

76.5

61.6

Attributable to: Equity holders of the parent Minority interest

32 32

74.4 2.1

58.5 3.1

76.5

61.6

Total recognised income and expense for the year

Statutory Information

Consolidated Statement of Recognised Income and Expense For the year ended 31 March 2008

68

VT Group Plc Annual Report & Accounts 2008

Consolidated Balance Sheet at 31 March 2008

Notes

2008 £m

2007 £m (restated)*

ASSETS Non-current assets Property, plant and equipment Investment property Goodwill Other intangible assets Equity accounted investments Financial assets Other receivables Deferred tax assets

14 15 16 17 18 19 23 11

171.4 0.7 250.8 70.7 30.3 0.4 4.1 17.7

155.8 0.8 206.1 51.2 27.1 0.2 4.2 24.4

Total non-current assets

546.1

469.8

Current assets Inventories Trade and other receivables Income tax receivable Financial assets Assets classified as held for sale Cash and cash equivalents

21 23

19 14 24

31.1 203.1 6.1 2.1 0.8 60.1

28.4 163.0 8.1 0.2 4.3 75.2

Total current assets

303.3

279.2

TOTAL ASSETS

849.4

749.0

26 25

26 28

18.6 294.6 3.9 0.5 9.6

39.7 288.0 5.0 0.4 11.3

Total current liabilities

327.2

344.4

Non-current liabilities Interest-bearing loans and borrowings Other payables Other financial liabilities Employee benefits Provisions Deferred tax liabilities

26

26 36 28 11

186.7 2.8 1.3 9.7 15.9 43.0

106.9 0.9 37.6 13.8 43.1

Total non-current liabilities

259.4

202.3

TOTAL LIABILITIES

586.6

546.7

NET ASSETS

262.8

202.3

32 32 32 32 32

8.9 40.6 (1.0) (2.0) 213.6

8.8 34.0 (2.4) 159.3

Equity attributable to equity holders of the parent Minority interest

32

260.1 2.7

199.7 2.6

TOTAL EQUITY

262.8

202.3

LIABILITIES Current liabilities Interest-bearing loans and borrowings Trade and other payables Income tax payable Other financial liabilities Provisions

EQUITY Issued share capital Share premium Hedging reserve Translation reserve Retained earnings

*See note 2 in respect of the restatement of a prior year acquisition

These financial statements were approved by the board of directors on 12 May 2008 and were signed on its behalf by: PJ Harrison Director

PL Lester Director

69

VT Group Plc Annual Report & Accounts 2008

Consolidated Cash Flow Statement

Notes

2008 £m

2007 £m

Cash flow from operating activities Tax paid

33

65.7 (11.4)

107.4 (12.9)

Net cash inflow from operating activities

54.3

94.5

Cash flows from investing activities Interest received

Disposal of property, plant and equipment

Proceeds from assets held for resale

Sale of subsidiary undertaking (net of cash disposed of) Purchase of subsidiary undertakings (net of cash acquired) Investment in equity accounted investments

Loans advanced

Purchase of investment

Sale of investment

Purchase of property, plant and equipment

Payments to acquire intangible fi xed assets

20

14 17

4.4 1.3 3.2 - (74.3) (0.1) (0.3) - - (27.7) (1.0)

4.8 0.9 2.1 (76.5) (0.1) 1.0 (17.4) (2.1)

Net cash outflow from investing activities

(94.5)

(87.3)

Cash flows from financing activities Interest paid

Dividends paid to equity shareholders of the parent Dividends paid to minority interests

Proceeds from issue of share capital

New borrowings

Purchase of treasury shares

Repayment of loans arising on acquisition

Repayment of loans

13 32 32 33 32 33 33

(14.2) (21.4) (2.0) 5.3 91.0 (2.0) - (32.0)

(12.8) (19.2) (0.4) 3.4 37.3 (1.6) (32.5) (16.7)

Net cash inflow / (outflow) from financing activities

24.7

(42.5)

Net decrease in cash and cash equivalents

Cash and cash equivalents at the beginning of the year Net foreign exchange movements

33 33 33

(15.5) 75.2 0.4

(35.3) 112.0 (1.5)

Cash and cash equivalents at the end of the year

24

60.1

75.2

Statutory Information

for the year ended 31 March 2008

70

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements 1 Authorisation of financial statements and statement of compliance with IFRSs The Group financial statements for the year ended 31 March 2008 have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’). The Company has elected to prepare its parent company financial statements in accordance with UK GAAP; these are presented on pages 114 to 118. VT Group plc is a public limited company incorporated and domiciled in the UK. The Company’s ordinary shares are traded on the London Stock Exchange.

The accounting policies as set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements and have been applied consistently by Group companies. The Group’s results for the year have not been materially affected by the adoption of any new accounting standards.

2 Summary of significant accounting policies i Basis of preparation The consolidated financial statements have been prepared on a historical cost basis as modified for derivative financial instruments that have been measured at fair value.

The Group financial statements are presented in Sterling and all values are stated in £m except when otherwise indicated.

In accordance with IFRS 3 the Group has reassessed the provisional fair values and purchase consideration in respect of the acquisition of Milcom Systems Corporation made in the prior financial year. As a result of this reassessment goodwill arising from the transaction has been increased by £5.2m from that previously assessed. In addition, trade and other receivables were increased by £0.1m, deferred tax assets increased by £0.5m, trade and other payables increased by £3.5m (including additional consideration of £2.5m), provisions increased by £1.8m and taxation receivable decreased by £0.5m. There was no effect on the reported profit for the prior year. The restated amounts are presented in the balance sheet at 31 March 2007. ii Basis of consolidation The consolidated financial statements comprise the financial statements of VT Group plc and its subsidiaries at each balance sheet date, and include its share of its joint ventures’ and associates’ results on the equity method. A subsidiary is an entity controlled by the Group.

Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.

All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated.

The results of subsidiaries sold or acquired during the year are consolidated up to, or from, the date control passes. iii Investments in associates and joint ventures Joint ventures are those businesses in which the Group has a long-term interest and is able to exercise joint control with its partners under a contractual agreement. Associates are those businesses in which the Group has a long-term interest and is able to exercise significant influence, but not control, over the financial and operating policies.

The Group’s share of post tax results of joint ventures and associates are included in the consolidated income statement as an element of profit before tax.

In the consolidated balance sheet the net investment in joint ventures and associates is carried as a non-current asset being the share of the joint ventures’ or associates’ equity including any goodwill arising on the Group’s acquisition of its interest. iv Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be reliably measured and recovery of consideration is considered probable.

Rendering of services Revenue from services rendered is recognised by reference to the stage of completion of the transaction. Revenue from services provided on a short-term or one-off basis is recognised when the service is complete. The provision of services over a long-term period are accounted for under the principles of construction contracts, and the revenue recognised as set out below.

Construction contracts Revenue from construction contracts, including long-term service provision contracts, is recognised by reference to the stage of completion of the contract. The stage of completion is determined according to the nature of the specific contract concerned. Methods used to assess the stage of completion include incurred costs as a proportion of total costs, labour hours incurred or earned value of work performed. Profit attributable to the contract activity is recognised if the final outcome of such contracts can be reliably assessed.

An expected loss on a contract is recognised immediately in the income statement.

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71

2 Summary of signifi cant accounting policies (continued) Variations and claims are included where it is probable that the amount will be settled. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable that those costs will be recoverable.

The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retentions are included within ‘trade and other receivables’.

The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which billings exceed costs incurred plus recognised profits (less recognised losses).

Equipment leasing income Rental income arising is accounted for on a straight-line basis over the lease term on ongoing leases. v Leases Finance leases, which transfer substantially all the risks and rewards of ownership of the assets concerned, are capitalised on the balance sheet at the lower of fair value of the leased asset and net present value of the minimum lease payments at the inception of the lease.

The corresponding liabilities are recorded as non-current or current liabilities depending on the period when they are due. The interest elements of the rental obligations are charged to the income statement over the periods of the leases as a finance cost. Lease payments are apportioned between the finance cost and the reduction in the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.

Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

Lease incentives received are recognised in the income statement as an integral part of the total lease expense over the period of the relevant committed lease period.

Assets held for leasing out under operating leases are included in property, plant and equipment and investment property at cost less accumulated depreciation and accumulated impairment losses. vi Income tax Income tax comprises current and deferred tax.

Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not recognised for: • goodwill not deductible for tax purposes, • initial recognition of assets or liabilities that affect neither accounting or taxable profit, and • differences relating to investments in subsidiaries, associates and interests in joint ventures, to the extent that they will probably not reverse in the foreseeable future.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. vii Property, plant and equipment Items of property, plant and equipment are stated as cost less accumulated depreciation and impairment losses. The cost of property, plant and equipment comprises purchase price and directly attributable costs.

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land and assets in the course of construction are not depreciated. The estimated useful lives are as follows: Buildings Computer equipment Fixtures and fittings Motor vehicles Plant and machinery Heavy equipment

up to 50 years, or the lease term if shorter 3 to 5 years 5 years 4 years 5 to 10 years 20 to 33 years

Statutory Information

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

72

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 2 Summary of significant accounting policies (continued) Impairment reviews are undertaken if there are indications that the carrying values may not be recoverable.

The residual value and useful lives of property, plant and equipment are reassessed annually and adjustments, where applicable, are made on a prospective basis. viii Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset when it is probable that they will result in future economic benefits and can be measured reliably.

Other borrowing costs are recognised as an expense in the period in which they are incurred. ix Goodwill Goodwill arising on consolidation consists of the excess of the fair value of the consideration over the fair value of the identifiable intang­ible and tangible assets net of the fair value of the liabilities including contingencies of businesses acquired at the date of acquisition.

Goodwill in respect of business combinations of subsidiaries is recognised as an intangible asset. Goodwill arising on the acquisition of a joint venture or associated undertaking is included in the carrying value of the investment.

Goodwill is carried at cost less any recognised impairment losses that arise from annual assessment of its carrying value. To the extent that the carrying value exceeds its recoverable amount, goodwill is written down and an impairment charge is recognised in the income statement. The recoverable amount is the higher of fair value less costs to sell and the estimated value in use. Value in use is determined from estimated discounted future net cash flows.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Between 1998 and the Group’s conversion to IFRS, goodwill was accounted for in accordance with UK GAAP. x Research costs Research costs are expensed as incurred. xi Other intangible assets Intangible assets acquired separately are capitalised at cost and from a business combination are capitalised at fair value as at the date of acquisition.

Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred.

Acquired computer software licences are capitalised as an intangible asset on the basis of the costs incurred to acquire and bring to use the specific software.

Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of the intangible asset. The estimated useful lives are as follows: Computer software Brands Customer contracts and relationships

2-5 years 3-5 years up to 30 years

Useful lives are examined on an annual basis and adjustments, where applicable are made on a prospective basis. xii Investment properties Land and buildings that are leased to non-Group entities are classified as investment properties. The Group applies the cost model to measure investment properties at their cost less accumulated depreciation and accumulated impairment losses.

Depreciation is provided on a straight-line basis to write off the cost of investment properties over their estimated useful lives of up to 50 years.

The residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. xiii Impairment The carrying amounts of the Group’s assets are tested for impairment when events occur or circumstances indicate that their carrying values may be impaired. Goodwill is subject to annual impairment tests. Impairments arising are charged to the income statement.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis.

VT Group Plc Annual Report & Accounts 2008

73

2 Summary of signifi cant accounting policies (continued) An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. xiv Other investments The Group determines the classification of its other investments at initial recognition. The classification depends upon the purpose for which the investments were acquired. Currently the Group has other investments designated as ‘held-to-maturity’ and ‘loans and receivables’.

Purchases and sales of investments are recognised on trade-date, the date on which the Group commits to purchase or sell the asset.

Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit and loss.

Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risk and rewards of ownership. xv Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.

The cost of inventories is based on the first-in-first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. xvi Trade and other receivables Trade receivables are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Other receivables are stated at their amortised cost less impairment losses. xvii Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts repayable on demand. xviii Foreign currency

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to Sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Sterling at average rates of exchange during the year. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation shall be recognised in the income statement. Translation differences that arose before the transition date to IFRSs were deemed to be nil. xix Derivative financial instruments The Group primarily uses foreign currency contracts and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. In accordance with its treasury policy, the Group does not hold or issue derivative financial statements for trading purposes.

Derivative financial instruments are recognised at fair value in the balance sheet. The fair value of forward exchange contracts and interest rate swaps are calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Statutory Information

Transactions in foreign currencies are translated to the respective functional currency of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities are translated using the exchange rate at the date of the initial transaction.

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VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 2 Summary of significant accounting policies (continued) For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in fair value of a recognised asset or liability; or cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. The Group currently only has designated cash flow hedges.

In relation to cash flow hedges to hedge firm commitments which meet the conditions for hedge accounting (such as a known foreign currency receipt or payment and a known interest payment), the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in profit or loss.

When the hedged firm commitment results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the profit or loss.

For derivatives that do not qualify for hedge accounting, any gains or losses arising in fair value are taken directly to profit or loss for the year.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the year. xx Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value, being the amount of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

The Group has certain borrowings relating to PFI contracts where there is no recourse to the Group in the event of default. Such loans, although recognised in full on the Group’s balance sheet, are classified as non-recourse loans within the analysis on net debt provided. xxi Retirement benefit plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.

The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value and any unrecognised past service costs, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations.

The calculations, together with the cost of providing benefits under the plans, are performed by a qualified actuary using the projected unit credit method.

Actuarial gains and losses are recognised in full in the period in which they occur, and are recognised in the statement of recognised income and expense. xxii Long-term service benefits The Group’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s obligations. xxiii Share-based payment transactions Share based incentive arrangements are provided to employees under the Group’s share option, incentive and other award schemes.

Share options granted to employees and share based arrangements put in place since 7 November 2002 are valued at the date of grant or award using an appropriate option pricing model and are charged to operating profit over the vesting period of the scheme, with a corresponding entry recorded within equity. The annual charge is modified to take account of shares forfeited by employees who leave during the vesting period and, in the case of non-market related performance conditions, where it becomes unlikely the option will vest.

