Interserve Regulatory News (IRV)

9 Mar 2011 07:00

Interserve ANNUAL RESULTS ANNOUNCEMENT YEAR ENDED 31 DECEMBER 2010 Interserve, the international support services and construction group, reportsa strong second-half performance within its annual results for the year ended31 December 2010, with significant opportunities for growth in a number ofmarkets both in the UK and internationally. 2010 2009 Revenue £1,872.0m £1,906.8m Headline pre-tax profit £69.6m £78.3m Profit before tax £64.1m £89.2m Headline earnings per share 42.8p 49.7p Basic earnings per share 39.5p 54.9p Net debt £53.8m £37.3m Full-year dividend 18.0p 17.5pStrong performance

* As anticipated a strong second half, with a 32 per cent improvement on

first half headline pre-tax profit

* Full-year operating cash conversion of 107 per cent

* Full-year dividend up 3 per cent to 18.0 pence per share

Strong financial position

* Significant capacity to drive growth, with £250 million of committed debt

facilities renewed until late 2013

* Net debt of £54 million, after pension deficit funding contributions of £22

million and acquisitions of £27 million

* Marked reduction in pension deficit (net of taxation) to £38 million (2009:

£69 million)

Confidence in Group's prospects

* 2011: expect stable trading conditions

* £1.6 billion of workload for 2011, within a substantial total future

workload of £5.3 billion

* On track with progression towards c. 5 per cent target margin in Support

Services

* Medium term capability to double earnings per share again over five years

Chief Executive Adrian Ringrose commented, "Interserve traded in line with expectations during challenging conditions in 2010, with an excellent performance from Project Services and the initial benefits of our margin enhancement programme in Support Services being offset by cyclical weakness in Equipment Services.

We expect stable trading conditions overall in 2011. Moreover we believe that we have the capability to double earnings per share over five years, given:

* our proven strategy, which has led to a doubling of earnings per share over

the past five years;

* our attractive mix of end markets; and

* our strong financial position, with significant capacity for growth.

This confidence is reflected in the Board's recommendation of the continuation of our progressive dividend policy."

- Ends -

For further information please contact:

Adrian Ringrose, Chief Executive 0118 932 0123 Tim Haywood, Group Finance Director 0118 932 0123 Matt Jones, Head of Investor Relations 0118 960 2280

Neil Bennett / Tom Eckersley 020 7379 5151 Maitland About InterserveInterserve's vision is to be The Trusted Partner of all our stakeholders. Weare one of the world's foremost support services and construction companies,operating in the public and private sectors in the UK and internationally. Weoffer advice, design, construction, equipment and facilities managementservices for society's infrastructure. We are based in the UK, have revenue of£1.9 billion and a workforce of 50,000 people worldwide.

Note

This news release, the Chairman's statement and the Director's report include anumber of non-statutory measures, to reflect the impact of non-trading andnon-recurring items. See note 15 to the consolidated financial statements for areconciliation of these measures to their statutory equivalents.

Directors' report - Chairman's statement

The group had a strong second-half performance in 2010, delivering results forthe year in line with our expectations and, notably, demonstrating excellentcash generation after funding increased pension deficit payments and furtherinternational expansion. While the impact of the global recession hasinterrupted the Group's growth in earnings, the relative stability of Groupprofits over this period and the strength of our balance sheet are a testamentto the robustness of our business, our geographic mix and our strong customerrelationships, as well as the actions taken to manage costs and cash flow.These should provide a good springboard to resume growth as the global economicenvironment improves.Both Project Services and Support Services reported improved results, with theformer benefiting from excellent execution of its significant contractportfolio and the latter responding well to internal actions to improvecontract profitability in our outsourcing operations, the benefits of whichwill continue into 2011. However Group headline pre-tax profit was lower thanthat achieved in 2009 as these improvements were offset by a downturn in ourEquipment Services division which, as anticipated, faced cyclical weakness inmost of its markets.

Our results are summarised below:

2010 2009 Revenue £1,872.0m £1,906.8m Headline pre-tax profit £69.6m £78.3m Profit before tax £64.1m £89.2m Headline earnings per share 42.8p 49.7p Basic earnings per share 39.5p 54.9p Net debt £53.8m £37.3m Full year dividend 18.0p 17.5pPeopleOn behalf of the Board I would like to thank all of our people for theirefforts and contribution to Interserve's achievements during the last 12months. 2010 has been a difficult year for many people within the Group giventhe restructuring undertaken in response to economic conditions. Against thisbackdrop the Board is confident that, with our wealth of talented, dedicatedpeople, we will continue to navigate our way through these uncertain economicconditions and realise our potential for growth and development.

Board

As previously announced, Tim Haywood joined the Board on 30 November 2010 inorder to take up the position of Group Finance Director, succeeding Tim Joneswho left in October 2010. Tim Haywood joined from St Modwen Properties, wherehe had held the position of Finance Director since 2003.On 1 January 2011 we welcomed three additional new members to the Board. KeithLudeman, who has been Chief Executive of Go-Ahead Group Plc since 2006, joinedas a Non-executive director. David Paterson, managing director of ProjectServices since 2005, and Dougie Sutherland, managing director of PFIInvestments since 2006, were also appointed as new Executive directors. Thevaluable range of experience and insights that these new members bring addsfurther strength to the Board.Looking forward I would also like to take this opportunity to pay tribute toour long-serving Senior Independent Director ("SID"), Patrick Balfour, whoplans to retire from the Board following this year's Annual General Meeting. Weintend that he will be succeeded as SID by David Trapnell, with David Thorpethen taking over as Chairman of the Remuneration Committee.

Dividend

On the basis of our confidence in the medium-term prospects for the Group andour strong cash generation, the directors are recommending an increased finaldividend of 12.4p (2009: 12.0p), bringing the total dividend for the year to18.0p (2009: 17.5p), an increase of 2.9 per cent and a continuation of ourprogressive dividend policy. Subject to shareholder approval at the AnnualGeneral Meeting, the final dividend will be paid on 2 June 2011 to shareholderson the register at the close of business on 15 April 2011.

Possible offer for Mouchel Group Plc ("Mouchel")

On 25 February 2011 we announced that we had made an indicative proposal toacquire Mouchel and had entered into a co-operation agreement as preferredpossible offeror. We believe that the proposed transaction has an attractivestrategic rationale, creating an enlarged group that is a fully integratedmarket leader in consultancy and support services and combining thecomplementary range of services of the two companies. The making of an offerhowever remains subject, amongst other things, to the completion ofsatisfactory due diligence, which is progressing.We will proceed with an offer if we conclude that it is financially attractiveto both sets of shareholders. In determining whether the transaction isattractive to Interserve we will be seeking to ensure that leverage for theenlarged group is maintained at acceptable levels and that the transaction isaccretive to earnings within a reasonable timeframe, having taken account ofsynergies arising from the integration. Our financial discipline will also makeit important to retain the capability to pay an attractive stream of dividendpayments to shareholders, as well as making an attractive return on investmentfrom the acquisition. A further announcement will be made when appropriate.There can be no certainty that any offer will be made or as to the terms of

anyoffer which might be made.ProspectsWe anticipate that overall trading conditions in 2011 will be stable comparedwith 2010 and will show similar seasonality. We expect our margin enhancementprogramme in Support Services to continue to deliver improving performancewhich, in combination with the anticipated resumption of growth in EquipmentServices, should mitigate our expectations of tougher trading conditions forProject Services following its strong performance in 2010.Beyond 2011 our principal markets offer good prospects for sustainedmedium-term growth at attractive margins. We believe that our strategy ofconcentrating on long-term client relationships in our core sectors ofexpertise is a key strength, given the visibility of future workload it brings.We are also well-placed to benefit from the emerging trend for increasinglyintegrated value-added solutions, as demonstrated by the successful developmentof our partnership with HSBC. Our strategy includes the progressive extensionof our infrastructure integration skills and capabilities across high-growthinternational markets, including the Middle East.In the UK we look forward with confidence to the anticipated structural growthand development of outsourcing over the coming years, particularly in thepublic sector where the benefits of outsourcing as a means of reducing cost andimproving service delivery will be essential in enabling the UK government tomeet its expenditure objectives. Whilst the UK construction market will likelyexperience a softening in the near term, the medium-term drivers remainpositive as an increasing and ageing population puts additional pressure on thecountry's infrastructure.Our construction businesses in the Middle East continued to trade well in 2010,benefiting from the geographic and sectoral diversity of our local partnershipsand their close links within the region. Whilst competition is intensifying webelieve medium-term growth drivers for the markets in which we operate remainattractive, subject to any constraints arising from wider geopoliticaluncertainties.We will continue to target additional new markets that exhibit attractivegrowth characteristics for our businesses and which have sound economic bases.Our recent entries into the USA and the fast-growing Indian constructionindustry represent the initial steps into exciting new market opportunities forthe Group.Overall, we performed well in 2010, in line with our expectations in difficultmarket conditions. With a substantial future workload, new opportunities in UKoutsourcing and our growing international footprint we are confident that wehave a strong platform and capability to deliver medium-term growth atattractive margins.Lord BlackwellChairman9 March 2011

Directors' report - Business review

Principal activities

Interserve is one of the world's foremost support services and construction companies, operating in the public and private sectors in the UK and internationally. We offer advice, design, construction, equipment and facilities management services for society's infrastructure.

Strategic growth

Our vision is to be The Trusted Partner of all our stakeholders, bringingtogether all of our capabilities to create innovative solutions that supportlong-term relationships with our customers, offering rewarding careers for ourstaff and underpinning sustained value creation for shareholders.We have a proven strategy that has led to a doubling of earnings over the pastfive years, despite the challenging economic backdrop of the past two years. Webelieve that a continuation of this strategy, coupled with attractive demanddrivers in our markets and the financial strength to supplement organic growthwith acquisitions, gives us the capability to deliver another doubling ofearnings per share in the coming five years. Strategies Drivers Outcomes Build strong core Attractive UK demand Substantial future businesses based on environment despite workload:

long-term, value-added short-term pressures:

client relationships - Strong revenue - Structural growth in visibility afforded by a outsourcing future workload in excess of £5bn - Rising population, increasing pressure on ageing infrastructure - Drive for public sector efficiencies Expand internationally High growth international Strong earnings growth: markets: - Organic revenue growth - Extend our full range above 5% per annum over of services across medium term existing markets - Margin trends over - Enter new growth medium term: markets with attractive economic fundamentals Outsourcing c. 5% - Operate in a range of UK construction c. 2% markets to diversify and reduce risk International construction c. 7% Equipment services c. 15% Capture emerging Organic growth Strong cash conversion, opportunities for supplemented by supporting:

increasingly integrated selective, accretive

solutions acquisitions - Selective, accretive acquisitions - Progressive dividend policy - Elimination of pension deficit

An international support services and construction group capable of doubling earnings per share over five years

Directors' report - Business review continued

Operational review

Key performance indicators ("KPIs")

We use a set of clear financial and non-financial KPIs to measure criticalaspects of the Group's performance. These KPIs are aligned with (a) achievingthe Group's strategic objectives of delivering a substantial future workloadand generating strong earnings growth and cash conversion; and (b) the Group'skey behavioural goals, specifically regarding our employees and the health andsafety of everyone working both directly and indirectly for Interserve. Thelatter category is also considered within the Principal Risks and Uncertaintiessection of the Directors' report.KPI Unit Target 2010 2009 2008 2007 2006 Workload for £billion Visibility over 1.6 1.7 1.6 1.5 1.5

next year 70% of next 12 months revenue (consensus) Headline Pence Double headline 42.8 49.7 46.7 39.9 31.7

earnings per EPS over five share ("EPS") years Operating cash % 100% over 122.1 116.9 88.6 108.7 104.8 conversion (1), medium term

3-year rolling average

Annualised staff % Below 10 per 8.6 5.6 8.6 9.9 7.9

turnover (2) cent Annualised Per Halve the rate 379 344 429 444 556 all-employee 100,000 by 2020 from a accident workforce 2010 base incidence rate Footnotes:

1. See note 15 to the consolidated financial statements for a definition of

cash conversion.

