Factors Affecting Results of Operations

Group Turnover

We are the leading provider of classified directory advertising and associated products and services in the United Kingdom and the leading independent provider of classified directory advertising in the United States. We currently derive our turnover principally

from sales of advertisements in our printed directories, Yellow Pages, Yellow Book East, Yellow Book West (from 16 April 2002), NDC (included in Yellow Book West from 31 December 2002) and Business Pages. We also generate turnover from online-related activities such as online advertising, website design and domain-name sales and from Yellow Pages 118 24 7. Our sales and publishing cycle requires us to agree to an advertising sale often months in advance of the actual delivery of the directories and recognition of the corresponding revenues. Therefore, we have better visibility of our expected near-term financial results than might otherwise be the case.

We recognise turnover from advertisement sales for a printed directory when we have completed delivery of that directory, in accordance with UK GAAP. Because the number and type of directories are not evenly distributed throughout the year, turnover and profits do not arise evenly over the year. Therefore, certain periods have higher-than-average levels of turnover and profits, while others have lower-than-average levels. For example, during our 2004 financial year, the four financial quarters accounted for 22%, 26%, 23% and 29% of Group turnover, respectively. Different directories may grow at different rates, such that growth may not be evenly distributed between quarters. The re-phasing or timing of distribution into an earlier or later period also affects the quarterly distribution of turnover. By the same token, our sales and publishing cycle requires us to agree to an advertising sale often months in advance of the actual delivery of the directories and recognition of the corresponding revenues, and hence provides better visibility of our expected near-term financial results than might otherwise be the case. We recognise turnover from non-printed directories and other activities over the life of the contract from the point at which the service is first provided or, in the case of a single delivery, at the time of delivery.

Growth in our turnover is driven primarily by the volume of advertisement sales to new and existing advertisers and by new product offerings. In the United States, we have also experienced growth in turnover as a result of acquisitions of other independent directory publishers and new printed directory launches.

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Our ability to increase turnover in the United Kingdom during most of the period under review was limited by the undertakings given to the UK Secretary of State for Trade and Industry in 2001, under which, from January 2002 we were required to limit the annual growth in advertising rates in our UK printed Yellow Pages directories to RPI less 6%, for an expected period of four years. This has restricted our ability to raise prices on advertisements within our printed Yellow Pages directories in the United Kingdom.

When RPI is less than 6%, this new price cap requires us to reduce the price in absolute terms that we can charge our advertisers for placing advertisements in our UK printed consumer classified directories. Relative to inflation, our prices will decrease each year that the price cap remains in effect. For example, if inflation as measured by RPI were 2% at the time prices are set for given directories in each of the four years commencing January 2002, then advertisement prices would be reduced in absolute terms by 4% each year, and the prices in the fourth year would be approximately 15% lower than they were when the new price cap took effect. During our 2004 financial year, the average price of advertising in our Yellow Pages directories decreased by 4.8%, as compared to a decrease of 4.4% during our 2003 financial year. We are not subject to any regulatory price constraints in the United States.

In the 2004 financial year, approximately 49% of our Group turnover was affected by a price cap, as compared to 50% during the 2003 financial year and 60% during the 2002 financial year. In the 2004 financial year, 53% of our turnover came from UK operations compared with 55% in the 2003 financial year.

Cost of Sales

Our cost of sales consists principally of costs associated with the publication of directories, including advertising sales, paper, printing and pre-press production, as well as bad debt expense. The principal components of advertising sales costs, which represent a significant portion of our cost of sales, are employee costs of the sales force, including salaries, benefits and commissions, and associated direct costs. We recognise the cost of sales for each directory on completion of delivery of that directory.

We anticipate that cost of sales will increase as we expand and introduce new directories and other products. Our expansion into new markets in the United States also increases our employee costs. In addition to requiring a larger sales force, the commissions we pay to our sales force tend to be higher in new markets, as our commission structure pays higher remuneration for new advertisers.

Paper is our largest raw material and one of our largest variable-cost items. In recent years paper prices have fluctuated significantly. In the 2004 financial year, paper costs were equivalent to 6.7% of Group turnover and represented 11.5% of our total cost of sales in the United Kingdom and 16.5% of our total cost of sales in the United States.

Cost of sales also includes bad debt expense. Our UK business currently has low bad debt expense relative to our US business due to our established market position in the United Kingdom. Our Yellow Book directories business operates in a number of markets in which we are a relatively new entrant, and as a result a higher proportion of our advertisers are new advertisers, a category in which historically we have intentionally allowed a higher rate of bad debts. We believe that the benefits of our growth strategy in the United States outweigh any risks associated with the credit profile of our advertisers, and over time, as our newer directories become more established in their respective markets, we expect that bad debt expense as a percentage of turnover in the United States will decrease. Nevertheless, because we expect to continue our growth strategy in the future, we expect our bad debt expense as a percentage of turnover in the United States to remain higher than in the United Kingdom.

