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Virgin Media 10-K 2008

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)  

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              

Commission File No. 000-50886


VIRGIN MEDIA INC.
(Exact name of registrant as specified in its charter)

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED
(Additional Registrant)

Delaware
(State or other jurisdiction of incorporation or organization)
  59-3778247
(I.R.S. Employer Identification No.)

909 Third Avenue, Suite 2863 New York, New York
(Address of principal executive office)

 

10022
(Zip Code)

(212) 906-8440
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

 

NASDAQ National Market

Series A Warrants to purchase shares of Common Stock

 

NASDAQ National Market

           Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

           Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

           Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

           Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

           Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

           Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

           The aggregate market value of the registrant's voting stock held by non-affiliates as of June 29, 2007 based on the closing price for the registrant's common stock on the NASDAQ National Market on such date, was $7,937,008,713.

           As of February 26, 2008, there were 327,791,514 shares of the registrant's common stock, par value $0.01 per share, issued and outstanding, excluding 25,769,060 shares of the registrant's common stock issuable upon the exercise of Series A Warrants and 1,240,409 unvested shares of restricted stock held in escrow.

           The Additional Registrant meets the conditions set forth in the General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. See "Note Concerning VMIH" on page 3 in this Form 10-K.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:

           Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o

DOCUMENTS INCORPORATED BY REFERENCE

           Portions of the registrant's definitive Proxy Statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III.




VIRGIN MEDIA INC. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007


TABLE OF CONTENTS

 
   
  Page
PART I        
Item 1.   Business   7
Item 1A.   Risk Factors   29
Item 1B.   Unresolved Staff Comments   41
Item 2.   Properties   41
Item 3.   Legal Proceedings   41
Item 4.   Submission of Matters to a Vote of Security Holders   41

PART II

 

 

 

 
Item 5.   Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   42
Item 6.   Selected Financial Data   44
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   46
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   77
Item 8.   Financial Statements and Supplementary Data   80
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   80
Item 9A.   Controls and Procedures   80
Item 9B.   Other Information   82

PART III

 

 

 

 
Item 10.   Directors, Executive Officers and Corporate Governance   83
Item 11.   Executive Compensation   83
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   83
Item 13.   Certain Relationships and Related Transactions and Director Independence   83
Item 14.   Principal Accountant Fees and Services   83

PART IV

 

 

 

 
Item 15.   Exhibits and Financial Statement Schedules   83

Index to Consolidated Financial Statements and Financial Statement Schedules

 

F-1

SIGNATURES

 

 

EXHIBIT INDEX

 

 

2


"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

        Various statements contained in this document constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. Words like "believe," "anticipate," "should," "intend," "plan," "will," "expects," "estimates," "projects," "positioned," "strategy," and similar expressions identify these forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from those contemplated, projected, forecasted, estimated or budgeted, whether expressed or implied, by these forward-looking statements. These factors, among others, include:

    the ability to compete with a range of other communications and content providers;

    the ability to manage customer churn;

    the continued right to use the Virgin name and logo;

    the ability to maintain and upgrade our networks in a cost-effective and timely manner;

    possible losses in revenues due to systems failures;

    the ability to provide attractive programming at a reasonable cost;

    the ability to control unauthorized access to our network;

    the effect of technological changes on our businesses;

    the reliance on single-source suppliers for some equipment, software and services and third party distributors of our mobile services;

    the ability to achieve our business plans;

    the ability to fund debt service obligations through operating cash flow;

    the ability to obtain additional financing in the future and react to competitive and technological changes;

    the ability to comply with restrictive covenants in our indebtedness agreements; and

    the extent to which our future cash flow will be sufficient to cover our fixed charges.

        These and other factors are discussed in more detail under "Risk Factors" and elsewhere in this Form 10-K. We assume no obligation to update our forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting these statements.

Note Concerning VMIH

        This annual report on Form 10-K (excepting financial statements responsive to Part IV, Item 15) covers both Virgin Media Inc., or Virgin Media, and Virgin Media Investment Holdings Limited, or VMIH, an English company with an address at 160 Great Portland Street, London W1W 5QA, United Kingdom, that is a wholly-owned subsidiary of Virgin Media Finance PLC and a wholly-owned indirect subsidiary of Virgin Media. VMIH is not an accelerated filer. VMIH is one of the guarantors of Virgin Media Finance PLC's 9.75% senior notes due 2014 (sterling denominated), 8.75% senior notes due 2014 (euro denominated), 8.75% senior notes due 2014 (U.S. dollar denominated), and 9.125% senior notes due 2016 (U.S. dollar denominated). VMIH's guarantee of those notes is not deemed to be unconditional.

        VMIH carries on the same business as Virgin Media, and is the principal borrower under Virgin Media's senior credit facility. In this annual report, unless the context otherwise requires, the terms "Virgin Media," "the Company," "we," "us," "our" and similar terms refer to the consolidated business

3



of Virgin Media Inc., including VMIH and its subsidiaries. Unless otherwise indicated, the discussion contained in this report applies to VMIH as well as Virgin Media Inc.

Note Concerning Financial Information and Currency of Financial Statements

        All of the financial statements included in this annual report have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The reporting currency of our consolidated financial statements is U.K. pounds sterling.

Note Concerning Historical Structure of the Company

        Virgin Media Inc. is a Delaware corporation and is publicly traded on the NASDAQ National Market in the United States.

        Our historical structure is as follows:

        NTL Incorporated was incorporated in 1993 as a Delaware corporation and continued as a publicly traded holding company until February 1999. From February 1999 until January 10, 2003, NTL Incorporated was a wholly-owned subsidiary of NTL (Delaware), Inc., a Delaware corporation, referred to in this annual report as NTL Delaware, which was incorporated in February 1999 in order to effect a reorganization into a holding company structure. The holding company structure was implemented to pursue opportunities outside of the United Kingdom, or the U.K., and Ireland, and was accomplished through a merger. NTL Incorporated's stockholders at the time became stockholders of the new holding company, NTL Delaware. The new holding company took the name NTL Incorporated until May 2000, when its name was changed back to NTL (Delaware), Inc.

        In May 2000, another new holding company structure was implemented in connection with the acquisition of the cable assets of Cable & Wireless Communications plc, or CWC (the operations acquired from CWC are called ConsumerCo), and was accomplished similarly through a merger. The stockholders of NTL Delaware became stockholders of the new holding company, NTL Delaware became a subsidiary of the new holding company, and NTL remained a subsidiary of NTL Delaware. The new holding company then took the name NTL Incorporated, which remained its name until January 10, 2003, at which time its name was changed to NTL Europe, Inc., referred to in this annual report as NTL Europe. On February 21, 2001, NTL Europe contributed the assets of ConsumerCo to NTL.

        On January 10, 2003, NTL emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the plan of reorganization, which we refer to as the Plan, NTL's former parent, NTL Europe, and its subsidiaries and affiliates were split into two separate groups, with NTL and NTL Europe each emerging as independent public companies. We were renamed NTL Incorporated and became the holding company for the former NTL group's principal U.K. and Ireland assets. NTL Europe became the holding company for the former NTL group's continental European and various other assets. All of the outstanding securities of NTL's former parent and some of its subsidiaries, including NTL, were cancelled. NTL issued shares of its common stock and Series A warrants, and NTL Europe issued shares of its common stock and preferred stock, to various former creditors and stockholders. As a result, NTL is no longer affiliated with NTL Europe. NTL Europe has since changed its name to PTV Inc., or PTV.

        On March 3, 2006, NTL merged into a subsidiary of Telewest Global, Inc., or Telewest, which changed its name to NTL Incorporated. Because this transaction is accounted for as a reverse acquisition, the financial statements included in this Form 10-K for the period through March 3, 2006 are those of NTL, which is now known as Virgin Media Holdings Inc. For the period since March 3, 2006 our financial statements reflect the reverse acquisition of Telewest. See note 1 to the consolidated financial statements of Virgin Media Inc. The merger combined the two largest U.K. cable operators,

4



with the resulting company becoming the U.K.'s largest provider of residential broadband and triple-play services of television, broadband and fixed line telephone. The total acquisition price was £3.5 billion, including £2.3 billion in cash, common stock valued at £1.1 billion and stock options and transaction costs.

        On July 4, 2006, we added a mobile phone offering by acquiring 100% of the outstanding shares and options of Virgin Mobile Holdings (UK) plc, or Virgin Mobile, through a U.K. Scheme of Arrangement. The total purchase price was £953.2 million, including common stock valued at £518.8 million, cash of £419.2 million and transaction costs. We also entered into a license agreement with Virgin Enterprises Limited under which we are licensed to use certain Virgin trademarks within the United Kingdom and the Republic of Ireland.

        In February 2007, we rebranded our consumer and a large part of our content businesses to "Virgin Media". We also changed the name of our corporate parent from NTL Incorporated to Virgin Media Inc. and the corporate names of certain of our subsidiaries, including:

    NTL Investment Holdings Limited, the principal borrower under our senior credit facility, to Virgin Media Investment Holdings Limited;

    NTL Cable PLC, the issuer of our public bonds, to Virgin Media Finance PLC;

    NTL Group Limited, a principal operating subsidiary, to Virgin Media Limited;

    Flextech Television Limited, our content subsidiary, to Virgin Media Television Limited;

    NTL Communications Limited to Virgin Media Communications Limited; and

    NTL Holdings Inc. to Virgin Media Holdings Inc.

        For the purposes of this annual report, the new names will be used where applicable. In this annual report, unless we have indicated otherwise, or the context otherwise requires, references to:

    "Virgin Media," "the Company," "we," "us," "our" and similar terms refer to Virgin Media Inc. and its subsidiaries (which include Telewest and its subsidiaries and Virgin Mobile and its subsidiaries);

    "NTL" refers to NTL Incorporated and its subsidiaries as they existed prior to the name change to Virgin Media Inc. and prior to the merger with Telewest refers to Virgin Media Holdings Inc. (which was formerly known as NTL Incorporated before the merger); and

    "Telewest" refers to Telewest Global, Inc. and its subsidiaries as they existed prior to the merger with NTL in March 2006.

5


Summary Corporate Structure

        The following chart shows the corporate structure of Virgin Media through which our primary operations are conducted. This is a condensed chart and it does not show all of our operating and other intermediate companies.

GRAPHIC


(1)
Virgin Media Inc. indirectly owns other non-material subsidiaries, which are not shown here in this chart.

(2)
Issuer of our 8.75% U.S. dollar senior notes due 2014, 9.75% Sterling senior notes due 2014, 8.75% Euro senior notes due 2014 and 9.125% U.S. dollar senior notes due 2016.

(3)
Substantially all of the assets of Virgin Media Investment Holdings Limited and its subsidiaries secure our senior credit facility. Virgin Media Investment Holdings Limited is the principal borrower under our senior credit facility.

(4)
Virgin Media Limited is one of our principal operating companies, although significant portions of our operations are conducted through its subsidiaries.

(5)
Virgin Mobile Holdings (UK) Limited was acquired by us pursuant to a U.K. Scheme of Arrangement on July 4, 2006.

6



PART I

Item 1.    Business

Overview

        Virgin Media is a leading U.K. entertainment and communications business providing the first "quad-play" offering of television, broadband, fixed line telephone and mobile telephone services in the U.K. together with one of the most advanced TV on demand services available in the U.K. market. By customer numbers, we are the U.K.'s largest residential broadband and mobile virtual network operator and the second largest provider in the U.K. of pay television and fixed line telephone services. We believe our advanced, deep fiber access network enables us to offer faster and higher quality broadband services than our digital subscriber line, or DSL, competitors. Through ntl:Telewest Business, which also operates under the Virgin Media group, we provide a complete portfolio of voice, data and internet solutions to leading businesses, public sector organizations and service providers in the U.K.

        Through Virgin Media Television, or Virgin Media TV, we also provide a broad range of programming through our wholly-owned channels, such as Virgin 1, Living and Bravo; through UKTV, our joint ventures with BBC Worldwide; and through the portfolio of retail television channels operated by sit-up tv.

        We presently manage our business through three reportable segments:

    Cable (76.8% of our 2007 revenue):  our cable segment includes the distribution of television programming over our cable network and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations, both on our cable network and, to a lesser extent, off our network;

    Mobile (14.7% of our 2007 revenue):  our mobile segment includes the provision of mobile telephone services under the name Virgin Mobile to consumers over cellular networks owned by third parties; and

    Content (8.5% of our 2007 revenue):  our content segment includes the operations of our U.K. television channels, such as Virgin 1, which was launched on October 1, 2007, as well as Living, Bravo, and sit-up's portfolio of retail television channels. Although not included in our content segment revenue, our content segment management team also oversees our interest in the UKTV television channels through our joint ventures with BBC Worldwide.

        For financial and other information on our segments, refer to note 19 to Virgin Media's consolidated financial statements included elsewhere in this annual report.

        On February 6, 2007, we changed our name from NTL Incorporated to Virgin Media Inc. as part of our rebrand to Virgin Media. Virgin is one of the most recognized consumer brands in the world and gives us a prominent profile in a crowded communications marketplace. We believe the strong heritage and reputation of the Virgin brand is a powerful competitive advantage and our distinctive approach to advertising, packaging and marketing differentiates us from our competitors.

        We are incorporated in the State of Delaware, United States. Our principal executive offices are located at 909 Third Avenue, Suite 2863, New York, New York 10022, United States, and our telephone number is (212) 906-8440. Our U.K. headquarters are located outside of London, England in Hook, Hampshire, United Kingdom. Our website is www.virginmedia.com and the investor relations section of our website can be accessed under the heading "About Virgin Media—Investors Information" or at www.virginmedia.com/investors, where we make available free of charge annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this annual report.

7


Our Business

Cable Segment

        In our Cable segment, we provide our services to residential consumers and business customers.

Consumer

        We provide television, internet (broadband and dial-up) and fixed line telephone services under the Virgin Media brand to residential customers in the U.K. Our services are distributed principally via our wholly-owned, cabled, local access communications network and are available to an addressable market of approximately 12.6 million homes. The network covers parts of many major metropolitan areas in England, Wales, Scotland and Northern Ireland. In addition, we provide broadband and telephone services to residential customers outside of our network via access to other telecommunications networks, which we refer to in this annual report as "off-net". We also provide Virgin Mobile services both on a pre-paid pay-as-you-go basis or on a contractual basis. Increasingly, we seek to grow our mobile customer base by selling to our existing Virgin Media customer base. See "Mobile Segment" below.

        We believe that our deep fiber local access communications network provides us with several competitive advantages in our addressable markets:

    Virgin Media, uniquely, has fiber already deployed to street cabinets. From there, our twin cable, consisting of both high capacity coaxial cable and twisted copper-pair elements, provides us with the flexibility to deliver broadband services over either or both coaxial or copper cables. Currently, we provide our broadband internet services over coaxial cable, which we believe allows us to provide a superior broadband experience to our customers as our network has fiber generally closer to a customer's home than BT or our other competitors who use BT's access network. BT's access infrastructure is copper pair technology over which broadband speeds can significantly diminish with distance from the local exchange. In 2008, we plan to use our advantage to offer increasingly faster broadband services.

    It provides real two-way interactivity with residential customers who are connected to the network, which enables us to offer video on demand services through the set-top box.

    It enables us to provide true "triple-play" bundled services of television, broadband, and fixed line telephone services to residential customers in our franchise areas without relying on another service provider or network.

        In contrast:

    Direct to home satellite service providers do not have the capacity to offer two-way interactivity except by adding a phone line from another service provider or other cable facility.

    Communication service providers today have only a limited capacity to provide video over existing DSL technology, using BT's access network, without significant capital investment in their network.

        Virgin Media was the first U.K. provider of a residential "triple-play" offering of television, broadband and fixed line telephone services. Our packaging and pricing are designed to encourage residential customers to purchase multiple services from us and we frequently offer discounts to customers taking two or more products from our portfolio. As of December 31, 2007, more than 79%

8


of our residential customers on our network, which we refer to as "on-net", received multiple services from us and approximately 49.5% of our on-net customers were "triple-play".

        With our acquisition of Virgin Mobile in July 2006, Virgin Media began offering the U.K.'s first "quad-play" of television, broadband, fixed line telephone and mobile telephone services to residential customers. We expect to drive both mobile and cable penetration through the two customer bases by applying our past experience of cross selling products. See "Mobile Segment" below.

        As part of our rebrand in 2007, we renamed our product offerings and bundles so they are easy to understand. For each of our products, we have a range of packages and tariffs for customers to choose from and have labeled them as Medium (M), Large (L) and Extra Large (XL). For example, we currently offer a 2Mb broadband service as Medium, a 4Mb service as Large and a 20Mb service as Extra Large. In 2008, we plan to increase the speed of our 4Mb service to 10Mb, strengthen the capacity of our 20Mb service and launch a 50Mb service, resulting in four tiers of broadband service at 2Mb, 10Mb, 20Mb and 50Mb. From time to time, we may enhance the value of our M, L or XL bundles as we did in 2007 by increasing the speed of our 10Mb broadband service to 20Mb, and by offering the Setanta Sports channels to our XL customers at no additional cost.

        We offer a wide range of digital, or DTV, and analog, or ATV, television services. As of December 31, 2007, we provided cable television services to approximately 3.5 million residential customers, of which approximately 3.3 million received our DTV service and approximately 0.2 million received our ATV service.

        Our DTV service includes access to over 130 television channels, advanced interactive features, and a range of premium and pay-per-view services. Our ATV service packages offer up to 60 television channels, including premium services. In addition to offering the basic and premium pay TV channels, we also offer our DTV customers one of the most comprehensive Video on Demand, or VOD, services in the U.K. called "Virgin TV On Demand". See "Virgin TV On Demand" below.

        Our network technology enables us to deliver a significant range of digital interactive services over an 'always on' broadband connection from the network to a customer's home. Examples of interactive services provided include games, television email and access to news, entertainment and information services from an on-screen menu. Interactive services also include enhanced television functionality utilizing the "red button" applications from the BBC and other commercial broadcasters. "Red button" functionality in the U.K. permits television viewers to press a red button on their remote control handset to receive additional interactive services including multiple broadcasts. For example, in a Wimbledon tennis broadcast, a customer can press the red button and choose which match to watch.

        In 2007, we introduced "Free TV" for customers who purchase a Size M fixed line telephone service from us where, similar to Freeview, customers can access over 40 linear channels and radio services such as Virgin 1, Five US, Five, E4 and UKTV History as well as Setanta Sports News. In addition, customers also have access to red button functionality and Virgin TV On Demand.