2. Staff turnover measures the proportion of managerial, technical and

office-based staff leaving over the course of the period.

Future workload

Our future workload comprises forward orders and pipeline. Forward orders arethose for which we have secured contracts in place. Pipeline covers contractsfor which we are in bilateral negotiations and on which final terms are beingagreed. We include our share of work won by our international associates.The future workload at the end of the period stood at £5.3 billion, comprising£4.3 billion of forward orders and £1 billion relating to pipeline. Thereduction from the 2009 year-end future workload level of £6.5 billion reflectsthe following movements:

* new contract wins amounting to £1.5 billion;

* delivery of around £2 billion of work; and

* a reduction in the estimated value of pipeline in light of discussions with

UK public- sector clients, amounting to £0.7 billion, the majority of which

relates to 2013 onwards. OutlookWe are confident in the future growth prospects of the Group on the assumptionthat world markets continue to improve. We operate in attractive markets, bothin the UK and internationally. In addition, the breadth of our capabilities andexpertise, our track record of developing successful long-term, value-addedclient partnerships and our ability to create innovative solutions places us ina strong position as new opportunities emerge.In the UK our clients are increasingly under pressure to reduce budgets, toimprove efficiencies and to maximise the effectiveness of their availableresources given the prevailing economic environment. With the public sectorlooking to deliver services more efficiently we believe that there is astructural growth opportunity as government bodies both at the central andlocal level increasingly turn to the private sector to help them meet thisobjective. We are already seeing the initial indications of this trend, withour current £6 billion opportunity pipeline in Support Services being as largeas it has been for many years, boosted in particular by growing interest fromthe local authority sector. With our track record in building long-termpartnerships in the public sector, such as those with Defence Estates andCroydon Council, as well as delivering increasingly integrated outsourcingsolutions, such as our contracts with Defra and Ealing Council, we arewell-positioned to benefit from this structural growth trend. The medium-termoutlook for infrastructure development in the UK also remains attractive, withrising demand from a growing and ageing population putting additional pressureon the country's infrastructure.Challenges are clearly evident in the UK in the near-term, however,particularly for our construction business, as our customers are under pressureto curtail discretionary expenditure and the competitive environment hasintensified. Against this backdrop we have maintained a substantial UK futureworkload of some £5 billion, of which more than £1.3 billion relates to 2011,affording strong revenue visibility. We expect our UK Project Services businessto face a more difficult year in 2011, following its record, above-trend 2010performance, given the reduced capital expenditure plans across some of itscore sectors. Nevertheless it enters the year with a healthy future workload inexcess of £600 million for 2011; whilst we expect activity levels to be broadlymaintained, this will likely be at the expense of margins which are set toreturn to their historical range of around two per cent over the next fewyears.Our Support Services business is poised to build on the positive momentumcreated in the second half of 2010 and deliver further progress in 2011 andbeyond. We continue to expect the business to achieve sustainable margins thatare comparable to our peer group, and look forward to volume growth returningfrom 2012.In the Middle East, our geographical spread, the diversity of services weprovide, our local partners and our attractive mix of markets will continue topresent us with growth opportunities in the absence of any constraints arisingfrom wider geopolitical uncertainties. Whilst the pace and scale ofconstruction growth experienced in the years preceding 2009 has slowed as theglobal financial crisis permeated the Gulf, there are initial indications thatthis slowdown is now running its course. Some projects that had been repeatedlyre-tendered or held in their pre-construction phase during much of 2010 are nowgradually progressing to main contractor award phase. Aside from improvingconfidence in Dubai's debt situation and a buoyant oil price that is well inexcess of that used for government budget planning, this more encouragingoutlook has also been catalysed by the award of the 2022 FIFA World Cup toQatar, our largest market in the Gulf. Although the event is more than tenyears away, the sheer scope of investment plans - for example, the constructionof an integrated national rail network - means that many infrastructureprojects will get underway sooner rather than later. This investment by Qataris also expected to have a positive effect on infrastructure investment inneighbouring countries.Hence, on economic fundamentals, the medium-term outlook for the Gulf remainspositive, particularly in Qatar where Business Monitor International isforecasting the construction output growth rate to average in excess of nineper cent per annum over the next four years. This positive outlook has led torising levels of competition in the region, which is likely to result in areduction in margins from recent levels of ten per cent. However we stillexpect margins to remain well above levels experienced elsewhere, at aroundseven per cent, which is the level experienced prior to the Dubai constructionboom. Against this backdrop we expect Project Services' internationalassociates to face a less buoyant 2011, but with a healthy demand outlook forour key markets in the region the businesses look forward to robust medium-termgrowth.Equipment Services, after a challenging 2010, is anticipating a resumption ofgrowth in 2011, with a gradual pick-up in Abu Dhabi, continued momentum fromour Saudi Arabian operation and a contribution from our recent acquisition inthe USA being the primary growth drivers. An improved demand outlook shoulddeliver a modest increase in margin over the coming years, as part of a returnto the division's historical margin range in the mid teens.Overall, we expect 2011 performance to be stable as compared with 2010, drivenby further margin improvement in Support Services and modest growth inEquipment Services, offset by a reduced contribution from Project Services.Looking forward, with our proven strategy, attractive end markets and a strongbalance sheet from which to supplement organic growth, we remain confident thatwe have a platform and capability to deliver medium-term growth at attractivemargins.Segmental reviewInterserve's divisions create and deliver integrated and single-serviceinfrastructure solutions that offer real benefits in meeting our clients'outsourcing requirements. Our divisions are supported by a Group Servicesfunction which provides a range of central services, including the Group Board,and encompasses our financing and PFI bidding activities. Group Services' costsin 2010 were £20.0 million (2009: £17.7 million), the increase primarilyreflecting non-recurring restructuring charges and acquisition-related costs.

Support Services

Support Services provides a broad range of outsourced solutions to the publicand private sectors, predominantly in the UK, the majority of which weintegrate and deliver ourselves. The division addresses the market throughclient-facing units which allows us to tailor our delivery to the particularneeds of our target sectors while maximising efficiency and promotingoperational best practice across the division.Results summary: 2010 2009 Change Revenue £1,093.6m £1,010.2m +8.3% Contribution to Total Operating Profit £27.2m £22.1m +23.1% Margin 2.5% 2.2% +0.3% ptsSupport Services delivered an improved contribution to Total Operating Profitof £27.2 million and a margin of 2.5 per cent in the year. This full-yearresult is best understood in the context of its first half and second halfperformance, when margins were 1.7 per cent and 3.3 per cent respectively.Operating profit in the second half was more than double that achieved in thefirst half. In addition to the usual seasonality, the first half of 2010 wasfurther impacted by restructuring actions associated with several recentlymobilised large public sector outsourcing contracts, predominantly involvingthe reduction of headcount on these contracts. These initiatives, theannualised benefit of which is around £10 million, had been largely implementedby the middle of 2010 leading to improved contract profitability in the secondhalf.The division's result also benefited from the full-year impact of the HSBCcontract which began in December 2009 and is progressing well, providingopportunities for us to grow the scope of services we provide, notably insecurity, consulting and construction. We remain confident that the contractwill provide a boost to our private sector outsourcing credentials, as and whenthe economy recovers.The positive effects of our restructuring actions and the full-year impact ofcontract wins helped offset continuing difficult trading conditions across muchof the private sector during 2010, particularly in our security business, wheremany of our clients remain subdued by the current economic climate and thecompetitive environment remains tough. Nevertheless, we grew our existingbusiness with long-standing clients such as Sainsbury and BP, were successfulin winning work with customers such as William Hill and BNY Mellon, and arebidding major opportunities with other blue-chip commercial businesses.Around two-thirds of the division's revenues are derived from the public andutilities sectors in the UK, notably the defence, central and local governmentand health sectors. Over the past six months we have been engaged inconstructive discussions with the government on how we can support itscost-savings programme, and in January we signed a Memorandum of Understanding("MoU") with central government that identifies how the services we provide onour key contracts with them can be scoped differently to produce furthersavings. These savings and the MoU do not alter the division's financialexpectations for 2011 and beyond.Whilst activity levels within our core markets remained solid during 2010 theMoU, together with reductions in discretionary work across other contracts, islikely to result in modest volume pressure in 2011, as previously indicated.However the UK outsourcing market remains an attractive growth market,underpinned by long-term trends towards outsourcing as customers, in particularlocal authorities, continue to seek to reduce costs and improve operationalefficiency by purchasing bundled services whilst facing rising demand from agrowing and ageing population to improve the delivery of services. We continueto see good potential in this market given there are a limited number ofservice providers with the ability to deliver full-scope, integratedoutsourcing contracts, our proven track record in delivering change and ourability to create innovative solutions.Our confidence in these positive structural growth drivers is underpinned by ahealthy opportunity pipeline of some £6 billion, which supplements thedivision's current future workload of around £4 billion, of which £0.7 billionrelates to 2011. A significant portion of this opportunity pipeline relates tothe local authority and government agency sectors, although, given many ofthese bodies are currently focused on their immediate fiscal imperatives, we donot expect significant numbers of contracts to be procured until the secondhalf of 2011 and into 2012.We continue to develop our infrastructure and business model to enable us toremain well-positioned to benefit from the positive market outlook. OurNational Service Centre continues to progress, managing over 80,000 requests aweek for five key clients, and has capacity to manage additional contracts. Wealso have procurement initiatives underway targeting multi-million poundproductivity benefits.Whilst the UK market opportunity remains substantial, the business is alsocontinuing to develop its activity overseas, notably in the Middle East whereit can leverage existing Group relationships and infrastructure. We haverecently extended our UK-based relationships with the Ministry of Defence andHSBC into Oman and Qatar respectively, supplementing previous awards in theUAE, including one of the largest support services contracts in the country,and we remain excited about the business' future in the Gulf.