Distribution Costs and Administrative Costs

Our distribution costs consist principally of amounts payable to third-party delivery companies with which we contract for the delivery of our printed directories. Our distribution costs related to a directory are recognised when the directory is delivered.

Our administrative costs consist principally of amortisation and depreciation, advertising, promotion and marketing expenses, administrative staff expenses, information technology costs and staff training. Advertising, promotion and marketing expenses represent our most significant discretionary expenses.

A substantial portion of our advertising, promotion and marketing expenses and the costs relating to the development of our online services relate to promotional and brand-building expenditures, which are largely discretionary and which we can reduce if we determine at any stage that the business environment does not justify the related expenditure.

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Gross Profit Margins

The change of the geographic mix of our business, as well as the strategy we have pursued of rapid growth and geographic expansion of our business in the United States, has had an important effect on our financial results during the periods under review, including our profit margins. These factors are expected to continue affecting our financial results in the future.

Our printed directories business in the United Kingdom, which we view as more developed and which covers substantially all of the United Kingdom, has historically had higher gross profit margins than those in the United States.

In the United States, the different market dynamics and the younger portfolio result in lower gross profit margin. In the 2004 financial year, for example, our gross profit margin for our UK printed directories was 62.1%, compared to 43.4% for our US printed directories. Our overall gross profit margin is therefore affected and will continue to be affected to the extent our US operations continue to form an increasing portion of the geographic mix of our business.

We intend to increase our focus on enhancing our operating efficiencies and organic growth in the United States, and we believe there will be opportunities to improve our US gross profit margins as our US operations become more established.

Group turnover increased by £72.9 million, or 6.5%, from £1,114.0 million in the 2003 financial year to £1,186.9 million in the 2004 financial year, reflecting increased turnover during the period from each business segment, particularly US printed directories.

UK turnover

UK printed directories increased by 3.5%, or £20.2 million during the 2004 financial year. The growth was primarily the result of an increase in the number of unique advertisers from approximately 451,000 to approximately 480,000 as a result of the continued success of our first-year advertiser discount programmes and our ability to retain 77% of existing customers. We attracted 116,300 new advertisers, achieving our target of 100,000 new advertisers for the fourth successive year.

Turnover per unique advertiser in decreased for all UK printed directories by 2.8% to £1,237 from £1,272, after the impact of the 4.8% price reduction, on our Yellow Pages directories and the dampening effect that the increased number of customers had on yield.

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Turnover from our online directory service increased by £5.5 million, or 27.1%, from £20.3 million to £25.8 million. This increase was offset by a reduction in turnover from our other products and services, primarily from discontinued products resulting from the sale of our data-service business, Yell Data, in June 2003 and the ending of our contract with BT to sell advertising in their phone books in March 2003.

US turnover

Turnover from US printed directories increased by £52.9 million, or 10.6%, from £499.1 million in the 2003 financial year to £552.0 million for the 2004 financial year. Turnover was negatively affected by £53.0 million from a weakening US dollar. On a constant US dollar basis, US turnover grew by £105.9 million, or 21.2%. The average exchange rates were approximately $1.69 to £1.00 in the year ended 31 March 2004 and $1.55 to £1.00 in the prior year.

The Group had 386,000 unique advertisers in the United States in the year ended 31 March 2004 compared to 363,000 in the prior year. Average turnover per unique advertiser grew 14% from $2,135 to $2,434.

Same-market growth of 9.3% has grown from 6.1%. Directories from acquisitions that published for the first time in the most recent year are not included in the same market growth results. The former McLeod directories are now performing in line with Yellow Book same-market growth.

Same-market growth is derived by comparing the turnover from directories (including rescoped directories) that we published in a period with turnover from these same directories or predecessor directories covering substantially the same geographic area published in the previous publishing cycle, which is not necessarily the same period in the prior financial year. Rescoped directories are directories where we redefined the geographic boundaries covered by one or more directories, which could include replacing one directory with multiple directories or combining multiple directories into fewer directories.

Remaining growth was due to ten new directory launches (contributing 2.2% to the growth), four directories publishing for the first time after acquisition and the inclusion of a full year of results of McLeod and NDC (contributing 9.4% to the growth).