        Virgin TV On Demand is a significant enhancement to the existing DTV service, offering viewers choice over and above scheduled programming without any requirement for new equipment, installation or additional subscription. The VOD service provides access to thousands of hours of premium movies, music videos, and TV programs and series on demand. It appears within the existing electronic programming guide, and can be accessed and viewed at any time via the remote control. The service offers DVD-style features including freeze frame, fast-forward and rewind. These features provide a customer with control over the content and timing of their television viewing. This service is available

9


to almost all of our digital customers. In 2007, VOD usage increased to 33 million average monthly views in the fourth quarter from 14 million average monthly views in the first quarter. We believe customers who use VOD are less likely to churn.

        There are three primary types of content available within Virgin TV On Demand, a portion of which is refreshed on a daily basis. A selection of content is available to watch for free to all DTV customers irrespective of package size. This is primarily focused within our 'catch-up' TV service which offers a selection of more than 150 hours of top broadcast TV shows from the previous seven days for no additional charge. Additionally, all DTV customers have access to pay-per-transaction content including over 1,300 pay-per-track music videos and 500 current and library movies provided by 'FilmFlex'. In total, we have over 4,000 hours of on-demand content. New movies within this library are available on VOD up to nine months before they appear on scheduled TV movie channels. Pay-per-transaction programs are available for 24 hours after purchase and can be watched as many times as a customer wishes during that period for only one single charge. Finally, DTV customers that subscribe to our Size XL Virgin TV package have additional access to a subscription VOD, or SVOD, package which includes premium TV shows and music videos, all included within the price of their monthly subscription. Customers on our other TV packages can also receive the SVOD package on payment of a monthly subscription charge.

        In 2007, we launched an innovative new kind of television channel called "Virgin Central", which combines the simplicity of a traditional channel with the choice and control of next generation TV-on-demand technology. The channel hosts a continuously refreshing showcase of entertainment around the clock. As with our other VOD offerings, by pressing one button and using a simple on-screen guide, viewers have instant access to different episodes of the show they select. They can then stop, rewind and pause—just like using a DVD player. Virgin Central includes free access to hit shows like Sopranos, The OC, Nip/Tuck, Grey's Anatomy, Spooks, Cold Case and Lost. The content is updated regularly and, unlike a traditional TV channel, subscribers do not need to wait for scheduled start times.

        We also offer one of the most advanced fully-supported digital video recorders, or DVRs, for a premium monthly rental option or an up-front payment as part of our top bundle. The Virgin Media DVR box, which is called the "V+ Box", is available to our entire DTV customer base. The V+ Box has 160 Gigabytes of storage space (up to 80 hours of broadcast television), is high definition, or HD, enabled and has three tuners, allowing viewers to record two programs while watching a third. V+ Box customers that also have an HD compatible television can access our HD on demand content. Digital video recorders are also known as personal video recorders, or PVRs, in the United Kingdom. In 2008, we plan to further enhance the functionality of our V+ Box.

        We deliver high-speed broadband and dial-up internet access to customers within reach of our access network by direct connection to our network. We offer broadband services at a selection of download speeds: 2Mb for Size M customers, 4Mb for Size L customers and 20Mb for Size XL customers. During 2008, we plan to increase the speed of the 4Mb service to 10Mb and launch a 50Mb service. All of our broadband services offer unlimited usage (subject to our fair usage policy) and PC security software. Premium broadband services (which are free for Size L and XL customers) include advanced security features such as anti-spyware and premium broadband content. We plan to focus our efforts on increasing our market share in the U.K. by marketing the benefits of our high-speed broadband service to both existing and potential customers. As of December 31, 2007, we provided on-net broadband services to approximately 3.4 million customers.

10


        Virgin Media operates a content destination site, virginmedia.com, which is regularly in the top ten of most visited sites in the U.K. and in the top 15 by page ranking. There is a broad base of content available on our website, with a particular strength in sports content. For example, exclusive near-live clips of English football programming over the internet are available on this website. We also use the website to cross-promote our entire product range and to generate advertising revenues. Our customers can access their broadband email services as well as customer care information through the website.

        We also provide broadband and dial-up internet services to residential customers who do not purchase our cable broadband service via BT's local access network. Various price and feature packages are available including broadband ranging from 512Kb to 8Mb, and metered and unmetered dial-up. As of December 31, 2007, we had approximately 287,300 broadband customers using this service.

        We provide local, national and international telephone services to our residential customers who are within reach of our access network by direct connection to our network. We enhance our basic telephone service by offering additional services, such as call waiting, call barring (which prevents unauthorized outgoing calls), call diversion (call forwarding), three-way calling, advanced voicemail, caller line identification and fully itemized monthly billing. We also provide national and international directory enquiry services.

        In addition to a core line rental fee, we offer Size M, L and XL variants of our fixed line telephone service as alternatives to straight usage-based billing. These packages include "Talk Plans" that enable customers to make unlimited local and national calls for a fixed monthly fee in addition to the standard line rental. As of December 31, 2007, we provided on-net telephone services to approximately 4.0 million residential customers.

        We also provide phone service via BT's local access network to customers not connected to our network. As of December 31, 2007, we provided this type of telephone service to approximately 103,900 customers.

        We use a variety of sales channels to sell our services to residential customers, including telesales, online and retail channels. Historically, telesales has been the single largest channel for consumer product sales. We expect, however, growth in the proportion of sales coming from online and retail channels. Retail channels include 13 of our own Virgin Media-branded stores as of December 31, 2007, as well as retail distribution partners such as Zavvi (formerly Virgin Megastores), Carphone Warehouse and Phones 4U.

        Prior to the acquisition of Virgin Mobile, our consumer retail reach was limited to concessions and third party retail channels. In 2007, we leveraged Virgin Mobile's retail experience with the launch of a series of Virgin Media-branded stores. In 2008, we expect to open additional Virgin Media-branded stores.

        These sales channels are supported by direct marketing initiatives and national and regional television and press advertising. We use our residential customer database to identify the profiles of our customers so that we can design offers to match the needs of our customers. As Virgin Media, we have the scale and reach as a combined company to justify larger television and radio campaigns. Our offers encourage customers to purchase new services and upgrade their existing services. Our marketing balances acquisition marketing, or prospects, and customer marketing to ensure we optimize growth from new and existing customers.

        Since the February rebrand to Virgin Media, awareness of the "Virgin" brand as a telecoms/entertainment supplier has increased steadily, reaching 90% amongst prospective customers in our

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addressable market at year end. Brand consideration, which measures the likelihood of a person considering to purchase a product from a particular company, also improved during 2007 for each of our product lines.

        A combination of in-house call centers and outsource partners handle our customer service calls. Our in-house call centers are located in the U.K. in Bellshill (Scotland), Manchester, Sheffield, Dudley, Nottingham, Glenrothes, Edinburgh, Gateshead, Teeside and Birmingham. As of December 31, 2007, we employed approximately 3,200 call center staff. Our outsourced call centers in the U.K. are located in Swansea, Liverpool and Airdrie (Scotland) and our outsourced call centers off-shore are located in India in Delhi, Pune, Bangalore and Mumbai.

Business

        ntl:Telewest Business retains its focus on meeting the communications requirements of U.K. public and private sector organizations, and serving other telecommunications service providers. Through the merger of NTL and Telewest in 2006 and the subsequent integration of their networks, we are now able to leverage one of the most advanced national access networks in the U.K., delivering a wide portfolio of voice and data products to business customers.

        While the wider organization has rebranded to Virgin Media, ntl:Telewest Business has retained its legacy brand. Being a business predicated upon customer relationships, a strong service proposition and sector specific expertise, significant brand equity has been created in the market over the past 15 years by each of the legacy businesses.

        The two sales organizations within the division, Business Markets and Service Provider, are structured to support retail and wholesale customers, respectively.

    Business Markets—Private Sector:  This sales channel focuses on meeting the telecommunications needs of the U.K. private sector, from small businesses to large, national corporations. Centralized telephone account managers serve small organizations (with approximately 5 to 99 employees), while regionally-located account, service and project management teams, supported by pre-sales technical consultants, offer a differentiated service proposition to medium and large U.K. businesses (with over 100 employees). We believe this local presence and the resulting level of service is not available to this mid-market segment from any of our key competitors and the benefits of this strategy are reflected by the long-term relationships held with many of our customers.

    Business Markets—Public Sector:  This sales channel focuses on specific vertical segments, including local government, education, health and the emergency services. This meets a requirement for sector-specific expertise where an understanding of the drivers and procurement processes of publicly funded organizations is needed to enable the efficient deployment of communications solutions. The inclusion of ntl:Telewest Business as an approved supplier under various government framework agreements acts as both an enabler of growth in this sector and an endorsement of our track-record, commitment and capability to offer value to publicly funded organizations. An area of specific focus in 2007 and moving forward into 2008 lies within the health sector and the deployment of Community of Interest Networks, or COINs. Given our deep regional coverage, we believe we are ideally placed to deliver these multi-site solutions, which enable health authorities to move to integrated network architectures, delivering cost benefits.

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    Service Provider—This sales channel is divided into vertical segments, including fixed and mobile network operators, system integrators, or SIs, and internet service providers, or ISPs, reflecting the differing network requirements of each type of service provider. This sales channel predominantly provides data connectivity both in terms of local access (tail-ends) and core networks. Being well placed to leverage our extensive network asset, the Service Provider sales channel has demonstrated strong underlying growth in providing customers with backhaul solutions, which are high bandwidth connections between a site and the core network. We believe significant market demand exists for such services driven by local loop unbundlers transporting data away from BT exchanges, as well as mobile operators requiring higher bandwidth connections from mobile masts as a result of growth in 3G and data services.

        In addition to network services, a small number of significant contracts drive financial performance, such as local area network cabling projects in Business Markets, such as the new Terminal 5 at Heathrow Airport, and network builds for other operators in Service Provider where revenue peaks during construction phases and lower ongoing rentals are received during the maintenance phase.

        ntl:Telewest Business offers a wide portfolio of voice and data services, from analog telephony to managed data networks and applications. Our product strategy is focused on delivering managed services, such as customer contact solutions, national Ethernet and internet protocol virtual private networks, or IP VPN, products which as a result, have experienced strong growth since 2005.

        We enhance product development through an internal program we have developed that drives regular and timely deliverables that are aligned with the needs of target customers. This clear focus has helped to maintain our leadership in Ethernet services in 2007, innovate in new areas such as IP CCTV, and drive cost-base improvements in more traditional services.

        Voice Products and Services

    Outbound and Inbound Voice:  We offer a complete suite of voice products ranging from analog and digital services to converged IP telephony solutions. Strong regional presence and expertise has driven market share in products such as Centrex, where local government and private sector organizations benefit from a managed platform that delivers a uniform suite of features across multiple sites. Developments like IP Multimedia, which offers functionality such as desktop-to-desktop video conferencing, represent the next generation of voice services in a converging IP world.

        Data Products and Services

    Converged Solutions:  By using a single network to transport voice, data and video, our customers can benefit from cost synergies, flexibility and control. The services within our converged solutions portfolio enable this with products such as IP VPN. Given our network ownership and extensive reach, we are able to link sites across the U.K. using a wide range of access technologies and with developments such as eight classes of service (currently more than offered by any other U.K. service provider) traffic can be discretely segmented into up to eight categories and prioritized to ensure that more time sensitive (e.g. voice) or critical application data is transported with priority.

    Ethernet:  As a market leader in Ethernet solutions in the U.K., ntl:Telewest Business was the first European service provider to be independently tested and accredited by the Metro Ethernet Forum, or MEF. MEF9 and MEF14 accreditation demonstrates our ability to deploy 'point-to-point' and 'any-to-any' Ethernet networks that can be installed and scaled effectively,

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      while offering performance that supports voice, video and converged services. A complete range of products from local area network extensions to managed wide area Ethernet networks are available, providing customers with high bandwidth and flexible solutions.

    Applications and Services:  As an overlay to network products, we also offer applications and services that add value to customers' communications infrastructure. For example, the IP CCTV services we deployed to a Scottish council delivered clear socioeconomic benefits and earned recognition by winning the 2007 IFSEC (a leading event for the security industry) Best Security Project award, as well as the Frost & Sullivan (a leading industry consultancy) accolade for Product Innovation.

        The goal of ntl:Telewest Business is to become the natural choice for providing the communications requirements of our target customers, something we aim to achieve by delivering the best customer experience. This is reflected in the strategic emphasis of the division, focusing over 75% of ntl:Telewest Business employees on the sales, provisioning and in-life support of customers and their services. We believe this differentiated and complete service proposition provides us with a competitive advantage in our target market.

        To maintain our capability and continually add value to our customers' experiences, we also focus investment in our people, developing teams in best-practice methodologies and supporting professional qualifications. The Cisco Gold Partnership requires sales and technical teams to be appropriately trained in new technologies, while Lean Sigma within business improvement teams, PRINCE2 (Projects in Controlled Environments 2) and APM (The Association for Project Management) in project management, and ITIL (IT Infrastructure Library) Best Practice accreditation within service management, all seek to ensure that employees are capable of responding professionally and effectively to customers.

Mobile Segment

        On July 4, 2006, we acquired Virgin Mobile, the U.K.'s leading mobile virtual network operator, with approximately 4.5 million customers as of December 31, 2007. As a mobile virtual network operator, Virgin Mobile provides mobile telephone services to its customers over cellular networks owned by third parties. Virgin Mobile's main network partner currently is T-Mobile, and Virgin Mobile has entered into a minimum 10 year, non-exclusive network supply agreement with T-Mobile that was signed in January 2004. The majority of Virgin Mobile's customers are prepay customers, who top up their accounts prior to using the services and are not contracted to remain with Virgin Mobile for any period of time. Contract customers enter into contracts with Virgin Mobile for a minimum 30-day period. Virgin Mobile's customer base reflects a broad age demographic.

        Virgin Mobile's successful business philosophy is centered around five key strengths: a strong brand; a capital-light business model; a differentiated approach to the market; award-winning customer service; and a focused management team. Increasingly, the opportunity to sell mobile services into the Virgin Media cable customer base will be a competitive differentiator for Virgin Mobile and for Virgin Media generally.

        Virgin Mobile offers a broad range of mobile communications products and services, such as mobile voice and non-voice services (including SMS, picture messaging and entertainment services, such as games, news and music services) delivered over 2G, 2.5G and 3G platforms. Virgin Mobile offers handsets and/or SIM cards by way of cross-sell opportunities into the Virgin Media cable customer base, and through approximately 5,000 sales outlets in the U.K., including approximately 1,300 specialist shops, concessions located in Zavvi (previously Virgin Megastores) and Virgin Media-branded stores, as well as through a wide range of general retailers, its website and its customer care centers. We plan to

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expand the distribution network by opening further retail stores over the next few years. The concessions and retail outlets act as both a sales and service channel and provide Virgin Mobile with direct access to its customers. Prepaid airtime is sold in all of these channels in addition to others.

        Virgin Mobile aims to provide superior customer service and has won the Best Customer Service Award from Mobile Choice magazine for the past seven years running, as well as many other industry customer service awards. Virgin Mobile's three existing customer call centers are located in Trowbridge (in-house) and Middlesbrough (outsourced) in England, and in Johannesburg, South Africa (outsourced). Customers can contact the call centers 24 hours per day, 7 days per week.

Content Segment

        Through our wholly-owned subsidiaries, Virgin Media Television Limited, or Virgin Media TV, and sit-up Limited, or sit-up, we provide basic (i.e., non-premium) television channels and related services to the U.K. multi-channel broadcasting market (including to our Cable Segment) and a wide variety of consumer products by means of sit-up's auction-based shopping channels.

        Virgin Media TV has seven genre-based entertainment channels, including Virgin 1, Living, Bravo, Trouble and Challenge, and five additional "multiplexed" channels which have identical content to another channel but broadcast one hour later. Virgin Media TV also owns a 50% interest in the companies that comprise the UKTV Group, a series of joint ventures with BBC Worldwide. Together, Virgin Media TV and the UKTV Group are the largest supplier of basic channels to the U.K. pay television market. UKTV currently has nine pay channels, including UKTV Gold and Dave, and eight associated multiplexed channels.

        Depending upon the distribution agreement with the platform operator and the package chosen by the customer, our wholly-owned and UKTV channels are available on our own analog and digital platforms and the satellite digital platform. These channels generate revenue by the sale of airtime and sponsorship to advertisers and advertising agencies by Virgin Media TV's advertising sales department, IDS (Interactive Digital Sales Limited). Most channels also generate distribution revenue based on either the number of customers subscribing to programming packages carried by the relevant platform operators or a fixed monthly fee. Virgin Media TV and UKTV are also represented on Freeview, a U.K. free-to-air digital television service, with UKTV History, Dave and Virgin 1 available to Freeview viewers as well as subscribers to all multi-channel platforms. UKTV History, Dave and Virgin 1 are separate channels with distinct offerings that operate within one of the general entertainment slots available on Freeview.

        sit-up provides a wide variety of consumer products through three interactive auction-based television channels: price-drop tv, bid tv and speed auction tv. These channels are available on our own digital platforms, satellite, and also on the internet. Price-drop tv and bid tv are also available on Freeview.

        In November 2007, with our joint venture partner Setanta Sports Holdings Limited, we launched Setanta Sports News, a sports news channel available to all of our DTV customers at no additional cost. Setanta Sports News is also available on satellite and the internet.

Our Network

        Our deep fiber access network has enabled us to take a leading position in the roll-out of next generation broadband access technologies in the U.K. During 2008 and 2009, we plan to deploy the next generation of wideband cable broadband technology enabling ultra-fast broadband services of 50Mb and higher. Our investment in the next generation broadband access technologies is the latest in a series of significant infrastructure investments to ensure that we remain at the forefront of communication and entertainment services in the U.K.

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        Our network in the U.K. currently passes approximately 12.6 million homes in our regional service areas as well as passing a significant number of businesses in these areas. Our service areas include parts of many of the major metropolitan areas in the U.K., including Belfast, Birmingham, Bradford, Brighton, Bristol, Cambridge, Cardiff, Coventry, Derby, Dundee, Edinburgh, Exeter, Glasgow, Leeds, Leicester, Liverpool, London, Manchester, Newcastle, Nottingham, Oxford, Perth, Plymouth, Portsmouth, Reading, Sheffield, Southampton, Swansea and Teesside.