Project Services

Project Services works in close collaboration with clients in the UK andinternationally, notably in the Middle East, leading the design andconstruction process in the creation of a broad range of buildings andinfrastructure. The majority of Project Services' UK work comes from low-riskprojects with long-standing clients, and over three-quarters of this activityis in the public and utilities sectors. In the Middle East, where we have beenactive across the region for 30 years, our associate partners play a key rolein understanding the local business environment, advising on suitable clients,and providing direction and support in developing long-term, mutuallybeneficial working relationships. In an uncertain economic environment suchpartnerships have been, and will remain, of vital importance.Results summary: 2010 2009 Change Revenue (UK only) £740.0m £820.5m (9.8)% Contribution to Total Operating Profit £48.6m £40.7m +19.4% - UK £22.4m £17.6m +27.3% - International £26.2m £23.1m +13.4% Operating margin (UK) 3.0% 2.1% +0.9% pts Operating margin (International) 10.7% 9.1% +1.6%

pts

United Kingdom

The UK business performed very well in a more competitive environment, delivering profit growth of 27.3 per cent and reporting an improved, above-trend margin of 3.0 per cent. With anticipated near-term pressure on public sector capital spending the business has positioned itself well, and we are encouraged by our future workload, in particular the workload for 2011 which stands at £0.6 billion and is comparable to the prior year level.

2010 was another strong year for our health business, which delivered around £200 million of work in the period, an increase of more than 20 per cent on 2009levels. We were awarded a place as one of only six suppliers on the Departmentof Health's new framework contract, ProCure21+, and have already been appointedon projects by three NHS Trusts since the framework began in November 2010. Oursuccess on ProCure21+ means that we are now the only UK contractor working onall three major healthcare frameworks in England, Scotland and Wales and weretain a healthy future workload in this sector. Examples of our work acrossthe UK include the flagship £35 million oncology facility at Christie Hospital,Manchester, the Children's Hospital for Wales in Cardiff and a new communityhospital for NHS Greater Glasgow and Clyde.The education sector remains an important source of work for us, generatingsimilar turnover as the healthcare sector. The contracts we have secured onthree major Building Schools for the Future ("BSF") projects in Leeds, Sandwelland St Helens will ensure we maintain good activity levels throughout 2011 andinto 2012, although the outlook beyond 2012 currently appears more challenginggiven the lack of new BSF programmes being procured. The custodial sector hasbeen less buoyant for us in 2010, with activity levels down on 2009 as wecompleted the £110 million young offender institution at Belmarsh, south eastLondon. Whilst the near-term outlook for new prison builds is challenging webelieve there will be an ongoing requirement for refurbishments, extensions andbuilding modifications in this sector, an area of strength for our business,and our recent appointment as a partner on the new Ministry of Justice minorworks framework further enhances our position in this sector.In infrastructure, we continued to develop strong relationships with the waterutilities, the Highways Agency and the Environment Agency. Of particular noteis the progress made in the water sector, where we were successful in securingplaces on the AMP5 framework contracts with United Utilities and South WestWater and on a framework agreement with Northumbrian Water. We completed theThames Gateway desalination plant for Thames Water and began major workprogrammes for the same client at their Riverside wastewater treatment plant.In the roads sector we delivered over £20 million of work for the HighwaysAgency and are currently refurbishing the Royal Albert Bridge for Kensingtonand Chelsea Borough Council.Looking forward, we expect to be able to maintain activity levels by retainingour strong positions in our key sectors whilst also increasing our focus on thecommercial sector. For example, we are benefiting from the development of theGroup's successful relationship with HSBC and have recently renewed ourlong-standing partnership with the BBC, being selected as a contractor on theirminor works framework.International

The majority of our international earnings are generated from our associatebusinesses in the Middle East. The strong demand experienced in our MiddleEastern construction markets in recent years slowed somewhat during 2010, butnevertheless there was an increase in contribution from associates of 13.4 percent, resulting in another strong margin performance of 10.7 per cent. In thesummer of 2010 we expanded our geographical reach to India via an investment ina construction business operating in the south of the country. This new ventureis developing well and winning contracts with clients such as Accor, albeitthis is currently from a small base, and we are very optimistic about thesignificant growth opportunities that the Indian construction market presents.In our most significant market, Qatar, we continued to work with blue-chip,long-term clients such as Siemens, Shell, Total and HSBC. At the petrochemicalhub of Qatar, Ras Laffan Industrial City, we mobilised the five-year ShellPearl Gas-To-Liquids maintenance contract, extended our services relationshipwith RasGas for a further three years, and were awarded additional contractswith Nakilat, the Qatari shipping company, to construct a ship-building halland associated offices. In the vicinity of Doha we are building energy centresto service both Education City and the Cultural Village and we secured ourfirst major state school building contracts in Qatar, leveraging our UKknowledge and expertise to enter a new sector for us in the country. We arealso developing new business streams in Qatar, including a specialist interiorfit-out operation and a joint venture to service the growing water demands ofthe country with an environmentally-friendly, cost-effective wastewatertreatment solution.The future for our business in Qatar remains exciting. Having alreadytransformed the country into a global gas superpower in the space of barely tenyears, the Qatari authorities are now undertaking to host the 2022 FIFA WorldCup, a project that could have a similarly transformational impact on thecountry in the next decade. The government faces a major infrastructurechallenge in order to stage the event, with the stadium building a relativelyminor cost compared to the anticipated investment of over US$50 billion intransport, power and utilities infrastructure over the next decade. Much of thework is underway, with the 2010-2011 budget earmarking significant expenditurefor the completion of the New Doha International airport, the New Doha Port, aswell as roads, drainage, land reclamation and the expansion of the power andwater network. Beyond that, the next five years is expected to see investmentin major projects including a national rail network, the Doha metro system anda causeway linking Qatar to Bahrain.In the UAE, the market in Dubai remained subdued during 2010, reflectingcontinued caution following the Dubai World debt default in late 2009 and anoversupply of projects in several sectors. However, opportunities remain inDubai and in 2010 we won contracts to extend the Ritz Carlton Hotel and fit-outthe Sofitel Resort Palm Jumeirah, as well as the construction of the tallestindustrial building in the GCC, Ducab's high-voltage cable production facility,which was completed in conjunction with our Equipment Services business. Wewere also active in emirates outside of Dubai, with the award of a constructioncontract at the Saadiyat Beach Club in Abu Dhabi, road improvement works in UmmAl Quwain and infrastructure projects in Fujairah. More recently, we have justbeen awarded an AED 250 million contract to build a shopping mall in Fujairahfor our long-standing client, Majid al Futtaim. Going forward, we expect anincreasing amount of our work to come from Abu Dhabi, which has a moresustainable development plan than Dubai, and we expect to derive a largerproportion of business from the roads and infrastructure sectors across theUAE.In Oman, the market environment improved modestly during 2010 and we areencouraged by the economic outlook. Sectors such as tourism and leisure, whichhad previously seen project delays, are now progressing, and the rail, aviationand defence sectors are all scheduled for new investment, reflecting theSultanate's desire to develop its infrastructure and diversify the economy awayfrom oil and gas. During the year we completed further accommodation blocks forRenaissance Services and were awarded construction contracts on power stationsin Sohar. We also invested in Occupational Training Institute LLC, a leadingprovider of training and consultancy to the petrochemical and constructionindustries in Oman.

Equipment Services

Equipment Services provides temporary structural equipment and the engineeringdesigns for use in complex infrastructure and building projects, generatingrevenue through both hire contracts and equipment sales (of both new and usedcomponents). It has a strong position as one of the leading global competitorsin these specialist markets. The division operates across a wide range ofgeographies and market sectors, enabling the transfer of equipment to areas ofhigh demand to optimise asset productivity and mitigating the effects ofcountry-specific cyclicality.Results summary: 2010 2009 Change Revenue £139.9m £157.1m (10.9)% Contribution to Total Operating Profit £14.4m £35.9m (59.9)% Margin 10.3% 22.9% (12.6)% ptsThe division experienced cyclical weakness in infrastructure spending in mostof its key markets during 2010, with the exception of Australia where tradingremained solid. Of particular impact was a pronounced slowdown in our hireactivity in the UAE. Despite tough trading conditions, the division posted afull-year margin in excess of ten per cent, and we expect a gradual improvementin margin back towards historical levels in the mid teens as activity in theMiddle East improves and our new business in the USA gains momentum.

It is pleasing and noteworthy that the division's geographic reach and success in increasing its overseas business was recognised with the award of the prestigious Queen's Award for Enterprise: International Trade 2010 in June 2010.

Regionally:Middle East and AfricaThe Middle East region remains the largest market for the division, with thebusiness operating principally in the UAE, Qatar, Oman and Saudi Arabia. Thebusiness also exports to many countries across the region and we are developinga business stream in India, leveraging our newly-formed Indian constructionrelationship.Performance in the Middle East in 2010 reflected a sharp decline in hireactivity in the UAE following a record year in 2009. The anticipated pick-up inactivity in Abu Dhabi failed to materialise in 2010, with many projects beingre-tendered and delayed. However, in recent weeks there have been signs of themarket in the emirate gradually improving, giving us confidence that our UAEbusiness will resume growth in 2011.2010 was our first full year of operation in Saudi Arabia; the businessperformed well and made a positive contribution to divisional performance inthe year. We made good progress in building our personnel and equipmentresources in the country during the year and the business now has the resourceswith which to pursue the numerous exciting projects in the market. We continueto believe that the quality of our offering, with its high degree of safety andreliability of design and equipment, means that we will be well-placed to takeadvantage of a significant pipeline of opportunities across the country through2011 and beyond.Australasia and Far EastOur market-leading Australian business had another good year, boosted byinfrastructure spending related to the government's fiscal stimulus programmeand strength in the resources sector. With the commercial and residentialsectors expected to remain subdued in Australia during 2011, much now dependson the continuation of the government's fiscal stimulus programme and furtherinvestment by the mining and oil and gas sectors. In that respect, the majorGorgon Liquefied Natural Gas project is likely to involve significantinfrastructure investment in the northwest of Australia over the coming years.The contribution from the Far East in 2010 showed an improvement on 2009 as thebusinesses responded to previous restructuring initiatives, and we expectfurther progress in 2011 and beyond as the market environment across the regionbegins to improve.EuropeWith continuing difficult market conditions across the region throughout 2010the focus has remained on minimising indirect costs and capital expenditure.The trading environment has been particularly poor in Ireland and Spain, wheremany projects have been delayed. The UK market was also challenging, though theperformance of the business was creditable, benefiting from previouscost-reduction measures and a greater exposure to the infrastructure sectorrelative to the commercial and residential sectors. The UK business istargeting opportunities within the nuclear sector and also major infrastructureprojects such as Crossrail, although any significant growth from the Europeanregion is likely to remain muted until the macro-economic environment improves.