The Group has an employee share incentive plan and an employee share trust for the granting of non-transferable options to executives and senior employees. Shares in the Group held by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity. xxiv Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate discount rate.

VT Group Plc Annual Report & Accounts 2008

75

2 Summary of signifi cant accounting policies (continued) Provisions for losses on contracts are recorded when it becomes probable that total estimated contract costs will exceed total contract revenues. Such provisions are recorded as write downs of work in progress for that portion of the work which has already been completed, and as liability provisions for the remainder. Losses are determined on the basis of estimated results on completion of contracts which are updated regularly.

A provision for warranties is recognised when the underlying products and services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

Provisions for restructuring or reorganisation are recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been publicly announced. Future operating costs are not provided for.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligation under the contract. xxv Accounting for PFI contracts In determining an appropriate accounting policy for the Group’s interests in PFI projects under Adopted IFRSs, the Group has considered the current status of the project by the International Financial Reporting Interpretations Committee (IFRIC) on accounting for service concession arrangements. IFRIC published IFRIC 12 – ‘Service Concession Arrangements’ in December 2006 which is applicable for accounting periods commencing after 1 January 2008.

The Group has opted not to adopt this pronouncement early and until such time as this pronouncement is adopted, it will continue to apply elements of the approach set out in UK Financial Reporting Standard 5 “Reporting the substance of transactions” in accounting for its interests in PFI projects. This involves applying a “risks and rewards” test to determine whether a non-current asset or finance debtor model should be followed. Once the accounting model has been determined, the recognised assets and liabilities of the PFI projects are measured in accordance with Adopted IFRS. The Group will be adopting IFRIC 12 (subject to EU endorsement) for the year commencing 1 April 2008 as outlined below.

The Group expenses costs incurred in developing and competing for contracts up until a contract has achieved preferred bidder stage.

Costs incurred after preferred bidder status has been achieved are held on the balance sheet and recovered through contract activity.

Such costs are subject to review for impairment if there are indicators that they may not be recoverable. xxvi Assets held for sale Non-current assets are classified as held for sale when their carrying value will be recovered through disposal rather than continuing use within the business, the asset is available for sale in its present condition and the sale is highly probable. Following reclassification, non-current assets are measured in the balance sheet at the lower of their carrying amount and fair values less costs to sell. xxvii Critical accounting estimates and judgements An analysis and explanation of the accounting estimates and judgements used in producing this set of financial statements is made in the Business Review on pages 3 to 36. xxviii New standards and interpretations With effect from 1 April 2007, the Group adopted IFRS 7 Financial Instruments: Disclosures and the amendment to IAS 1: Capital Disclosures which have resulted in some additional disclosures within the financial statements, but have had no impact on the Group’s primary statements.

New accounting standards and interpretations effective next year

• IFRS 8 Operating Segments relating to segmental reporting of financial information. It is not expected to have a significant impact on the Group’s current segmental reporting.

• The amendment to IAS 23 Borrowing Costs removes the option to expense borrowing costs directly attributable to the acquisition, construction or production of qualifying assets. The Group already complies with the requirements.

• IFRIC 12 Service Concession Arrangements will require the Group to assess all Service Concession Arrangements and may result in the recognition and derecognition of certain assets and reclassification of income earned on some contracts. The Group is currently assessing the impact of this interpretation.

• IFRIC 14 1AS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of the minimum funding requirements on such assets. The Group has yet to assess the potential impact of IFRIC 14.

IFRIC 12, IFRIC 14 and the amendment to IAS 23 have not yet been endorsed by the EU. The Group has not early adopted the above standards in preparing these financial statements.

Statutory Information

A number of new standards, amendments to standards and interpretations are not yet effective, including:

76

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 2 Summary of significant accounting policies (continued) Additionally, the Group is currently considering the impact of the revisions to IFRS 2 and IFRS 3 which, if endorsed, will become effective in 2010. The directors do not believe that any of the other new standards or pronouncements will materially impact the financial statements of the Group.

3 Revenue Revenue disclosed in the income statement is analysed as follows:

2008 2007

Share of equity

Share of equity accounted

accounted

Group investments Total Group investments £m £m

£m £m £m

Total £m

Sale of goods Construction contracts Rendering of services Equipment leasing income

61.1 211.0 660.5 87.4

2.7 29.3 149.0 -

63.8 240.3 809.5 87.4

56.1 128.0 600.7 67.7

2.5 8.2 141.4 -

58.6 136.2 742.1 67.7

Revenue

1,020.0

181.0

1,201.0

852.5

152.1

1,004.6

No revenue was derived from exchanges of goods or services (2007: £nil).

4 Segment reporting Segment information is presented in respect of the Group’s business and geographical segments. The primary segment reporting format is determined to be business segments as the Group’s risks and rates of return are affected predominantly by differences in the products and services provided. Secondary segment information is reported geographically.

The Group’s geographical segments are based on the location of the Group’s assets. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers.

Inter-segment pricing is determined on an arm’s length basis. Segment revenue, segment expense and segment result include transfers between business segments. Those transfers are eliminated in consolidation.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

The Group comprises the following main business segments: Communications – provides critical communications services in the broadcast, defence, space, emergency services and security sectors worldwide.

Education and Skills – provides a wide range of supporting services to schools, LEAs and central government, including careers guidance and provision of vocational work based training.

VT Services Inc. – provides a range of support service activities, including base operations, facilities management and the installation and support of communication systems. This activity is primarily for the US Department of Defense, operating across the US. Support Services – provides technical services, logistics and training for commercial customers, government bodies and all three armed services in the UK and around the World. Activities include facilities management, consultancy, operation and maintenance of assets, provision of specialist manpower and supply chain management.

Shipbuilding – designs and constructs advanced naval vessels for the Royal Navy and navies worldwide. The segment’s activities also include the design and manufacture of smaller craft and equipment for the marine, offshore and aerospace markets.

77

VT Group Plc Annual Report & Accounts 2008

4 Segment reporting (continued) Primary reporting format – Business segments The following tables present revenue and profit and certain asset and liability information regarding the Group’s business segments for the year ended 31 March 2008 and 2007.

Communications £m

Education

and Skills Shipbuilding £m £m

Support Services £m

VT Services Inc £m

Elimination £m

Total £m

Sales from external customers Less: share of equity accounted investments

107.2

124.9

243.7

483.8

241.4

-

1,201.0

-

(12.7)

-

(165.4)

(2.9)

-

(181.0)

Revenue Inter-segment revenue

107.2 1.5

112.2 -

243.7 4.1

318.4 6.5

238.5 -

- (12.1)

1,020.0 -

Segment revenue

108.7

112.2

247.8

324.9

238.5

(12.1)

1,020.0

Results Segment result before non-recurring charges and amortisation of intangible assets arising from business acquisitions 17.7 Share of joint venture profi t before taxation and amortisation arising from business combinations -

5.3

16.3

24.2

9.0

-

72.5

0.3

-

26.0

0.2

-

26.5

Amortisation of intangible assets arising from business combinations Taxation of joint venture profi ts

17.7

5.6

16.3

50.2

9.2

99.0

- -

(2.4) (0.1)

- -

(5.2) (7.8)

(2.3) -

(9.9) (7.9)

Operating profit

17.7

3.1

16.3

37.2

6.9

81.2

Net fi nance costs

(9.9)

Profit before taxation

71.3

Income tax expense

(13.3)

Net profit for year

58.0

17.7

2.9

16.3

19.5

6.7

63.1

Included in the above: Group Operating Profit – continuing operations

Statutory Information

Year ended 31 March 2008 – Continuing operations

78

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 4 Segment reporting (continued) Primary reporting format – Business segments (continued)

Year ended 31 March 2008 – Continuing operations

Assets and liabilities Segment assets Investment in joint ventures Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information Capital expenditure: Tangible fixed assets Intangible fixed assets Depreciation and impairment Amortisation

Communications £m

Education and Skills Shipbuilding £m £m

Support Services £m

VT Services Inc £m

Elimination £m

Total £m

149.0 85.0 108.4 308.0 151.9 - - 0.1 - 30.2 - -

802.3 30.3 16.8

849.4

(60.8) (28.2) (73.4) (150.2) (34.2) -

(346.8) (239.8)

(586.6)

6.6 0.1 1.6 0.3

0.2 0.1 1.0 2.5

11.8 0.3 4.9 0.4

8.2 0.3 9.0 5.2

0.9 0.2 0.7 2.5

27.7 1.0 17.2 10.9

Unallocated business segment assets and liabilities comprise centrally held properties, Group-wide bank funding/taxation and Group-wide pension scheme balances.

79

VT Group Plc Annual Report & Accounts 2008

4 Segment reporting (continued) Primary reporting format – Business segments (continued)

Communications £m

Education and Skills £m

Shipbuilding £m

Support Services £m

VT Services Inc £m

Elimination £m

Total £m

Sales from external customers Less: share of equity accounted investments

99.2

112.1

164.0

436.1

193.2

-

1,004.6

-

(2.2)

-

(144.1)

(5.8)

-

(152.1)

Revenue Inter-segment revenue

99.2 1.9

109.9 0.1

164.0 12.3

292.0 1.8

187.4 -

- (16.1)

852.5 -

101.1

110.0

176.3

293.8

187.4

(16.1)

852.5

15.7

3.4

13.1

22.0

5.6

-

59.8

-

0.4

-

22.0

0.3

-

22.7

Non-recurring charges Amortisation of intangible assets arising from business combinations Taxation of joint venture profi ts

15.7 -

3.8 -

13.1 (6.0)

44.0 -

5.9 -

-

82.5 (6.0)

- -

(2.4) (0.2)

- -

(4.4) (6.4)

(0.9) (0.1)

- -

(7.7) (6.7)

Operating profit Net fi nance costs

15.7

1.2

7.1

33.2

4.9

-

62.1 (8.3)

Profi t before taxation

53.8

Income tax expense

(7.7)

Net profit for year

46.1

Included in the above: Group Operating Profit – continuing operations

15.7

0.9

7.1

18.2

4.7

46.6

Assets and liabilities Segment assets Investment in joint ventures Unallocated assets

130.3 -

86.4 0.6

126.2 -

252.3 25.6

116.5 0.9

- -

711.7 27.1 10.2

749.0

(71.4)

(45.6)

(118.5)

(136.5)

(45.9)

-

(417.9) (128.8)

(546.7)

1.7 0.3 1.6 0.3

0.8 0.7 1.1 2.6

4.1 0.3 7.0 0.4

10.5 0.8 11.8 4.5

0.3 - 0.5 1.1

- - - -

17.4 2.1 22.0 8.9

Segment revenue Results Segment result before non-recurring charges and amortisation of intangible assets arising from business combinations Share of joint venture profi t before taxation and amortisation arising from business combinations

Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information Capital expenditure: Tangible fi xed assets Intangible fi xed assets Depreciation and impairment Amortisation

Statutory Information

Year ended 31 March 2007 – Continuing operations

80

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 4 Segment reporting (continued) Secondary reporting format – Geographical segments The following tables present revenue, expenditure and certain asset information regarding the Group’s geographical segments for the years ended 31 March 2008 and 2007.

Year ended 31 March 2008

United Kingdom Europe £m £m

North America £m

Africa and Asia £m

Other £m

Elimination £m

Total £m

Sales to external customers Less share of joint ventures

745.3 (177.6)

26.6 (0.1)

291.9 (3.2)

123.4 (0.1)

13.8 -

- -

1,201.0 (181.0)

Revenue Inter-segment revenue

567.7 12.1

26.5 -

288.7 -

123.3 -

13.8 -

- (12.1)

1,020.0 -

Segment revenue

579.8

26.5

288.7

123.3

13.8

(12.1)

1,020.0

644.5

10.9

158.9

1.1

3.7

-

819.1

30.3

-

-

-

-

-

30.3

849.4

Other segment information Segment assets Investment in equity accounted investments Total assets Capital expenditure: Tangible fixed assets Intangible fixed assets

26.2 0.8

- -

1.0 0.2

- -

0.5 -

- -

27.7 1.0

Depreciation Amortisation

16.2 8.1

- -

0.8 2.8

- -

0.2 -

- -

17.2 10.9

United Kingdom £m

Europe £m

North America £m

Africa and Asia £m

Other £m

Elimination £m

Total £m

Year ended 31 March 2007

Sales to external customers Less share of joint ventures

684.8 (145.8)

38.2 -

201.6 (6.1)

68.0 (0.1)

12.0 (0.1)

- -

1,004.6 (152.1)

Revenue Inter-segment revenue

539.0 16.2

38.2 -

195.5 -

67.9 -

11.9 -

- (16.2)

852.5 -

Segment revenue

555.2

38.2

195.5

67.9

11.9

(16.2)

852.5

Other segment information Segment assets Investment in joint ventures

584.3 26.2

7.8 -

125.7 0.9

1.4 -

2.7 -

- -

721.9 27.1

749.0

Capital expenditure: Tangible fixed assets Intangible fixed assets

16.8 2.1

- -

0.3 -

0.1 -

0.2 -

- -

17.4 2.1

Depreciation Amortisation

21.1 7.8

0.1 -

0.6 1.1

- -

0.1 -

- -

21.9 8.9

Total assets

81

VT Group Plc Annual Report & Accounts 2008

5 Group operating profi t This is stated after charging / (crediting):

2008 £m

2007 £m

Research expenditure

0.4

0.3

Depreciation of property, plant and equipment Depreciation of investment properties

Impairment of assets held for resale

Impairment charge arising on business restructuring Amortisation of intangible assets

17.1 0.1 0.3 - 10.9

20.0 1.9 8.9

Total depreciation and amortisation expense

28.4

30.8

Loss / (profi t) on disposal of property, plant and equipment

0.7

(0.2)

Foreign currency differences

(2.4)

(0.2)

Cost of inventories recognised as an expense Including: write-down of inventories to net realisable value

7.5 -

11.9 0.2

Operating lease payments

62.7

53.8

6 Non-recurring charges

2008 £m

2007 £m

Included within cost of sales Redundancy costs Impairment of plant and equipment Onerous contract commitments Other costs

- - - -

0.7 2.0 2.0 0.3

-

5.0

Included within administrative expenses Other costs

-

1.0

Total non-recurring charges

-

6.0

2008 £m

2007 £m

0.2

0.2

0.5 - 1.2 0.1

0.4 0.1 0.8 0.1

2.0

1.6

7 Auditor’s remuneration

Fees payable to the Company’s auditor for the audit of the Company and consolidated fi nancial statements Fees payable to the Company’s auditor for other services: Audit of companies subsidiaries pursuant to legislation Taxation services

Transaction services

Other services

The Group has entered into merger and acquisition activity during both the current and prior year including due diligence and public reporting work, principally in respect of the planned formation of the shipbuilding joint venture. Fees in respect of this work totalled £1.2m (2007: £0.7m).