        The core network has a fiber backbone that is approximately 23,000 kilometers long. This includes over 15,500 kilometers which are owned and operated by us and approximately 7,500 kilometers which are leased fiber from other network owners. Over 157 switches direct telephone traffic around the core and local networks. In addition, we have more than 600 hub sites, points of presence, repeater nodes or other types of network sites, and facilities at over 140 radio sites.

        Our deep fiber access network delivers broadband, fixed line telephony and both digital and analog television services to our customers' homes. The connection into each home from the fiber access network comprises of two components combined into a single "siamese" drop cable. First, to provide television services and high-speed broadband internet access, we make use of a high capacity, two-way, coaxial cable which has considerable bandwidth and is able to support a full portfolio of linear and on demand TV services as well as ultra-fast broadband services. Second, we use short length twisted copper-pair to economically connect fixed line telephony services to our fiber access network via primary multiplexers. Our relatively short twisted copper pairs (typically 500 meters in length) are also capable of supporting the latest VDSL2 copper broadband technologies enabling speeds of 50Mb/s downstream and 10Mb/s upstream. This capability provides us with a structural advantage over traditional all copper local distribution networks, which are typically 3,250 meters in length, and are only capable of supporting the previous generation of ADSL and ADSL2+ broadband technologies which are both slower and much less capable in the upstream.

        Because of the extensive use of fiber in our access networks, we are also able to provide high-speed ethernet services directly to business customers and provide nationwide area networking to these customers via our core networks.

        We have a variety of alternative methods to connect our national telecommunications network over the "last mile" to the premises of those customers that are located outside of our cabled areas, including:

    we obtain permits to construct telecommunications networks and build out our network to reach our customers. Although this is often the most costly means of reaching a customer, the expense can be justified in the case of larger customers, or where a significant level of traffic is obtained from a customer; and

    we lease circuits and DSL connections on the local networks of other service providers to connect to our customers' premises. Although this may reduce the operating margin on a particular account, it requires significantly less capital expenditure than a direct connection, can often be put into place relatively quickly, and can be replaced with a direct connection at a later date if traffic volumes justify doing so.

        Nationally, approximately 94% of the homes passed by our cable network can receive all of our broadband, digital television and fixed line telephone services. We cannot however currently provide all three of the main services on some older parts of the network. In 2007, we completed a cable network upgrade program targeting more than half a million homes in the London area, where there was an older, less robust cable network. These homes can now be offered broadband, interactive digital television and fixed line telephone services.

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        Our mobile telephone services are provided over cellular networks owned by third parties. Our main mobile network provider is T-Mobile. We also use networks owned by other partners to provide some ancillary services. T-Mobile currently operates 2G, 2.5G and 3G networks in the U.K.

Information Technology

        The operation and support of our information technology systems are performed by a mix of outsourced and internally managed services. These systems include billing, enterprise resource planning, business intelligence, corporate network, payroll, data center and desktop infrastructure.

        The program of integrating our key information technology systems in order to improve operational efficiency continued in 2007. A further 1.57 million customers were migrated during the year onto our principal customer care and billing system. The billing system integration is largely completed with the remainder of our on-net broadband customers, our off-net broadband customers and a portion of our ntl:Telewest Business customers expected to be migrated during 2008. As a result of this program and other IT consolidation activities we continue to reduce our dependency on high cost external support and management services for a number of diverse software applications and hardware platforms that have now been decommissioned.

        In April 2007, we completed the consolidation of the majority of our finance, logistics, human resources and payroll functions into a single enterprise resource planning system. Our consolidated enterprise resource planning system has facilitated a number of process efficiencies and governance enhancements. During 2008, we will continue to investigate further consolidation and enhancements, and will leverage cost savings and process benefits where appropriate.

Competition

Cable Segment

Consumer

        We believe that we have a competitive advantage in the U.K. residential market because we offer a wide range of communications services, including high-speed broadband internet, fixed line and mobile telephone and television services using our advanced network, while many of our competitors must rely on BT's network to provide their services. We offer most of our products on a stand alone basis or as part of bundled packages designed to encourage customers to subscribe to multiple services. We offer broadband internet and telephone services nationally and currently offer television services in our service areas only. Competition in each of these services individually is significant and some of the other service providers have substantially greater resources than us.

        Key recent developments amongst our primary competitors have included:

    BT Group plc.  During 2007, BT Vision, a Freeview and IP-based pay television service, was launched nationally. BT also expanded its library of on-demand programming through a number of agreements with content partners. In mid 2007, BT Vision Sport was launched, offering access to Setanta Sports and near-live matches. BT Retail launched its second evolution of BT Fusion in 2007, which offers a dual-mode mobile/WiFi handset that allows a user to make Voice over Internet Protocol, or VoIP, based calls via WiFi in the home and using the BT Openzone network on a handset which can also make traditional mobile calls outside the home. BT also acquired two small internet service providers, Plusnet plc and Brightview Group Limited.

    British Sky Broadcasting Group plc.  BSkyB, a long-time competitor in the pay television market, heavily markets triple play bundles (broadband, fixed line telephone and television). BSkyB also has a limited video on demand service branded Sky Anytime for their customers with newer PVRs.

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    Carphone Warehouse Group plc.  Carphone Warehouse resells mobile phone services (including Virgin Mobile) via its own retail distribution channels and offers fixed line telephone and broadband services under its TalkTalk brand. During 2007, Carphone Warehouse continued to pursue an aggressive pricing policy by introducing a cheaper TalkTalk fixed telephone line and broadband bundle and offering free laptops with AOL broadband.

    Tiscali S.p.A.  Tiscali offers fixed line telephone, broadband and, following the acquisition of Video Networks Limited in 2006, IP-based television services. During 2007, Tiscali acquired Pipex Communications plc, which consisted of several smaller retail broadband internet service providers, such as Bulldog and Toucan. Tiscali's IP-based television service was re-launched in 2007 under the brand name Tiscali TV and offered as part of an aggressively priced bundle. In 2007, Tiscali also introduced a free line rental bundle which was available in selected areas.

    Orange.  Orange offers a triple play of mobile phone, fixed line phone and broadband services. During 2007, Orange entered the fixed line telephone market, having previously only offered VoIP calls, by offering the service as part of a bundled package.

    Vodafone and O2.  Vodafone launched a fixed line and broadband package in early 2007. Following the acquisition of Be Internet in 2006, O2 launched a broadband service in late 2007.

        We compete primarily with BSkyB in providing pay DTV to residential customers in the U.K. BSkyB is the only pay-satellite television platform in the U.K. and has a high market share of the U.K. pay television market. BSkyB owns the U.K. rights to various sports and movie programming content which it has used to create some of the most popular premium pay TV channels in the U.K. BSkyB is therefore both our principal competitor in the pay television market, and an important supplier of premium television content to us. The Office of Fair Trading, a U.K. regulatory agency which we refer to as the OFT, has previously determined that BSkyB is dominant in the wholesale supply of channels carrying certain premium sports content and premium movies. Subject to a continuing finding of dominance, European and U.K. competition laws prevent BSkyB from abusing its market position in relation to the supply of these channels to us. Even so, we believe that the current terms for this content are not reasonable and should be improved. We currently trade on BSkyB's rate card terms and pricing for their premium movie and sports channels. These terms can be changed by BSkyB on 45 days' notice. Additionally, BSkyB has refused to supply us certain enhancements to these services, such as High Definition TV content, some sports programming offered via "red button" functionality and other "red button" functionality features.

        Residential customers may also receive digital terrestrial television, or DTT. Digital signals are delivered to customer homes through a conventional television aerial and a separately purchased set-top box or an integrated digital television set. The free-to-air DTT service in the U.K. is branded Freeview. This service is provided by a consortium of operators, including the BBC, and offers customers a limited range of television channels, which include the traditional analog channels. Customers do not pay a monthly subscription fee for basic Freeview service but must acquire a Freeview enabled set-top box or a television with a digital tuner. During 2007, according to the Office of Communications, or Ofcom, Freeview became the U.K.'s most popular digital television service. Other developments included the launch of a new range of Freeview digital television recorders under the brand "Playback". BSkyB has also announced its intention (subject to an Ofcom consultation) to remove its free channels (Sky News, Sky Sports News and Sky Three) from Freeview and to substitute pay channels in their place.

        Top Up TV is a pay television service offering selected programs from over twenty pay television channels for a fixed fee to subscribers who otherwise receive Freeview and have purchased a Top Up TV digital video recorder.

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        During 2007, the availability of IPTV services increased as BT Vision, a combined DTT television service and a video on demand service over a DSL broadband connection, was launched nationally and Tiscali expanded coverage of their service beyond parts of the London metropolitan area. BSkyB also launched a video on demand service over a DSL broadband connection and bundles that service with its other offerings.

        There are a number of new and emerging technologies which can be used to provide video services that are likely to compete with our DTV and video on demand services. These include DSL services mentioned above and third generation, or 3G, mobile telephony.

        Telecommunications is a constantly evolving industry and we expect that there will continue to be many advances in communications technology and in content. These advances, together with changes in consumer behavior, and in the regulatory and competitive environments, mean that it will be difficult to predict how our operations and businesses will be affected in the future.

        The U.K. government has stated that it will terminate ATV transmission by 2012. Consumers wishing to receive television services will have to convert to DTV, currently available via digital satellite, DTT, DSL or cable. However, when ATV transmission is terminated, the terrestrial DTV signal and network may be strengthened. This will enable terrestrial DTV to be made available to additional customers' homes that cannot currently receive a signal. It may also provide additional capacity to allow the Freeview channel line-up to be expanded to include new channels.

        There is also a growing demand and supply of full-length video content via broadband connections to the personal computer. Content owners, online aggregators, television channel owners, etc. are increasingly using broadband as a new digital distribution channel direct to consumers (primarily via downloading). Current business models tend to be on a pay-per-transaction basis. This does represent a potential disintermediation threat to pay television platforms, though the actual demand and willingness to pay for broadband distributed content is unlikely to represent sufficient revenues and benefit to content owners to displace pay television as a preferred distribution channel for the near future.

        We provide broadband and dial-up internet services to customers within reach of our access network by direct connection to our network. We also provide broadband and dial-up internet services to customers not within reach of our access network by providing a connection to our network via BT's local access network. Our internet services compete with BT, which provides broadband and dial-up internet access services over its own network both as a retail brand and as a wholesale service.

        An increasing number of companies are deploying their own network access equipment in BT exchanges via a process known as local loop unbundling, or LLU. LLU allows an ISP to reduce the recurring operating costs incurred through BT Wholesale by reducing the proportion of traffic that must travel directly over BT's network. LLU deployment requires a substantial capital investment to implement, and requires a large customer base to deliver a return on investment. By the end of 2007, both Carphone Warehouse and BSkyB had rolled out significant LLU networks (with approximately 70% coverage in the United Kingdom). Other operators such as Orange and Tiscali were deploying LLU to some degree.

        BT and third party service providers use DSL technologies which, like our network, permit internet access to be provided at substantially greater speeds than conventional dial-up access.

        In addition to the increasing competition and pricing pressure in the broadband market arising as LLU players look to gain the customer scale to make a return on their investment, there is the longer term threat of new access technology. 3G mobile technology, other wireless technologies such as Wi-Fi and Wi-Max, broadband power line (which utilizes existing electricity networks to deliver high-speed

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broadband internet services) and mobile broadband may subject us to increased competition over time in the provision of broadband services.

        We provide fixed line telephone services to customers who are within reach of our network by direct connection to our network and, like our internet services, to customers off our network via BT's local access network. We compete primarily with BT in providing telephone services to residential customers in the U.K. BT occupies an established market position. We also compete with other telecommunications companies that provide telephone services, either directly through LLU or indirectly, including Carphone Warehouse under the brand name TalkTalk, BSkyB, Tiscali, Orange and Tesco.

        We also compete with mobile telephone networks that may threaten the competitive position of our networks by providing a substitute to fixed line telephone services. Mobile telephone services also contribute to the downward price pressure in fixed line telephone services. Through our acquisition of Virgin Mobile in July 2006, we now provide mobile telephony services to approximately 4.5 million customers.

        There is also competition from companies offering VoIP services using the customer's existing broadband connection. These include services offered by independent providers, such as Vonage and Skype, as well as those affiliated with established competitors such as BT and Orange. These services generally offer free calls between users of the same service, but charge for calls made to normal phone numbers either on a flat monthly rate for unlimited calls (typically restricted to geographic calls) or on a pence per minute rate.

        The U.K. business telecommunications market is characterized by strong competition and comprised of traditional network operators such as BT and Cable & Wireless plc, or C&W, virtual network operators such as Vanco plc, or Vanco, and systems integrators like Affiniti, a trading name of Kingston Communications (Hull) Plc. While BT represents the main competitive threat nationally due to its network reach and product portfolio, other providers compete within product and geographic segments. Thus plc, Affiniti and COLT Telecom Group plc, for example, have network advantages within certain regions.

        Within retail markets, traditional competitors are becoming increasingly focused, with organizations such as C&W, and Thus plc targeting the largest national and multi-national corporations. We continue to focus on small, medium and large nationally oriented businesses where leveraging our network asset can provide an economic advantage.

        System integrators, or SIs, are also becoming an increasing competitive threat, as IT integration, management and outsourcing begins to form an element of many larger organizations requirements. ntl:Telewest Business seeks to address this as an opportunity to drive sales of access network, the underlying infrastructure for integrated IT systems, and, in 2007, established an SI channel within the Service Provider sales team.

        In the future, further competition from mobile operators is expected, as they explore strategies to enter the fixed line market with convergence propositions to our target customers.

        Competition in the U.K. market continues to be based on value for money, the key components of which are quality, reliability and price. Customers, particularly larger organizations that utilize the network to enable business-critical applications and solutions, accept higher price points in exchange for consistent delivery and performance against service level agreements.

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Mobile Segment

        Virgin Mobile faces direct competition from mobile network operators and other mobile virtual network operators. Its key competitors are the other major mobile communication providers in the U.K., including O2, Vodafone, Orange, T-Mobile and 3. In addition, a number of smaller players have emerged including BT Mobile, Carphone Warehouse, Tesco Mobile and ASDA.

        In the broader telephony market, Virgin Mobile competes indirectly with many fixed line telephone operators and resellers, and internet telephony providers in the U.K., including BT. See "Competition—Cable Segment" for more information on these competitors.

Content Segment

        Virgin Media TV supplies basic television programming to the U.K. multi-channel television market and generates revenues largely on advertising and subscription revenues from that television programming.

        Virgin Media TV's television programming competes with other broadcasters and may lose audience share, as a result of which its advertising revenues may decrease. Market and economic factors apart from individual channel performance may also adversely influence subscription and advertising revenues or carriage of the channels. Virgin Media TV's primary customer other than Virgin Media itself is BSkyB, which has used its dominance in the pay TV market to substantially reduce carriage subscription payments made to Virgin Media.

        Virgin Media TV competes for program rights with broadcasters transmitting similar channels. As a result of this and competition for a limited number of well-known program rights, the price of these program rights is increasing and could increase further, thereby limiting Virgin Media TV's ability to purchase that programming for transmission on its channels or adversely affecting the profitability of its channels. UKTV, Virgin Media's joint venture with the BBC, could be affected by similar factors, although this is less likely due to a 'first look' program agreement with the BBC.

        Virgin Media TV's advertising sales department competes with the sales departments of BSkyB, ITV1 and Channel 4.

        sit-up sells a wide range of products, including electronics, jewelry, clothing and home furnishings through its innovative retail shopping channels. Consequently, it competes with a large variety of retailers in the U.K. market. In common with other retailers, the business experiences a seasonal peak in the fourth quarter of the year and is affected by general consumer confidence and purchasing trends.

        sit-up also competes with other shopping and auction-based channels. Because the majority of its sales are initiated from television broadcasts, sit-up also competes with other television channels for audiences. The future performance of the business may be affected by any changes in television viewing habits.

Government Regulation

Regulation in the European Union (EU)

        The European Parliament and Commission regulate our principal business activities through Directives and various other regulatory instruments.

        In particular, in February 2002, the European Commission adopted a package of new Directives which, together, set out a new framework for the regulation of electronic communications networks and services throughout the EU. This new framework consisted of four Directives, namely:

    Directive 2002/21 on a common regulatory framework for electronic communications networks and services (the Framework Directive);

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    Directive 2002/20 on the authorization of electronic communications networks and services (the Authorization Directive);

    Directive 2002/19 on access to and interconnection of electronic communications networks and associated facilities (the Access and Interconnection Directive); and

    Directive 2002/22 on universal service and users rights relating to electronic communications networks and services (the Universal Service Directive).

        This package of Directives was supplemented, subsequently, by the Communications and Privacy Directive which dealt, among other things, with data protection issues in relation to the provision of electronic communications services.

        The U.K. Government incorporated these Directives into its national laws under the Communications Act 2003, which came into effect on July 25, 2003, and the Communications Privacy Regulations, which came into effect on December 11, 2003.

        During 2006, the European Commission commenced a review of these Directives (the Regulatory Framework Review). This review led to the publication of a number of draft amending Directives in November 2007. It is anticipated that these draft Directives will have their First Reading in the European Parliament in September 2008. One notable proposal under these draft Directives is for the creation of a European Electronic Communications Market Authority which would have, as part of its remit, the duty to contribute towards the harmonization of regulation relating to electronic communications across the EU. It is not intended, however, that this new Authority would replace national regulatory authorities such as Ofcom (see below under Regulation in the U.K.). It is not currently anticipated that the proposals contained in the draft Directives will have any material adverse impact on our business.

        In June 2007, the EU Roaming Regulation (the Roaming Regulation) imposed new retail and wholesale price controls on international mobile roaming within the EU and required greater levels of transparency of retail pricing information.

        At the retail level, operators such as Virgin Mobile were required to offer a per minute "Eurotariff" and consequently, Virgin Mobile reduced its standard retail prices for roaming calls within the EU in line with the Eurotariff requirements. Virgin Mobile will be required to further reduce such retail roaming prices in August 2008 and August 2009, in line with the further reductions in the Eurotariff mandated in the Roaming Regulation.

        At the wholesale level, the average per minute wholesale charge between any pair of network operators over a 12 month period in respect of outbound roaming calls within the EU may not exceed the price cap mandated in the Roaming Regulation. Further reductions are required in August 2008 and 2009. We understand Ofcom expects network operators to adjust their bilateral contractual pricing provisions to meet the wholesale price cap well before the end of the first 12 month calculation period in August 2008.

        The wholesale rate cap should result in a reduction in the wholesale cost per minute incurred by Virgin Mobile when its customers roam in the EU, although the requirement that the wholesale price cap be based on a 12 month average charge will delay the flow-through to Virgin Mobile of the benefit of this reduction. The Roaming Regulation could have a negative impact on profits especially in the period until Virgin Mobile receives the benefit of the wholesale price reduction.