Americas

We extended our position in the USA in November 2010 with the $35 millionpurchase of the formwork and shoring assets, including related distributioncentres, of CMC Construction Services, a business owned by Commercial MetalsCompany. This has enabled us to gain a direct foothold in the world's largestconstruction market, operating initially in Texas, California and Colorado. Thepost-acquisition plan for the operation is proceeding well, with theintegration of our systems and processes into the business progressing and there-employment of the majority of the management and staff associated with thebusiness activity having taken place. The RMD Kwikform brand was well receivedwhen launched at a major trade show. As the business builds momentum during2011 and the market environment improves, we expect the operation to make avaluable contribution towards the division's growth in 2011 and beyond.

PFI Investments

PFI Investments directs all of the Group's Private Finance Initiative ("PFI") activities, leading the bid process and managing the company's PFI equity investments.

2010 2009 Change

Contribution to Total Operating Profit £4.2m £4.7m (10.6)%

Interest received on subordinated debt £2.8m £4.6m (39.1)% investments

£7.0m £9.3m (24.7)%Our PFI portfolio continues to make a healthy contribution to Group earnings,with a total contribution to pre-tax profit of £7.0 million. The reduction on2009 principally reflects the full-year impact of the transfer of the Group'sinterest in 13 investments into the Interserve Pension Scheme in November 2009.As at 31 December 2010 we had 21 signed contracts (31 December 2009: 20), ofwhich 13 are now operational and eight under construction, with the addition tothe portfolio during the year resulting from reaching financial close on a £63million schools programme for St Helens Council. This programme will involvethe construction of two schools with a capital cost of £48 million, followed bythe provision of facilities management services at one of the schools over the25-year contract life, worth around £15 million. We have made a significantinvestment commitment on the signed contracts, totalling £55.9 million at 31December 2010 (31 December 2009: £54.3 million), of which £25.8 million (31December 2009: £19.8 million) has already been paid.We expect our portfolio to be cash neutral over the medium term, with newinvestments being funded by disposals of mature projects. With our considerableexpertise and track record in delivering, operating and financing using PFIstructures we believe we are well placed to benefit from the further evolutionof similar funding arrangements for public sector investments. We areshortlisted on a number of projects, notably in the health sector, and weexpect to make further progress in generating value from our portfolio.

Directors' report - Business review continued

Financial review

The Chairman's statement and the Business review provide an overview of the Group's results for 2010. This report provides further information on key aspects of the performance and financial position of the Group.

Summary

Financial highlights of 2010 included:

* A robust trading performance in line with expectations

* Significantly improved margins in Support Services

* A record year for Project Services, with continuing strong margins in UK

and international construction

* Further improvement in our Middle East debtor position

* Continued strong cash generation, particularly in the second half of the

year. Average net debt for the year was £20 million (2009: £62 million)

* Three acquisitions, for aggregate consideration of £27 million, completed

during the period expanding the geographic footprint of the Group into the

US and India

* £31.0 million (45 per cent) reduction in net pension deficit after taxation

* Successful refinancing completed in April 2010 providing committed

facilities of £250 million until October 2013 with significant headroom to

fund our future growth Financial performance

The income statement for the period is summarised below:

£million 2010 2009 Revenue 1,872.0 1,906.8 Headline operating profit 74.4 85.7 Investment revenue and finance costs (4.8)

(7.4)

Headline profit before taxation 69.6

78.3

Amortisation of acquired intangible assets (5.5) (5.4) Exceptional items - 16.3 Profit before taxation 64.1 89.2 Taxation (10.6) (16.8) Profit for the year 53.5 72.4 Headline EPS 42.8p 49.7p Dividend per share 18.0p 17.5pRevenue and operating profit

Across the Group, total revenues have been broadly stable year on year. However our three principal trading divisions experienced very different market conditions.

Strong revenue growth of 8.3 per cent in Support Services represents in-contract growth on existing contracts and the full-year benefit of new contracts such as our £200 million whole-life value HSBC contract. This was offset by declining activity in Project Services and Equipment Services in tough global construction markets.

A full-year operating margin of 4.0 per cent (2009: 4.5 per cent) reflects asignificantly stronger second half than first half with an operating margin of4.9 per cent (H1 2010: 3.1 per cent). Within this, the operating margin inSupport Services strengthened from 1.7 per cent in the first half to 3.3 percent in the second half, reflecting the benefits of ongoing cost restructuring.Project Services' operations in the UK delivered a near record operating marginof 3.0 per cent for the year (2009: 2.1 per cent) reflecting the execution ofthe significant contract portfolio developed in recent years. Offsetting theseimprovements is the previously anticipated decline in margin in EquipmentServices from 22.9 per cent in 2009 to 10.3 per cent in 2010 as revenuesdeclined from an historic high and the mix of revenue from hire and salereturned to previous trend levels.Average and closing exchange rates used in the preparation of these resultswere: Average rates Closing rates 2010 2009 2010 2009 US dollar 1.55 1.56 1.55 1.59 Australian 1.69 1.99 1.52 1.78 dollar Euro 1.17 1.12 1.17 1.11

Movements in exchange rates during the year had no material impact on the results of the Group.

Investment revenue and finance costs

The net charge for the year of £4.8 million can be analysed as follows:

£million 2010 2009 Net interest on Group debt (5.4) (3.2) Interest due on PFI sub-debt 2.8 4.6 IAS 19: Expected return on Scheme assets 32.3 24.4 Interest cost on pension obligations (34.5) (33.2) Group net interest charge (4.8) (7.4)The strong focus on cash during the year delivered a significant reduction inaverage net debt to £20 million (2009: £62 million). However, following therefinancing of the Group's revolving credit facilities during the year, theresulting higher interest margins led to an increase in the net interest chargeon Group debt.Interest receivable on PFI sub-debt fell to £2.8 million (2009: £4.6 million)following the transfer of a significant proportion of the portfolio and itsassociated income streams into the Interserve Pension Scheme ("the Scheme") inlate 2009.A reassessment of the pension fund's investment strategy, together with strongequity markets during the period, resulted in significant increases in pensionfund asset values. The contribution of PFI assets and strong increases inpension fund asset values in late 2009 enabled the 2010 results to reflectincreased assumed returns on the Scheme assets to £32.3 million (2009: £24.4million), resulting in a reduced non-cash net interest cost.

Taxation

The tax charge for the year of £10.6 million represents an effective rate of16.5 per cent on total Group profit before taxation. The factors impacting thisrate are shown in the table below:£million 2010 2009 Profit Tax Rate Profit Tax Rate Group companies 33.6 11.5 34.2% 60.5 21.2 35.0% Joint ventures and 30.5 - 0.0% 28.7 - 0.0%associates * Underlying tax charge and 64.1 11.5 17.9% 89.2 21.2 23.8%rate Prior period adjustments (0.9) (0.5) Tax on unremitted earnings - (5.2) Non-taxable exceptional - 1.3 items Total per Income Statement 64.1 10.6 16.5% 89.2 16.8 18.8%

* The Group's share of the post-tax results of joint ventures and associates are included in profit before tax in accordance with IFRS.

Dividend

The directors recommend a final dividend for the year of 12.4 pence, to bringthe total for the year to 18.0 pence, an increase of three per cent over lastyear. This dividend is covered 2.4 times by headline earnings per share and

1.9times by free cash flow.Net debt and cash flowAverage net debt for the year was £20 million (2009: £62 million) and year-endnet debt was £53.8 million (2009: £37.3 million), having benefited from freecash flow generation of £43.1 million (2009: £100.9 million).£million 2010

2009

Operating profit before exceptional items and 43.4 56.6amortisation of intangible assets Depreciation and amortisation 26.3 24.5 Net disposal proceeds / (capital expenditure) 9.5 (15.9) Gain on disposal of property, plant and equipment (13.0) (7.2) Share-based payments 1.6 3.1 Working capital movement (21.5) 52.6 Operating cash flow 46.3 113.7

Pension contributions in excess of the income (26.7) (15.5) statement charge

Dividends received from associates and joint ventures 32.1 17.6

Tax paid (6.3) (15.7) Other (2.3) 0.8 Free cash flow 43.1 100.9 Dividends paid (24.8) (24.5)

Investments, acquisitions and disposals (32.6) 68.6 Special pension contribution - (61.5) Other non-recurring (2.2) (11.6) (Increase) / Decrease in net debt (16.5) 71.9The strong operating cash flow of £46.3 million, representing 107 per centconversion of Operating profit before amortisation of intangible assets (2009:£113.7 million and 201 per cent respectively), was driven by the actions thatwe have taken to reduce capital expenditure and a controlled outflow of workingcapital following a large net inflow in the previous year.Including a £14.3 million net outflow of advances received from customers(2009: £15.0 million inflow) working capital produced a net outflow of £21.5million. Set in the context of a £52.6 million working capital inflow in theprevious period, this is a strong performance and represents a net workingcapital inflow of £31.1 million over two years.A planned reduction in capital expenditure continued into 2010, resulting inproceeds from disposal exceeding new capital invested by £9.5 million duringthe year (2009: £15.9 million net outflow).Dividends received from associates and joint ventures of £32.1 million (2009: £17.6 million) exceeded profits from these vehicles of £31.0 million (2009: £29.1 million), demonstrating the strong cash generation in both our operationsin the Middle East and our PFI special purpose vehicles.Tax paid at £6.3 million (2009: £15.7 million) remains considerably lower thanthe Consolidated Income Statement charge incurred by the Group due principallyto timing differences and the tax deductions for pension deficit payments.Investments and acquisitions outflow of £32.6 million in 2010 includes the £21.6 million acquisition of the formwork and shoring assets of CMC ConstructionServices ("CMC") referred to below, £4.8 million invested in the new Indianjoint venture with SSPDL and £6.1 million of additional equity and sub-debtinvested in PFI joint venture companies.

Other non-recurring outflow of £2.2 million includes the purchase of own shares to fund future anticipated share award issues.

Acquisitions

The Group completed three acquisitions during the year, each further extending the geographic footprint of the Group's operations into already large and growing markets.