Statutory Information

During the previous year the board undertook a strategic review of the small boat activities carried out within the Group’s Shipbuilding division which resulted in the decision to exit from the commercial boat building activities. This decision resulted in one-off charges during the prior year for both the costs of restructuring and exiting contracts. The analysis of the costs, which were incurred after the announcement of this decision, within the income statement are as follows:

82

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 8 Staff costs and directors’ emoluments

(a) Staff costs

2008 £m

2007 £m

Wages and salaries Social security costs Other pension costs

279.0 22.7 17.2

248.0 21.1 18.4

318.9

287.5

Included in wages and salaries is a total expense of share-based payments of £5.0m (2007: £3.5m) of which £4.1m (2007: £2.7m) arises from transactions accounted for as equity-settled share-based payment transactions.

The pension costs represent £11.5m (2007: £14.0m) in respect of defined benefit schemes and £5.7m (2007: £4.4m) in respect of defined contribution schemes.

The average monthly number of employees during the year was made up as follows:

2008

2007

Shipbuilding VT Services Inc. Education and Skills Communications Support Services Corporate central functions

1,409 4,020 2,146 734 3,552 197

1,337 3,686 2,460 720 3,067 188

12,058

11,458

2008 £m

2007 £m

Interest income on loans and receivables

Interest income on financial assets designed as fair value through the profit and loss account

4.4 1.7

4.8 -

Total finance income

(b) Directors’ emoluments Details of directors’ emoluments are included in the Remuneration Report on pages 56 to 63.

9 Finance income

6.1

4.8

2008 £m

2007 £m

Interest expense on financial liabilities measured at amortised cost: Bank loans and overdrafts – recourse

Bank loans – non recourse

Finance lease

Other loans

Facility fees

Net foreign exchange losses

9.0 1.3 2.2 0.2 2.0 1.3

8.9 1.3 2.4 0.5 -

Total finance expenses

16.0

13.1

10 Finance expenses

83

VT Group Plc Annual Report & Accounts 2008

11 Taxation (a) Tax on profit on ordinary activities Tax charged in the income statement

2008 £m

2007 £m

Current tax expense UK Corporation tax Foreign tax

12.3 0.7

7.8 2.3

Income tax charge in respect of current year Adjustment in respect of previous years’ tax

13.0 1.4

10.1 (2.6)

Total current income tax

14.4

7.5

Deferred tax (credit) / expense

Origination and reversal of temporary differences

(1.1)

0.2

Tax charge in the income statement

13.3

7.7

2008 £m

2007 £m

Deferred tax charge Actuarial gains and losses on pension schemes Net gain on revaluation of cash fl ow hedges

Share based payments

Exchange differences on retranslation

6.5 (0.4) (1.9) (0.1)

6.9 0.2 (0.3) (1.0)

Tax charge in the statement of recognised income and expense

4.1

5.8

Current tax credit Share based payments

2.8

-

Tax relating to items charged or credited to equity:

(b) Reconciliation of the total tax charge

2008 £m

2007 £m

Accounting profi t before income tax

71.3

53.8

Accounting profi t multiplied by the UK standard rate of corporation tax of 30% (2007: 30%) Tax effect of share of results of joint ventures

Adjustment in respect of previous years’ tax

Other (including deferred tax rate change)

21.4 (5.4) 0.2 (2.9)

16.1 (4.6) (3.8) -

Total tax expense reported in the income statement

13.3

7.7

Statutory Information

The tax expense in the income statement for the year is lower than the standard rate of corporation tax in the UK of 30% (2007: 30%).

The differences are reconciled below:

84

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 11 Taxation (continued) (c) Deferred tax The deferred tax included in the balance sheet is as follows:

2008 £m

2007 £m

Deferred tax asset Accelerated capital allowances Other long-term benefits Pension benefits Acquisition fair value adjustments Share based payments Revaluation of cash flow hedges Lease rental deduction Temporary timing differences Other

2.6 0.6 3.0 0.9 5.7 0.5 0.7 3.6 0.1

4.0 1.5 11.3 1.4 3.3 0.1 0.8 1.8 0.2

Deferred tax asset

17.7

24.4

Deferred tax liability Accelerated capital allowances

Revaluation in respect of foreign currency cash flow hedges Capitalised interest

Acquisition fair value adjustments

Intangible assets arising from business combinations Temporary timing differences

Other

22.2 0.6 - 1.2 17.1 1.6 0.3

26.1 0.1 0.1 1.3 13.4 1.9 0.2

Deferred tax liability

43.0

43.1

The deferred tax included in the Group income statement is as follows:

2008 £m

2007 £m

Deferred tax in the income statement Accelerated capital allowances Amortisation of fair value adjustments Revaluation of cash flow hedges Share based payments Pension benefits Adjustments in respect of prior years Other

(0.8) (2.5) 0.5 (0.4) 1.9 0.4 (0.2)

1.9 (0.8) (0.1) 0.1 0.6 (1.2) (0.3)

Deferred income tax (credit) / expense

(1.1)

0.2

85

VT Group Plc Annual Report & Accounts 2008

12 Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

The following reflects the income and share date used in the basic and diluted earnings per share computations:

2008 £m

2007 £m

Net profi t attributable to equity holders of the parent

56.8

44.4

2008

2007

Basic weighted average number of shares (excluding treasury shares) Dilutive potential ordinary shares – employee share options

176,469,027 174,922,425 4,471,147 4,182,458

Diluted weighted average number of shares

180,940,174 179,104,883

2008

2007

Basic earnings per share Diluted earnings per share

32.2p 31.4p

25.4p 24.8p

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements.

Adjusted basic earnings per share

2008 £m

2007 £m

Net profi t attributable to equity holders of the parent

Charges / (credits) included in profi t: Amortisation of intangible assets arising from business combinations Non-recurring charges

Tax on charges included in profi t

56.8

44.4

9.9 - (4.0)

7.7 6.0 (4.1)

Adjusted earnings attributable to equity holders of the parent

62.7

54.0

Weighted average number of shares

176,469,027 174,922,425

Adjusted basic earnings per share Adjusted diluted earnings per share

35.5p 34.7p

30.9p 30.1p

Statutory Information

Earnings per share before amortisation of intangible assets acquired from business combinations and non-recurring charges of exiting businesses, which the directors consider gives a useful additional indicator of performance, is calculated on earnings for the period as follows:

86

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 13 Dividends paid and proposed Declared and paid during the year:

2008 £m

2007 £m

Equity dividends on ordinary shares:

Final dividend for 2007 of 8.6p (2006: 7.75p) per ordinary share Interim dividend for 2008 of 3.55p (2007: 3.25p) per ordinary share

15.1 6.3

13.5 5.7

21.4

19.2

2008 £m

2007 £m

17.0

15.1

Proposed for approval at AGM (not recognised as a liability at 31 March)

Equity dividends on ordinary shares: Final dividend for 2008 of 9.55p (2007: 8.6p) per ordinary share

87

VT Group Plc Annual Report & Accounts 2008

14 Property, plant and equipment

Land and buildings £m

Cost Balance at 1 April 2006 Foreign currency adjustment Additions Acquired through business combinations Disposals Disposal of subsidiary Transfers

79.3 (0.2) 0.8 6.7 (0.1) - 2.7

Balance at 31 March 2007 Additions Acquired through business combinations Disposals Transfers

Balance at 31 March 2008

Depreciation and impairment Balance at 1 April 2006 Foreign currency adjustment Depreciation charge for year Restructuring impairment charge Disposals Disposal of subsidiary

Balance at 31 March 2007 Depreciation charge for year Disposals Transfers

Plant and equipment £m

Under construction £m

Total £m

100.4 (0.5) 14.7 29.2 (2.5) (0.6) -

0.4 - 1.9 3.3 - - (2.7)

180.1 (0.7) 17.4 39.2 (2.6) (0.6) -

89.2 10.9 4.0 (0.7) 0.8

140.7 14.8 2.2 (9.2) 0.4

2.9 2.0 0.8 - (1.2)

232.8 27.7 7.0 (9.9) -

104.2

148.9

4.5

257.6

12.6 - 3.5 - - -

45.0 (0.4) 16.5 1.9 (1.8) (0.3)

- - - - - -

57.6 (0.4) 20.0 1.9 (1.8) (0.3)

16.1 4.2 (0.7) 0.3

60.9 12.9 (7.2) (0.3)

- - - -

77.0 17.1 (7.9) -

Balance at 31 March 2008

19.9

66.3

-

86.2

Net book value At 31 March 2008

84.3

82.6

4.5

171.4

At 31 March 2007

73.1

79.8

2.9

155.8

At 1 April 2006

66.7

55.4

0.4

122.5

At 31 March 2008, assets with a carrying amount of £17.5m (2007: £18.6m) are subject to charges to secure two of the Group’s bank loans.

Assets with a net book value of £2.7m (2007: £3.2m) are held under finance lease arrangements.

Assets held for resale Under the provisions of IFRS 5, assets with a carrying value of £0.8m (2007: £4.3m) have been classified as assets held for sale. These vessels have a carrying value in the balance sheet equal to the value of the expected net sale proceeds less costs of sale expected to be incurred.

Statutory Information

Security

88

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 15 Investment property

£m

Cost

Balance at 1 April 2006, 31 March 2007 and 31 March 2008

1.1

Depreciation and impairment Balance at 1 April 2006 and 31 March 2007 Depreciation charge for year

0.3 0.1

Balance at 31 March 2008

0.4

Net book value At 31 March 2008

0.7

At 31 March 2007

0.8

At 1 April 2006

0.8

Investment property comprises a number of commercial and residential properties that are leased to third parties. The estimated fair value of investment property at 31 March 2008 amounted to £2.4m (2007: £2.4m). Fair values were determined having regard to recent market transactions for similar properties in the same location as the Group’s investment property.

16 Goodwill

£m

Cost Balance at 1 April 2006 Foreign currency adjustment Acquisition of subsidiaries Disposal of subsidiary

170.3 (1.1) 33.4 (1.7)

Balance at 31 March 2007

Fair value adjustments to prior year acquisition

200.9 5.2

Balance at 31 March 2007 restated Foreign currency adjustment Acquisition of subsidiaries (note 20)

206.1 (0.1) 44.8

Balance at 31 March 2008

250.8

Impairment

Balance at 1 April 2006, 31 March 2007 and 31 March 2008

-

Net book value At 31 March 2008

250.8

At 31 March 2007

206.1

At 1 April 2006

170.3

89

VT Group Plc Annual Report & Accounts 2008

16 Goodwill (continued) During the previous year the Group acquired Milcom Systems Corporation, a support services business based in the United States of America. Goodwill of £10.3m was recognised at 31 March 2007 based on provisional fair values. The fair values and acquisition consideration have been finalised since 31 March 2007 and in accordance with IFRS 3, an increase to goodwill of £5.2m has been made as outlined in note 2 to the financial statements.

The recoverable amount of goodwill has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by the board. The discount rate applied to cash flow projections is 10%-13% and cash flow projections beyond the three year budget are extrapolated using a 2.5% growth rate (2007: 2.5%).

The calculation of value in use is most sensitive to the following key assumptions: • Gross margin • Discount rates • Growth rate used to extrapolate cash flows beyond the budget period Gross margins are based on the current values being achieved. Discount rates reflect the Company’s weighted average cost of capital.

Growth rate estimates are based on published information in respect of long-term growth rates. Management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any unit to exceed its recoverable amount.

Goodwill has been allocated to the following significant cash generating units:

UK VT Communications VT Aerospace VT Training VT Land VT Nuclear Services

US VT Griffi n VT Milcom VT Aepco

Other cash generating units Total goodwill

2008 £m

78.3 27.2 20.2 21.3 21.5

24.8 15.4 23.4

18.7

250.8

Statutory Information

The impairment review as required by IAS 36 has been undertaken at 31 March 2008 and no impairment loss has been recognised.

90

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 17 Other intangible assets

Customer contracts and Brands relationships £m £m

Cost Balance at 1 April 2006 Foreign currency adjustment Additions Disposal of subsidiary Disposals Acquired through business combinations

1.0 - - - - 3.7

17.2 (0.5) - - - 31.8

7.9 (0.2) 2.1 (0.9) (0.1) 2.6

26.1 (0.7) 2.1 (0.9) (0.1) 38.1

Balance at 31 March 2007 Foreign currency adjustment Additions Disposals Acquired through business combinations

4.7 - - - 1.7

48.5 (0.1) - - 27.8

11.4 - 1.0 (1.6) -

64.6 (0.1) 1.0 (1.6) 29.5

Balance at 31 March 2008

6.4

76.2

10.8

93.4

Amortisation and impairment Balance at 1 April 2006 Foreign currency adjustment Amortisation for the year Disposals Disposal of subsidiary

0.1 - 0.6 - -

1.6 (0.1) 6.0 - -

3.8 (0.1) 2.3 (0.1) (0.7)

5.5 (0.2) 8.9 (0.1) (0.7)

Balance at 31 March 2007 Amortisation for the year Disposals

0.7 1.2 -

7.5 8.0 -

5.2 1.7 (1.6)

13.4 10.9 (1.6)

Balance at 31 March 2008

1.9

15.5

5.3

22.7

Net book value At 31 March 2008

4.5

60.7

5.5

70.7

At 31 March 2007

4.0

41.0

6.2

51.2

At 31 March 2006

0.9

15.6

4.1

20.6

Computer software £m

Total £m

Customer contracts and relationships and brands are intangible assets acquired through business combinations and are measured using the cost model.