Regulation in the U.K.

        We are subject to regulation under the Communications Act 2003, the Broadcasting Acts 1990 and 1996 and other U.K. statutes and subordinate legislation. The Communications Act 2003 established a

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regulatory authority, the Office of Communications (Ofcom), as the single regulatory authority for the entire communications sector.

        Under the Communications Act 2003, communications providers, such as ourselves, are no longer required to hold individual licenses in order to provide electronic communications networks and services, although certain licenses are required (see below under "Cable TV Regulation" and "Mobile Telecoms Regulation") in order to own or operate mobile networks, TV channels or to provide certain facilities such as electronic program guides on the cable TV platform. Even so, all communications providers are subject to a set of basic conditions imposed by Ofcom, which are known as the General Conditions of Entitlement. Any breach of these conditions could lead to the imposition of fines by Ofcom and, ultimately, to the suspension or revocation of a company's right to provide electronic communications networks and services.

The General Conditions of Entitlement and SMP Conditions

        Full details of the General Conditions of Entitlement are available on Ofcom's website (www.ofcom.org.uk). Some of the requirements under the General Conditions of Entitlement include:

    a requirement to negotiate interconnection arrangements with other network providers

    a requirement to ensure that any end-user can access the emergency services and that accurate customer location data is made available to the emergency services

    a requirement to offer outbound number portability to customers wishing to switch to another network provider and to support inbound number portability where we acquire a customer from another network provider

    a requirement to comply with a number of high-level obligations designed to address consumer harm associated with broadband migrations

    a requirement to ensure that any end-user can access a directory enquiry service

    a requirement to publish up-to-date price and tariff information

    a requirement to provide itemized billing on request from each customer

        In addition to the General Conditions of Entitlement, Ofcom imposes further conditions on providers of electronic communications networks or services who have significant market power (SMP) in identified markets. In regulatory terms, SMP equates to the competition law concept of dominance. The EU regulatory framework adopted in 2002, required Ofcom to carry out a number of initial market reviews to establish which providers held SMP in these markets, and should therefore be subject to further conditions, and to keep these markets and any other relevant markets identified by Ofcom under regular review. This resulted in British Telecommunications plc (BT) being found to have SMP in a substantial number of markets and as a result, being made subject to further regulatory requirements in both wholesale and retail markets. Under the Regulatory Framework Review (see above under "Regulation in the European Union") the number of markets that Ofcom is obliged to keep under review and where it is required to make SMP assessments has been reduced significantly with effect from November 2007. It is possible that this will lead, over time, to the lifting of a number of regulations previously imposed on BT, particularly in retail markets, with the result that BT will be able to compete more aggressively in these markets. However, prior to any such regulation being reduced in any market, Ofcom is obliged to undertake a further market review. Only if the market is deemed to be competitive will a reduction in regulation be considered. Moreover, any reduction of specific SMP-related regulation would not remove the requirement for BT to comply with remaining SMP-related regulation, the General Conditions of Entitlement and U.K. and EU competition law.

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        Under one of the earlier reviews, all fixed operators, including ourselves, have been found to possess SMP in relation to the termination of calls on their own networks. This has resulted in the imposition of a requirement on all fixed operators to provide access to their networks on fair and reasonable terms for terminating calls, with additional requirements being imposed on BT and Kingston Communications. We have not been found to possess SMP in any of the other voice, data or internet markets in which we operate.

        All U.K. mobile network operators (MNOs) have been found to possess SMP in relation to the termination of calls on their own networks. Accordingly, in June 2004, Ofcom imposed Specific Conditions on each of the MNOs in respect of their 2G networks requiring, among other things, a reduction in the average charges for termination of voice calls on their networks levied on fixed line operators or other MNOs. These price controls were renewed in March 2007 and require further average price reductions to be achieved by all MNOs (including 3) in respect of voice call termination on their 2G and 3G networks over the period from the end of March 2007 to the end of March 2011. As Virgin Mobile is not an MNO such proposals do not apply directly to us. However, under the terms of the network supply agreement we have with our network provider, T-Mobile, they will continue to operate to decrease the inbound interconnect revenue we receive from T-Mobile in respect of calls made to our customers. Ofcom is currently reviewing the wholesale SMS termination market. Ofcom believes the review will take 12 to 18 months.

The Strategic Review of Telecommunications

        Following the passing of the Communications Act 2003, Ofcom announced that one of its first tasks would be to carry out a strategic review of telecommunications in the U.K. (TSR).

        The TSR commenced in April 2004 with the observation from Ofcom that, despite almost twenty years of telecommunications liberalization in the U.K., BT remained dominant in almost all telecommunications markets. Ofcom felt, therefore, that it should seek to increase competitive intensity by improving third party access to the BT network.

        Having reached this conclusion, Ofcom has developed a concept known as "equivalence". Broadly, this concept has been defined as enabling BT's competitors to gain access to BT's network infrastructure on exactly the same (i.e. equivalent) terms as BT itself enjoys.

        At the conclusion of the TSR, BT offered and Ofcom accepted a number of undertakings to put the concept of equivalence into practice in its dealings with competitors. This has been achieved primarily through the creation of a new division within BT called "Openreach" which manages and sells network services to competitors and the rest of BT on the same terms and conditions (including prices) and in accordance with the same processes.

        The efficacy of these undertakings was formally reviewed by Ofcom during 2007. Ofcom stated that BT had made very significant progress in implementing the undertakings and had committed considerable resources to meeting its obligations, including the creation of Openreach as an independent business unit in January 2006. Ofcom stated that these changes had benefited competition and end consumers. In addition, Ofcom now wants to ensure that Openreach has clear incentives to improve its performance levels to deliver better products and service to its own retail business and to other communications providers and their customers. We expect this matter to be addressed further during 2008.

Universal Service

        The concept of universal service is designed to ensure that basic fixed line telecommunications services are available at an affordable price to all citizens across the EU. The scope of universal service obligations is defined by the Universal Service Directive (see above under "Regulation in the European

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Union") and is transposed into U.K. regulation by the Universal Service Order. This Order has been implemented by Ofcom which has imposed a number of specific universal service requirements on BT and Kingston Communications, both of which have been designated by Ofcom as universal service providers.

        The European Commission has been considering the future scope of universal service obligations as part of the Regulatory Framework Review (see above under "Regulation in the European Union"). Some of the main changes proposed are intended to improve the provision of information for customers and end-users and to facilitate the use of e-communications services by disabled users. We would be affected by any future decision to require us to provide or to contribute to the funding of universal service in the U.K.

Electronic Communications Code

        Under the Telecommunications Act 1984, which was largely replaced by the Communications Act 2003, licensed public telecommunications operators were eligible for enhanced legal powers under the electronic communications code annexed to the Telecommunications Act 1984, or Code Powers. Code Powers give enhanced legal rights of access to private land, exemption from some requirements of general planning law and the right to install equipment in the public highway.

        Any operator which possessed Code Powers under the previous licensing regime automatically retained those powers under the Communications Act regime. Our subsidiaries that provide electronic communications networks and services have Code Powers.

        Each operator is required to certify to Ofcom each year that it has sufficient and acceptable financial security in place to cover the costs which could be incurred by local councils or road authorities if they were required to remove equipment or restore the public roads following the insolvency of that operator. This security is commonly described as "funds for liabilities." Ofcom has indicated that it will generally require an operator to provide board level certification of third party security for this purpose.

Next Generation Access

        In September 2007, Ofcom launched a consultation process in respect of Next Generation Access (NGA), the focus of which was to consider whether changes to current regulation were necessary in order to stimulate increased and further investment in high-speed broadband access networks. We will continue to engage with Ofcom in this debate throughout 2008.

Wholesale Broadband Access

        Ofcom concluded the second phase of the Wholesale Broadband Market Review in February 2008. A statement and action plan is expected in summer 2008. This will remove certain regulatory obligations on BT to provide wholesale services currently used by operators to provide broadband access in the most competitive areas of the U.K. Until the timing for these changes is proposed it is not possible to accurately predict the impact for our business, The impact of any changes is unlikely to be seen until late 2009.

Business Connectivity

        A market review of Business Connectivity services was launched in January, 2008. It is likely this will determine that competition exists in certain areas and, as such, a reduction in regulation over time is likely to be proposed. The impact of these changes is unlikely to be seen until late 2009.

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Cable TV Regulation

        Although we are no longer required to hold individual licenses to provide electronic communications networks and services, we are still required to hold individual licenses under the Broadcasting Acts 1990 and 1996 for any television channels which we own or operate and for the provision of certain other services (e.g. electronic program guides) on our cable TV platform.

        We therefore hold a number of Television Licensable Content Service Licenses (TLCS licenses) under the Broadcasting Act 1990 for the operation of television channels and for the provision of our electronic program guide.

        TLCS licenses are granted and administered by Ofcom. The licenses require that each licensed service complies with a number of Ofcom codes, including the Broadcasting Code, and with all directions issued by Ofcom. Breach of any of the terms of a TLCS license may result in the imposition of fines on the license holder and, ultimately, to the license being revoked.

        Holders of TLCS licenses are required to pay an annual fee to Ofcom. The fees are related to the revenue earning capacity of each television service and are based on a percentage, set by Ofcom, of revenues from advertising, sponsorship, subscriptions and interactive services, with special rules applying to shopping channels.

        In October 2006, Ofcom commenced a review of the various ways and the terms on which operators of digital TV platforms in the U.K. (including ourselves) allow access to their platforms for third-party TV channels and content providers. This review has not yet progressed beyond its initial stages. It is not possible, therefore, to predict the outcome of this review and whether access to digital TV platforms in general or to specific platforms in particular, including our cable TV platform, will become more heavily regulated as a result.

Mobile Telecoms Regulation

        The use of radio frequency spectrum is regulated by the Wireless Telegraphy Act 2006 (WTA) and the Communications Act 2003. Ofcom has responsibility for allocating, licensing and regulating the use of spectrum. As Virgin Mobile is not an MNO we are not directly regulated by the WTA but our network provider, T-Mobile, does (and is required to) have WTA licenses in respect of the operation of their network.

        A new legal and policy framework is being implemented across the U.K. and other member states to fulfill the European Commission's objective to effect coordination and harmonization with regard to the availability and efficient use of radio spectrum. The European Commission has proposed that specific spectrum bands should be subject to tradability throughout the EU and that this would be supported by limiting or removing regulatory restrictions on use. This would be mainly regulated at national level.

U.K. Competition Law

        The Competition Act 1998 prohibits the abuse of a dominant market position and anti-competitive agreements in essentially the same terms as Articles 81 and 82 of the EU Treaty. The Act also introduced third party rights, stronger investigative and enforcement powers and the ability for the competition authorities to issue interim measures. The new enforcement powers include the ability to impose fines of up to 10% of worldwide turnover. The Competition Act is enforced by the Office of Fair Trading (OFT) and gives concurrent investigative and enforcement powers in matters concerning communications to Ofcom.

        The U.K.'s competition law framework was further strengthened by the competition provisions of the Enterprise Act 2002, which came into force in June 2003. Under these provisions, among other

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things, decisions on mergers are now made by the independent competition authorities, using competition based tests, rather than by the U.K. Government.

        Under other provisions of the Enterprise Act, individuals who cause, encourage, participate in or, in some cases, even those who have knowledge of, the making of agreements between competitors which are designed to fix prices, share markets, limit supply or production or rig bids in the U.K., can be prosecuted and punished with unlimited fines and imprisonment for up to five years. The courts may also order the disqualification for up to fifteen years of directors whose companies have committed a breach of U.K. or EU competition law.

        In addition, the Enterprise Act gives sector regulators such as Ofcom the ability to make a "Market Reference" to the Competition Commission where they have reasonable grounds to suspect that any feature or combination of features of a market restricts or distorts competition. If a reference to the Competition Commission is made on these grounds, the Competition Commission will carry out a detailed inquiry and has wide-ranging powers to impose structural and behavioral remedies or both.

Pay TV Market Investigation

        In January 2007, we made a joint submission to Ofcom with BT, Setanta Sport Holdings Limited (Setanta) and Top Up TV Europe Limited (Top Up) indicating that there are a number of features of the U.K. Pay TV market which result in competition being prevented, restricted or distorted and that BSkyB is able to exploit these features to marginalize and even foreclose competitors at all levels of the Pay TV market value chain.

        Following this submission, Ofcom announced in March 2007 that it would be carrying out a study of the UK Pay TV market to determine whether a reference to the Competition Commission was appropriate. We made a further, more detailed, joint submission to Ofcom with BT, Setanta and Top Up in July 2007. Ofcom published its consultation document in December 2007.

        Ofcom will continue its study of the UK Pay TV market throughout 2008 before deciding whether to make a referral to the Competition Commission. Ofcom cannot impose remedies itself (only the Competition Commission has power to impose remedies under these provisions of the Enterprise Act) but once Ofcom has decided that a referral to the Competition Commission is appropriate, it can accept undertakings from parties such as BSkyB, which can be structural and/or behavioral in nature, to remedy the competition problems in lieu of a referral to the Competition Commission.

WEEE Directive

        On December 12, 2006, the U.K. government adopted the Waste Electrical and Electronic Equipment Directive (the WEEE Directive) previously adopted by the European Union relating to certain obligations associated with historical waste (as defined by the WEEE Directive). The WEEE Directive became effective on January 2, 2007 and imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of such equipment. The main provisions relate to separate collection, disposal and recycling; standards for its treatment at authorized facilities; and collection, recycling and recovery targets. It requires distributors to allow consumers to return their waste equipment free of charge, which would include the set-top boxes and cable modems that we provide to our customers.

Corporate Responsibility

        We regard corporate responsibility, or CR, as an important factor in the way we run our business. During 2007, we challenged ourselves to gain a better understanding of the fundamental responsibilities we owe to our stakeholders. Consequently, our approach to CR encompasses basic ethical questions associated with our marketplace and workplace in addition to wider questions around social and

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environmental sustainability. We believe that our brand, people and products present a clear opportunity for using CR as a point of differentiation both in our sector and beyond.

        The need to engage our people, which is a key priority for senior management, has been augmented by the strengthening of policies on issues such as employee well-being and learning and development. Similarly, we have worked alongside the Virgin Group's charitable arm, Virgin Unite, in developing a series of partnerships with charities such as Foyer and Lucca Leadership that enable us to use our people, products and expertise to generate social benefit. We have focused on generating an internal structure, consisting of regional and local charity champions, through which we can significantly accelerate our investment in charities and communities.

        We have sought to gain an accurate understanding of our environmental impact by establishing baseline data in a number of key areas such as energy, transport and waste. We are also committed to the principle of sustainable procurement, details of which have been articulated in a new code of conduct that has formed the basis of a constructive dialogue with suppliers around issues such as labor standards and environmental sustainability.

Seasonality

        Some revenue streams are subject to seasonal factors. For example, fixed line telephone usage revenue by customers and businesses tends to be slightly lower during summer holiday months. Our customer churn rates include persons who disconnect their service because of moves, resulting in a seasonal increase in our churn rates during the summer months when higher levels of U.K. house moves occur and students leave their accommodation between school years. In addition, our Content segment includes Virgin Media TV, which has a seasonally higher programming spend in the fourth quarter, and sit-up's home shopping channels, which earn potentially higher revenues in the fourth quarter, reflecting the Christmas holiday period, which is common in the retail industry. In our Mobile segment, fourth quarter customer acquisition and retention costs generally increase due to the important Christmas period and Mobile ARPU generally decreases in the first quarter of each year due to the lower number of days in February and lower usage after the Christmas period.

Research and Development

        Our research and development activities involve the analysis of technological developments affecting our cable television, telephone and telecommunications business, the evaluation of existing services and sales and marketing techniques and the development of new services and techniques.

Patents, Trademarks, Copyrights and Licenses

        We do not have any material patents or copyrights nor do we believe that patents play a material role in our business. We own and have the right to use registered trademarks, which in some cases are, and in others may be, of material importance to our business, including the exclusive right to use the "Virgin" name and logo in connection with our corporate activities and in connection with the activities of our consumer and a large part of our content businesses under license from Virgin Enterprises Limited. This license with Virgin Enterprises Limited is for a 30-year term and exclusive to us within the U.K. and Ireland. The license entitles us to use the "Virgin" name for the TV, broadband internet, telephone and mobile phone services we provide to our residential customers, as well as the acquisition and branding of sports, movies and other premium television content and the sale of certain communications equipment, such as set top boxes and cable modems. For our content operations, we are entitled to use the "Virgin Media Television" name for the creation, distribution and management of our wholly-owned television channels, and to use the "Virgin" name for our recently launched television channel, Virgin 1. Our license agreement provides for an annual royalty of 0.25% of certain consumer and content revenues, subject to a minimum annual royalty of £8.7 million, except for

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Virgin 1, where we pay an annual royalty of 0.5% of revenues received by Virgin 1, subject to a minimum of £100,000. As part of the agreement, we have the right to adopt, and have adopted, a company name for our parent, Virgin Media Inc., over which, together with the name "Virgin Media", we retain worldwide exclusivity.

Employees

        As of December 31, 2007, we had 15,060 employees, of whom 13,319 were permanent, and 1,741 were temporary or contract. Approximately 1,800 Service Operations, Network Operations, Design & Civils and Business Field Operations employees are covered by two recognition agreements with the Communication Workers Union, or CWU, and the Broadcasting, Entertainment, Cinematograph and Theatre Union, or BECTU. Both of these agreements are terminable by either the Union or us with three months' written notice. Except for the CWU arrangements, no other employees are covered by collective bargaining agreements. We believe that our relationship with the CWU, BECTU and our employees is generally good.

        Our strategy is to become an employer of choice within our U.K. marketplace and therefore continue to build a well trained and motivated workforce. We are working on a number of initiatives to ensure that we build this into the way we work and have established specific milestones over the next 18 months. These initiatives range from embedding a consistent performance management process across the whole organization by setting clear annual objectives (both business and personal), establishing incentive-based awards, through to the ongoing refurbishment and improvement of the working environment. A number of other engagement initiatives are ongoing including employee satisfaction surveys and action plans, a recognition scheme, brand/culture training, and local charity and community activities.

Item 1A.    Risk Factors

        Our business, financial condition or results of operations could be materially adversely affected by any of the risks and uncertainties described below. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business.

Risks Relating to Our Business and Industry

We are subject to significant competition.