RMDK North America (United States of America)

On 23 November 2010 the Group completed the acquisition of the heavy formingand shoring assets, including related distribution centres, of CMC, a divisionof CMC Steel Fabrications, Inc., which is a subsidiary of Commercial MetalsCompany. The acquisition represents an attractive opportunity to gain access tothe largest construction market in the world, to which we had previously beenan indirect supplier, via an existing client base and an established salesforce, branch and distribution network.

A total cash consideration of $34.6 million (£21.6 million) was paid for the assets, funded from the Group's existing cash resources.

A review of the business acquired identified intangible assets of £1.6 million,principally representing the value of existing customer relationships onacquisition. These intangible assets are being amortised over an estimated lifeof five years.

SSPDL Interserve Private Limited (India)

On 25 August 2010 the Group completed the acquisition of a 49 per cent interestin SSPDL Interserve Private Limited, a construction company based in Chennai,India. This newly-formed joint venture with SSPDL will execute constructionworks for SSPDL on a preferred contractor basis in addition to targetingselected construction opportunities with respected external clients.A review of the business acquired identified intangible assets of £1.0 million,principally representing the value of existing customer relationships onacquisition. These intangible assets are being amortised over an estimated lifeof five years.

A total cash consideration of Rupees 343 million (£4.8 million) has been paid from the Group's existing cash resources.

Occupational Training Institute LLC (Oman)

On 1 June 2010 the Group's 49 per cent owned associated company, Douglas OHILLC, completed the acquisition of 100 per cent of Occupational TrainingInstitute LLC, a training company based in Oman. A total cash consideration ofOmani riyals 572,000 (£1.0 million) was paid by Douglas OHI LLC.

Pensions

At 31 December 2010 the Group pension deficit under IAS 19, net of deferred tax, had been reduced to £37.6 million (2009: £68.6 million):

£million 2010 2009 Defined benefit obligation 642.3 627.4 Scheme assets (590.8) (532.1) Deferred tax thereon (13.9) (26.7) Net deficit 37.6 68.6This significant reduction in the deficit during the year was driven byadditional employer cash contributions in excess of the Income Statementcharge, increases in asset values in excess of previous expectations and achange, in line with government announcements, to the use in certaincircumstances of the Consumer Prices Index (CPI) rather than the Retail PricesIndex (RPI) to measure minimum pension indexation. Following the actions takento address the pension deficit over the previous two years, it is reassuring tonote that the net deficit is now less than the Group's free cash generation

in2010.Pension indexation

In July 2010, the government announced its intention that future statutoryminimum pension indexation would be measured by the Consumer Prices Index (CPI)rather than the Retail Prices Index (RPI). The implementation of this change,where scheme rules allow, has been reflected in the Group's assumptions and again of £14 million has been recognised as a result, included in actuarialgains on assumptions for 2010. For some benefits the effect of the government'sannouncement has not yet been determined and discussions with the trustees andlegal advisors are ongoing.

Defined benefit liabilities and funding

The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 93 per cent of the total defined benefit obligations of the Group.

The latest triennial valuation as at 31 December 2008 assessed a fundingshortfall, at that date, of £224 million. Since then, in November 2009, theGroup has contributed £61.5 million of PFI assets to the Scheme. Further, theGroup has agreed with the Trustee of the Scheme that it will aim to eliminatethis deficit over the period to 31 December 2017. During 2010 the Group paiddeficit funding contributions of £22 million and currently expects to continueto pay £22 million per annum, increasing by 2.8 per cent each year, into theScheme in addition to the funding of ongoing accrual of benefit for the nextseven years to meet this deficit. In practice, the level of contributions willbe reviewed at the next formal valuation, due as at 31 December 2011. Thisprogress in 2010 builds on a number of actions completed in the prior perioddesigned to reduce both the funding shortfall and the risk in accruedliabilities:

* The closure of the defined benefit scheme to future accrual for all

non-passport members from the end of 2009.

* PFI investments, valued at £61.5 million, contributed through an innovative

structure.

* A full investment strategy review resulting in greater asset

diversification and matching of inflation and interest volatility with

Scheme liabilities.

Investment risks

At 31 December 2010 the Scheme assets were invested in a mixed portfolio thatconsisted of a balance of performance-seeking assets (such as equities) andlower-risk assets (such as gilts and corporate bonds). As at 31 December 2010,48 per cent of the Scheme assets were invested in performance-seeking assets(2009: 46 per cent).

The agreed investment objectives of the Scheme are:

* to secure, with a high degree of certainty, liabilities in respect of all

defined benefit members; and

* to adopt a long-term strategy which aims to capture outperformance from

equities and move gradually into bonds to reflect the increasing maturity

of the defined benefit membership with a view to reducing the volatility of

investment returns.

The majority of equities held by the Scheme are in international blue chipentities. The aim is to hold a globally diversified portfolio of equities, withan ultimate target of 50 per cent of equities being held in UK and 50 per centin US, European and Asia Pacific equities.

IAS 19 assumptions and sensitivities

Assumptions adopted in assessment of the Group charge and funding position under IAS 19 are reviewed and updated as necessary under advice from our actuarial advisers, Lane Clark & Peacock LLP. At the balance sheet date mortality rates used for the Scheme remain unchanged and are based on an adjustment to the "00 series tables" using the "medium cohort" mortality improvement projection strengthened with a minimum underpin to the annual rate of improvement (1.0 per cent for males and 0.5 per cent for females).

The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:

Assumption adopted Sensitivity Indicative change in liabilities 2010 2009 Key financial assumptions Discount rate 5.4% 5.6% +/- 0.5% -/+ 8% -/+ £51m RPI / CPI 3.4%/2.8% 3.5%/n/a +/- 0.5% +/- 5% +/-

£32m

Real salary increases 0.75%-1.5% 0.75%-1.5% +/- 0.5% +/- 0.2% +/- £1m Life expectancy (years) Current pensioners 1 Men 85.9 85.8 } Women 87.9 87.8 }Š Future pensioners 2 } + 1 year +3% +£19m Men 87.7 87.7 } Š Women 89.0 89.0 }

1 Life expectancy of a current pensioner aged 65.

2 Life expectancy at age 65 for an employee currently aged 45.

PFI/PPP Investments

The credit in the Income Statement relating to the performance of the Group's share of the PFI equity portfolio is analysed as follows:

£million 2010 2009 Share of operating profit 3.8 4.8 Net finance credit 2.8 3.0 Taxation (2.4) (3.1) Share of profit included in Group Total Operating 4.2

4.7

Profit This is a strong result given the disposal of 14 operational assets during theprevious period, 13 of which were transferred into the Interserve PensionScheme in November 2009, and reflects the increasing operational maturity ofthe remaining portfolio.

Assets created under PFI contracts have been assessed in relation to the balance of risks and rewards assumed by the Group and are accounted for as financial assets, classified as available-for-sale. As such these assets are held at their assessed fair value at the balance sheet date, with movements over the period being taken directly to equity.

Having achieved financial close on the St Helens Schools project, at thebalance sheet date the Group had £55.9 million of committed investment in 21PFI/PPP projects which had reached financial close. Of this, £25.8 million hadbeen invested at that date, with the balance due to be invested over the nextthree years.£million Investment Remaining Total to date commitment 1 January 2010 19.8 34.5 54.3

New projects achieving financial close - 1.7

1.7 Loans and capital advanced 6.1 (6.1) - Repayment of sub-debt (0.1) - (0.1) 31 December 2010 25.8 30.1 55.9The Group's share of gross liabilities of £701.8 million (2009: £587.1 million)principally represents non-recourse debt within these ventures to fund capitalbuilding programmes and working capital requirements.Our PFI portfolio represents a significant source of value. For illustrativepurposes, the present value of the expected future cash flows of the currentportfolio excluding projects at preferred bidder stage at a range of discountrates would be:Discount rate 6.0% 8.0% 10.0% 12.0%

Projects past financial close only £147.3m £111.1m £83.2m £64.8m

Treasury risk management

The Group operates a centralised Treasury function whose primary role is tomanage interest rate, liquidity and foreign exchange risks. The Treasuryfunction is not a profit centre and it does not enter into speculativetransactions. It aims to reduce financial risk in the Group by the use ofhedging instruments. Management and control of identified risks is carried outby reference to a framework of policies and guidelines approved by the Boardwithin which Treasury must operate.

Liquidity risk

The Group seeks to maintain sufficient facilities to ensure that it has accessto funding to meet current and anticipated future requirements determined frombudgets and medium term plans.

The Group has access to a committed syndicated revolving credit facility totalling £250 million which expires in October 2013.

Market price risk

The objectives of the interest rate policy for the Group are to match fundingcosts with operational revenue performance and to ensure that adequate interestcover is maintained in line with Board approved targets and banking covenants.

Group borrowings are principally denominated in sterling and mostly subject to floating rates of interest linked to LIBOR. The Group has in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of these instruments is a little over two years.

Foreign currency risk

Transactional currency translation

The revenues and costs of a trading entity will typically be denominated in itsfunctional currency. Where a material trade is transacted in non-functionalcurrency, the entity is required to take out instruments through thecentralised Treasury function to hedge the currency exposure. The instrumentsused will normally be forward currency contracts. The impact of retranslatingany entity's non-functional currency balances into its functional currency wasnot material.

Consolidation currency translation

The Group does not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.

In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year.

The balance sheets of overseas entities are translated at the year-end exchangerates. The impact of changes in the year-end exchange rates, compared to therates used in preparing the 2009 consolidated financial statements, has led toan increase in consolidated net assets of £7.7 million (2009: £21.3 millionreduction).Going concern

The Group's business activities, together with the factors likely to affect itsfuture development, performance and position are set out in the Businessreview. The financial position of the Group, its cash flows, liquidity positionand borrowing facilities and details of its financial risk management aredescribed in the Financial review.The majority of the Group's revenue is derived from long-term contracts, whichprovides the Group with a strong future workload and good forward revenuevisibility. The Group has access to committed debt facilities totalling £250million until October 2013. As a consequence, the directors believe that theGroup is well placed to manage its business risks successfully despite thecurrent uncertain economic outlook.After making enquiries, the directors have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. For this reason, they continue to adopt the going concernbasis in preparing the financial statements.

Directors' report - Business review continued

Principal risks and uncertainties

Interserve operates in a business environment in which a number of risks anduncertainties exist. While it is not possible to eliminate these completely,the established risk-management and internal control procedures, which areregularly reviewed by the Group Risk Committee on behalf of the Board, aredesigned to manage their effects and so to contribute to the creation of valuefor the Group's shareholders as we pursue our business objectives. The Groupcontinues to be dependent on effective maintenance of its systems and controls.Over and above that, the principal risks and uncertainties which the Groupaddresses through its risk-management measures are detailed below.