91

VT Group Plc Annual Report & Accounts 2008

18 Investment in joint ventures and associates

2008 £m

2007 £m

Investments in associates Investments in joint ventures

0.1 30.2

0.6 26.5

30.3

27.1

Investments accounted for using the equity method

The Group has the following interests in joint ventures and associates:

Principal activity

Country

Flagship Training Limited Fleet Support Limited ALC (Superholdco) Limited CH2M Hill/VT Griffi n Joint Venture Airtanker Services Limited Learning 21 Lewisham PSP Limited Lewisham Schools for the Future LEP Limited Lewisham Schools for the Future SPV Limited Careers Enterprise (Futures) Limited

Provision of training Provision of support services Provision of support services Provision of support services Provision of support services Provision of support services Provision of support services Provision of support services Provision of careers advice

England England England USA England England England England England

50% 50% 50% 50% 23% 50% 40% 40% 26%

Associates 2007 £m

2008 £m

Joint ventures 2008 2007 £m £m

2008 £m

Ownership 2008 2007

50% 50% 50% 50% 26%

Total 2007 £m

At 1 April Additions Share of profi ts retained Dividends Arising on business combinations Exchange adjustment Actuarial (loss) / gain on pension obligations (net of deferred tax) Financial instruments – effective cash fl ow hedges (net of deferred tax)

26.5 - 17.9 (13.1) - -

12.9 - 15.2 (13.9) 10.9 (0.1)

0.6 0.1 0.2 (0.5) - -

- - 0.3 (0.1) - -

27.1 0.1 18.1 (13.6) - -

12.9 15.5 (14.0) 10.9 (0.1)

(0.8)

1.5

(0.3)

0.4

(1.1)

1.9

(0.3)

-

-

-

(0.3)

-

At 31 March

30.2

26.5

0.1

0.6

30.3

27.1

Statutory Information

92

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 18 Investment in joint ventures and associates (continued) The share of the assets, liabilities, income and expenses of the joint ventures at 31 March and for the year then ended are as follows:

Joint ventures 2008 2007 £m £m

2008 £m

Associates 2007 £m

Share of balance sheet Non-current assets Current assets

39.2 93.8

34.5 80.7

0.1 13.6

0.3 0.8

39.3 107.4

34.8 81.5

Share of gross assets

133.0

115.2

13.7

1.1

146.7

116.3

Current liabilities Non-current liabilities

58.3 44.5

54.8 33.9

3.2 10.4

0.4 0.1

61.5 54.9

55.2 34.0

Share of gross liabilities

102.8

88.7

13.6

0.5

116.4

89.2

Share of net assets

30.2

26.5

0.1

0.6

30.3

27.1

Income statement Revenue Cost of sales Administrative expenses Amortisation of intangible assets arising from business combinations Finance (expense) / income

168.2 (128.6) (13.1)

149.9 (113.6) (15.6)

12.8 (12.2) (0.3)

2.2 (1.4) (0.4)

181.0 (140.8) (13.4)

152.1 (115.0) (16.0)

(0.6) (0.2)

(0.5) 1.6

- -

- -

(0.6) (0.2)

(0.5) 1.6

Profit before income taxes Income tax expense

25.7 (7.8)

21.8 (6.6)

0.3 (0.1)

0.4 (0.1)

26.0 (7.9)

22.2 (6.7)

Net profit

17.9

15.2

0.2

0.3

18.1

15.5

2008 £m

2007 £m

Loan advanced to joint venture undertaking Interest rate swaps Reimbursement rights

0.1 0.1 0.2

0.2

0.4

0.2

2008 £m

Total 2007 £m

19 Financial assets Financial assets – non-current

The reimbursement represents a life insurance policy held to fund the future liabilities arising in the US defined benefit pension scheme.

Under the provisions of IAS 19 this policy is defined as a non-qualifying insurance policy and as such is not deemed to be an asset of the pension scheme. It is therefore deemed to be a corporate asset and is held at fair value on the balance sheet.

Other financial assets – current

2008 £m

2007 £m

Forward currency contracts Interest rate swaps Other loans receivable

1.9 - 0.2

0.2 -

2.1

0.2

93

VT Group Plc Annual Report & Accounts 2008

20 Business combinations and disposals Acquisition of British Nuclear Group Project Services On 18 January 2008 the Group acquired 100% of the ordinary share capital in British Nuclear Group Project Services Limited for a consideration of £45m satisfied wholly by cash. The business has subsequently been renamed VT Nuclear Services and provides consultancy services in the nuclear power arena, particularly for plant decommissioning.

Book and provisional fair values of the net assets at the date of acquisition were as follows:

Book values £m

Fair value adjustments £m

Fair value to Group £m

Property, plant and equipment Intangible assets Deferred tax assets Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Provisions Deferred tax liabilities

4.5 - 1.6 0.9 20.6 7.5 (20.9) (2.6) -

2.0 17.9 1.6 - 0.6 - (2.0) - (5.6)

6.5 17.9 3.2 0.9 21.2 7.5 (22.9) (2.6) (5.6)

Net identifi able assets and liabilities Goodwill on acquisition

11.6

14.5

26.1 21.5

47.6

Discharged by: Cash consideration Costs associated with the acquisition

45.0 2.6

47.6

The goodwill recognised on acquisition is principally attributable to the skills and technical talent of the acquired businesses’ workforce and those other assets not requiring valuation under IFRS 3.

From the date of acquisition, VT Nuclear Services contributed an operating profit of £nil to the results of the Group, after incurring a restructuring charge following the acquisition of £1.0m. If the combination had taken place at the beginning of the year, the profit before tax of the Group would have been increased by £4.8m and revenue from continuing operations would have been increased by £57.7m.

Statutory Information

Contingent consideration may be payable under the terms of the acquisition, dependant upon profit targets to be measured to the period ended 31 March 2008. Management have estimated the level of contingent consideration at £nil, based upon the results achieved for this period.

94

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 20 Business combinations and disposals (continued) Acquisition of Advanced Engineering and Planning Corporation Inc. On 31 December 2007 the Group acquired 100% of the common stock in Advanced Engineering and Planning Corporation (‘Aepco’), a company incorporated in the United States of America, for an initial consideration of $68m satisfied wholly by cash. Aepco provides support to the US Department of Defense in maintaining and updating its military helicopter fleet.

Book and provisional fair values of the net assets at the date of acquisition were as follows:

Property, plant and equipment Intangible assets Deferred tax assets Trade and other receivables Cash and cash equivalents Trade and other payables Deferred tax liabilities

Net identifiable assets and liabilities Goodwill on acquisition

Discharged by: Cash consideration Contingent consideration Costs associated with the acquisition

Book values £m

Fair value adjustments £m

Fair value to Group £m

0.5 - - 6.4 0.7 (4.8) (0.7)

- 11.6 0.1 (0.2) - (0.2) -

0.5 11.6 0.1 6.2 0.7 (5.0) (0.7)

2.1

11.3

13.4 23.3

36.7

34.1 1.8 0.8

36.7

Contingent consideration may be payable under the terms of the acquisition, dependant upon revenue and profit targets to be measured to the period ending 31 December 2008. Management have estimated the level of contingent consideration based upon the latest available forecasts for this period.

The goodwill recognised on acquisition represents the value of those assets not requiring valuation under IFRS 3 and the synergies expected to be achieved from integrating the Company into the Group’s existing business.

From the date of acquisition, Aepco contributed an operating profit of £0.9m to the results of the Group. If the combination had taken place at the beginning of the year, the profit before tax of the Group would have been increased by £0.3m and revenue from continuing operations would have been increased by £27.6m.

95

VT Group Plc Annual Report & Accounts 2008

21 Inventories

2008 £m

2007 £m

Raw materials and consumables Work in progress Finished goods and goods for resale

8.5 20.4 2.2

8.3 18.5 1.6

31.1

28.4

2008 £m

2007 £m

Contracts in progress at balance sheet date:

Amounts due from contract customers included in trade receivables

Amounts due to contract customers included in trade and other payables

27.3 67.2

14.1 66.8

Aggregate costs incurred on contracts to date

590.2

413.6

Reported profi t on contracts to date

62.1

50.7

2008 £m

2007 £m

Other receivables and prepayments

4.1

4.2

2008 £m

Trade receivables

Amounts recoverable on contracts

Amounts due from joint ventures and associates Prepayments and other receivables

109.2 27.3 1.4 65.2

100.7 14.1 0.7 47.5

203.1

163.0

22 Construction contracts

23 Trade and other receivables Non-current assets

Current assets

2007 £m (restated)*

Impairment of trade receivables

2008 £m

2007 £m

Trade receivables Provision for impairment of trade receivables

112.7 (3.5)

103.8 (3.1)

109.2

100.7

Included in the provision for impairment of trade receivables are specific trade receivables and amounts owed by specific customers where recovery of the balance due is considered by the management to be less than certain.

Statutory Information

* See note 2 for details of the balance sheet restatement arising from reassessment of a prior year acquisition.

96

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued Movements in the provision for impaired trade receivables during the year are as follows:

2008 £m

2007 £m

At 1 April Additional provision Arising upon business combinations Utilised

3.1 1.2 0.1 (0.9)

2.4 1.2 0.1 (0.6)

At 31 March

3.5

3.1

The ageing analysis of trade payables at the year end is as follows:

2008 £m

2007 £m

Current (not yet due) Overdue 30 days Overdue 30-120 days Overdue greater than 120 days

81.2 11.1 7.9 12.5

73.2 9.2 9.2 12.2

At 31 March

112.7

103.8

Currency analysis The carrying amounts of trade and other receivables are denominated in the following currencies:

2008 £m

2007 £m

Sterling US dollars Euros Other currencies

157.3 36.9 7.8 1.1

120.9 35.5 5.3 1.3

At 31 March

203.1

163.0

2008 £m

2007 £m

Cash at bank and in hand Short-term deposits

25.0 35.1

33.8 41.4

Cash and cash equivalents

60.1

75.2

24 Cash and cash equivalents

Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short‑term deposit rates.

Included in the above amounts are restricted funds of £3.8m (2007: £2.8m).

97

VT Group Plc Annual Report & Accounts 2008

25 Trade and other payables

2008 £m

Trade payables

Amounts owed to joint ventures and associates Other taxes and social security costs

Accrued expenses and deferred income

131.9 5.4 13.6 143.7

154.9 0.2 9.1 123.8

294.6

288.0

2007 £m (restated)*

* See note 2 for details of the balance sheet restatement arising from reassessment of a prior year acquisition.

26 Financial liabilities Interest-bearing loans and borrowings

2008 £m

2007 £m

Non-current liabilities Non-current instalments due on bank loans Finance lease creditors Other loans

164.2 20.7 1.8

74.5 30.6 1.8

186.7

106.9

Current liabilities Current portion of bank loans Current portion of guaranteed loan notes Current portion of fi nance lease creditors Loans from joint ventures

1.1 0.4 9.8 7.3

1.2 13.6 9.3 15.6

18.6

39.7

2008 £m

2007 £m

Other financial liabilities – current Foreign exchange contracts

0.5

0.4

Other financial liabilities – non-current Interest rate swap contracts Foreign exchange contracts

0.3 1.0

-

1.3

-

Statutory Information

The bank overdrafts are secured by cross-guarantees between certain material subsidiary undertakings.

98

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 27 Obligations under leases Operating leases Group as lessee Future minimum rentals payable under non-cancellable operating leases at 31 March are as follows:

2008 £m

2007 £m

Within one year After one year but not more than five years More than five years

58.9 159.3 28.9

57.4 197.3 41.6

247.1

296.3

The Group leases a number of commercial properties under operating leases. The leases run for terms of between 1 and 21 years.

Lease payments are reviewed at regular intervals to reflect market rentals. None of these leases include contingent rentals.

The Group has also entered into commercial leases on certain motor vehicles, vessels and items of machinery. These leases have an average life of between 1 and 11 years with renewal terms included in the contracts. There are no restrictions placed upon the lessee by entering into these leases.

Group as lessor The Group leases out its investment property under operating leases. In addition the Group leases out certain items of plant and machinery. The future minimum rentals receivable under non-cancellable leases at 31 March are as follows:

2008 £m

2007 £m

Within one year After one year but not more than five years More than five years

73.3 195.9 17.1

73.2 256.2 29.8

286.3

359.2

Finance leases Future minimum lease payments under finance leases are as follows:

2008 £m

2007 £m

Within one year After one year but not more than five years

11.1 22.3

11.1 33.5

Less finance charges allocated to future periods

33.4 (2.9)

44.6 (4.7)

30.5

39.9

99

VT Group Plc Annual Report & Accounts 2008

28 Provisions

Contingent consideration £m

Contract and Reorganisation warranty Chester Street and provisions provision redundancy £m £m £m

At 1 April 2007: Current Non-current

- -

6.2 5.2

0.9 8.6

2.5 -

9.6 13.8

-

11.4

9.5

2.5

23.4

Prior year adjustment (note 2)

-

1.7

-

-

1.7

At 1 April 2007 as restated

Created during the year Arising on business combinations Utilised Unused amounts reversed

-

1.8 - - -

13.1

3.9 0.5 (2.8) (3.4)

9.5

2.5

25.1

- - (0.8) -

1.3 2.1 (1.2) (1.0)

7.0 2.6 (4.8) (4.4)

At 31 March 2008

1.8

11.3

8.7

3.7

25.5

Analysed as:

Current

1.8

4.9

1.1

1.8

9.6

Non-current

-

6.4

7.6

1.9

15.9

Total £m

Contingent consideration As outlined in note 20 contingent consideration may be payable in respect of the acquisition of Advanced Engineering and Planning Corporation, made during the current financial year. The final consideration will be determined with reference to revenue and profit performance in the period to 31 December 2008. The above provision represents management’s best estimate of the consideration payable based upon forecast business performance.

Contract and warranty provisions Provisions are made when contracts are put to sales to cover expected warranty claims. Provisions are based on an assessment of future claims with reference to past experience. Such costs are generally incurred within one to five years post delivery.