        The level of competition is intense in each of the markets in which we compete, and we expect competition to increase. In particular, we compete with BT, BSkyB, Carphone Warehouse (Talk Talk), Tiscali, Vodafone, O2, Orange and T-Mobile, each of whom has significant operational scale, resources and national distribution capacity. We also compete with numerous internet service providers and indirect telephone access operators that offer telephone, broadband and dial-up internet services over BT's network. We will face increasing competition from mobile telephone network providers and new market entrants, including those providing VoIP and IPTV. The increase in competition will be compounded by technological changes and business consolidation, which may permit more competitors to offer the "triple-play" of digital television, fixed line telephone and broadband services, or "quad-play" bundles including mobile telephone services.

        In the digital television market, we compete primarily with BSkyB in providing digital pay television services. Competition increased as a result of the launch of Freeview in October 2002, which provides over 40 digital terrestrial TV channels on a free-to-air basis to consumers who have purchased a Freeview digital set-top box or digital television recorder. In March 2004, Top Up TV launched a pay television service offering approximately 120 programs from 19 channels for a fixed fee to subscribers who otherwise receive Freeview and have purchased a Top Up TV set-top box. BT launched a personal

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computer download service of video on demand home entertainment content over a broadband connection called BT Vision. BSkyB, Tiscali and others offer a similar service.

        Our broadband service faces increased competition from BT, BSkyB, Carphone Warehouse (TalkTalk), Orange, O2 and others. Competitors may use new alternative access technology such as advanced, faster asymmetric digital subscriber lines, or ADSL+2, to deliver higher speeds. Local loop unbundling may decrease costs for new entrants and existing BT wholesale customers, leading to increased price competition.

        Our fixed line telephony business competes with fixed line operators such as BT, telephone local loop unbundlers such as Carphone Warehouse (TalkTalk) and BSkyB, and several mobile telephone operators such as Vodafone, O2, Orange and T-Mobile.

        Our business services also face a wide range of competitors, including BT, C&W, COLT Telecom Group plc and Thus plc, and a number of regional service providers. The nature of this competition varies depending on geography, service offerings and the size of the marketable area.

        In the mobile telephony market, we face direct competition from mobile network operators such as O2, Vodafone, Orange, T-Mobile and 3, and other mobile virtual network operators, such as Carphone Warehouse, Tesco Mobile, BT Mobile and ASDA, in addition to fixed line telephone operators and internet telephony providers. Many of our competitors are part of large multinational groups, have substantial advertising and marketing budgets, have greater retail presence and may benefit from greater economies of scale than we do. As a mobile virtual network operator, our per unit economies may differ substantially from our competitors with their own networks, which may impact our ability to compete.

        In order to compete, we have had to reduce the prices we charge for our services or increase the value of our services without being able to recoup associated costs. Reduced prices or increased costs have had a negative impact on our margins and profitability and could continue to do so in the future. In addition, if we are unable to compete successfully, even following price reductions or value enhancements, we may not be able to attract new customers, or retain existing customers.

Failure to control customer churn may adversely affect our financial performance.

        The successful implementation of our business plan depends upon controlling customer churn. Customer churn is a measure of customers who stop using our services. Customer churn could increase as a result of:

    general reduction in the quality of our customer service, including billing errors;

    customers moving to areas where we cannot offer our digital television, or DTV, services;

    interruptions to the delivery of services to customers over our network and poor fault management;

    the availability of competing services, some of which may, from time to time, be less expensive or technologically superior to those offered by us or offer content that we do not offer; and

    the potential loss of customers due to their required migration from our analog television, or ATV, services to our more expensive DTV services when we stop transmitting our ATV signal.

        An increase in customer churn can lead to slower customer growth, or indeed loss of customers, and a reduction in revenue.

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We are licensed to use the Virgin name and logo but do not own it.

        In February 2007, we rebranded certain areas of our business as Virgin Media and renamed our corporate parent Virgin Media Inc. under a 30-year license agreement with Virgin Enterprises Limited to use the Virgin name and logo. The use of the Virgin Media name and brand carries various risks, including the following:

    we will be substantially reliant on the general goodwill of consumers towards the Virgin brand. Consequently, adverse publicity in relation to the Virgin Group or its principals, particularly Sir Richard Branson, who is closely associated with the brand, or in relation to another Virgin name licensee, could have a material adverse effect on our business;

    the license agreement has a 30-year term, and we are obligated to pay a termination payment if the license is terminated early under certain circumstances; and

    we are required to meet certain customer service level requirements which are grouped into three key categories.

        These service level categories include: Base Service Levels which, in addition to ensuring that employees are fully-trained, competent, courteous and respectful, set basic standards against which to measure complaint handling, complaint levels and call center performance. Technical Service Levels which measure certain technical requirements that affect our customers' experience, such as service availability and service response times. Aspirational Service Levels, which are levels of service that we and Virgin Group wish to achieve over time, to create new service measures and increase the demands on certain existing measures, covering a range of matters including customer satisfaction, customer advocacy, complaint levels, call center performance and staff satisfaction. A failure to meet our obligations under the license agreement could lead to a termination of the license.

        If we lose the right to use the Virgin brand, we would need to rebrand those areas of our business that have been rebranded, which could result in increased expenditures and increased customer churn.

If we do not maintain and upgrade our networks in a cost-effective and timely manner, we could lose customers.

        Maintaining an uninterrupted and high-quality service over our network infrastructure is critical to our ability to attract and retain customers. Providing a competitive service level will depend in part on our ability to maintain and upgrade our networks in a cost-effective and timely manner. The maintenance and upgrade of our networks will depend upon, among other things, our ability to:

    modify network infrastructure for new products and services, including faster broadband speeds;

    install and maintain cable and equipment; and

    finance maintenance and upgrades.

        Our covenants in our senior credit facility effectively restrict our use of cash. If these covenants affect our ability to replace network assets at the end of their useful lives or if there is any reduction in our ability to perform necessary maintenance on network assets, our networks may have an increased failure rate, which is likely to lead to increased customer churn.

A failure in our critical systems could significantly disrupt our operations, which could reduce our customer base and result in lost revenues.

        Our business is dependent on many sophisticated critical systems that support all of the various aspects of our cable network operations. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, malicious human acts, theft, natural disasters, fire, power loss, gas build-up, war or other catastrophes or any other threat to business continuity.

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Moreover, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. We do not currently have a formal company-wide disaster recovery plan, however, we are in the process of creating plans for key areas of risk in the business. Unanticipated problems affecting our systems could cause failures in our information technology systems, including systems that are critical for timely and accurate customer billing, or our customer service centers or interrupt the transmission of signals over our cable network. Sustained or repeated system failures that interrupt our ability to provide service to our customers, prevent us from billing and collecting revenue due to us, or otherwise meet our business obligations in a timely manner, would adversely affect our reputation and result in a loss of customers and revenue. Improvements to our revenue collection processes may not be successful or may not yield enhanced revenue collection. Inefficient collection could result in an increase in bad debt.

Our inability to obtain popular programming, or to obtain it at a reasonable cost, could potentially materially adversely affect the number of customers or reduce margins.

        For the provision of television programs and channels distributed via our cable network, we enter into agreements with program providers, such as public and commercial broadcasters, or providers of pay or on demand television. We have historically obtained a significant amount of our premium programming and some of our basic programming and pay-per-view sporting events from BSkyB, one of our main competitors in the television services business. BSkyB is a leading supplier of programming to pay television platforms in the U.K. and is the exclusive supplier of some programming, including its Sky Sports channels and Sky Movie channels, which are the most popular premium subscription sports and film channels, respectively, available in the U.K. We buy BSkyB wholesale premium content on the basis of BSkyB's rate card terms and pricing, which can be changed on 45 days' notice by BSkyB, and not under a long term supply contract. Our agreement with BSkyB to purchase its basic programming channels expired on February 28, 2007, and we lost the right to carry those channels. As a result, we experienced increased churn and higher customer retention costs in 2007.

        In addition to providing programming to us, BSkyB competes with us by offering its programming directly to its digital satellite customers. As a result of BSkyB's ownership of this content, it is able to charge us a price for its content that makes it challenging for us to compete with BSkyB's own retail pricing and still maintain a profit margin on the sale of that premium programming. BSkyB also offers content, such as high definition, some sports programming and interactive content, exclusively to its digital satellite customers and not to us.

        In addition to BSkyB, our significant programming suppliers include the BBC, ITV plc, Channel 4, Channel Five, Viacom Inc., HBO, Discovery Communications Inc. and Turner, a division of Time Warner Inc. Our dependence on these suppliers for television programming could have a material adverse effect on our ability to provide attractive programming at a reasonable cost. In addition, the loss of programs could negatively affect the quality and variety of the programming delivered to our customers, which could have a material adverse effect on our business and results of operations and increase customer churn.

Unauthorized access to our network could result in a loss of revenue.

        We rely on the integrity of our technology to ensure that our services are provided only to identifiable paying customers. The number of devices available in the U.K. which facilitate theft of service has increased. Any unauthorized access to our network could result in a loss of revenue, and any failure to respond to security breaches could raise concerns under our agreements with content providers. We continue to work on controlling unauthorized access to our networks.

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The sectors in which we compete are subject to rapid and significant changes in technology, and the effect of technological changes on our businesses cannot be predicted.

        The broadband internet, television, fixed line telephone and mobile telephone services sectors are characterized by rapid and significant changes in technology. The effect of future technological changes on our business cannot be predicted. It is possible that products or other technological breakthroughs, such as VoIP (over fixed and mobile technologies), mobile instant messaging, wireless fidelity, or WiFi, WiMax (i.e., the extension of local WiFi networks across greater distances) or internet protocol television, may result in our core offerings becoming less competitive and render our existing products and services obsolete. We may not be able to develop new products and services at the same rate as competitors or keep up with trends in the technology market as well as our competitors.

        The cost of implementing emerging and future technologies could be significant, and our ability to fund that implementation may depend on our ability to obtain additional financing.

We depend on equipment and service suppliers that may discontinue their products or seek to charge us prices that are not competitive, either of which may adversely affect our business and profitability.

        We have important relationships with several suppliers of customer equipment, hardware, software and services that we use to operate our network and systems and transmit our services. We also outsource various customer services. In many cases, we have made substantial investments in the equipment or software of a particular supplier, making it difficult for us in the short-term to change supply and maintenance relationships in the event that our initial supplier refuses to offer us favorable prices or ceases to produce equipment or provide the support that our network and systems require. If equipment or service suppliers were to discontinue their products or seek to charge us prices that are not competitive, our business and profitability could be materially adversely affected.

        Furthermore, we rely upon outside contractors to install our equipment in customers' homes. Delays caused by these contractors, or quality issues concerning these contractors, could cause our customers to become dissatisfied and could produce additional churn or discourage potential new customers.

The integration of our billing systems may have an adverse effect on our customer service, customer acquisitions, customer churn rate and operating costs.

        As a result of our growth through acquisitions, we inherited numerous billing and customer service systems. We continue to migrate our consumer cable and business customers to one central billing system. If we are not successful with this process, we might not be able to achieve the expected cost savings and customer service improvements associated with the new system. It is possible that billing errors and other customer service disruptions could occur during further integration processes, potentially resulting in increased customer churn or adverse effects on customer service, customer acquisitions, collections, customer numbers and the costs of maintaining our billing systems going forward.

Acquisitions and other strategic transactions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction.

        From time to time we have made acquisitions, dispositions and have entered into other strategic transactions. In connection with such transactions, we may incur unanticipated expenses, fail to realize anticipated benefits, have difficulty integrating the acquired businesses, disrupt relationships with current and new employees, customers and suppliers, incur significant indebtedness, or have to delay or not proceed with announced transactions. These factors could harm our business and our reputation.

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Revenue from our Content segment is highly dependent on subscriber fees and the television advertising market.

        Our Content segment owns pay channels through Virgin Media TV and our joint ventures with the BBC and derives its revenue from subscriber fees and advertising revenue. BSkyB, our main competitor, is our largest customer for our programming and in early 2007 used its dominant position in pay television to substantially reduce the fees it pays for our Virgin Media TV channels. As we are dependent upon carriage of our programming in order to attract advertising revenue, BSkyB has considerable power to renegotiate the fees that we charge for our programs. In addition, the TV advertising market has faced steady declines over the last few years. Our failure to generate sufficient subscriber fees or advertising revenue will cause our Content segment revenue and cash flow to decline.

Regulation of the markets in which we provide our services has been changing rapidly; unpredictable changes in U.K. and EU regulations affecting the conduct of our business, including price regulations, may have an adverse impact on our ability to set prices, enter new markets or control our costs.

        Our principal business activities have historically been regulated and supervised by various governmental bodies in the U.K. and by the regulatory initiatives of the European Commission. Regulatory changes have recently occurred, and may in the future occur, at the U.K. or EU level with respect to licensing requirements, price regulation, environmental regulation, accounting practices, interconnection arrangements, mobile termination rates, roaming regulation, number portability, carrier pre-selection, the ability to provide digital services, ownership of media companies, programming, local loop unbundling, data protection, the provision of open access by U.K. cable operators to other telecommunications operators, the adoption of uniform digital technology standards or the bundling of services. Regulatory changes relating to our activities and those of our competitors, such as changes relating to third party access to cable networks, the costs of interconnection with other networks or the prices of competing products and services, could adversely affect our ability to set prices, enter new markets or control costs.

        In addition, our business and the industry in which we operate are also at times being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. Any such action could harm our reputation and result in increased costs to the business.

We are subject to tax in more than one tax jurisdiction and our structure poses various tax risks.

        We are subject to taxation in the U.S. and the U.K. Our effective tax rate and tax liability will be affected by a number of factors in addition to our operating results, including the amount of taxable income in particular jurisdictions, the tax rates in those jurisdictions, tax treaties between jurisdictions, the manner in which and extent to which we transfer funds to and repatriate funds from our subsidiaries, accounting standards and changes in accounting standards, and future changes in the law. Because we operate in more than one tax jurisdiction and may therefore incur losses in one jurisdiction that cannot be offset against income earned in a different jurisdiction, we may pay income taxes in one jurisdiction for a particular period even though on an overall basis we incur a net loss for that period.

        We have a U.S. holding company structure in which substantially all of our operations are conducted in U.K. subsidiaries that are owned by one or more members of a U.S. holding company group. As a result, although we do not expect to have current U.K. tax liabilities on our operating earnings for at least the medium term, our operations may give rise to U.S. tax on "Subpart F" income generated by our U.K. subsidiaries, or on repatriations of cash from our U.K. operating subsidiaries to the U.S. holding company group. While we believe that we have substantial U.S. tax basis in some of our U.K. subsidiaries which may be available to avoid or reduce U.S. tax on repatriation of cash from our U.K. subsidiaries, there can be no assurance that the Internal Revenue Service, or IRS, will not

34



seek to challenge the amount of that tax basis or that we will be able to utilize such basis under applicable tax law. As a result, although in accordance with applicable law we will seek to minimize our U.S. tax liability as well as our overall worldwide tax liability, we may incur U.S. tax liabilities with respect to repatriation of cash from our U.K. subsidiaries to the United States. The amount of the tax liability, if any, would depend upon a multitude of factors, including the amount of cash actually repatriated.

There is no assurance that new products we may introduce will achieve full functionality or market acceptance.

        Our strategy includes the roll-out of 50Mb broadband to our addressable market and we cannot guarantee that this new service, or any other new products that we may develop in the future, will perform as expected when first introduced in the market. Should these new products and services fail to perform as expected or should they fail to gain market acceptance, our results of operations may be negatively effected.

Virgin Mobile relies on T-Mobile's network to carry its communications traffic.

        Virgin Mobile relies on its long-term agreement with T-Mobile for voice, non-voice and other telecommunications services we provide our mobile customers, as well as for certain ancillary services such as pre-pay account management. If the agreement with T-Mobile is terminated, or if T-Mobile fails to deploy and maintain its network, or if T-Mobile fails to provide the services as required under our agreement with them and we are unable to find a replacement network operator on a timely and commercial basis, if at all, we could be prevented from carrying on our mobile business or, if we found a replacement operator, we may be able to carry on our mobile business only on less favorable terms or provide less desirable services. Additionally, any migration of all or some of our customer base to a new operator would be in part dependent on T-Mobile and could entail potential technical or commercial risk. T-Mobile is also a customer of our business division. Any disagreements between T-Mobile and Virgin Mobile may affect our other relationships with T-Mobile.

We rely on third parties to distribute our Virgin Mobile products and procure customers for our services.

        Our ability to distribute Virgin Mobile products and services depends, to a large extent, on securing and maintaining agreements with a number of third party distributors who sell our branded handsets and service packs and prepay vouchers. These distributors also procure customers for our competitors and, in some cases, themselves as well. In particular, Carphone Warehouse also sells its own broadband and telephone services. They may also receive incentives to encourage potential customers to subscribe to our competitors' services rather than our own. They may at their discretion decide to cease to distribute our products and services.

        As part of our purchase of Virgin Mobile, we entered into an agreement with Virgin Retail Limited to occupy a dedicated space in which to advertise and promote our products and services in specified existing and future Virgin Megastores. In 2007, Virgin Retail Limited sold Virgin Megastores, which has since been rebranded as Zavvi. We have no control over the number of stores that may be opened or closed in the future by any of our distribution partners. If any of our distribution partners were to close some or all of their operations, or we fail to maintain these key distribution relationships, our revenue may decline.

        In addition, in 2007, we opened our own Virgin Media-branded retail outlets. We plan on opening more of our own retail outlets in the next few years to increase the sales of our products and services. Our stores may not perform successfully.

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We depend on the ability to attract and retain key personnel without whom we may not be able to manage our business lines effectively.

        We operate in a number of rapidly changing technologically advanced markets that will continue to challenge our senior management. There is significant competition in attracting and retaining qualified personnel in the telecommunications industry, especially individuals with experience in the cable sector. We believe that the unique combination of skills and experience possessed by our senior management would be difficult to replace, and that the loss of our key personnel could have a material adverse effect on us, including the impairment of our ability to execute our business plan. Our future success is likely to depend in large part on our continued ability to attract and retain highly skilled and qualified personnel.

Certain of our significant stockholders could have an influence over our business and affairs.

        Certain persons or entities are our significant stockholders. Based on SEC filings to date, the Virgin Group beneficially owns 10.5% of our issued and outstanding common stock; in addition, RiverSource Investments, LLC beneficially owns 10.3%, Franklin Mutual Advisers, LLC beneficially owns 9.7%, SRM Global Master Fund Limited Partnership beneficially owns 9.1% and Glenview Capital Management, LLC beneficially owns 5.0%, of our issued and outstanding common stock. Each of these significant stockholders could have an influence over the business and affairs of our company.