Market change

Among the market changes which could affect Interserve's business are: shiftsin the economic climate both in the UK and internationally; a deterioration inthe profile of our counterparty risk; alterations in the UK government's policywith regard to expenditure on improving public infrastructure, buildings andservices; delays in the procurement of government-related projects; saturationof or a downturn in our markets in the Middle East; fluctuations in theproportion of our earnings derived from associates and joint ventures; shiftsin the political climate in some of the regions in which we operate; changes inour competitors' behaviour; and the imposition of unusually onerous contractconditions by major clients. Any of these might result in a failure to win newor sufficiently profitable contracts in our chosen markets or to complete thosecontracts with sufficient profitability.The Group seeks to mitigate these risks by fostering long-term relationshipswith its clients and partners, its predominantly governmental/quasigovernmental medium to long-term revenue streams, careful supply chainmanagement and by operating in various regions of the world, including theMiddle East, where we are able to transfer resources to maximum effect betweenthe differing economies of that region. The Group also has in place a £250million loan facility. We constantly monitor market conditions and assess ourcapabilities in comparison to those of our competitors. Whether we win, lose orretain a contract we analyse the reasons for our success or shortcomings andfeed the information back at both tactical and strategic levels. We constantlymonitor our cost base and take action to ensure it is suitable given theprevailing market environment.

Major contracts

As Interserve focuses on large-volume relationships with certain major clientsfor a significant part of its revenue, termination of one or more of theassociated contracts would be likely to reduce revenue and profit for theGroup. In addition, the management of such contracts entails potential risksincluding mis-pricing, inaccurate specification, failure to appreciate risksbeing taken on, poor control of costs or of service delivery, sub-contractorinsolvency and failure to recover, in part or in full, payments due for workundertaken. In PFI/PPP contracts, which can last for periods of around 30 yearsand typically require the Special Purpose Companies (SPCs) established byInterserve and one or more third parties to provide for the future capitalreplacement of assets, there is a risk that such a company may fail toanticipate adequately the cost or timing of the necessary works or that theremay be increases in costs, including wage inflation, beyond those anticipated.Among the Group's mitigation strategies are targeting work within, orcomplementary to, its existing competencies, the fostering of long-termrelationships with clients, operating an authority matrix for the approval oflarge bids, monthly management reporting with key performance indicators atcontract and business level, the use of monthly cost-value reconciliation,supply chain management, taking responsibility for the administration of ourPFI/PPP SPCs, securing Board representation in them and ensuring that periodicbenchmarking and/or market testing are included in long-term contracts.

Key people

The success of Interserve's business is dependent on recruiting, retaining,developing, motivating and communicating with appropriately skilled, competentpeople of integrity at all levels of the organisation. The members of themanagement team contribute to Interserve's ability to obtain, generate andmanage opportunities. We have various incentive schemes and run a broad rangeof training courses for people at all stages in their careers. With activehuman resources management and Investors in People accreditation in many partsof the Group, we manage our people professionally and encourage them to developand fulfil their maximum potential with Interserve.

Health and safety regime

The nature of the businesses conducted by the Group involves exposure to healthand safety risks for both employees and third parties. Management of theserisks is critical to the success of the business and is implemented through theadoption and maintenance of rigorous operational and occupational health andsafety procedures. A commitment to safety forms part of Interserve's missionstatement and the subject leads every Board meeting both at Group anddivisional level. Each member of the Executive Board undertakes dedicatedvisits to look at health and safety measures in place at our operational sitesand we have ongoing campaigns across the Group emphasising its importance.

Financial risks

The Group is subject to certain financial risks which are discussed in the Financial review.

In particular, Interserve carries out major projects which from time to timerequire substantial amounts of cash to finance working capital, capitalexpenditure and investment in PFI projects. Failure to manage working capitalappropriately could result in the Group being unable to meet its tradingrequirements and ultimately to defaulting on its banking covenants. Interservehas policies in place to monitor the effective management of working capital,including the production of daily balances, weekly cash reports and forecaststogether with monthly management reporting.

Interserve recognises a pension deficit on its balance sheet. The deficit's value is sensitive to several key assumptions, and any significant changes in these may result in the Group having to increase its pension scheme contribution with a resultant impact on liquidity.

Damage to reputation

Issues arising within contracts, from Interserve's management of its businessesor from the behaviour of its employees at all levels can have broaderrepercussions on the Group's reputation than simply their direct impact.Control procedures and checks governing the operation of our contracts and ofour businesses are supported by business continuity plans and arrangements formanaging the communication of issues to Interserve's stakeholders.Consolidated income statementFor the yearended 31 December 2010 Year ended 31 December 2010 Year ended 31 December 2009 Before Exceptional Total Before Exceptional Total exceptional items and exceptional items and items and amortisation items and amortisation amortisation of acquired amortisation of acquired of acquired intangible of acquired intangible intangible assets intangible assets assets assets Notes £million £million £million £million £million £million

Continuing operations

Revenue 3 1,872.0 - 1,872.0 1,906.8 - 1,906.8

Cost of sales * (1,693.4) - (1,693.4) (1,697.5) - (1,697.5) Gross profit 178.6 - 178.6 209.3 - 209.3 Administration (135.2) - (135.2) (152.7) - (152.7)expenses * Amortisation of - (5.0) (5.0) - (5.0) (5.0)

acquired intangible assets

Impairment of 4 - - - - (30.0) (30.0)goodwill Other exceptional 4 - - - - 9.0 9.0items Total administration (135.2) (5.0) (140.2) (152.7) (26.0) (178.7)expenses Profit on disposal 4 - - - - 37.3 37.3

of property and investments

Operating profit 43.4 (5.0) 38.4 56.6 11.3 67.9 Share of result 31.0 - 31.0 29.1 - 29.1 Amortisation of - (0.5) (0.5) - (0.4) (0.4)

acquired intangible assets Share of result of 10 31.0 (0.5) 30.5 29.1 (0.4) 28.7associates and joint ventures

Total operating profit 74.4 (5.5) 68.9 85.7

10.9 96.6

Investment revenue 5 36.1 - 36.1 31.6

- 31.6 Finance costs 6 (40.9) - (40.9) (39.0) - (39.0)

Profit before tax 69.6 (5.5) 64.1 78.3

10.9 89.2

Tax (charge)/credit 7 (12.0) 1.4 (10.6) (12.4)

(4.4) (16.8)

Profit for the year 57.6 (4.1) 53.5 65.9

6.5 72.4

Attributable to: Equity holders of 53.8 (4.1) 49.7 62.2 6.5 68.7the parent Minority interest 3.8 - 3.8 3.7 - 3.7 57.6 (4.1) 53.5 65.9 6.5 72.4 Earnings per share 9 Basic 39.5p 54.9p Diluted 38.5p 53.7p

* Business unit overheads in the former Specialist Services businesses have been reallocated in the prior period comparatives from administration expenses to cost of sales in line with the current Support Services divisions' classification. This reclassification does not impact operating profit.

Consolidated statement of comprehensive incomeFor the year ended 31 December 2010 Notes Year ended 31 Year ended 31 December 2010 December 2009 £million £million Profit for the period 53.5 72.4 Other comprehensive income Exchange differences on 7.7 (21.3)

translation of foreign operations

Loss on available-for-sale (0.6) (0.4)financial assets (excl joint ventures)

(Losses)/gains on cash flow hedges (30.3)

28.8(joint ventures) Gains/(losses) on 13.1 (16.8)available-for-sale financial assets (joint ventures) Actuarial gains/(losses) on 19.3 (31.0)

defined benefit pension schemes

Deferred tax on items taken 7 (1.2) 5.3directly to equity Other comprehensive income/( 8.0 (35.4)expense)net of tax Total comprehensive income 61.5 37.0 Attributable to: Equity holders of the parent 57.7 33.3 Minority interest 3.8 3.7 61.5 37.0Consolidated balance sheetAt 31 December 2010 31 December 31 December 31 December 2010 2009 2008 Notes £million £million £million Non-current assets Goodwill 199.6 198.9 228.9 Other intangible assets 28.7 31.9 33.4 Property, plant and equipment 149.0 148.8 156.8 Interests in joint ventures 60.1 67.4 114.0 Interests in associated 61.7 57.0 72.5undertakings Deferred tax asset 16.5 31.4 19.2 515.6 535.4 624.8 Current assets Inventories 19.6 20.1 27.8 Trade and other receivables 386.1 355.3 372.1 Cash and deposits 67.6 60.9 61.3 473.3 436.3 461.2 Total assets 988.9 971.7 1,086.0 Current liabilities Bank overdrafts (35.2) (11.6) (3.1) Trade and other payables (492.8) (482.7) (466.0) Current tax liabilities (3.9) (8.5) (13.8) Short-term provisions (20.2) (23.1) (14.0) (552.1) (525.9) (496.9) Net current liabilities (78.8) (89.6) (35.7) Non-current liabilities Bank loans (85.0) (85.0) (165.5) Trade and other payables (6.7) (9.0) (5.1) Non-current tax liabilities (9.1) (9.1) (9.1) Long-term provisions (26.9) (25.7) (24.0) Retirement benefit obligation 11 (51.5) (95.3) (153.1) (179.2) (224.1) (356.8) Total liabilities (731.3) (750.0) (853.7) Net assets 257.6 221.7 232.3 Equity Share capital 12 12.6 12.5 12.5 Share premium account 112.7 112.7 112.7 Capital redemption reserve 0.1 0.1 0.1 Merger reserve 49.0 49.0 49.0 Hedging and translation reserves 64.2 69.3 108.3 Investment in own shares (2.8) (0.5) (0.5) Retained earnings 18.0 (24.1) (51.8) Equity attributable to equity 253.8 219.0 230.3holders of the parent Minority interest 3.8 2.7 2.0 Total equity 257.6 221.7 232.3

Reconciliation of movement in equity

Share Share Capital Merger Hedging and

Investment Retained Attributable Minority Total

capital premium redemption reserve translation in own earnings to equity interest reserve reserves shares holders of the parent £m £m £m £m £m £m £m £m £m £m Balance at 1 12.5 112.7 0.1 49.0 108.3 (0.5) (51.8) 230.3 2.0 232.3January 2009 Total - - - - (13.1) - 46.4 33.3 3.7 37.0comprehensive income Disposal of - - - - (25.9) - - (25.9) - (25.9)available-for-sale financial assets (joint ventures) and related cash flow hedges recycled through the income statementDividends paid - - - - - - (21.5) (21.5) (3.0) (24.5) Shares issued - - - - - - - - - - Purchase of - - - - - - - - - -Company shares Company shares - - - - - - - - - -used to settle share-based payment obligations Share-based - - - - - - 2.8 2.8 - 2.8payments Balance at 31 12.5 112.7 0.1 49.0 69.3 (0.5) (24.1) 219.0 2.7 221.7December 2009 Total - - - - (5.1) - 62.8 57.7 3.8 61.5comprehensive income Disposal of - - - - - - - - - -available-for-sale financial assets (joint ventures) and related cash flow hedges recycled through the income statement Dividends paid - - - - - - (22.1) (22.1) (2.7) (24.8) Shares issued 0.1 - - - - - - 0.1 - 0.1 Purchase of - - - - - (2.3) - (2.3) - (2.3)Company shares Company shares - - - - - - - - - -used to settle

share-based payment obligations

Share-based - - - - - - 1.4 1.4 - 1.4payments Balance at 31 12.6 112.7 0.1 49.0 64.2 (2.8) 18.0 253.8 3.8 257.6December 2010

The £49.0 million merger reserve represents £16.4 million premium on the sharesissued on the acquisition of Robert M. Douglas Holdings Plc in 1991 and £32.6million premium on shares issued in the acquisition of MacLellan Group Plc in2006.