Total cost of sales in 2004 increased by £43.0 million, or 8.4%, compared to the 2003 financial year.

The £20.1 million, or 9.7%, increase in cost of sales for UK printed directories from £207.9 million in the 2003 financial year to £228.0 million in the 2004 financial year reflected higher advertisement volumes. Cost of sales for Yellow Book directories as a percentage of related turnover remained flat at 56.6% in the 2004 financial year, as compared to 57.5% in the 2003 financial year.

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Cost of sales for other UK products and services decreased by £2.6 million, or 17.3%, from £15.0 million in the 2003 financial year to £12.4 million in the 2004 financial year, reflecting the products discontinued in the year.

Our consolidated bad debt expense was £71.0 million, or 6.0%, of Group turnover in the 2004 financial year, as compared with £67.6 million, or 6.1%, of Group turnover in the 2003 financial year. The charge for UK bad debts was 4.5% of UK printed directories and other products and services turnover for both the 2003 and 2004 financial years. The US bad debt expense was 7.7% of US printed directories turnover in the 2004 financial year as compared to 8.1% in the 2003 financial year, reflecting the more developed US profile and the relatively low level of launches in 2004.

The decrease in gross profit as a percentage of Group turnover from 54.2% in the 2003 financial year to 53.4% in the 2004 financial year principally reflected the changing geographic mix of our operations resulting from the increased contribution of our US business.

Distribution Costs and Administrative Costs

Distribution costs decreased by £1.5 million, or 4.2%, from £36.0 million in the 2003 financial year (3.2% of Group turnover) to £34.5 million in the 2004 financial year ( 2.9% of Group turnover). Excluding the effects of the weakening dollar, distribution costs would have increased by £0.4 million.

Administrative costs increased by £64.4 million, or 16.7%, from £384.7 million in the 2003 financial year to £449.1 million in the 2004 financial year. The increase was largely due to exceptional costs arising as a result of our parent company’s initial public offering in July 2003:

These increases were partially offset by the absence of £15.0 million in costs incurred for the withdrawn initial public offering of our parent company in July 2002 and the effect of the weakening US dollar.

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EBITDA from the UK operations decreased 5.8% to £199.2 million after charging £33.9 million in connection with the initial public offering of our parent company in July 2003 and £14.7 million for the postponed initial public offering in July 2002. Excluding exceptional costs, EBITDA from the UK operations increased by £6.9 million, or 3.1%. Growth in EBITDA before exceptional costs primarily reflects the increased profitability of Yell.com. Yell.com reported EBITDA of £5.3 million (operating profit of £3.6 million adding back depreciation of £1.7 million) for the 2004 financial year as compared to £1.1 million (operating loss of £1.3 million adding back depreciation of £2.4 million) in the prior year.

EBITDA from Yellow Book for the 2004 financial year decreased by £22.0 million compared to the 2003 financial year after including exceptional costs of £56.2 million in 2004 relating to our parent company’s initial public offering, and costs in 2003 of £4.0 million relating to the postponed initial public offering and a one-off restructuring cost. Excluding the exceptional items, EBITDA from Yellow Book increased by £30.2 million, or 31.2%, compared to the 2003 financial year. The EBITDA margin for Yellow Book

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was 12.8% in the 2004 financial year; excluding exceptional items, the EBITDA margin increased to 23.0%, as we focused on increasing the benefit and yield from our directory investments. We increased the profitability of our directories by leveraging off our existing operations and administrative cost base to yield additional turnover from our directories without a corresponding increase in costs.

Group EBITDA for the financial year ended 31 March 2004 decreased by £34.3, or 11.3%, compared to 2003. Excluding the exceptional and other one-off items in 2004 and 2003, Group EBITDA would have increased by £37.1 million, or 11.5%. If we also exclude the effect of exchange rate movements of £11.4 million, Group EBITDA would have increased by £48.5 million, or 15.0%.

Net Interest Payable

Net interest expense was £194.5 million, comprising both cash interest and non-cash interest, in the 2004 financial year, compared to £236.6 million in the 2003 financial year. Net interest before exceptional items was £136.1 million in the 2004 financial year, compared to £236.6 million in 2003. The exceptional items of £58.4 million comprised £36.4 million accelerated amortisation of deferred financing costs in connection with the repayment of the senior credit facilities on 15 July 2003 and senior notes on 18 August 2003; £19.7 million early redemption of 35% of our senior notes on 18 August 2003, and £2.3 million arrangement fee on the undrawn revolving credit facility. Net interest expense before exceptional items comprised £118.9 million of net interest paid or to be paid within a six-month period, £12.0 million of interest rolled-up into our long-term debt and £5.2 million of amortised financing costs.