        On April 3, 2006, we entered into a license agreement with Virgin Enterprises Limited which provides for us to use the Virgin name and logo in our consumer and content businesses. In connection with this agreement, Virgin Enterprises Limited had the right to propose a candidate to our Nominating Subcommittee to fill a single seat on our board. Virgin Enterprises Limited nominated Mr. Gordon McCallum, Director of Virgin Enterprises Limited, and he was appointed to our board on September 11, 2006. As a result of Mr. McCallum's relationship with Virgin Enterprises Limited, if conflicts between the interests of Virgin Enterprises Limited and the interests of our other stockholders should arise, this director may not be disinterested.

Disruptions in Virgin Media TV's or sit-up's satellite transmissions could materially adversely affect their respective operations.

        Virgin Media TV and sit-up currently broadcast their digital programming content with leased satellite transponders, the operations of which are beyond the control of Virgin Media TV and sit-up. Disruption to one of these satellites would result in disruption to Virgin Media TV's or sit-up's programming and, depending upon the nature of that disruption, could result in a loss of revenues, a loss of customers and/or adverse publicity. In addition the satellite transponders may fail before the expiration of Virgin Media TV's and sit-up's contractual right to utilize them, which may result in additional costs as alternative arrangements are made for satellite transmission.

We do not insure the underground portion of our cable network and various pavement-based electronics associated with our cable network.

        We obtain insurance of the type and in the amounts that we believe are customary for similar companies. Consistent with this practice, we do not insure the underground portion of our cable network or various pavement-based electronics associated with our cable network. Almost all our cable network is constructed underground. As a result, any catastrophe that affects our underground cable network or our pavement-based electronics could prevent us from providing services to our customers and result in substantial uninsured losses.

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We could suffer losses due to asset impairment charges for goodwill and long-lived intangible assets.

        In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which we refer to in this annual report as FAS 142, goodwill and indefinite-lived intangible assets are subject to annual review for impairment (or more frequently should indications of impairment arise). Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. On December 31, 2007, we had goodwill and intangible assets of £3.3 billion. A downward revision in the fair value of a reporting unit or intangible assets could result in an impairment and a non-cash charge would be required. Any significant shortfall could lead to a downward revision in the fair value of such assets, which could have a material effect on our reported net earnings.

We have limited capacity on our cable platform.

        Our analog television, digital television, broadband internet and video on demand services are transmitted through our core and access networks, which have limited capacity. We have plans in place to add additional capacity to our core and access networks. Until these plans are implemented, we are therefore limited in the number of channels that can be transmitted as part of our digital television service. As new channels are developed, we may be unable to carry them on our platform due to these capacity constraints. As such, our digital television offering may not be as competitive which could result in an increase in customer churn and a decrease in revenue.

We may be adversely affected by a general deterioration in economic conditions in the U.K.

        The risks associated with certain segments of our business become more acute in periods of a slowing economy or recession. In our content segment, a slowing economy could be accompanied by a decrease in advertising on our channels. Generally, expenditures by advertisers are sensitive to economic conditions and tend to decline in recessionary periods and other periods of uncertainty. In addition, consumers generally have less discretionary spending to purchase goods and services. Our mobile segment may also be similarly affected by an economic slowdown as customers reduce their expenditures on mobile phones and usage. While the impact of an economic slowdown on our business is difficult to predict, it could result in a decline in revenue.

Risks Relating to Our Financial Indebtedness and Structure

We may not be able to fund our debt service obligations through operating cash flow in the future.

        We may not achieve or sustain sufficient cash flow in the future for the payment of principal or interest on our indebtedness when due. Consequently, we may be forced to raise cash or reduce expenses by doing one or more of the following:

    increasing, to the extent permitted, the amount of borrowings under new credit facilities;

    restructuring or refinancing our indebtedness prior to maturity, and/or on unfavorable terms;

    selling or disposing of some of our assets, possibly on unfavorable terms; or

    foregoing business opportunities, including the introduction of new products and services, acquisitions and joint ventures.

        We cannot be sure that any of, or a combination of, the above actions would be sufficient to fund our debt service obligations, particularly in times of turbulent capital markets.

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Our current leverage is substantial, which may have an adverse effect on our available cash flow, our ability to obtain additional financing if necessary in the future, our flexibility in reacting to competitive and technological changes and our operations.

        We had consolidated total long-term debt of £6.0 billion as of December 31, 2007. This high degree of leverage could have important consequences, including the following:

    a substantial portion of the cash flow from operations will have to be dedicated to the payment of interest and principal on existing indebtedness, thereby reducing the funds available for other purposes;

    the ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions or general corporate purposes may be impaired;

    our flexibility in reacting to competitive technological and other changes may be limited;

    the substantial degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or adverse developments in our business; and

    we may be exposed to risks inherent in interest rate and foreign exchange rate fluctuations.

We have incurred losses in the past and may not be profitable in the future.

        We had losses from continuing operations for 2007 of £463.5 million and for 2006 of £570.9 million (2006 is on a pro forma basis for the acquisition of Telewest and Virgin Mobile). We cannot be certain that we will achieve or sustain profitability in the future. Failure to achieve profitability could diminish our ability to sustain operations, meet financial covenants, obtain additional required funds and make required payments on present or future indebtedness.

The covenants under our debt agreements limit our ability to operate our business.

        The agreements that govern our indebtedness contain financial maintenance tests and restrictive covenants that limit the discretion of our management over various business matters. For example, the financial maintenance tests include liquidity, coverage and leverage ratios, and the restrictive covenants impact our ability to:

    incur or guarantee additional indebtedness;

    pay dividends or make other distributions, or redeem or repurchase equity interests or subordinated obligations;

    make investments;

    sell assets, including the capital stock of subsidiaries;

    enter into sale and leaseback transactions and certain vendor financing arrangements;

    create liens;

    enter into agreements that restrict some of our subsidiaries' ability to pay dividends, transfer assets or make intercompany loans;

    merge or consolidate or transfer all or substantially all of our assets; and

    enter into transactions with affiliates.

        These restrictions could materially adversely affect our ability to finance future operations or capital needs or to engage in other business activities that may be in our best interests. We may also incur other indebtedness in the future that may contain financial or other covenants more restrictive than those that will be applicable under our current indebtedness.

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We are a holding company dependent upon cash flow from subsidiaries to meet our obligations.

        Virgin Media Inc. and a number of its subsidiaries are holding companies with no independent operations or significant assets other than investments in their subsidiaries. Each of these holding companies depends upon the receipt of sufficient funds from its subsidiaries to meet its obligations.

        The terms of our senior credit facility and other debt securities limit the payment of dividends, loan repayments and other distributions to or from these companies under many circumstances. Various agreements governing our debt may restrict and, in some cases, may also prohibit the ability of these subsidiaries to move cash within their restricted group. Applicable tax laws may also subject such payments to further taxation.

        Applicable law may also limit the amounts that some of our subsidiaries will be permitted to pay as dividends or distributions on their equity interests, or even prevent such payments.

        The inability to transfer cash among entities within their respective consolidated groups may mean that even though they may have sufficient resources to meet their obligations, they may not be permitted to make the necessary transfers from one entity in their restricted group to another entity in their restricted group in order to make payments to the entity owing the obligations.

We are subject to currency and interest rate risks.

        We are subject to currency exchange rate risks because substantially all of our revenues and operating expenses are paid in U.K. pounds sterling, but we pay interest and principal obligations with respect to a portion of our indebtedness in U.S. dollars and euros. To the extent that the pound sterling declines in value against the U.S. dollar and the euro, the effective cost of servicing our U.S. dollar and euro-denominated debt will be higher. Changes in the exchange rate result in foreign currency gains or losses.

        We are also subject to interest rate risks. Before taking into account the impact of current hedging arrangements, as of December 31, 2007, we would have had interest determined on a variable basis on £4.8 billion, or 81%, of our long term debt. An increase in interest rates of 0.25% would increase unhedged gross interest expense by approximately £12 million per year.

        To manage these foreign exchange and interest rate risks, we have entered into a number of derivative instruments, including interest rate swaps, cross-currency swaps and foreign currency forward rate contracts. We are required by our lenders under our senior credit facility to fix the interest rate (whether through coupon or through derivatives) on not less than two thirds of the total debt represented by our senior credit facility and high yield notes, for a period of not less than three years from March 3, 2006. Accordingly, after giving effect to these hedges, an increase in interest rates of 0.25% would increase our gross interest expense by approximately £4 million per year.

Risks Relating to Our Common Stock

The market price of our common stock is subject to volatility, as well as to trends in the telecommunications industry in general, which will continue.

        The current market price of our common stock may not be indicative of prices that will prevail in the trading markets in the future. Stock prices in the telecommunications sector have historically been highly volatile, and the market price of our common stock could be subject to wide fluctuations in response to numerous factors, many of which will be beyond our control. These factors include actual or anticipated variations in our operational results and cash flow, our earnings releases and our competitors' earnings releases, announcements of technological innovations, changes in financial estimates by securities analysts, trading volume, rumors of private equity interest in our company, market conditions in the industry and the general state of the securities markets and the market for

39



telecommunications stocks, changes in capital markets that affect the perceived availability of capital to communications companies, governmental legislation or regulation, currency and exchange rate fluctuations, as well as general economic and market conditions, such as recessions. Trends in this industry are likely to have a corresponding impact on the price of our common stock.

We may in the future seek to raise funds through equity offerings, which could have a dilutive effect on our common stock.

        In the future, we may determine to raise capital through offerings of our common stock, securities convertible into our common stock, or rights to acquire these securities or our common stock. In any case, the result would ultimately be dilutive to our common stock by increasing the number of shares outstanding. We cannot predict the effect this dilution may have on the price of our common stock.

We have not historically paid cash dividends on our common stock, we may not be able to continue to pay dividends, and the failure to do so could adversely affect our stock price.

        Until June 2006, we had not paid any cash dividends on our common stock. The terms of our existing indebtedness limit our ability to pay dividends from cash generated from operations. We may be unable to continue to pay cash dividends on our common stock.

Sales of stock by stockholders in the company may decrease the price of the common stock.

        Based on SEC filings to date, the Virgin Group beneficially owns 10.5% of our issued and outstanding common stock; in addition, RiverSource Investments, LLC beneficially owns 10.3%, Franklin Mutual Advisers, LLC beneficially owns 9.7%, SRM Global Master Fund Limited Partnership beneficially owns 9.1% and Glenview Capital Management, LLC beneficially owns 5.0%, of our issued and outstanding common stock. Each of these significant stockholders could have an influence over the business and affairs of our company.

        Some of our stockholders also have rights, subject to various conditions, to require the company to file one or more registration statements covering their shares, or to include their shares in registration statements that the company may file for itself or on behalf of other stockholders.

        Subsequent sales by any of these stockholders of a substantial amount of the company's common stock may significantly reduce the market price of the common stock of the company. Moreover, the perception that these stockholders might sell significant amounts of such common stock could depress the trading price of the company's common stock for a considerable period. Sales of the company's common stock, and the possibility of these sales, could make it more difficult for the company to sell equity, or equity related securities, in the future at a time, and price, that it considers appropriate.

Provisions of our debt agreements, our stockholder rights plan, our certificate of incorporation, Delaware law and our contracts could prevent or delay a change of control of us.

        We may, under some circumstances involving a change of control, be obligated to repurchase substantially all of our outstanding senior notes and repay our outstanding indebtedness under our senior credit facility and other indebtedness. We or any possible acquirer may not have available financial resources necessary to repurchase those notes or repay that indebtedness in those circumstances.

        If we or any possible acquirer cannot repurchase those senior notes or repay our indebtedness under our credit facilities and other indebtedness in the event of a change of control of us, the failure to do so would constitute an event of default under the agreements under which that indebtedness was incurred and could result in a cross-default under other indebtedness that does not have similar provisions. The threat of this could have the effect of delaying or preventing transactions involving a

40


change of control of us, including transactions in which our stockholders would receive a substantial premium for their shares over then current market prices, or otherwise which they may deem to be in their best interests.

        Our stockholder rights plan, some provisions of our certificate of incorporation and our ability to issue additional shares of common stock or preferred stock to third parties without stockholder approval may have the effect, alone or in combination with each other, of preventing or making more difficult transactions involving a change of control of us. We are subject to the Delaware business combinations law that, subject to limited exceptions, prohibits some Delaware corporations from engaging in some business combinations or other transactions with any stockholder who owns 15% or more of the corporation's outstanding voting stock for three years following the date that the stockholder acquired that interest. The terms of certain of our existing agreements relating to changes of control may also have the effect of delaying or preventing transactions involving a change of control of us.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        In the U.K., we own, lease or occupy under license 131 business units and regional offices including our U.K. corporate head offices in Hook, Hampshire. We also maintain an office, which is our principal executive office, under lease in New York City. Twenty two of our corporate real estate sites are unoccupied, representing 17% of our properties or 12% of available accommodation. We continue to explore opportunities to dispose of these surplus buildings.

        In addition, we own or lease facilities at approximately 780 locations for operational network purposes such as head-ends, hubs, switching centers, points of presence, repeater nodes and radio sites and we also have network equipment in over 580 significant customer/third party sites. We also own or lease warehouses and other non-operational properties, as well as operating various cable television, telephone and telecommunications equipment housed in street cabinet enclosures situated on public and private sites. Currently five of our leased technical sites are unoccupied, representing a rental expense of approximately 3.5% of our rents on our technical sites. Again, we continue to explore opportunities to dispose of these surplus sites.

Item 3.    Legal Proceedings

        We are involved in various other disputes and litigation arising in the ordinary course of our business. While we do not believe any of these litigation matters alone or in the aggregate will have a material adverse effect on our financial position or results of operation, any adverse outcome in one or more of these matters could be material to our consolidated financial statements for any one period.

Item 4.    Submission of Matters to a Vote of Security Holders

        There were no matters that were submitted to a vote of our stockholders during the quarter ended December 31, 2007.

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PART II

Item 5.    Market for the Registrant's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)   Market Information

        Our shares are traded on the NASDAQ National Market under the symbol "VMED". The following table sets forth the reported high and low price per share of our common stock on the NASDAQ National Market for the periods indicated.

 
  Price per Share
 
  High
  Low
2006            
First Quarter to March 3, 2006(1)   $ 27.76   $ 25.27
First Quarter from March 6, 2006   $ 29.15   $ 27.00
Second Quarter   $ 29.69   $ 22.91
Third Quarter   $ 26.90   $ 21.02
Fourth Quarter   $ 27.50   $ 23.68

2007

 

 

 

 

 

 
First Quarter   $ 28.22   $ 24.14
Second Quarter   $ 26.65   $ 22.83
Third Quarter   $ 29.39   $ 21.94
Fourth Quarter   $ 24.80   $ 17.00

2008

 

 

 

 

 

 
First Quarter (through February 26, 2008)   $ 16.85   $ 13.35

(1)
Restated for the merger with Telewest. On the merger of NTL and Telewest on March 3, 2006, each stockholder of NTL (now known as Virgin Media Holdings Inc.) received 2.5 shares of stock and shareholders of Telewest received $16.25 in cash and retained 0.287 shares of the company now known as Virgin Media Inc. for each share that Telewest held previously.

Holders

        As of February 26, 2008, our transfer agent informed us that there were 484 record holders of our common stock, although there is a much larger number of beneficial owners.

Dividends

        We commenced the payment of regular quarterly dividends in June 2006. During the years ended December 31, 2006 and 2007, we paid the following dividends:

Board Declaration Date

  Per Share Dividend
  Record Date
  Payment Date
  Total Amount
 
   
   
   
  (in millions)

Year ended December 31, 2006:                  
May 18, 2006   $ 0.01   June 12, 2006   June 20, 2006   £1.6
August 28, 2006     0.02   September 12, 2006   September 20, 2006   3.5
November 28, 2006     0.02   December 12, 2006   December 20, 2006   3.4

Year ended December 31, 2007:

 

 

 

 

 

 

 

 

 
February 27, 2007   $ 0.02   March 12, 2007   March 20, 2007   £3.3
May 16, 2007     0.03   June 12, 2007   June 20, 2007   5.0
August 15, 2007     0.04   September 12, 2007   September 20, 2007   6.5
November 27, 2007     0.04   December 12, 2007   December 20, 2007   6.4

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        Future payments of regular quarterly dividends by us are at the discretion of the board of directors and will be subject to our future needs and uses of cash, which could include investments in operations, the repayment of debt, and share repurchase programs. In addition, the terms of our and our subsidiaries' existing and future indebtedness and the laws of jurisdictions under which those subsidiaries are organized limit the payment of dividends, loan repayments and other distributions to us under many circumstances.

Stock Performance Graph

        The following graph compares the cumulative total return on our common stock with the cumulative total return on Standard & Poor's 500 Stock Index and a Peer Group Index. Because no published index of comparable companies currently reports values on a dividends reinvested basis, we have created a Peer Group Index for purposes of this graph in accordance with the requirements of the SEC. The Peer Group Index is made up of companies that engage in cable television operations and related businesses as a significant element of their overall business, although not all of the companies included in the Peer Group Index participate in all of the lines of business in which we are engaged and some of the companies included in the Peer Group Index also engage in lines of business in which we do not participate. In addition, the market capitalizations of many of the companies included in the Peer Group Index are different from ours.

        Furthermore, all of the companies included in the Peer Group Index are U.S. based, whereas our operations are exclusively based in the U.K. and our U.S. dollar performance is significantly influenced by exchange rate changes. The common stocks of the following companies have been included in the Peer Group Index: Comcast Corporation, Cablevision Systems Corporation and Time Warner Cable Inc.

GRAPHIC

        The graph assumes that $100 was invested on January 13, 2003 and all dividends are reinvested. The graph covers only the period from January 13, 2003 to December 31, 2007 because NTL's common stock was registered under Section 12 of the Exchange Act and started trading on that date.

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Total Returns

 
  January 13,
2003

  December 31,
2003

  December 31,
2004

  December 31,
2005

  December 31,
2006

  December 31,
2007

Virgin Media(1)   100   354.42   370.73   345.93   321.26   219.43
S&P 500   100   122.16   135.46   142.11   164.56   173.60
Peer Group   100   119.84   122.24   98.21   153.68   103.45

(1)
Share prices from January 13, 2003 through March 3, 2006 reflect the historic prices of the common stock of NTL Incorporated prior to its merger into a subsidiary of Telewest Global, Inc., in a transaction that was accounted for as a reverse acquisition. The new holding company, Telewest Global, Inc., changed its name to NTL Incorporated on March 3, 2006. From March 6, 2006, share prices reflect the market price for that company, which was renamed Virgin Media Inc. on February 6, 2007.