The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group, Bandt and Interserve Employee Benefit Trust. The market value of these shares at 31 December 2010 was £3.1 million (2009: £0.5 million).

Consolidated cash flow statementFor the year ended 31 December 2010 Year ended 31 Year ended 31 December 2010 December 2009 Notes £million £million Operating activities Total operating profit 68.9 96.6 Adjustments for:

Amortisation of acquired intangible assets 5.0

5.0 Impairment of goodwill 4 - 30.0

Amortisation of capitalised software 1.1

0.1development

Depreciation of property, plant and 25.2

24.4equipment Profit on disposal of property and 4 - (37.3)investments Pension payments in excess of the income (26.7) (15.5)statement charge Special pension contribution - (61.5) Pension curtailment 4 - (20.6) Share of results of associates and joint 10 (30.5) (28.7)ventures

Charge relating to share-based payments 1.6

3.1

Gain on disposal of property, plant and (13.0) (7.2)equipment Operating cash flows before movements in 31.6 (11.6)working capital Decrease in inventories 2.6 6.9

(Increase)/decrease in receivables (29.1)

13.8 Increase in payables 5.0 31.9 Cash generated by operations 10.1 41.0 Taxes paid (6.3) (15.7)

Net cash from operating activities 3.8

25.3 Investing activities Interest received 3.8 7.2

Dividends received from associates and joint 10 32.1

17.6ventures

Proceeds on disposal of property, plant and 29.8

15.1equipment Capital expenditure (20.3) (31.0) Purchase of business (21.6) - Purchase of own shares (2.3) - Investment in joint ventures - PFI investments (6.1)

(7.9)

Investment in associated undertaking (5.0)

- Disposal of investments - 68.0

Receipt of loan repayment - PFI investments 0.1

8.2

Receipt of loan repayment - associated undertakings -

0.3

Net cash used in investing activities 10.5

77.5 Financing activities Interest paid (6.4) (5.8) Dividends paid to equity shareholders 8 (22.1)

(21.5)

Dividends paid to minority shareholders (2.7) (3.0) Issue of shares 0.1 - Repayment of bank loans - (80.5) Movement in obligations under finance leases (0.4)

(0.3)

Net cash used in financing activities (31.5)

(111.1)

Net decrease in cash and cash equivalents (17.2)

(8.3)

Cash and cash equivalents at beginning of period 49.3

58.2

Effect of foreign exchange rate changes 0.3

(0.6)

Cash and cash equivalents at end of period 32.4

49.3

Cash and cash equivalents comprise

Cash and deposits 67.6 60.9 Bank overdrafts (35.2) (11.6) 32.4 49.3

Reconciliation of net cash flow to movement

in net debt Net decrease in cash and cash equivalents (17.2) (8.3) Repayment of bank loans - 80.5

Movement in obligations under finance leases 0.4

0.3

Change in net debt resulting from cash flows (16.8)

72.5

Effect of foreign exchange rate changes 0.3

(0.6)

Movement in net debt during the period (16.5)

71.9 Net debt - opening (37.3) (109.2) Net debt - closing (53.8) (37.3)Notes to the Consolidated Financial StatementsFor the year ended 31 December 2010

1. General information

Interserve Plc (the Company) is a company incorporated in the United Kingdom.The financial information in this announcement, which was approved by the Boardof Directors on 9 March 2011, does not constitute the Company's statutoryfinancial statements for the years ended 31 December 2010 or 2009 but isderived from these accounts.Statutory accounts for 2009 have been delivered to the Registrar of Companiesand those for 2010 will be delivered following the Company's annual generalmeeting. The auditors have reported on these accounts; their reports wereunqualified and did not contain statements under section 498(2), (3) or (4) ofthe Companies Act 2006. The Company expects to publish its statutory accountsthat comply in April 2011.2. Accounting policies

These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.

The annual financial statements have been prepared on a going concern basis inaccordance with International Financial Reporting Standards (IFRS) adopted foruse in the European Union and therefore comply with Article 4 of the EU IASRegulation and with those parts of the Companies Act 2006 that are applicableto companies reporting under IFRS.The accounting policies and methods of computation followed in these financialstatements are consistent with those as published in the Group's Annual Reportand Financial Statements for the year ended 31 December 2009 which areavailable on the Company's website at www.interserve.com. In addition, theaccounting policies used are consistent with those that the directors intend touse in the Annual Report and Financial Statements for the year ending 31December 2010.

3. Business and geographical segments

During the previous 12 months, the Specialist Services division had becomeprogressively integrated into services offered by the Facilities Managementdivision to its third party customers. As a result the group merged theFacilities Management and substantially all of the Specialist Services divisioninto a single reporting segment, forming the Support Services division. Priorperiod comparatives have been adjusted accordingly. The Group is now organisedinto four operating divisions, as set out below. These divisions are the basison which the Group reports its primary segment information.

* Support Services: provision of outsourced support services to public- and

private-sector clients.

* Project Services: design, construction and maintenance of buildings and

infrastructure.

* Equipment Services: design, hire and sale of formwork, falsework and

associated access equipment.

* PFI Investments: transaction structuring, and management of, the Group's

PFI activities. The Joint ventures - PFI Investments segmental figures

represent the Group's share of its PFI special purpose companies.

Segment information about these operating divisions is presented below.

Revenue Result 2010 2009 2010 2009 £million £million £million £million Support Services 1,093.6 1,010.2 27.2 22.1 Project Services 740.0 820.5 48.6 40.7 Equipment Services 139.9 157.1 14.4 35.9 Joint ventures - PFI Investments - - 4.2 4.7 Group Services - - (20.0) (17.7) Inter-segment elimination (101.5) (81.0) - - 1,872.0 1,906.8 74.4 85.7 Amortisation of acquired intangible (5.5) (5.4)assets Exceptional items (note 4) - 16.3 Total operating profit 68.9 96.6 Investment revenue 36.1 31.6 Finance costs (40.9) (39.0) Profit before tax 64.1 89.2 Tax (10.6) (16.8) Profit for the year 53.5 72.4 Segment assets Segment Net assets/ liabilities (liabilities) 2010 2009 2010 2009 2010 2009 £m £m £m £m £m £m Support Services 225.1 221.3 (242.2) (243.1) (17.1) (21.8) Project Services 201.9 199.8 (277.1) (304.9) (75.2) (105.1) Equipment Services 188.8 178.5 (30.8) (40.1) 158.0 138.4 Joint ventures - PFI 60.1 69.6 - (2.2) 60.1 67.4Investments 675.9 669.2 (550.1) (590.3) 125.8 78.9 Group Services, goodwill 245.4 241.8 (63.6) (64.4) 181.8 177.4and acquired intangible assets 921.3 911.0 (613.7) (654.7) 307.6 256.3 Net debt (53.8) (37.3) Net assets (excluding 253.8 219.0minority interests) Depreciation and Additions to amortisation property, plant and equipment and intangible assets 2010 2009 2010 2009 £million £million £million £million Support Services 6.6 5.2 5.6 8.1 Project Services 3.0 2.8 1.1 3.4 Equipment Services 16.7 16.3 14.9 19.5 Joint ventures - PFI - - - -Investments 26.3 24.3 21.6 31.0 Group Services 5.5 5.6 0.3 - 31.8 29.9 21.9 31.0Geographical segments

The Support Services division is predominantly based in the United Kingdom. TheProject Services division is located in the United Kingdom and has investmentsin associates in the Middle East. Equipment Services has operations in all ofthe geographic segments listed below.

The table below provides an analysis of the Group's sales by destination, irrespective of the origin of the goods/services.

Revenue by Total operating geographical profit market 2010 2009 2010 2009 £m £m £m £m United Kingdom 1,846.7 1,840.4 51.7 39.6 Rest of Europe 17.5 27.1 (2.8) 0.3 Middle East and Africa 60.9 79.8 30.5 52.0 Australasia 37.4 31.7 10.5 9.1 Far East 6.1 5.5 0.7 (1.2) Americas 4.9 3.3 (0.4) (1.1) Group Services - - (20.0) (17.7) Joint ventures - PFI Investments - - 4.2 4.7 Inter-segment elimination (101.5) (81.0) - - 1,872.0 1,906.8 74.4 85.7 Amortisation of acquired intangible assets (5.5) (5.4) Exceptional Items (note 4) - 16.3 68.9 96.6 Non-current assets 2010 2009 £million £million United Kingdom 101.4 117.5 Rest of Europe 14.7 19.8 Middle East and Africa 105.4 108.7 Australasia 19.3 16.0 Far East 6.3 4.8 Americas 26.1 4.2 Group Services, goodwill and acquired intangible 225.9 233.0assets 499.1 504.0 Deferred tax asset 16.5 31.4 515.6 535.44. Exceptional items 2010 2009 £million £million Profit on disposal of property and investments - 37.3Impairment of goodwill - (30.0)Other exceptional items - 9.0 - 16.35. Investment revenue 2010 2009 £million £million Bank interest 0.3 2.2 Other interest 3.5 5.0 Return on defined benefit pension assets 32.3 24.4 36.1 31.66. Finance costs 2010 2009 £million £million

Bank loans and overdrafts and other loans repayable (6.4) (5.8)

Interest cost on pension obligations (34.5) (33.2) (40.9) (39.0)7. Income tax expense 2010 2009 £million £million Current tax - UK (1.6) 6.6 Current tax - overseas 3.1 3.2 Deferred tax 9.1 7.0 Tax charge for the year 10.6 16.8

Corporation tax is calculated at 28.0% (2009: 28.0%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

The total charge for the year can be reconciled to the profit per the incomestatement as follows: 2010 2009 £million % £million % Profit before tax 64.1 89.2 Tax at the UK income tax rate of 28.0% 17.9 27.9% 25.0 28.0%(2009: 28.0%)

Tax effect of expenses not deductible in 1.2 1.9% 2.7

3.0%determining taxable profit

Non-taxable exceptional items - - 1.3

1.5%

Tax effect of share of results of associates (8.7) (13.6%) (8.1) (9.1%)