Reorganisation and redundancy Provisions are made to cover costs to be incurred in respect of committed programmes and other liabilities arising from such reorganisations. Such liabilities are generally incurred within one year of the balance sheet date, however, certain employee termination costs may lead to commitments for payments to be made after more than one year from the balance sheet date.

Chester Street Provision

Statutory Information

Provision has been made for potential liabilities following a previous Group insurance carrier entering a Scheme of Arrangement.

100

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 29 Financial risk management An explanation of the Group’s treasury strategies, risk management and capital management are set out in the discussion of the treasury policies on page 20 in the Operating and Financial Review.

Hedging instruments The notional, or contracted amounts of derivative financial instruments are shown below, analysed between foreign exchange contracts and interest rate contracts, classified by year of maturity.

Foreign exchange contracts

Not exceeding one year £m

Euro Other

20.1 2.3

22.4

2008 Between one and five years £m

Total £m

Not exceeding one year £m

2007 Between one and five years £m

(6.3) -

13.8 2.3

55.4 1.5

(8.7) -

46.7 1.5

(6.3)

16.1

56.9

(8.7)

48.2

Total £m

Not exceeding one year £m

Greater than five years £m

Total £m

20.0

-

21.6

21.6

Cash-flow hedges

Foreign

Interest exchange

rate swaps contracts

£m £m

Non-hedge accounted foreign exchange contracts £m

Total £m

Total £m

Net forward (sales) / purchases

Interest rate contracts

Sterling

2008 Not

exceeding Greater than one year five years £m £m

-

20.0

Balance sheet analysis

2007

0.1 -

(0.3)

- 0.2 (0.4) (1.0)

- 1.7 (0.1) -

0.1 1.9 (0.5) (1.3)

Fair value at 31 March 2008

(0.2)

(1.2)

1.6

0.2

Derivative financial instruments – current assets Derivative financial instruments – current liabilities Derivative financial instruments – non-current liabilities

0.2 - -

- (0.3) -

- (0.1) -

0.2 (0.4) -

Fair value at 31 March 2007

0.2

(0.3)

(0.1)

(0.2)

Derivative financial instruments – non-current assets Derivative financial instruments – current assets Derivative financial instruments – current liabilities Derivative financial instruments – non-current liabilities

Fair value of financial instruments The fair value of a financial instrument is the price at which one party would assume the rights and/or duties of another party. The fair value of financial instruments have been determined based on available market information at the balance sheet date.

Forward exchange contracts are either marked to market using listed market prices or by discounting the contractual forward price and deducting the current spot rate. For interest rate swaps broker quotes are used. Those quotes are back tested using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date.

The fair value of interest-bearing loans and borrowings is calculated based on discounted expected future principal and interest cash flows.

101

VT Group Plc Annual Report & Accounts 2008

29 Financial instruments (continued) Carrying values The Group’s financial assets and liabilities can be categorised as follows:

Loans and receivables £m

Amortised cost £m

Derivatives used for hedging £m

Total carrying amount £m

Financial assets Cash and cash equivalents Loan to joint venture Other loans Other investments Trade receivables Other receivables Derivative contracts (not hedge-accounted)

Financial liabilities Trade payables Other liabilities Borrowings Derivative contracts (not hedge-accounted)

Hedging instruments Assets Liabilities

60.1 0.1 0.2 - 109.2 98.0 -

- - - -

- -

- - - 0.2 - - 1.7

- - - (0.1)

- -

- - - - - - -

(131.9) (19.0) (205.3) -

- -

- - - - - - -

- - - -

0.3 (1.7)

60.1 0.1 0.2 0.2 109.2 98.0 1.7

(131.9) (19.0) (205.3) (0.1)

0.3 (1.7)

0.3 (1.7)

Net fi nancial assets at 31 March 2008

267.6

1.8

(356.2)

(1.4)

(88.2)

(88.2)

Financial assets Cash and cash equivalents Other investments Trade receivables Other receivables

Financial liabilities Trade payables Other liabilities Borrowings Derivative contracts (not hedge-accounted)

Hedging instruments Assets Liabilities

75.2 - 100.7 66.5

- - - -

- -

- 0.2 - -

- - - (0.1)

- -

- - - -

(154.9) (9.3) (146.6) -

- -

- - - -

- - - -

0.2 (0.3)

75.2 0.2 100.7 66.5

(154.9) (9.8) (146.6) (0.1)

0.2 (0.3)

Net fi nancial assets at 31 March 2007

242.4

0.1

(310.8)

(0.1)

(68.4)

Fair value £m

60.1 0.1 0.2 0.2 109.2 98.0 1.7

(131.9) (19.0) (205.3) (0.1)

75.2 0.2 100.7 66.5

(154.9) (9.3) (146.6) (0.1)

0.2 (0.3) (68.4)

Statutory Information

Fair value through profi t or loss £m

102

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 29 Financial instruments (continued) Interest rate risk The Group uses various long and short-term borrowings, principally in US dollars and Sterling at both fixed and floating rates of interest.

Group policy is to assess borrowings with regard to fixed or variable rates of interest depending on prevailing market conditions and to acquire interest rate swaps to manage the interest rate risk.

The interest rate profile of the Group’s net debt at 31 March is as follows: 31 March 2008

Effective interest rate

Within 1 year £m

1-2 years £m

2-3 years £m

3-4 years £m

4-5 years £m

More than 5 years £m

Total £m

Fixed rate

Bank loans: Non-recourse – £ 6.16% Recourse – US$ 6.00% Other loans 6.50%

(1.1) (0.1) -

(1.1) - -

(1.2) - -

(1.2) - -

(1.3) - -

(14.1) - (1.8)

(20.0) (0.1) (1.8)

(1.2)

(1.1)

(1.2)

(1.2)

(1.3)

(15.9)

(21.9)

Floating rate

Cash and cash equivalents

Loan to associate 12.00% Other loans receivable 6.00% Loan notes 5.14% Finance leases 5.60% Revolving credit facility – £ 6.09% Revolving credit facility – US$ 3.01% Loan from joint venture 5.63%

60.1 - - - - - 0.1 - - - - - 0.2 (0.4) - - - - - (9.7) (10.4) (10.4) - - - - - - (88.6) - - - - - (56.6) - - (7.3) - - - - -

60.1 0.1 0.2 (0.4) (30.5) (88.6) (56.6) (7.3)

43.0

-

(123.0)

31 March 2007 Fixed rate Bank loans: Non-recourse – £ 5.55% (1.1) (1.1) (1.1) (1.2) (1.2) (15.3) Recourse – US$ 6.00% (0.1) (0.1) - - - - Other loans 6.50% - - - - - (1.8)

(21.0) (0.2) (1.8)

Floating rate Cash and cash equivalents Loan notes Finance leases Revolving credit facility Loan from joint venture

(10.4)

(10.4)

(145.2)

-

(1.2)

(1.2)

(1.1)

(1.2)

(1.2)

(17.1)

(23.0)

- 4.34% 5.76% 5.80% 5.31%

75.2 (13.6) (9.3) - (15.6)

- - (9.7) - -

- - (10.2) - -

- - (10.7) - -

- - - (54.5) -

- - - - -

75.2 (13.6) (39.9) (54.5) (15.6)

36.7

(9.7)

(10.2)

(10.7)

(54.5)

-

(48.4)

A change of 100 basis points in short-term rates applied to the average fixed/floating mix and level of borrowings would vary the interest cost to the Group by £1.8m (2007: £1.2m).

Currency risk The Group has significant investment in overseas operations, predominantly in the USA. As a result the Group’s balance sheet can be affected by movements in exchange rates. The Group’s policy is to reduce where possible both structural and transactional foreign exchange risk.

Foreign currency borrowings are used to mitigate the impact of foreign currency exchange rates on the Group’s overseas net assets.

The Group also has transactional currency exposures which arise when sales and purchases are made in currencies other than its own functional currency. The Group actively manages and mitigates this exposure through matching non functional currency revenues with non functional currency costs and through the use of forward contracts. Currency exposures are reviewed regularly by the Group treasury function.

The major currency in which the Group trades in overseas operations is the US dollar. A 10% movement in the US dollar: sterling exchange rate from the year average rate of 2.0133 would have changed the reported Group profit after taxation by £0.2m.

Uncommitted borrowing facilities At 31 March 2008 the Group had available £160m (2007: £170.1m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. £80m of these facilities fall for review in September 2009, and the remainder is available until November 2011.

103

VT Group Plc Annual Report & Accounts 2008

30 Share capital Authorised 2008

2007

Ordinary shares of 5p each

200,000,000

In thousands of shares On issue at 1 April Issued for cash

175,489 2,250

174,278 1,211

On issue at 31 March – fully paid

177,739

175,489

200,000,000

Allotted, called up and fully paid Ordinary shares of 5p each 2008

2007

During the year 2,013,321 (2007: 1,211,020) ordinary shares were issued for cash consideration of £5.3m (2007: £3.4m) under the Company’s share option schemes. In addition 236,679 (2007: nil) shares were issued to the employee trust to satisfy future pending awards under the Company’s share schemes.

31 Share-based payments Employee and management share participation plans exist as follows. All plans are equity-settled except for an element of the Deferred Annual Bonus Scheme. New awards are no longer made under the long-term incentive or share option plans.

Long-term incentive plan (LTIP) The long-term incentive plan was established as an incentive scheme for executive directors and other selected senior executives.

Under the terms of the scheme, employees may be awarded shares equal in value up to 50% of basic salary. The grant of awards is at the discretion of the Remuneration Committee. The shares are held in trust and released after three years pro rata to achievement of the performance target. The performance criteria is the Total Shareholder Return (‘TSR’) of the comparator group which currently comprises the members of the FTSE250 (but excluding Investment Trusts) but for future years the remuneration committee has the discretion in addition to relate the TSR to the Defence sector or the Support services sector. Shares vest fully if the Company’s performance equals the upper quartile of the comparator group but there is no vesting if performance is below the median.

For LTIP awards made prior to July 2005, each time share awards were made under the LTIP employees were entitled to invest, subject to certain conditions, up to 5% of basic salary to purchase additional shares in the Company (‘Retained Shares’). These shares are held in the trust for at least three years and they are then matched on a 1:1 basis with further shares (‘Matching Shares’). This element of the scheme has now ceased for all future awards. The last potential matching share award will vest in July 2008.

Deferred annual bonus scheme (DABS)

The deferred shares are held in trust for a period of three years. At the end of the three year period employees will receive these shares together with a matching element from the Company. The quantum of the matching element is dependant upon earnings per share growth targets. The maximum matching element obtainable is three times the deferred shares originally held for an employee.

Share option plans The Group operates two share option plans under which directors and other executives are eligible to participate at the discretion of the Remuneration Committee. Options are granted at market value, determined immediately before the grant.

Share options vest in equal tranches on the 3rd, 4th and 5th anniversaries of the date of the grant subject to achievement of a performance condition. The performance condition currently applying is real growth in earnings per share of at least 2% per annum over three consecutive years. These share options have a maximum life of 10 years.

Share incentive plan (SIP) The Group operates a share incentive plan open to all employees. Under this plan employees are granted share options subject to the Group meeting certain financial profit targets. Options are granted at the market value on date of the award and vest unconditionally if the employee remains in service for a period of 3 years from the date of the award. The contractual life of the options is five years and there are no cash settlement alternatives.

Statutory Information

The Group operates a deferred annual bonus scheme for senior executives. Under the provisions of the scheme members are required to defer 40% of their annual bonus which is used to acquire shares to that value. In addition, employees have the option to defer a further portion of annual bonus to acquire additional shares, up to a maximum of a further 35% of annual bonus.

104

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 31 Share-based payments (continued) Performance Share Plan (PSP) During the year the Group launched the Performance Share Plan. Under this scheme certain employees are granted nil cost options which vest after a three year performance period, subject to the satisfaction of performance conditions and continued employment. Awards are subject to two performance conditions being either the Group’s earnings per share growth or the relative total shareholder return.

Employee Share Option Savings Plans (ESOP) The Group operates Share Option Savings Plans for all eligible employees, whereby employees can save towards the exercise price payable for an award of share options. The exercise price of these options is set at 90% of the market value of the share price at the date of grant.

Under awards granted by the Group, the savings period is ether 3 or 5 years for UK based employees and 2 years for US based employees.

At the end of the savings period, the options vest and the option holders have a 6 month window in which to exercise their options.

The following tables sets out share option activity under these plans illustrating the number and weighted average exercise prices (WAEP) of, and movements in share options during the year.

Long-term incentive plan

Outstanding at 1 April Granted during the year Forfeited during the year Exercised Expired during the year

762,293 - (13,303) (225,384) (41,137)

3.47 - 3.34 2.67 2.67

861,505 209,794 (42,257) (220,511) (46,238)

2.83 4.84 4.26 2.35 2.37

Outstanding at 31 March

482,469

3.91

762,293

3.47

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

The weighted average share price at the date of exercise for the options exercised was £6.17 (2007: £4.84).

For the options outstanding as at 31 March 2008 the weighted average remaining contractual life is 0.7 years (2007: 1.2 years).

The weighted average fair value of options granted during the year was £nil (2007: £2.80). The range of exercise prices for options outstanding at the year end was £3.34–£4.84 (2007: £2.67–£4.84).

Deferred annual bonus plan

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

Outstanding at 1 April Granted during the year

226,386 225,972

4.61 5.79

- 226,386

4.61

Outstanding at 31 March

452,358

5.20

226,386

4.61

For the awards outstanding as at 31 March 2008 the weighted average remaining contractual life is 1.7 years (2007: 2.3 years).

The weighted average fair value of options granted during the year was £5.44 (2007: £4.30).

Share option schemes

Outstanding at 1 April Granted during the year Forfeited during the year Exercised Expired during the year

4,077,236

-

(97,523) (854,369)

(24,400)

3.00 4,444,548 - 617,246 (151,799) 3.85 2.68 (732,445) (100,314) 1.71

2.72 4.65 3.57 2.59 1.67

Outstanding at 31 March

3,100,944

3.07 4,077,236

3.00

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

Included within the outstanding options are 1,575,291 (2007: 1,882,810) shares that have not been recognised in accordance with the transitional provisions of IFRS 2 as the options were granted before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.