Taxation

Taxation before exceptional items was a charge of £44.2 million for the 2004 financial year and a credit of £10.3 million in the 2003 financial year. Taxation is determined on taxable profits that do not reflect certain amortisation charges. Tax credits in the amount of £37.2 million for the 2004 financial year and £2.3 million in the 2003 financial year were recognised as a benefit arising from exceptional items. Our future taxation charge will depend on our taxable income in the United Kingdom and the United States and our ability to continue using our net operating losses to offset our future taxable income in the United States.

Profit (Loss) Before and After Tax

After charging the exceptional items, the loss on ordinary activities before tax was £44.1 million in the 2004 financial year as compared to a loss of £53.2 million in the 2003 financial year. Excluding the effect of the exceptional IPO costs, the profit before taxation and profit after taxation for the 2004 financial year would have been £104.4 million and £60.2 million, respectively.

Loss before taxation for the year ended 31 March 2003 was £53.2 million. Excluding the exceptional costs of £15.0 million and the £3.7 million charge for non-recurring restructuring costs as part of the integration of the former McLeod organisation in the United States, loss before taxation for the year ended 31 March 2003 would have been £34.5 million. The effect on the loss after tax of excluding the restructuring cost is £2.4 million, bringing the loss after tax and before exceptional costs for the year ended 31 March 2003 to £25.5 million.

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Group turnover increased by £248.6 million, or 28.7%, from £865.4 million in the 2002 financial year to £1,114.0 million in the 2003 financial year, reflecting increased turnover during the period from each business segment, particularly US printed directories.

UK printed directories

Yellow Pages turnover increased by 6.6%, or £34.9 million, during the 2003 financial year.

The growth was primarily the result of:

In addition, we introduced five new directories through rescoping or redefining the geographic coverage of some of our directories which we believe will allow us to attract new advertisers and additional advertising by aligning the geographic coverage of our directories more closely to the target market areas of our advertisers.

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A lower level of demand for business-to-business advertisements during the year resulted in turnover from our Business Pages directories decreasing by £1.7 million, or 11.6%, from £14.7 million in the 2002 financial year to £13.0 million in the 2003 financial year. We are seeking to address the level of demand by introducing various product and marketing initiatives.

US printed directories

Turnover from US printed directories increased by £215.0 million, or 75.7%, from £284.1 million in the 2002 financial year to £499.1 million for the 2003 financial year, reflecting the inclusion of McLeod and other acquisitions for the first time and a strong performance by Yellow Book East.

The Group had 363,000 unique advertisers in the United States in the year ended 31 March 2003 compared to 166,000 in the prior year, when the Group owned only the Yellow Book East operations.

Yellow Book East .    Yellow Book East grew turnover by 5.1% as reported in pounds sterling from £284.1 million to £298.7 million. The results were affected by a weakening US dollar, which had a negative impact of £26.1 million. On a constant US dollar basis, Yellow Book East turnover grew by £40.7 million ($57.8 million), or 14.3%, comprising:

Yellow Book West .    Turnover from the acquired McLeod and NDC operations was £200.4 million for the period from their acquisition on 16 April 2002 and 31 December 2002, respectively, through 31 March 2003. Same-market growth during this period for the McLeod and NDC operations, which was due primarily to volume and yield improvement, was 2.8% and 8.7%, respectively. Yellow Book West’s contribution to Yell’s turnover during the period was still largely the result of sales made by the McLeod and NDC sales organisations prior to, or shortly after, their acquisition by Yell. The results therefore do not reflect the benefit of integration with the Yellow Book East sales organisation and the transfer of best practises, which we expect to come through continually during the 2004 financial year.

Other products and services .    Turnover from other products and services increased by £0.4 million, or 1.0%, from £40.8 million in the 2002 financial year to £41.2 million in the 2003 financial year. This was primarily due to growth in our online directory service, which grew from £14.9 million to £20.3 million during the period. Growth in Yell.com more than offset a decline in turnover from Talking Pages (now replaced by Yellow Pages 118 24 7) and Yell Data (which has been sold).

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Total cost of sales for the 2003 financial year increased by £122.9 million, or 31.8%, as compared to the 2002 financial year. The acquisition of McLeod and other acquisitions account for £110.7 million of the increase.

The £9.7 million, or 4.9%, increase in cost of sales for UK printed directories from £198.2 million in the 2002 financial year to £207.9 million in the 2003 financial year reflected higher advertisement volumes and increases in printing and production costs associated with the introduction of colour into our Yellow Pages directories. Cost of sales as a percentage of turnover was 36.2% in the 2003 financial year, as compared to 36.7% in the 2002 financial year.