(b)   Not applicable.

(c)   Purchases of Equity Securities by the Issuer

Period

  (a)
Total Number of Shares (or Units) Purchased(1)

  (b)
Average Price Paid per Share (or Unit)(2)

  (c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

  (d)
Maximum Number (or Approximate Dollar Value of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs

January 1–January 31, 2007   53,063   $ 25.30     $
March 1–March 31, 2007   93,366     25.09        
April 1–April 30, 2007   54,748     25.49        
   
       
     
Total   201,177     25.25        
   
       
     

(1)
In March, 2007, we adopted a net issuance policy to permit the net issuance of restricted stock to, and the net issuance exercise of our stock options by, a director or employee in specified circumstances. In a net issuance transaction, we withhold sufficient shares to satisfy the withholding taxes triggered upon the vesting of restricted stock or to satisfy the payment of the exercise price for options. This type of transaction is treated for accounting purposes effectively as the purchase of stock by the Company and an immediate cancellation of treasury stock.

(2)
Based on the mid-market share price of our common stock on the date of the net issuance transaction.

Item 6.    Selected Financial Data

        The selected consolidated financial information presented below should be read in conjunction with the consolidated financial statements and notes thereto and the information contained in our Management's Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this annual report. Historical results are not necessarily indicative of future results.

        On July 4, 2006, we acquired 100% of the outstanding shares and options of Virgin Mobile through a U.K. Scheme of Arrangement. Virgin Mobile is the largest mobile virtual network operator in the U.K., with approximately 4.5 million customers.

        On March 3, 2006, NTL merged with a subsidiary of Telewest, which changed its name to NTL Incorporated. Because this transaction was accounted for as a reverse acquisition, the financial

44



statements included in this annual report for the period through March 3, 2006 are those of NTL, which is now known as Virgin Media Holdings Inc., and for the period since March 3, 2006, these financial statements reflect the reverse acquisition of Telewest. See note 1 to the consolidated financial statements of Virgin Media Inc.

        On May 9, 2005, we sold our operations in the Republic of Ireland. The results of operations of the Ireland operations have been removed from our results of continuing operations for all periods presented.

        Following the disposal of our operations in the Republic of Ireland, all of our revenue from continuing operations and substantially all of our assets are denominated in U.K. pounds sterling. Consequently, we now report our results in pounds sterling. Financial information for all periods presented has been restated accordingly.

        We entered into an agreement for the sale of our Broadcast operations on December 1, 2004 and closed the sale on January 31, 2005. As of December 31, 2004, we accounted for the Broadcast operations as a discontinued operation. Therefore, the results of operations of the Broadcast operations have been removed from our results of continuing operations for all periods presented.

        We adopted fresh-start reporting upon our emergence from Chapter 11 reorganization in accordance with SOP 90-7, Financial Reporting By Entity in reorganization under the Bankruptcy Code, or SOP 90-7. For financial reporting purposes, the effects of the completion of the plan of reorganization as well as adjustments for fresh-start reporting were recorded as of January 1, 2003. Pursuant to fresh-start reporting, a new entity was deemed to have been created for financial reporting purposes. The carrying values of our assets were adjusted to their reorganization values, which were equivalent to their estimated fair values at January 1, 2003. The carrying values of our liabilities were adjusted to their present values at January 1, 2003. As a result, on January 1, 2003, we recognized £3,655.8 million for both operating income and income from continuing operations.

 
  Year ended December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (in millions, except per share data)

 
Statement of Operations Data:                                
Revenue     £4,073.7     £3,602.2     £1,947.6     £2,000.3     £1,887.4  
Operating income (loss)     16.6     9.8     (19.7 )   (52.5 )   (194.4 )
Loss from continuing operations     (463.5 )   (509.2 )   (241.7 )   (509.4 )   (606.7 )
Basic and diluted loss from continuing operations per share   £ (1.42 ) £ (1.74 ) £ (1.13 ) £ (2.34 ) £ (3.84 )
Average number of shares outstanding     325.9     292.9     213.8     218.0     158.0  
 
 
  As of December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (in millions, except per share data)

 
Balance Sheet Data:                                
Cash, cash equivalents and marketable securities   £ 321.4   £ 418.5   £ 832.1   £ 136.8   £ 446.1  
Working capital     (453.4 )   (604.4 )   529.9     (286.8 )   (48.1 )
Fixed assets     5,655.6     6,026.3     3,294.9     3,531.6     3,857.2  
Total assets     10,466.1     11,243.5     4,988.5     5,493.3     6,262.1  
Long term debt     5,958.5     6,159.1     2,280.0     3,013.5     3,211.9  
Shareholders' equity     2,810.5     3,230.1     1,955.0     1,574.5     2,068.6  
Dividends declared per common share (in U.S. dollars)   $ 0.13   $ 0.05              

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Virgin Media Inc. is a leading U.K. entertainment and communications business providing the first "quad-play" offering of television, broadband, fixed line telephone and mobile telephone services in the U.K. together with one of the most advanced TV on demand services available in the U.K. market. By number of customers, we are the U.K.'s largest residential broadband and mobile virtual network operator and second largest provider in the U.K. of pay television and fixed line telephone services. Through ntl:Telewest Business, which also operates under the Virgin Media group, we provide a complete portfolio of voice, data and internet solutions to leading businesses, public sector organizations and service providers in the U.K.

        Through Virgin Media Television, or Virgin Media TV, we also provide a broad range of programming through our wholly-owned channels, such as Virgin 1, Living and Bravo; through UKTV, our joint ventures with BBC Worldwide; and through the portfolio of retail television channels operated by sit-up tv.

        We presently manage our business through three reportable segments:

    Cable:  our cable segment includes the distribution of television programming over our cable network and the provision of broadband and fixed line telephone services to consumers, businesses and public sector organizations, both on our cable network and, to a lesser extent, off our network;

    Mobile:  our mobile segment includes the provision of mobile telephone services under the brand name Virgin Mobile to consumers over cellular networks owned by third parties; and

    Content:  our content segment includes the operations of our U.K. television channels, such as Virgin 1, which was launched on October 1, 2007, as well as Living, Bravo and sit-up's portfolio of retail television channels. Although not included in our content segment revenue, our content management team also oversees our interest in the UKTV television channels through our joint ventures with BBC Worldwide.

        For further discussion of our business, please refer to Item 1 of this annual report.

Revenue

        Our revenue by segment for the years ended December 31, 2007, 2006 and 2005 was as follows (in millions):

 
  Year ended December 31,
 
 
  2007
  2006
  2005
 
Cable Segment                                
  Consumer   £ 2,486.2   61.0 % £ 2,393.3   66.4 % £ 1,520.0   78.0 %
  Business     641.8   15.8     614.0   17.1     427.6   22.0  
   
 
 
 
 
 
 
      3,128.0   76.8     3,007.3   83.5     1,947.6   100.0  
Mobile Segment     597.6   14.7     292.1   8.1        
Content Segment     348.1   8.5     302.8   8.4        
   
 
 
 
 
 
 
    £ 4,073.7   100.0 % £ 3,602.2   100.0 % £ 1,947.6   100.0 %
   
 
 
 
 
 
 

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        The principal sources of revenue within each segment are:

    Cable

    consumer—monthly fees and usage charges for telephone services, cable television services and internet access; and

    business—monthly fees and usage charges for inbound and outbound voice, data and internet services and charges for transmission, fiber and voice services provided to retail and wholesale customers over our national network.

    Mobile

    mobile services—monthly fees and usage charges for airtime, data, roaming and long-distance calls; and

    mobile handset and other equipment—charges for the supply of equipment.

    Content

    transactional and interactive—sale and delivery of retail consumer goods through television shopping channels; and

    advertising—fees for television airing of advertising from advertisers or advertising agencies.

Expenses

        The principal components of our operating costs and selling, general and administrative expenses within each segment include:

    Cable

    payroll and other employee-related costs;

    television programming costs;

    interconnect costs paid to carriers relating to call termination services;

    facility-related costs, such as rent, utilities and rates;

    marketing and selling costs;

    costs of maintaining our cable network infrastructure and IT systems; and

    allowances for doubtful accounts.

    Mobile

    interconnect costs paid to other carriers relating to mobile call termination services;

    purchase costs of mobile handsets and other equipment;

    subscriber acquisition costs;

    payroll and other employee-related costs;

    marketing and selling costs;

    facility-related costs, such as rent, utilities and rates;

    repairs and maintenance costs; and

    allowances for doubtful accounts.

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    Content

    television production programming costs;

    amortization of television and movie program costs;

    costs of purchasing consumer goods for re-sale;

    leased satellite transponder costs;

    payroll and other employee-related costs;

    marketing and selling costs;

    repairs and maintenance costs;

    facility-related costs, such as rent, utilities and rates; and

    allowances for doubtful accounts.

Acquisitions and Disposals

Acquisition of Virgin Mobile

        On July 4, 2006, we acquired 100% of the outstanding shares and options of Virgin Mobile through a U.K. Scheme of Arrangement for a purchase price totaling £953.2 million, including cash of £419.2 million, common stock valued at £518.8 million and direct transaction costs of £15.2 million.

Reverse Acquisition of Telewest

        On March 3, 2006, NTL merged with a subsidiary of Telewest and the merger has been accounted for as a reverse acquisition of Telewest using the purchase method. In connection with this transaction, Telewest changed its name to NTL Incorporated, and has since changed its name to Virgin Media Inc. The total purchase price was £3.5 billion, including cash of £2.3 billion, common stock valued at £1.1 billion, stock options with a fair value of £29.8 million and direct transaction costs of £25.1 million.

Sale of Broadcast and Ireland Operations

        On January 31, 2005, we sold our Broadcast operations, a provider of commercial television and radio transmission services, to a consortium led by Macquarie Communications Infrastructure Group. The cash proceeds from the sale were £1.3 billion. Our Broadcast operations provided site leasing, broadcast transmission, satellite, media, public safety communications and other network services, utilizing broadcast transmission infrastructure, wireless communications and other facilities.

        On May 9, 2005, we sold our telecommunications operations in the Republic of Ireland to MS Irish Cable Holdings B.V., an affiliate of Morgan Stanley, for an aggregate purchase price of €333.4 million, or £225.5 million.

        As a result of the sale of our Broadcast and Ireland operations, we have accounted for the Broadcast and Ireland operations as discontinued operations. The results of operations for the Broadcast and Ireland operations have been excluded from the components of loss from continuing operations and shown in a separate caption, titled income from discontinued operations.

Factors Affecting Our Business

Cable Segment

        In our Cable segment, residential customers account for the majority of our total revenue. The number of residential customers, the number and types of services that each customer uses and the

48



prices we charge for these services drive our revenue. Our profit is driven by the relative margins on the types of services we provide to these customers and by the number of services that we provide to them. For example, broadband internet is more profitable than our television services and, on average, our "triple-play" customers are more profitable than "double-play" or "single-play" customers. Our packaging of services and our pricing are designed to encourage our customers to use multiple services such as television, telephone and broadband at a lower price than each stand-alone product on a combined basis. Factors particularly affecting our profitability include customer churn, average revenue per user (ARPU), competition, capital expenditures and seasonality.

        Customer Churn.    Customer churn is a measure of the number of customers who stop subscribing to our services. An increase in our customer churn can lead to increased costs and reduced revenue. We continue to focus on improving our customer service and enhancing and expanding our service offerings to existing customers in order to manage our customer churn rate. Our ability to reduce our customer churn rate beyond a base level is limited by factors like competition and customers moving outside our network service area, in particular during the summer season. Managing our customer churn rate is a significant component of our business plan. Our customer churn rate may increase if our customer service is seen as unsatisfactory, if we are unable to deliver our services over our network without interruption, or if we fail to match offerings by our competitors.

        Cable ARPU.    Average Revenue Per User, or ARPU, is a measure we use to evaluate how effectively we are realizing potential revenue from our residential cable customers on our network. We believe that our "triple-play" cable offering of television, broadband and fixed line telephone services is attractive to our existing customer base and generally allows us to increase our Cable ARPU by facilitating the sale of multiple services to each customer. Cable ARPU excludes any recognition of revenue from our Mobile segment.

        Competition.    Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant and increasing competition in the market for our consumer services, including broadband and telephone services offered by BT and resellers or local loop unbundlers, such as BSkyB and Carphone Warehouse (Talk Talk), alternative internet access services like DSL, satellite television services offered by BSkyB, digital terrestrial television offered through Freeview, internet protocol television offered by Tiscali and BT, and mobile telephone services offered by other mobile telephone operators. Our business services also face a range of competitors, including BT and Cable & Wireless. Certain competitors, such as BT and BSkyB, are dominant in markets in which we compete and may use their dominance in those markets to offer bundled services that compete with our product offerings. As a result of increased competition, we have had to, and may be required to continue to, adjust our pricing and offer discounts to new and existing customers in order to attract and retain customers.

        Capital Expenditures.    Our business requires substantial capital expenditures on a continuing basis for various purposes, including expanding, maintaining and upgrading our network, investing in new customer acquisitions, and offering new services. If we do not continue to invest in our network and in new technologies, our ability to retain and acquire customers may be hindered. Therefore, our liquidity and the availability of cash to fund capital projects are important drivers of our revenue. When our liquidity is restricted, so is our ability to meet our capital expenditure requirements.

        Seasonality.    Some revenue streams are subject to seasonal factors. For example, telephone usage revenue by residential customers and businesses tends to be slightly lower during summer holiday months. Our customer churn rates include persons who disconnect their service because of moves, resulting in a seasonal increase in our churn rates during the summer months when higher levels of U.K. house moves occur and students leave their accommodation between academic years.

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Mobile Segment

        Factors particularly affecting our Mobile segment include competition, seasonality and our third party distribution arrangements.

        Competition.    Our ability to acquire and retain customers and increase revenue depends on our competitive strength. There is significant competition in our markets from mobile operators, including O2, Vodafone, Orange, T-Mobile and 3, and from other mobile virtual network operators, including Tesco Mobile, BT Mobile and Carphone Warehouse. Many of our competitors are part of large multinational organizations, have substantial advertising and marketing budgets, and have a significant retail presence. If competitive forces prevent us from charging the prices for these services that we plan to charge, or if our competition is able to attract our customers or potential customers we are targeting, our results of operations will be adversely affected.

        Seasonality.    Some revenue streams and cost drivers are subject to seasonal factors. For example, in the fourth quarter of each year our customer acquisition and retention costs typically increase due to the Christmas holiday period. Our ARPU generally decreases in the first quarter of each year due to the fewer number of days in February and lower usage after the Christmas holiday period. During the summer holiday months, roaming revenue is generally higher as a result of increased international travel.

        Distribution.    We primarily rely upon third parties to distribute our mobile products and services. If any of these distribution partners were to cease to act as distributors for our products and services, or the commissions or other costs charged by the third parties were to increase, our ability to gain new customers or retain existing customers may be adversely affected. We also distribute our products through our own retail outlets.

Content Segment

        Factors particularly affecting our Content segment include competition, the number of buyers for our television channels, our access to content, seasonality and advertising revenue.

        Competition.    Our television channels compete with other broadcasters for advertising revenues, subscription revenues, and programming rights. sit-up competes with a large variety of retailers in the U.K. market and with other television channels for audiences. IDS, our advertising sales department, competes with advertising sales operations representing other television broadcasters.

        Limited Number of Buyers.    The principal third party buyer of our television channels is BSkyB. Other than BSkyB, there are no significant buyers of our television channels.

        Access to Content.    Most of the television content on the Virgin Media TV channels is purchased, mainly from the U.S., and because there is a limited supply of content available and an increasing number of digital channels in the U.K., Virgin Media TV has experienced and may continue to experience an increase in the cost of its programming.

        Seasonality.    Our Content segment incurs increased costs in the fourth quarter of each year due to the need to provide enhanced programming over the important Christmas holiday period. Also, sit-up records increased revenues and costs in the fourth quarter due to generally higher retail sales in the lead up to the Christmas holiday.

        Advertising Revenue.    The majority of revenue for Virgin Media TV is from advertisers. Consequently, Virgin Media TV's revenue is directly affected by changes in the total spend on television advertising in the U.K., the viewing levels for its channels and the proportion of the U.K. advertising market represented by IDS.

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General

        Other factors affecting our business include:

        Currency Movements.    We encounter currency exchange rate risks because substantially all of our revenue and operating costs are earned and paid primarily in U.K. pounds sterling, but we pay interest and principal obligations with respect to a portion of our existing indebtedness in U.S. dollars and euros. We have implemented a hedging program to seek to mitigate the risk from these exposures. The objective of this program is to reduce the volatility of our cash flows and earnings caused by changes in underlying rates.

        Integration.    We continue to integrate our legacy NTL and Telewest cable businesses and Virgin Mobile. This involves the incurrence of substantial operating and capital expenditures and, in some cases, involves the outsourcing of key functions in an effort to achieve synergies through the integration of the businesses. We will be completing the final stages of the integration of our cable billing platforms during 2008. Any issues that may arise in connection with our integration could have a material negative effect on our financial performance.

Critical Accounting Policies

        Our consolidated financial statements and related financial information are based on the application of U.S. Generally Accepted Accounting Principles, or GAAP. GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported, as well as disclosures about contingencies, risk and financial condition. The following critical accounting policies have the potential to have a significant impact on our financial statements. An impact could occur because of the significance of the financial statement item to which these policies relate, or because these policies require more judgment and estimation than other matters owing to the uncertainty related to measuring, at a specific point in time, transactions that are continuous in nature.

        These policies may need to be revised in the future in the event that changes to our business occur.

Impairment of Long-Lived Assets and Indefinite-Lived Assets

        Long-lived assets and certain identifiable intangibles (intangible assets that do not have indefinite lives) to be held and used by an entity are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Indications of impairment are determined by reviewing undiscounted projected future cash flows. If impairment is indicated, the amount of the impairment is the amount by which the carrying value exceeds the fair value of the assets.