The weighted average share price at the date of exercise for the options exercised is £5.98 (2007: £4.81).

For the options outstanding as at 31 March 2008 the weighted average remaining contractual life is 5.4 years (2007: 6.1 years).

The weighted average fair value of options granted during the year was £nil (2007: £1.02). The range of exercise prices for options outstanding at the year end was £1.72–£4.89 (2007: £1.71–£4.89).

105

VT Group Plc Annual Report & Accounts 2008

31 Share-based payments (continued) Share incentive plan

Outstanding at 1 April Granted during the year Forfeited during the year Exercised

155,378 173,963 (15,061) (7,513)

4.64 5.76 5.24 5.36

- 166,721 (3,081) (8,262)

4.64 4.64 4.64

Outstanding at 31 March

306,767

5.23

155,378

4.64

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

The share incentive plan was introduced with effect from 1 June 2005. Under the rules of the scheme, employees receive shares dependent upon the Group achieving certain profit targets. The first awards were made under this scheme during the year ended 31 March 2007. The shares will be held in trust for a minimum period of three years before vesting unconditionally with employees.

Shares may vest at earlier dates only in certain limited circumstances, such as early retirement or redundancy.

Share option savings plan

Outstanding at 1 April Granted during the year Forfeited during the year Expired during the year Exercised

3,192,807

-

(162,966)

(31,545)

(939,685)

3.06 2,489,794 1,193,148 3.14 (183,296) 2.58 - 2.60 (306,839)

2.45 4.10 2.92 2.26

Outstanding at 31 March

2,058,611

3.27 3,192,807

3.06

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

Included within the outstanding options are nil (2007: 670,887) shares that have not been recognised in accordance with IFRS 2 as the options were granted before 7 November 2002. These options had not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.

The weighted average share price at the date of exercise for the options exercised is £6.03 (2007: £4.62).

For the options outstanding as at 31 March 2008 the weighted average remaining contractual life is 2.4 years (2007: 2.6 years).

Performance Share Plan

Outstanding at 1 April Granted during the year Forfeited during the year

Outstanding at 31 March

2008 No

2008 WAEP (£)

2007 No

2007 WAEP (£)

- 546,269 (2,640)

- - -

- - -

-

543,629

-

-

-

Share option valuation assumptions The fair value of options granted were measured using the Black-Scholes method for the share option plans and Employee Share Options Savings Plans, the Monte-Carlo method for the grants under the Long-Term Incentive Plan, and a simplified Black-Scholes method for the matching shares granted within the Long-Term Incentive Plan. The weighted average assumptions used in determining fair value of options granted were as follows:

Dividend yield Expected volatility Risk-free interest rate Expected life Exercise price

2008

- 21.1% 5.2% 3 years -

PSP 2007

- - - -

Long-term incentive plan 2008 2007

- - - - -

2.2% 21.0% 4.7% 3 years 484p

Share options plans 2008 2007

- - - - -

2.3% 22.6% 4.7% 5 years 465p

Share options savings plans 2008 2007

- - - - -

2.4% 21.2% 4.7% 4 years 415p

Statutory Information

The weighted average fair value of options granted during the year was nil (2007: £1.04). The range of exercise prices for options outstanding at the year end was £2.20–£4.10 (2007: £2.20–£4.10).

106

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 31 Share-based payments (continued) The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options).

The expected life of the options is the Company’s best estimate of exercise patterns based on current available data.

The Long-Term Incentive Plan includes a market vesting condition linked to the Total Shareholder Return (‘TSR’) of a comparator group which requires the volatility of comparator companies’ share prices and the average correlation between the share prices of the Company and the comparator companies to be considered in assessing the fair value of options granted. The following approach has been adopted for these items: Comparator company volatility – Annualised, daily historic volatility assessed over a period prior to the date of grant that corresponds to the period over which the TSR is being projected; Company correlation – Taken as the average correlation of TSR between all of the companies over the same historic period Compensation expense

2008 £m

2007 £m

Long-term incentive plan Deferred annual bonus scheme Share option plans PSP Share incentive plan Employee share option savings plans

0.4 2.7 0.4 0.4 0.7 0.4

0.5 2.0 0.3 0.3 0.4

5.0

3.5

The portion of the above expense arising from equity settled share-based payment transactions is £4.1m (2007: £2.7m).

The carrying amount of the liability relating to cash settled options at 31 March 2008 is £1.4m (2007: £0.8m).

32 Reconciliation of movements in equity Attributable to equity holders of the parent

Share capital £m

Share premium £m

Hedging reserve £m

Translation reserve £m

Retained Earnings £m

Balance at 1 April 2006 Total recognised income and expense Share option exercised by employees Purchase of treasury shares Equity-settled transactions Dividends to shareholders

8.7 - 0.1 - - -

30.7 - 3.3 - - -

(0.4) 0.4 - - - -

1.0 (3.4) - - - -

116.0 61.5 - (1.6) 2.6 (19.2)

156.0 58.5 3.4 (1.6) 2.6 (19.2)

Balance at 31 March 2007 Total recognised income and expense Share option exercised by employees Purchase / issue of treasury shares Equity-settled share-based transactions Dividends to shareholders

8.8 - 0.1 - - -

34.0 - 5.2 1.4 - -

- (1.0) - - - -

(2.4) 0.4 - - - -

159.3 75.0 - (3.4) 4.1 (21.4)

199.7 74.4 5.3 (2.0) 4.1 (21.4)

Balance at 31 March 2008

8.9

40.6

(1.0)

(2.0)

213.6

260.1

Total £m

107

VT Group Plc Annual Report & Accounts 2008

32 Reconciliation of movements in equity (continued) Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments relating to hedged transactions that have not yet occurred.

Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations.

Treasury shares Own shares held are recognised as a deduction from retained earnings. At 31 March 2008, the Group held 443,326 (2007: 174,796) of the Company’s shares, which are reserved for issue under incentive plans.

Minority interest

£m

Balance at 1 April 2006 Total recognised income and expense Dividends paid

(0.1) 3.1 (0.4)

Balance at 31 March 2007 Total recognised income and expense Dividends paid

2.6 2.1 (2.0)

Balance at 31 March 2008

2.7

2008 £m

2007 £m

Profi t before taxation expense Finance income Finance expense

71.3 (6.1) 16.0

53.8 (4.8) 13.1

Operating profi t – continuing operations

Adjustments to reconcile operating profi t to net cash infl ows from operating activities:

Share of post tax earnings of equity accounted investments

Depreciation of property, plant and equipment

Depreciation of investment property

Impairment of assets held for resale

Restructuring impairment charge

Amortisation of intangible assets

Foreign currency differences

Loss / (profi t) on sale of property, plant and equipment

Dividends received from joint ventures and associates

Changes in fair value of fi nancial instruments

Equity settled share-based payment expenses

Difference between pension contributions paid and amounts recognised in the income statement (Increase) / decrease in inventories

(Increase) / decrease in trade and other receivables

(Decrease) / Increase in trade and other payables

(Decrease) in provisions

81.2

(18.1) 17.1 0.1 0.3 - 10.9 (2.4) 0.7 13.6 (0.1) 4.1 (5.8) (1.8) (12.3) (17.8) (4.0)

62.1

(15.5) 20.0 1.9 8.9 (0.2) (0.2) 14.0 0.2 2.7 (1.5) 2.8 0.7 20.0 (8.5)

Cash from operating activities

65.7

107.4

33 Additional cash fl ow information

Statutory Information

Cash flow from operating activities

108

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 33 Additional cash flow information (continued) Analysis of net debt as defined by the Group Arising on acquisition Cash flow £m £m

Exchange differences £m

Non-cash Movements £m

31 March 2008 £m

1 April 2007 £m

Cash and cash equivalents Loans receivable Interest bearing loans – non current Interest bearing loans – current

75.2 - (106.9) (39.7)

8.2 - - -

(23.7) 0.3 (91.0) 32.0

0.4 - 0.3 -

- - 10.9 (10.9)

60.1 0.3 (186.7) (18.6)

(71.4)

8.2

(82.4)

0.7

-

(144.9)

Analysed as: Recourse net funds debt Non-recourse net debt

(50.4) (21.0)

(124.9) (20.0)

(71.4)

(144.9)

1 April 2006 £m

Cash and cash equivalents Interest bearing loans – non current Interest bearing loans – current

112.0 (77.5) (49.8)

- - (32.5)

(35.3) (43.7) 55.6

(1.5) 0.8 0.5

- 13.5 (13.5)

75.2 (106.9) (39.7)

(15.3)

(32.5)

(23.4)

(0.2)

-

(71.4)

Analysed as: Recourse net funds Non-recourse net debt

6.7 (22.0)

(50.4) (21.0)

(15.3)

(71.4)

Arising on acquisition £m

Cash flow £m

Exchange differences £m

Non-cash Movements £m

31 March 2007 £m

34 Capital commitments At 31 March 2008 amounts contracted for but not provided in the financial statements for the acquisition of property, plant and equipment amounted to £6.5m (2007 £9.3m).

35 Contingent liabilities As at 31 March 2008, the parent company and the Group had contingent liabilities in respect of bank and contractual performance guarantees and other matters arising in the ordinary course of business entered into for, or on behalf of, certain Group and joint venture undertakings. Where it is expected that a material liability will arise in respect of these matters, appropriate provision is made within the Group consolidated financial statements or within those of the relevant subsidiary.

As the conditions of the above guarantees are currently being met, no obligating event is foreseeable and therefore no contingent liability exists at the year end.

The Company and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The Directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect on the Group’s financial position.

109

VT Group Plc Annual Report & Accounts 2008

36 Retirement benefi ts The Group participates in five defined benefit pension schemes; the Shipbuilding Industries Scheme (SIPS), four education related schemes: LAWDC, the Guidance Enterprise Group Scheme, the Local Government Pension Scheme (LGPS), and a US scheme. The UK schemes are funded by the payment of contributions to separately administered funds.

The US scheme is an unfunded scheme. The Group holds a life assurance policy which is to be used to fund retirement benefits arising.

Under IAS 19 this insurance policy is deemed to be a non-qualifying insurance policy and as such is not an asset of the pension scheme.

The asset is instead a corporate-owned asset and is included within financial assets on the balance sheet (note 19).

Pension contributions are determined with the advice of independent qualified actuaries on the basis of triennial valuations using the projected unit credit method. Scheme assets are stated at their market values at the respective balance sheet dates and overall expected rates of return are established by applying published forecasts to each category of scheme assets.

The assets and liabilities of the schemes at 31 March are: Year ended 31 March 2008

SIPS £m

US £m

Other £m

Total £m

Scheme assets at fair value Equities Bonds Other

251.7 32.7 11.7

- - -

37.7 8.4 4.5

289.4 41.1 16.2

Fair value of scheme assets Present value of scheme obligations

296.1 (305.5)

- (0.2)

50.6 (50.7)

346.7 (356.4)

Net pension liability

(9.4)

(0.2)

(0.1)

(9.7)

Year ended 31 March 2007

SIPS £m

US £m

Other £m

Total £m

Scheme assets at fair value Equities Bonds Other

230.8 21.5 53.4

- - -

42.5 5.7 2.8

273.3 27.2 56.2

Fair value of scheme assets Present value of scheme obligations

305.7 (338.8)

- (0.1)

51.0 (55.4)

356.7 (394.3)

Net pension liability

(33.1)

(0.1)

(4.4)

(37.6)

The pension plans have not directly invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group.

The amounts recognised in the Group income statement and in the Group statement of recognised income and expense for the year are analysed as follows: Year ended 31 March 2008

SIPS £m

US £m

Recognised in income statement Current service cost Curtailment and settlements Expected return on scheme assets Interest cost on scheme liabilities

15.3 - (23.6) 18.1

0.1 - - -

2.8 (0.3) (3.9) 3.0

18.2 (0.3) (27.5) 21.1

Recognised in arriving at operating profi t

9.8

0.1

1.6

11.5

Taken to the statement of recognised income and expense Actual return on scheme assets

Expected return on scheme assets

(16.4) (23.6)

- -

(1.9) (3.9)

(18.3) (27.5)

Other actuarial gains and losses

(40.0) 58.6

- -

(5.8) 9.3

(45.8) 67.9

18.6

-

3.5

22.1

Actuarial gains recognised in the statement of recognised income and expense

Total £m

Statutory Information

Other £m

110

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 36 Retirement benefits (continued) Year ended 31 March 2007

SIPS £m

US £m

Recognised in income statement Current service cost Past service cost Expected return on scheme assets Interest cost on scheme liabilities

15.4 0.2 (21.5) 16.7

0.1 - - -

3.6 - (3.4) 2.9

19.1 0.2 (24.9) 19.6

Recognised in arriving at operating profit

10.8

0.1

3.1

14.0

Taken to the statement of recognised income and expense Actual return on scheme assets

Expected return on scheme assets

23.5 (21.5)

- -

3.3 (3.4)

26.8 (24.9)

Other actuarial gains and losses

2.0 14.3

- -

(0.1) 7.0

1.9 21.3

16.3

-

6.9

23.2

2007

2008

Actuarial gains and losses recognised in the statement of recognised income and expense

Other £m

Total £m

The principal assumptions used in determining pension benefit obligations for the Group’s plans are:

2008

Discount rate Expected rate of return on assets: Equities Corporate bonds Government bonds Future salary increases Rate of increase in pensions in payment Inflation rate

Discount rate Expected rate of return on assets: Equities Corporate bonds Government bonds Future salary increases Rate of increase in pensions in payment Inflation rate

SIPS

LAWDC

LGPS

2007

2008

6.7%

8.0% 6.9% 4.5% 4.6% 3.4% 3.5%

5.3%

8.0% 5.4% 4.5% 4.1% 2.9% 3.0%

6.7%

8.0% 6.9% 4.5% 3.5% 3.4% 3.5%

5.3%

8.0% 5.4% 4.5% 3.0% 2.9% 3.0%

6.7%

8.0% 6.9% 4.5% 5.0% 3.5% 3.5%

2008

Guidance 2007

2008

6.7%

5.3%

6.75%

5.75%

8.0% 6.9% 4.5% 4.6% 3.4% 3.5%

8.0% 5.4% 4.5% 4.1% 2.9% 3.0%

- - - 4.0% - 2.7%

4.0% 2.7%

2007

5.3%

8.0% 5.4% 4.5% 4.5% 3.0% 3.0% US 2007

Assumptions for pensioner longevity are based upon actuarial tables relevant to the specific schemes. For the main SIPS scheme the actuarial table used is PA 92, which allows for expected increases in longevity. The table has been adjusted for deferred members and pensioners to reflect actual scheme experience. In addition the mortality assumption includes a short cohort effect (2007: medium cohort effect) reflecting improved longevity of members born between 1925 and 1945. The inclusion of this cohort effect strengthens the mortality assumption within the actuarial calculation. The mortality assumption has been updated to reflect the assumption adopted in the latest actuarial funding valuation of the scheme undertaken at 31 March 2007.