Release of deferred tax on unremitted - - (5.2)

(5.8%)

earnings on overseas associates Effect of overseas losses unrelieved 1.1 1.7% 1.6

1.8% Prior period adjustments (0.9) (1.4%) (0.5) (0.6%)

Tax charge and effective tax rate for the 10.6 16.5% 16.8 18.8% year

In addition to the income tax charged to the income statement, the followingdeferred tax charges/(credits) have been recorded directly to equity in theyear: 2010 2009 £million £million Tax on actuarial gains/(losses) on pension liability 5.2

(8.7)

Impact of change in corporation tax from 28% to 27% on 1.0

-pension liability Tax on loss on available-for-sale financial assets (0.2)

(0.1)

Tax on fair value adjustment on cash flow hedges (joint (8.5) 8.1ventures)

Tax on the fair value adjustment on available-for-sale 3.7 (4.6) financial assets within the PFI Special Purpose Companies

Total 1.2 (5.3)8. Dividends Dividend 2010 2009 per share pence £million £million

Final dividend for the year ended 31 December 2008 11.7 - 14.6

Interim dividend for the year ended 31 December 5.5 - 6.92009

Final dividend for the year ended 31 December 2009 12.0 15.1

-

Interim dividend for the year ended 31 December 5.6 7.0

-2010 Amount recognised as distribution to equity holders 22.1 21.5in the period

Proposed final dividend for the year ended 31 12.4 15.6 December 2010

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

9. Earnings per share

The calculation of the basic, diluted and headline earnings per share is basedon the following data: 2010 2009 £million £million Earnings

Earnings for the purposes of basic and diluted earnings 49.7 68.7 per share being net profit attributable to equity

holders of the parent Adjustments: Exceptional items - (16.3)

Amortisation of acquired intangible assets 5.5

5.4

Tax effect of above adjustments (1.4)

4.4 Headline earnings 53.8 62.2Number of shares 2010 2009 Number Number

Weighted average number of ordinary shares for 125,715,700 125,213,738 the purposes of basic and headline earnings

per share

Effect of dilutive potential ordinary shares:

Share options and awards 3,283,818 2,817,503

Weighted average number of ordinary shares for 128,999,518 128,031,241 the purposes of diluted earnings per share

Earnings per share 2010 2009 Pence Pence Headline earnings per share 42.8 49.7 Basic earnings per share 39.5 54.9 Diluted earnings per share 38.5 53.7

10. Results from joint venture and associated undertakings

2010 2009 Project Support Joint Total Project Support Joint Total Services Services ventures - Services Services ventures - PFI PFI Investments Investments £m £m £m £m £m £m £m £mRevenues 262.9 73.9 106.6 443.4 319.1 88.1 156.7 563.9 Operating profit 28.1 0.8 3.8 32.7 28.9 1.8 4.8 35.5 Net interest 1.1 - 2.8 3.9 0.7 - 3.0 3.7receivable Taxation (3.0) (0.2) (2.4) (5.6) (6.5) (0.5) (3.1) (10.1) Group share of 26.2 0.6 4.2 31.0 23.1 1.3 4.7 29.1profit Amortisation of (0.5) - - (0.5) (0.4) - - (0.4)acquired intangibles Total operating 25.7 0.6 4.2 30.5 22.7 1.3 4.7 28.7profit Dividends (25.9) (1.0) (5.2) (32.1) (13.9) (1.0) (2.7) (17.6) Retained profits (0.2) (0.4) (1.0) (1.6) 8.8 0.3 2.0 11.1

11. Retirement benefit schemes

The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.

Assumptions 2010 2009 2008 Retail price inflation 3.40% pa 3.50% pa 2.90% pa Consumer price index 2.80% pa n/a n/a Discount rate 5.40% pa 5.60% pa 6.30% pa

Pension increases in payment:

LPI/RPI 3.30%/3.40% 3.40%/3.50% 2.70%/2.90% Fixed 5% 5.00% 5.00% 5.00%

3% or RPI if higher (capped at 5%) 3.70% 3.70% 3.50%

General salary increases 4.15-4.90% pa 4.25-5.00% pa 3.65-4.40% pa

The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:

2010 2009 2008 2007 2006 £million £million £million £million £million Present value of defined 642.3 627.4 534.2 563.4 557.2benefit obligation Fair value of schemes' (590.8) (532.1) (381.1) (480.3) (445.8)assets

Liability recognised in 51.5 95.3 153.1 83.1 111.4 the balance sheet

The amounts recognised in the income statement are as follows:

2010 2009 £million £million Employer's part of current service cost 6.3 11.0 Interest cost 34.5 33.2 Expected return on plan assets (32.3)

(24.4)

Gains on curtailments and settlements -

(20.6)

Total expense/(income) recognised in the income 8.5

(0.8)

statement The current service cost is included within operating profit. The interest costand expected return on assets are included within financing costs. Thecurtailment gain, which arose on the decision in 2009 to close the InterservePension Scheme to future accrual of benefits to the majority of members, isshown within exceptional items in the income statement.12. Share capital Shares Share capital thousands £million As at 1 January 2009 125,016.4 12.5 Share awards issued 351.4 - As at 31 December 2009 125,367.8 12.5 Share awards issued 436.6 0.1 At 31 December 2010 125,804.4 12.613. Related parties

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period, Group companies entered into the following transactions with related parties who are not members of the Group:

Sales of goods Purchases of Amounts owed Amounts owed goods and services and services by related to related parties parties 2010 2009 2010 2009 2010 2009 2010 2009 £m £m £m £m £m £m £m £m Joint 225.2 195.5 0.1 - 1.1 - - -ventures - PFI Investments

Associates 103.1 135.4 1.0 3.0 2.3 1.6 - -

Sales and purchases of goods and services to related parties were made on normal trading terms.

The amounts outstanding shown in the above table are unsecured and will besettled in cash. No guarantees have been given or received on these amounts. Noprovisions have been made for doubtful debts in respect of the amounts owed

byrelated parties.14. Contingent liabilities

In the normal course of business, the Group is involved in disputes and litigation with third parties. Appropriate provision has been made in these financial statements for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.

The Company and certain subsidiary undertakings have, in the normal course ofbusiness, given performance guarantees and provided indemnities to thirdparties in relation to performance bonds and other contract related guarantees.These relate to the Group's own contracts and to the Group's share of thecontractual obligations of certain joint ventures and associated undertakings.The Group acts as guarantor for the following: Maximum guarantee Amounts utilised 2010 2009 2010 2009 £million £million £million £million Associated undertakings' 17.1 18.4 0.2 0.2borrowings Joint venture and associated 200.6 180.7 119.3 111.2

undertakings' bonds and guarantees Total 217.7 199.1 119.5 111.4

15. Reconciliation of non-statutory measures

The Group uses a number of non-statutory measures to monitor the performance ofits business. This note reconciles these non-statutory measures to individuallines in the financial statements.1) Headlinepre-taxprofit 2010 2009 2008 £million £million £million Profit before tax 64.1 89.2 79.9 Adjusted for

Amortisation of acquired intangible assets 5.0 5.0

5.0

Share of associates amortisation of acquired 0.5 0.4

0.3intangible assets Exceptional items (note 4) - (16.3) - Headline pre-tax profit 69.6 78.3 85.22) Operating cash flow 2010 2009 2008 £million £million £million Cash generated by operations 10.1 41.0 58.6 Adjusted for Pension contributions in excess of current service 26.7 15.5 10.7cost Special pension contribution - 61.5 -

Proceeds on disposal of property, plant and 29.8 15.1

20.2equipment Capital expenditure (20.3) (31.0) (54.8)

Cash impact of exceptional items - 11.6

- Operating cash flow 46.3 113.7 34.73) Free cash flow 2010 2009 2008 £million £million £million Operating cash flow 46.3 113.7 34.7 Adjusted for Pension contributions in excess of current service (26.7) (15.5) (10.7)cost Taxes paid (6.3) (15.7) (14.0)

Dividends received from associates and joint 32.1 17.6

13.5ventures Interest received 3.8 7.2 7.3 Interest paid (6.4) (5.8) (10.2)

Effect of foreign exchange rate change 0.3 (0.6)

2.2 Free cash flow 43.1 100.9 22.84) Operating cash conversion 2010 2009 2008 £million £million £million Three year rolling operating cashflow 194.7 199.6

140.5

Three year rolling operating profit, before 159.4 170.8

158.6

exceptional items and amortisation of acquired

intangible items Operating cash conversion 122.1% 116.9% 88.6%Non-statutory accountsThe information in this annual results announcement does not constitutestatutory accounts within the meaning of section 435 of the Companies Act 2006(the "Act"). The statutory accounts for the year ended 31 December 2010 will bedelivered to the Registrar of Companies in England and Wales in accordance withsection 441 of the Act. The auditor has reported on those accounts. Its reportwas unqualified and did not contain a statement under section 498(2), (3) or(4) of the Act.

The Directors' report is the "management report" for the purposes of DTR 4.1.8R.

Annual report

The Company's annual report and accounts for the year ended 31 December 2010 isexpected to be posted to shareholders by 6 April 2011. Copies of both thisannouncement and the annual report and accounts will be available to the publicat the Company's registered office at Interserve House, Ruscombe Park, Twyford,Reading, Berkshire RG10 9JU and through the Company's website atwww.interserve.com.

Cautionary statement

Statements made in these Annual Financial Results ("Results") reflect theknowledge and information available at the time of their preparation. TheResults contain forward-looking statements in respect of the Group'soperations, performance, prospects and financial condition. By their nature,these statements involve uncertainty. In particular, outcomes often differ fromplans or expectations expressed through forward-looking statements and suchdifferences may be significant. Assurance cannot be given that any particularexpectation will be met. No responsibility is accepted to update or revise anyforward-looking statement resulting from new information, future events orotherwise. Liability arising from anything in the Results shall be governed byEnglish Law. Nothing in the Results should be construed as a profit forecast.

Responsibility statement of the directors in respect of the annual results announcement

The annual report contains the following statements regarding responsibility for the financial statements and Directors' report included in the annual report:

"The directors confirm that, to the best of their knowledge:

a) the Company and Group financial statements in this Annual report, which havebeen prepared in accordance with UK GAAP and IFRS, respectively, give a trueand fair view of the assets, liabilities, financial position and profit of theCompany and of the Group taken as a whole; and(b) the Directors' report contained in this Annual report includes a fairreview of the development and performance of the business and the position ofthe Company and the Group taken as a whole, together with a description of theprincipal risks and uncertainties that they face."By order of the BoardA M Ringrose T P Haywood Chief Executive Group Finance Director 9 March 2011

vendor