The £4.6 million, or 2.7%, increase in cost of sales for Yellow Book East reflected higher selling costs associated with revenue growth and a reclassification of certain administrative costs to cost of sales for consistency across the Yell Group, offset by a decrease due to the weakening US dollar. On a constant US dollar basis, cost of sales increased by 11.8%. Cost of sales for Yellow Book East directories as a percentage of related turnover was 59.0% in the 2003 financial year, as compared to 60.4% in the 2002 financial year.

We realised synergies (the majority of which are reflected in Yellow Book East’s results) arising from the McLeod and NDC acquisitions, particularly in paper and printing and binding costs, where the directors believe that we have achieved estimated savings to 31 March 2003 of approximately £7 million ($11 million).

Cost of sales for other products and services decreased by £2.1 million, or 12.3%, from £17.1 million in the 2002 financial year to £15.0 million in the 2003 financial year.

Our consolidated bad debt expense was £67.6 million, or 6.1%, of Group turnover in the 2003 financial year, as compared with £53.2 million, or 6.1%, of Group turnover in the 2002 financial year. The £14.4 million increase is mainly due to the acquisition of McLeod. The charge for UK bad debts was 4.5% of UK printed directories and other products and services turnover in the 2003 financial year compared to a 4.6% charge in the 2002 financial year. The US bad debt expense was 8.1% of US printed directories turnover in the 2003 financial year as compared to 9.3% in the 2002 financial year. Historically, the US bad debt expense as a percentage of turnover has been higher than that in the United Kingdom due to different market dynamics.

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The decrease in gross profit as a percentage of Group turnover from 55.3% in the 2002 financial year to 54.2% in the 2003 financial year principally reflected the changing geographic mix of our operations resulting from the increased contribution of our US business.

Distribution Costs and Administrative Expenses

Distribution costs increased by £12.0 million, or 50.0%, from £24.0 million in the 2002 financial year (2.8% of Group turnover) to £36.0 million in the 2003 financial year (3.2% of Group turnover). The acquisition of McLeod and other acquisitions account for £11.9 million of this increase.

Administrative expenses increased by £81.9 million, or 27.0%, from £302.8 million in the 2002 financial year to £384.7 million in the 2003 financial year.

The increase was largely due to:

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The increase was partially offset by lower administrative expenses in Yellow Book East.

Group Operating Profit and EBITDA

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EBITDA from the UK operations increased 0.5% to £211.5 million after charging £14.7 million of costs for the postponed initial public offering. EBITDA growth from the UK operations would have been 7.5% without these costs. This growth reflects growth in earnings of our directories and the move into profitability of Yell.com, which were offset in part by a decline in Talking Pages and Yell Data. Yell.com reported EBITDA of £1.1 million (operating loss of £1.3 million adding back depreciation of £2.4 million) for the 2003 financial year as compared to losses of £10.1 million (operating loss of £12.3 million adding back depreciation of £2.2 million), £22.4 million (operating loss of £23.7 million adding back depreciation of £1.3 million) and £9.7 million (operating loss of £10.1 million adding back depreciation of £0.4 million) for the 2002, 2001 and 2000 financial years, respectively.

EBITDA from Yellow Book East for the 2003 financial year increased by £32.1 million compared to the 2002 financial year. The EBITDA margin for Yellow Book East increased to 21.5% from 11.3%, as we focused on increasing the benefit and yield from our directory investments. We increased the profitability of our directories by leveraging off our existing operations and administrative cost base to yield additional turnover from our directories without a corresponding increase in costs. The increases in EBITDA and related margins also reflected the absence of the costs of prototype launches and of one-off costs of running parallel pre-press activities during migration to a new supplier, which were incurred in the previous year.

EBITDA from the Yellow Book West operations was £28.6 million since the acquisition date, 16 April 2002, and was after charging £4.0 million of reorganisation costs primarily arising from the integration of Yellow Book West and Yellow Book East.

The acquisition of McLeod and other directories businesses were the most important factors leading to growth in EBITDA. Excluding the effect of acquisitions, in the 2003 financial year, our EBITDA increased by £33.2 million, or 13.7%. Excluding one-off items, comprising the terminated US management incentive scheme (£3.0 million) in the 2002 financial year, and the cost incurred in connection with the decision not to proceed with the initial public offering (£15.0 million) in July 2002 and the costs of closing a production site (£3.7 million), in the 2003 financial year our EBITDA increased by £77.5 million, or 31.6%.