The mortality assumption adopted predicts that a current 65 year old male (2007: 60 year old) would have a life expectancy to age 85 (2007: age 87) and a female would have a life expectancy to age 87 (2007: age 90). The effect of increasing this assumed life expectancy by one year is predicted to increase the deficit in the schemes by approximately £9m.

The assumption considered to be the most significant is the discount rate adopted. If the discount rate were to change by 0.1% then it is predicted that the deficit in the scheme would change by £7m.

111

VT Group Plc Annual Report & Accounts 2008

36 Retirement benefi ts (continued) Movement in the present value of the defined benefit pension obligations

At 1 April 2006 Current service cost Past service cost Interest cost Benefi ts paid Contributions paid by employees Actuarial gains and losses

At 31 March 2007 Current service cost Curtailments and credits Interest cost Benefi ts paid Contributions paid by employees Actuarial gains and losses

At 31 March 2008

US £m

Other £m

330.8 15.4 0.2 16.7 (10.8) 0.8 (14.3)

- 0.1 - - - - -

56.5 3.6 - 2.9 (1.1) 0.5 (7.0)

387.3 19.1 0.2 19.6 (11.9) 1.3 (21.3)

338.8 15.3 - 18.1 (9.2) 1.1 (58.6)

0.1 0.1 - - - - -

55.4 2.8 (0.3) 3.0 (1.4) 0.5 (9.3)

394.3 18.2 (0.3) 21.1 (10.6) 1.6 (67.9)

305.5

0.2

50.7

356.4

SIPS £m

US £m

Other £m

Total £m

At 1 April 2006 Expected return on plan assets Employer contributions Contributions by employees Benefi ts paid Actuarial gains and losses

279.3 21.5 12.9 0.8 (10.8) 2.0

- - - - - -

45.7 3.4 2.6 0.5 (1.1) (0.1)

325.0 24.9 15.5 1.3 (11.9) 1.9

At 31 March 2007 Expected return on plan assets Employer contributions Contributions by employees Benefi ts paid Actuarial gains and losses

305.7 23.6 14.9 1.1 (9.2) (40.0)

- - - - - -

51.0 3.9 2.4 0.5 (1.4) (5.8)

356.7 27.5 17.3 1.6 (10.6) (45.8)

At 31 March 2008

296.1

-

50.6

346.7

2008 £m

2007 £m

2006 £m

2005 £m

Fair value of scheme assets Present value of defi ned benefi t obligations

346.7 (356.4)

356.7 (394.3)

325.0 (387.3)

252.8 (314.5)

Defi cit in the schemes

(9.7)

(37.6)

(62.3)

(61.7)

Experience adjustments arising on plan liabilities

67.9

21.3

(51.1)

17.1

Experience adjustments arising on plan assets

(45.8)

1.9

50.1

7.4

Changes in the fair value of plan assets

SIPS £m

Total £m

The cumulative amount of actuarial gains and losses recognised since 1 April 2004 in the Group statement of recognised income and expense is £68.8m (2007: £46.7m).

Statutory Information

History of experience gains and losses

112

VT Group Plc Annual Report & Accounts 2008

Notes to the Consolidated Financial Statements continued 37 Related party transactions Identity of related parties The Group has a related party relationship with its subsidiaries, associates, joint ventures and with its directors and executive officers.

Transactions with key management personnel In addition to their salaries, the Group also provides non-cash benefits to directors and executive officers, and contributes to a post‑employment defined benefit plan on their behalf.

Executive officers also participate in the Group’s Long-Term Incentive Plan and share option programmes.

The key management personnel compensations are detailed in the Remuneration Report on pages 58 to 63.

Total remuneration is included in personnel expenses (note 8).

Other related party transactions During the year the Group has entered into transactions, in the ordinary course of business, with other related parties.

Transactions entered into, and trading balances outstanding at 31 March 2008, are as follows:

Sales to related party £m

Purchases from related party £m

Amounts owed by related party £m

Amounts owed to related party £m

Related party Flagship Training Limited

2008 2007

5.8 6.0

2.4 0.9

1.3 0.9

0.6 -

Fleet Support Limited

2008 2007

2.7 2.0

2.6 3.6

1.0 0.8

0.8 0.2

University of Wales, Bangor

2008 2007

0.5 0.6

- -

- 0.1

0.7 0.8

Careers Enterprise (Futures) Limited

2008 2007

1.0 0.4

0.1 0.1

0.1 0.1

-

ALC (Superholdco) Limited

2008 2007

2.6 -

- -

- 0.4

-

Lex Defence (Whitefleet) Limited

2008 2007

1.4 1.0

40.0 39.2

0.1 -

4.8 2.8

Lewisham Schools for the Future LEP Limited

2008 2007

2.0 -

- -

- -

-

VT Group Plc Annual Report & Accounts 2008

113

37 Related party transactions (continued) Flagship Training Limited The Group has a 50% (2007: 50%) interest in Flagship Training Limited. In addition to the amounts shown above, Flagship Training has provided a floating rate interest loan with a balance at 31 March 2008 of £7.3m (2007: £15.6m). Repayments of £8.3m (2007: £6.4m) were made during the year and interest of £0.4m (2007: £0.8m) was paid during the year.

Fleet Support Limited The Group has a 50% (2007: 50%) interest in Fleet Support Limited.

Careers Enterprise (Futures) Limited The Group has an effective interest of 25.5% (2007: 25.5%) in Careers Enterprise (Futures) Limited.

Whitefleet Limited The Group has a 50% (2007: 50%) interest in Whitefleet Limited.

ALC (Superholdco) Limited The Group has a 50% (2007: 50%) interest in ALC (Superholdco) Limited.

University of Wales, Bangor The University of Wales, Bangor, holds a 50% stake in the VT controlled company, VT Ocean Sciences Limited. The majority of the turnover of this company is to the related party, University of Wales, Bangor. In addition to the amounts shown above the University of Wales, Bangor has provided a fixed rate interest loan of £1.8m (2007: £1.8m); during the year interest of £0.1m (2007: £0.1m) was charged.

Lewisham Schools for the Future LEP Limited The Group invested in 40% of the equity in this company, which contracts with Lewisham Borough Council for school refurbishment services. The company commenced trading during the year ended 31 March 2008.

Statutory Information

All dealings with related parties are conducted on an arm’s length basis.

114

VT Group Plc Annual Report & Accounts 2008

Company Balance Sheet at 31 March 2008

Notes

2008 £000

2007 £000

Fixed assets Tangible assets Investments in subsidiary undertakings

4 5

0.3 74.1

0.3 51.4

Current assets Debtors – amounts falling due after more than one year Debtors – amounts falling due within one year

74.4

51.7

6

479.1 33.9

435.3

513.0

435.3

Creditors: amounts falling due within one year

7

(111.3)

(101.9)

Net current assets

401.7

333.4

Total assets less current liabilities

476.1

385.1

Creditors: amounts falling due after more than one year

7

(145.1)

(54.4)

Net assets

331.0

330.7

Capital and reserves Called up share capital Share premium account Revaluation reserve Capital reserve Profit and loss account

8 9 9 9 9

8.9 40.6 10.3 8.7 262.5

8.8 34.0 10.3 4.6 273.0

Shareholder’s funds

331.0

330.7

These financial statements were approved by the board of directors on 12 May 2008 and were signed on its behalf by:

PJ Harrison Director

VT Group Plc Annual Report & Accounts 2008

115

Notes to the Company Financial Statements 1 Presentation of the fi nancial statements Description of business VT Group plc is the parent company of the VT Group. The principal activities of the VT Group are set out on page 54.

2 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements.

Basis of preparation The financial statements are drawn up in accordance with UK generally accepted accounting principles.

The financial statements have been prepared in accordance with applicable accounting standards under the historical cost convention.

The Company is exempt under the terms of FRS 1 from the requirement to publish its own cash flow statement, as its cashflows are included within the consolidated cash flow statement of the Group.

Advantage has been taken of the exemption available under FRS 8 not to disclose details of transactions with other Group undertakings as the consolidated financial statements are shown on pages 66 to 113.

Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred taxation is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. Deferred taxation assets are recognised only to the extent that, in the opinion of the directors, there is a reasonable probability that the asset will crystallise in the foreseeable future.

Dividends on shares Dividends unpaid at the balance sheet date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements.

Investments Investments held as fixed assets are stated at cost or valuation less any provisions for impairment in value.

Fixed assets and depreciation Depreciation is provided on tangible fixed assets at rates calculated to write off the cost less estimated residual value of each asset on a straight line basis over the expected useful life as follows: Computer software – 3–5 years Share based payments

3 Profi t and loss account disclosures The Company has not presented its own profit and loss account or statement of total recognised gains and losses as permitted by section 230 of the Companies Act 1985.

The Company profit on ordinary activities after tax was £14.3m (2007: £279.5m).

The Company audit fee was £20,000 (2007: £17,000). Details of fees paid to auditors in respect of services provided to VT Group are disclosed in note 7 to the consolidated accounts.

Dividend disclosures are provided in note 13 of the VT Group plc consolidated accounts.

The Company had no employees during the year (2007: nil).

Details in relation to Directors’ remuneration are set out in the Directors’ remuneration report on pages 58 to 63.

Statutory Information

Although the Company does not incur a charge under FRS 20, the issuance by the Company to its subsidiaries of a grant over the Company’s options represents additional capital contributions by the Company in its subsidiaries. An additional investment in subsidiaries results with a corresponding increase in shareholders’ equity. The additional capital contribution is based on the fair value of the grant issued allocated over the underlying grant’s vesting period.

116

VT Group Plc Annual Report & Accounts 2008

Notes to the Company Financial Statements continued 4 Tangible fixed assets

Computer software £m

Cost At beginning of the year Additions

0.4 0.1

At end of the year

0.5

Depreciation At beginning of year Charge in year

0.1 0.1

At end of the year

0.2

Net book value At 31 March 2008

0.3

At 31 March 2007

0.3

2008 £m

2007 £m

Shares in group undertakings Shares in joint venture undertakings

74.0 0.1

51.4 -

74.1

51.4

5 Fixed assets investments

Shares in Group undertakings include capital contributions of £8.7m (2007: £4.6m) in respect of share based payment arrangements.

The cost of investment in subsidiary undertakings according to historical cost accounting rules is £51.7m (2007: £29.4m), with the revaluation relating to Vosper Thornycroft (UK) Ltd at the date of flotation 17 March 1988.

Details of principal subsidiary undertakings are as follows:

Subsidiary Principal activity Vosper Thornycroft (UK) Limited Shipbuilding, and design and manufacture of engineering products.

VT Group International Limited Holding company VT Insurance Services Limited Provision of group insurance VT Investments Limited Group investment holding company VT Shipbuilding Holdings Limited Holding company

Percentage of ordinary shares held 100% 100% 100% 100% 100%

6 Debtors

2008 £m

2007 £m

Amounts owed by subsidiary undertakings Other debtors

505.4 7.6

435.1 0.2

513.0

435.3

Included within the amounts owed by subsidiary undertakings are £479.1m (2007: £nil) of items that fall due for payment after one year from the balance sheet date.

117

VT Group Plc Annual Report & Accounts 2008

7 Creditors

2008 £m

2007 £m

Creditors: amounts falling due within one year Guaranteed loan notes

Bank overdraft

Amounts owed to subsidiary undertakings

Corporation tax

Other creditors

Accruals and deferred income

- 14.0 89.9 6.3 - 1.1

1.7 57.2 40.6 1.9 0.1 0.4

111.3

101.9

145.1

54.4

Creditors: amounts falling due after more than one year Bank loans

The bank loan and overdraft are secured by cross-guarantee arrangements between certain material subsidiary undertakings.

The bank loan represents drawings under a revolving credit facility of which £80m is available to the Company until September 2009, with the remainder available to the Company until November 2011. The total amount available under the facility is £305m (2007: £225m) and the facility currently bears interest at LIBOR plus 0.45% (2007: LIBOR plus 0.45%).

8 Called up share capital

2008 £m

2007 £m

Authorised 200,000,000 ordinary shares of 5p each

10.0

10.0

Allotted, called up and fully paid 177,739,167 ordinary shares of 5p each (2007: 175,489,299 ordinary shares of 5p each)

8.9

8.8

Share Premium Account £m

Revaluation reserve £m

Capital Reserve £m

Profi t and loss account £m

Total £m

As beginning of year

Profi t for the year

Dividends paid

Purchase of treasury shares

Premium on issue of shares

Capital contribution relating to share based payments

34.0 - - - 6.6 -

10.3 - - - - -

4.6 - - - - 4.1

273.0 14.3 (21.4) (3.4) - -

321.9 14.3 (21.4) (3.4) 6.6 4.1

At end of year

40.6

10.3

8.7

262.5

322.1

Treasury shares Own shares held are recognised as a deduction from retained earnings. At 31 March 2008, the Group held 443,326 (2007: 174,796) of the Company’s shares.

Statutory Information

9 Share premium and reserves

118

VT Group Plc Annual Report & Accounts 2008

Notes to the Company Financial Statements continued 10 Reconciliation of movements in shareholder’s funds

2008 £m

2007 £m

Profit on ordinary activities after taxation Dividends

14.3 (21.4)

279.5 (19.2)

Retained (loss) / profit for the year

New share capital subscribed

Capital contribution relating to share based payments Treasury shares (purchase) / issue

(7.1) 5.3 4.1 (2.0)

260.3 3.4 2.7 (1.6)

Net addition to shareholder’s funds

0.3

264.8

Opening shareholder’s funds

330.7

65.9

Closing shareholder’s funds

331.0

330.7

11 Contingent liabilities Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

119

VT Group Plc Annual Report & Accounts 2008

2008 £m

IFRS 2007 £m

2006 £m

2005 £m

UK GAAP 2004 £m

Turnover

1,201.0

1,004.6

847.1

734.1

670.7

Group Operating profi t – continuing operations Share of results of equity accounted investments Net interest (payable)/receivable

63.1 18.1 (9.9)

52.6 15.5 (8.3)

52.0 10.4 (7.0)

37.0 9.9 (5.3)

37.1 12.2 (3.1)

Profi t on ordinary activities before exceptional items, tax and goodwill amortisation

Exceptional costs

Property services and sale of businesses

71.3 - -

59.8 (6.0) -

55.4 - -

41.6 - -

46.2 (15.0) 4.9

Profi t on ordinary activities before tax and goodwill amortisation Goodwill amortisation

71.3 -

53.8 -

55.4 -

41.6 -

36.1 (9.8)

Profi t on ordinary activities before tax Taxation

71.3 (13.3)

53.8 (7.7)

55.4 (13.1)

41.6 (9.4)

26.3 (9.3)

Profi t on ordinary activities after tax Discontinued operations Minority interest

58.0 - (1.2)

46.1 - (1.7)

42.3 0.1 (0.7)

32.2 0.8 (1.2)

17.0 (1.4)

Profi t for the fi nancial year attributable to equity holders of the parent

56.8

44.4

41.7

31.8

15.6

Fixed assets Goodwill Property plant and equipment Investment property Other intangible assets Equity accounted investments Deferred tax assets Other non-current assets

250.8 171.4 0.7 70.7 30.3 17.7 4.5

206.1 155.8 0.8 51.2 27.1 24.4 4.4

170.3 122.5 0.8 20.6 12.9 30.2 5.4

155.9 181.7 0.9 7.7 10.8 22.1 12.4

158.8 192.2 9.4 -

Cash and cash equivalents Other current assets

60.1 243.2

75.2 204.0

112.0 170.9

39.9 147.5

43.5 149.5

Current liabilities

(327.2)

(344.4)

(295.9)

(258.0)

(255.7)

Non-current liabilities

(259.4)

(202.3)

(193.9)

(194.4)

(86.0)

Provisions for liabilities and charges

-

-

-

-

(65.3)

Minority interest

(2.7)

(2.6)

0.1

(1.1)

(3.9)

Equity shareholders’ funds

260.1

199.7

155.9

125.4

142.5

- - 32.2p 31.4p 13.1p

- - 25.4p 24.8p 11.9p

- - 24.0p 23.6p 10.8p

- - 18.4p 18.3p 9.8p

18.1p 14.8p 9.1p 9.0p 9.0p

Earnings per share – pre goodwill amortisation and exceptional items

Earnings per share – pre goodwill amortisation Earnings per share – post goodwill amortisation Earnings per share – diluted post goodwill amortisation Dividend per share

Statutory Information

Five Year Summary

120

VT Group Plc Annual Report & Accounts 2008

Principal subsidiary and joint venture undertakings The following is a list of the Group’s principal subsidiary and joint venture undertakings. All holdings are of ordinary shares or common stock and are 100% unless otherwise stated. A full list of the Group companies will be included in the Company’s annual return.

Name Activity ALC (FMC) Limited*† (50%) Provision of Services to HM Armed Forces Airwork Limited* Support Services for overseas airforces Ascent Flight Training Limited Provision of initial flying training

Provision of careers services in the counties of Careers Enterprise Limited* (50%)

Buckinghamshire, Kent and the City of London Worldwide provision of naval training services to Flagship Training Limited*† (50%)

HM Armed Forces and other establishments Fleet Support Limited*† (50%) Support services for the Royal Navy’s Fleet at Portsmouth Guidance Enterprise Group Limited* (50%) Provision of careers services HCTC Limited* Provision of training services Learning21 Limited Provision of services for Building Schools for the Future Maritime Dynamics, Inc.* Design and supply of electronic maritime ride control systems Naiad Marine BV* Design and supply of stabilisers and bow thrusters for yachts Surrey Careers Services Limited* Provision of careers services in the county of Surrey The Cube Corporation, Inc.* Support services for the US government Touchstone Learning and Skills Limited* Provision of training services Vosper Thornycroft (UK) Limited Shipbuilding and holding company VT Aepco* Provision of aviation support services to the US government VT Aerospace Limited* Support services for the Royal Air Force VT Career Progressions Limited* Provision of software for careers services VT Careers Management Limited* Holding company VT Communications Limited* Provision of worldwide communications VT Critical Services Limited* Provision of vehicle services VT Education and Skills Limited* Provision of education services VT Fire Services Limited* Special projects operating company VT Fire Training (Avonmouth) Limited* Special projects operating company VT Fitzroy Limited*† (50%) Support services for the Royal New Zealand Navy VT Four S Limited*† (80.1%) Provision of school support services in the county of Surrey VT Griffin Services, Inc.* Support services for the US government VT Group International Limited Holding company VT Group Services Limited* Support services for VT Group VT Halmatic Limited* Design and manufacture of small boats VT Hellas Marine Consultants SA* Provision of shipbuilding management services VT Insurance Services Limited Captive insurance company VT Integrated Services Limited* Provision of manpower, training and support services VT Investments Limited Group investment holding company VT Land Limited* Provision of vehicle services VT Leaseco Limited* Special projects company VT Maritime Affairs Limited* Special projects operating company VT Maritime Dynamics, Inc.* Design and supply of electronic maritime ride control systems VT Milcom, Inc.* Support services for the US government VT Naiad, Inc.* Design and supply of stabilisers and bow ride control systems VT Nuclear Services Limited* Project Management for the nuclear industry VT Ocean Sciences Limited*† (50%) Special projects operating company VT Property Services Limited* Special projects operating company VT Shipbuilding Limited* Shipbuilding VT Shipbuilding Holdings Limited Holding company VT Shipbuilding International Limited* Shipbuilding VT Southern Careers Limited* Provision of careers services VT Support Services Limited* Holding company VT Training Plc* Provision of training services VT US Inc.* Holding company VT West Sussex Careers Limited* Provision of careers services in the county of West Sussex Whitefleet Limited*† (50%) Provision of vehicle services * Investment held by a subsidiary company † Joint venture undertaking

Country of incorporation England England England

Country of operation UK Oman UK

England

UK

England

UK and worldwide

England England England England USA Netherlands England USA England England USA England England England England Scotland England England England New Zealand England USA England England England Greece Guernsey England England England England England USA USA USA England England England England England England England England England USA England England

UK UK UK UK USA and worldwide Worldwide UK USA UK UK USA UK UK UK UK and worldwide UK UK UK UK New Zealand UK USA UK UK UK Greece Guernsey UK and worldwide UK UK UK UK USA and worldwide USA USA and worldwide UK and worldwide UK UK UK UK UK UK UK UK USA UK UK

121

VT Group Plc Annual Report & Accounts 2008

Principal locations

VT Support Services Bournemouth International Airport Christchurch, Dorset BH23 6BS T: (01202) 365200 F: (01202) 573692 W: www.vtplc.com/supportservices VT Aerospace Bournemouth International Airport Christchurch, Dorset BH23 6BS T: (01202) 365200 F: (01202) 573692 W: www.vtplc.com/aerospace VT Critical Services Couching House 41 Couching Street Watlington, Oxfordshire OX49 5PX T: (01491) 615370 F: (01491) 615379 VT Land Bournemouth International Airport Christchurch, Dorset BH23 6BS T: (01202) 365200 F: (01202) 573692 W: www.vtplc.com/land VT Nuclear Services 1100 Daresbury Park, Daresbury, Warrington, Cheshire WA4 4GB T: (01928) 705000 F: (0870) 577631 VT Communications Blue Fin Building 110 Southwark Street London SE1 0TA T: (020) 7969 0000 F: (020) 7396 6221 E: vtcommunications@vtplc.com W: www.vtplc.com/communications

VT Services, Inc. 5755 Dupree Drive, NW, Suite 220 Atlanta, Georgia 30327-4352 USA Telephone: + 1 (770) 952 1479 Fax: + 1 (770) 859 0410 E: info@vtgriffin.com W: www.vtgriffin.com VT Education and Skills Sutton House, Weyside Park Catteshall Lane, Godalming Surrey GU7 1XJ T: (01483) 413200 F: (01483) 413201 E: vtes@vtplc.com W: www.vtplc.com/educationandskills VT Training Sutton House, Weyside Park Catteshall Lane, Godalming Surrey GU7 1XJ T: (01483) 413200 F: (01483) 413201 E: vtes@vtplc.com W: www.vtplc.com/plustraining VT Four S Limited Head office & Development centre Bay Tree Avenue, Kingston Road Leatherhead KT22 4UE T: (01372) 834444 F: (01372) 834000 E: info@fours.co.uk W: www.fours.co.uk VT Shipbuilding Fleet Way Portsmouth PO1 3AQ T: (023) 9285 7200 F: (023) 9285 7400 E:shipsales@vtplc.com W: www.vtplc.com/shipbuilding VT Halmatic Portchester Shipyard, Hamilton Road Portsmouth PO6 4QB T: (023) 9253 9600 F: (023) 9253 9601 E: halmatic@vtplc.com W: www.vtplc.com/halmatic

VT Hellas Stratigou Tombra 3 153 42 Aghia Paraskevi Athens Greece T: + 30 210 55 35 127 F: + 30 210 55 35 177 VT Naval Support White House Bld 2/103 Portsmouth Naval Base Fleet Way, Portsmouth PO1 3AQ T: (023) 9285 7200 F: (023) 9285 7400 VT Maritime Dynamics 21001 Great Mills Road, Lexington Park Maryland 20653 USA T: + 1 (301) 863 5499 F: + 1 (301) 863 0254 E: sales@maritimedynamics.com W: www.maritimedynamics.com VT Naiad Marine Head Office 50 Parrott Drive, Shelton Connecticut 06484 USA T: 00 1 (203) 929 6355 F: 00 1 (203) 929 3594 E: sales@naiad.com W: www.naiad.com Fleet Support Limited Postal Point 100, Building 2/166 HM Naval Base, Portsmouth PO1 3NJ T: (023) 9272 2669 F: (023) 9272 0723 E: enquiries@fleet-support.co.uk W: www.fleet-support.co.uk Flagship Training Limited Shore House, Compass Road North Harbour, Portsmouth, PO6 4PR T: (023) 9233 9000 F: (023) 9233 9001 E: marketing@flagshiptraining.co.uk W: www.flagshiptraining.co.uk

Statutory Information

VT Group plc VT House Grange Drive, Hedge End Southampton SO30 2DQ T: (023) 8083 9001 F: (023) 8083 9002 E: vtgroup@vtplc.com W: www.vtplc.com

122

VT Group Plc Annual Report & Accounts 2008

Shareholder information Dividend reinvestment plan (DRIP) You can elect to receive future dividends as shares rather than cash by participating in the Dividend Reinvestment Plan.

For further information please contact Capita Registrars.

Dividends direct to your bank account Having your dividend paid directly to your bank or building society account gives the following benefits: • Avoid the risk of cheques being lost in the post • No need to visit your bank to pay the cheque in • Dividend credited to your account on the day it is paid Your tax voucher will be sent to your registered address as usual.

To set up a dividend mandate or change your existing mandate details, please contact Capita Registrars. If you currently receive a dividend cheque, a mandate form will be included with your next cheque.

Unsolicited mail The Company is currently obliged by law to make its share register publicly available and as a consequence some shareholders may receive unsolicited mail. If you wish to limit the amount of unsolicited mail please contact: The Mailing Preference Service DMA House 70 Margaret Street London W1W 8SS www.mpsonline.org.uk Tel 020 7291 3310 The Mailing Preference Service is an independent organisation offering a free service to the public.

Contact us We welcome your comments.

Email us at shareholders@vtplc.com Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel 0870 162 3100

VT Group Plc Annual Report & Accounts 2008

Notes

123

124

Notes

VT Group Plc Annual Report & Accounts 2008

VT Group Plc Annual Report & Accounts 2008

Trusted to deliver From the BBC World Service to the Metropolitan Police, from the Royal Navy to British Airways and from the US Government to Local Education Authorities, our clients trust VT Group to keep their business critical services and assets working.

Contents

Overview of the year

01

How we run the Group

37

Results summary

01

Board of Directors

38

Chairman’s statement

02

Corporate responsibility

40

Key risks and uncertainties

47

Corporate governance

49

Explaining the Group

05

The nature of our business

06

VT Group

14

Statutory information

53

What we do

14

Directors’ report

54

Outlook

16

Remuneration report

56

Financial performance

17

Statement of Directors’ responsibilities

64

Our business divisions

21

Auditor’s report

65

VT Communications

21

Financial statements

66

VT Education and Skills

24

VT Services Inc

27

VT Support Services

30

VT Shipbuilding

34

Designed and produced by Barrett Howe, www.barretthowe.com

Front cover: Aaron McNish, Cross Trade Technician at Royal Air Force 202 Squadron E Flight, Leconfield, which provides search and rescue services throughout North East England.

This report is printed on Era Silk which contains 50% post-consumer waste. The FSC logo identifies products which contain wood from well managed forests certified in accordance with the rules of the Forest Stewardship Council. Printed using vegetable based inks and a bio-degradable laminate. Our printer is registered to environmental management system ISO 14001 and is a CarbonNeutral® company.

Annual report and accounts 2008 VT Group Plc Annual Report & Accounts 2008

VT Group plc VT House Grange Drive, Hedge End Southampton SO30 2DQ T: +44 (0)23 8083 9001 F: +44 (0)23 8083 9002 E: vtgroup@vtplc.com w: www.vtplc.com

www.vtplc.com

www.vtplc.com