        Goodwill arising from business combinations, reorganization value in excess of amounts allocable to identifiable assets and intangible assets with indefinite lives, are subject to annual review for impairment (or more frequently should indications of impairment arise). Impairment of goodwill and reorganization value in excess of amounts allocable to identifiable assets is determined using a two-step approach, initially based on a comparison of the reporting unit's fair value to its carrying value; if the fair value is lower than the carrying value, then the second step compares the asset's fair value (implied fair value for goodwill and reorganization value in excess of amounts allocable to identifiable assets) with its carrying value to measure the amount of the impairment. Impairment of intangible assets with indefinite lives is determined based on a comparison of fair value to carrying value. Any excess of carrying value over fair value is recognized as an impairment loss. We evaluate our Cable reporting unit for impairment on an annual basis as at December 31, while all other reporting units are evaluated as at June 30. In the future, we may incur impairment charges under Financial Accounting Standards

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Board Statement No. 142, Accounting for Goodwill and Other Intangible Assets, or FAS 142, if market values decline and we do not achieve expected cash flow growth rates.

        Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and those estimates include inherent uncertainties, including those relating to the timing and amount of future cash flows and the discount rate used in the calculation. Assumptions used in these cash flows are consistent with our internal forecasts. If actual results differ from the assumptions used in the impairment review, we may incur additional impairment charges in the future.

Fixed Assets

        Labor and overhead costs directly related to the construction and installation of fixed assets, including payroll and related costs of some employees and related rent and other occupancy costs, are capitalized. The payroll and related costs of some employees that are directly related to construction and installation activities are capitalized based on specific time devoted to these activities where identifiable. In cases where the time devoted to these activities is not specifically identifiable, we capitalize costs based upon estimated allocations. Costs associated with initial customer installations are capitalized. The costs of reconnecting the same service to a previously installed premise are charged to expense in the period incurred. Costs for repairs and maintenance are charged to expense as incurred.

        We assign fixed assets and intangible assets useful lives that impact the annual depreciation and amortization expense. The assignment of useful lives involves significant judgments and the use of estimates. Our management use their experience and expertise in applying judgments about appropriate estimates. Changes in technology or changes in intended use of these assets may cause the estimated useful life to change, resulting in higher or lower depreciation charges or asset impairment charges.

Business Combinations

        We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their fair values. We engage third party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.

        Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts and customer lists; the trademark's brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company's product portfolio and discount rates. Management's assumptions about fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur, which may affect management's estimates.

        Other estimates associated with the accounting for these acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. In particular, liabilities in relation to tax exposures or liabilities to restructure the pre-acquisition businesses of NTL, Telewest and Virgin Mobile, including the exit of properties and termination of employees, are revised as estimates are updated.

Restructuring Costs

        As of January 1, 2003, we adopted FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or FAS 146, and recognize a liability for costs associated with restructuring

52



activities when the liability is incurred. The adoption of FAS 146 did not have a significant effect on our results of operations, financial condition or cash flows.

        Prior to 2003, we recognized a liability for costs associated with restructuring activities at the time a commitment to restructure was given, in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), or EITF 94-3. Liabilities for costs associated with restructuring activities initiated prior to January 1, 2003 continue to be accounted for under EITF 94-3.

        In relation to our restructuring activities, we have recorded a liability of £89.6 million as of December 31, 2007 relating to lease exit costs of properties that we have vacated. In calculating the liability, we make a number of estimates and assumptions including the timing of ultimate disposal of the properties, our ability to sublet the properties either in part or as a whole, amounts of sublet rental income achievable including any incentives required to be given to sublessees, amounts of lease termination costs, and discount rates.

Income Taxes

        Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, income tax rates, and tax planning opportunities available in the jurisdictions in which we operate. From time to time, we engage in transactions in which the tax consequences may be subject to some uncertainty. Examples of such transactions include business acquisitions and disposals, issues related to consideration paid or received in connection with acquisitions, and certain financing transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations.

        At each period end, we make certain estimates and assumptions to compute the provision for income taxes including, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in the U.K. and the extent to which this income (or loss) may also be taxed in the U.S., permanent and temporary differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to matters such as business acquisitions and disposals and certain financing transactions including intercompany transactions, amongst others, and we accrue a liability when we believe an assessment is probable and the amount is estimable. In accordance with GAAP, the impact of revisions to these estimates are recorded as income tax expense or benefit in the period in which they become known. Accordingly, the accounting estimates used to compute the provision for income taxes have and will change as new events occur, as more experience is acquired, as additional information is obtained and as our tax environment changes.

Recent Accounting Pronouncements

        In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or FAS 157. FAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. FAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. FAS 157 is effective for certain financial instruments included in financial statements issued for fiscal years beginning after November 15, 2007 and for all other non-financial instruments for fiscal years beginning after November 15, 2008. The provisions of FAS 157 relating to certain financial

53



instruments are required to be adopted by us in the first quarter of 2008 effective January 1, 2008. While we are still addressing the impact of the adoption of this Standard it is not expected to have a material impact on our consolidated financial statements.

        In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, or FAS 159. FAS 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of FAS 159 will have on our consolidated financial statements and are not yet in a position to determine its effects.

Consolidated Results of Operations from Continuing Operations

Consolidated Results of Operations for the Years Ended December 31, 2007 and 2006

Revenue

        For the year ended December 31, 2007, revenue increased by 13.1% to £4,073.7 million from £3,602.2 million for the year ended December 31, 2006. This increase was primarily due to the reverse acquisition of Telewest and the inclusion of its revenues from March 3, 2006, and to the acquisition of Virgin Mobile and the inclusion of its revenues from July 4, 2006, as compared to their inclusion for the full year in 2007. Offsetting this has been an underlying decline in revenue in our Cable and Content segments due to the factors described below in our segmental results of operations for the years ended December 31, 2007 and 2006.

Expenses

        Operating costs.    For the year ended December 31, 2007, operating costs, including network expenses, increased by 16.4% to £1,830.0 million from £1,572.8 million during the same period in 2006. This increase was primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile. Operating costs as a percentage of revenue increased to 44.9% for the year ended December 31, 2007 from 43.7% for the same period in 2006, due to a decline in gross margins in our Cable segment together with the full year impact in 2007 of the inclusion of the Telewest Content segment subsequent to the reverse acquisition of Telewest and the new Mobile segment subsequent to the acquisition of Virgin Mobile, since these segments have lower gross margins than our Cable segment.

        Selling, general and administrative expenses.    For the year ended December 31, 2007, selling, general and administrative expenses increased by 5.9% to £960.2 million from £906.9 million for the same period in 2006. This increase was primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile and higher marketing costs in connection with the Virgin Media rebrand, partially offset by a reduction in our employee expenses as a result of our integration activities together with lower company bonus scheme payments, a reduction in our share-based compensation expense resulting primarily from stock and option forfeitures, lower bad debt expense due to operational improvements in our billing and collections following the integration of our systems and processes, and gains resulting from the settlement of certain contractual issues.

Other charges

        Other charges of £28.7 million in the year ended December 31, 2007 and £67.0 million in the year ended December 31, 2006 related primarily to employee termination costs and lease exit costs in connection with our restructuring programs initiated in respect of the reverse acquisition of Telewest.

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        The following table summarizes our historical restructuring accruals (in millions):

Historical Restructuring Accruals

  Involuntary Employee Termination and Related Costs
  Lease Exit Costs
  Total
 
Balance, January 1, 2007   £   £ 43.4   £ 43.4  
Revisions         (0.1 )   (0.1 )
Charged to expense         3.6     3.6  
Utilized         (11.0 )   (11.0 )
   
 
 
 
Balance, December 31, 2007   £   £ 35.9   £ 35.9  
   
 
 
 

        The following table summarizes our restructuring accruals resulting primarily from the reverse acquisition of Telewest (in millions):

Acquisition Restructuring Accruals

  Involuntary Employee Termination and Related Costs
  Lease Exit Costs
  Total
 
Balance, January 1, 2007   £ 18.7   £ 64.7   £ 83.4  
Amendments offset against goodwill         (11.3 )   (11.3 )
Revisions         (8.2 )   (8.2 )
Charged to expense     27.9     5.5     33.4  
Utilized     (34.0 )   (9.6 )   (43.6 )
   
 
 
 
Balance, December 31, 2007   £ 12.6   £ 41.1   £ 53.7  
   
 
 
 

Depreciation expense

        For the year ended December 31, 2007, depreciation expense increased to £924.9 million from £799.1 million for the same period in 2006. This increase was primarily attributable to the reverse acquisition of Telewest and the acquisition of Virgin Mobile, together with purchases of new fixed assets during the year and the effect of a full year of depreciation expense in 2007 for assets placed in service in 2006.

Amortization expense

        For the year ended December 31, 2007, amortization expense increased to £313.3 million from £246.6 million for the same period in 2006. The increase in amortization expense related to additional intangible assets arising from the reverse acquisition of Telewest and from the acquisition of Virgin Mobile.

Interest income and other, net

        For the year ended December 31, 2007, interest income and other decreased to £19.5 million from £34.7 million for the year ended December 31, 2006 primarily as a result of increased losses on disposals of fixed assets and a decline in interest income due to lower average cash balances, partially offset by a gain on disposal of investments. In 2007, interest income and other included gains on disposal of investments totaling £8.1 million, offset by losses on disposal of fixed assets totaling £18.8 million.

55


Interest expense

        For the year ended December 31, 2007, interest expense increased to £514.2 million from £457.4 million for the same period in 2006, primarily due to the additional borrowings resulting from the reverse acquisition of Telewest and the acquisition of Virgin Mobile.

        We paid cash interest of £486.9 million for the year ended December 31, 2007 and £327.1 million for the year ended December 31, 2006. The increase in cash interest payments resulted from the additional borrowings following the reverse acquisition of Telewest and the acquisition of Virgin Mobile, and changes in the timing of interest payments.

Loss on extinguishment of debt

        For the year ended December 31, 2007, loss on extinguishment of debt was £3.2 million, and related to the write off of deferred financing costs as a result of our partial repayments under our senior credit facility.

        For the year ended December 31, 2006, loss on extinguishment of debt was £32.8 million, and related primarily to the write off of deferred financing costs on our previous senior credit facility that was repaid upon completion of the refinancing of the reverse acquisition of Telewest.

Share of income from equity investments

        For the year ended December 31, 2007, share of income from equity investments was £17.7 million as compared with income of £12.5 million for the same period in 2006. The income from equity investments in the year ended December 31, 2007 was largely comprised of our proportionate share of the income earned by UKTV. The increase in our proportionate share of the income earned by UKTV was primarily due to the inclusion of UKTV within our Content segment only from March 3, 2006 following the reverse acquisition of Telewest as compared with its inclusion for a full year in 2007, together with an increase in UKTV's net income in 2007 resulting primarily from additional advertising revenue.

(Loss) gain from derivative instruments

        The loss from derivative instruments of £2.5 million in the year ended December 31, 2007, primarily related to losses on cross-currency interest rate swaps not designated as hedges offset by hedge ineffectiveness on interest rate swaps. The gain from derivative instruments of £1.3 million in the year ended December 31, 2006 related primarily to favorable movements in the fair value of derivative instruments not designated as hedges.

Foreign currency transaction gains (losses)

        For the year ended December 31, 2007, foreign currency transaction gains were £5.1 million as compared with losses of £90.1 million for the same period in 2006. The foreign currency transaction gains in the year ended December 31, 2007 were largely comprised of favorable exchange rate movements in our U.S. dollar long term debt and payables. The foreign currency losses in the year ended December 31, 2006 were largely comprised of foreign exchange losses of £70.8 million on U.S. dollar forward purchase contracts that were entered into to economically hedge the repayment of our U.S. dollar denominated bridge facility. The repayment of $3.1 billion of this facility on June 19, 2006 resulted in an offsetting gain during the period of £120.7 million that was recorded as a component of equity. Our results of operations will continue to be affected by foreign exchange rate fluctuations since £807.9 million of our indebtedness is denominated in U.S. dollars and £522.1 million of our indebtedness is denominated in euros.

56


Income tax expense (benefit)

        For the year ended December 31, 2007, income tax expense was £2.5 million as compared with an income tax benefit of £11.8 million for the same period in 2006. The 2007 and 2006 expense (benefit) was composed of (in millions):

 
  2007
  2006
 
U.S. state and local income tax   £ (0.6 ) £  
Foreign tax     (4.9 )   (2.7 )
Deferred U.S. income tax     7.6     (8.6 )
Alternative minimum tax     0.4     (0.5 )
   
 
 
Total   £ 2.5   £ (11.8 )
   
 
 

        In 2007, we received refunds of £7.9 million in respect of pre-acquisition periods of Virgin Mobile and £0.4 million of U.S. federal income tax relating to pre-acquisition periods of Telewest. We paid £0.6 million of U.S alternative minimum tax.

        In 2006, we received refunds of £1.3 million of U.S. alternative minimum tax and £0.1 million of U.S. state and local tax. We also paid £3.1 million of U.S. federal income tax in respect of pre-acquisition periods of Telewest. In addition, we paid £4.6 million of U.K. tax expense in respect of pre-acquisition periods of Virgin Mobile.

Loss from continuing operations

        For the year ended December 31, 2007, loss from continuing operations decreased to £463.5 million from a loss of £509.2 million for the same period in 2006 due to the factors discussed above.

Loss from continuing operations per share

        Basic and diluted loss from continuing operations per common share for the year ended December 31, 2007 was £1.42 compared to £1.74 for the year ended December 31, 2006. Basic and diluted loss per share is computed using a weighted average of 325.9 million shares issued and outstanding in the year ended December 31, 2007 and a weighted average of 292.9 million shares issued and outstanding for the same period in 2006. Options and warrants to purchase shares along with shares of restricted stock held in escrow outstanding at December 31, 2007 and 2006 were excluded from the calculation of diluted net loss per share, since the inclusion of such options, warrants and restricted stock are anti-dilutive.

Segmental Results of Operations for the Years Ended December 31, 2007 and 2006

        A description of the products and services, as well as year-to-date financial data, for each segment can be found in note 19 to Virgin Media's consolidated financial statements. The segment results for the year ended December 31, 2007 included in our consolidated financial statements are reported on an actual basis and include the results of Telewest and Virgin Mobile for the full year. The segment results for the year ended December 31, 2006 included in our consolidated financial statements are reported on an actual basis and include the results of Telewest from March 3, 2006 and the results of Virgin Mobile from July 4, 2006.

        The results of operations of each of our Cable and Content segments reported in this section for the year ended December 31, 2007 are reported on an actual basis and for the year ended December 31, 2006 are reported on a pro forma combined basis as if the reverse acquisition of Telewest had occurred at the beginning of the period presented and combine Telewest's historical

57



Content and sit-up segments into the combined company's Content segment. The pro forma data has been calculated on a basis consistent with the pro forma financial information filed with the Securities and Exchange Commission under our Form 8-K/A on May 10, 2006. We believe that a pro forma comparison of these segments is more relevant than a historic comparison as: (a) in respect of our Cable segment, the size of the acquired legacy Telewest cable business would obscure any meaningful discussion of changes in our Cable segment if viewed on a historical basis; and (b) we did not have a Content segment prior to March 3, 2006. Comparative pro forma results of our Mobile segment have not been presented.

        The reportable segments disclosed in this annual report are based on our management organizational structure as of December 31, 2007. Future changes to this organizational structure may result in changes to the reportable segments disclosed.

        Segment operating income before depreciation, amortization and other charges, which we refer to as Segment OCF, is management's measure of segment profit as permitted under FAS 131, Disclosures about Segments of an Enterprise and Related Information. Our management, including our chief executive officer who is our chief operating decision maker, considers Segment OCF as an important indicator of the operational strength and performance of our segments. Segment OCF excludes the impact of costs and expenses that do not directly affect our cash flows. Other charges, including restructuring charges, are also excluded from Segment OCF as management believes they are not characteristic of our underlying business operations.

Cable Segment

        The summary combined results of operations of our Cable segment were as follows (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(Pro Forma)

 
Revenue   £ 3,128.0   £ 3,225.4  
Inter segment revenue     4.1     3.0  
Segment OCF     1,162.3     1,145.2  
Depreciation, amortization and other charges     (1,160.1 )   (1,134.9 )
Operating income   £ 2.2   £ 10.3  

    Revenue

        Our Cable segment revenue by customer type for the years ended December 31, 2007 and 2006 was as follows (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(Pro Forma)

  Increase/
(Decrease)

 
Revenue:                  
  Consumer   £ 2,486.2   £ 2,568.6   (3.2 )%
  Business     641.8     656.8   (2.3 )%
   
 
 
 
Total revenue   £ 3,128.0   £ 3,225.4   (3.0 )%
   
 
 
 

        Consumer:    For the year ended December 31, 2007, revenue from residential customers decreased by 3.2% to £2,486.2 million from pro forma revenue of £2,568.6 million for the year ended December 31, 2006. This decrease was primarily due to a decline in the number of fixed line telephone customers, reductions in telephony usage and higher price discounting to stimulate customer activity and retention in light of competitive factors in the marketplace. In addition, in 2007 we took significant

58



steps to increase alignment of the prices paid by our existing customers with the prices paid by new customers. Partially offsetting these decreases have been increases in revenue from selective telephony price increases as well as from additional customers subscribing to our television and broadband services.

        Cable ARPU decreased to £42.24 for the three months ended December 31, 2007 from £42.82 for the three months ended December 31, 2006. The decrease in Cable ARPU was due to reduced telephony usage and higher price discounting as discussed above. The decline has been mitigated by our focus on acquiring new bundled customers and cross-selling and up-selling to existing customers. Our focus on acquiring new bundled customers and on cross-selling to existing customers is shown by Cable Revenue Generating Units, or Cable RGUs, per customer increasing to 2.29 at December 31, 2007 from 2.17 at December 31, 2006 and by "triple-play" penetration growing to 49.5% at December 31, 2007 from 40.6% at December 31, 2006. A triple-play customer is a customer who subscribes to our television, broadband and fixed line telephone services.

        Business:    For the year ended December 31, 2007, revenue from business customers decreased by 2.3% to £641.8 million from £656.8 million on a pro forma basis for the year ended December 31, 2006. This decrease was primarily attributable to declines in telephony voice revenues, partially offset by growth in data revenue in our retail sales channel. Retail data revenues represented 37.7% of the retail business revenue for the year ended December 31, 2007 compared with 35.1% for the year ended December 31, 2006.

        We anticipate that the revenue from our wholesale sales channel will decline in 2008 due to continued reduction in our internet service provider subscriber base and certain mobile customer contract accounts. Consequently, business revenue overall in 2008 is expected to be lower than in 2007, although we continue to expect higher retail data revenue.

        Business revenue was comprised of (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(Pro Forma)

  Increase/
(Decrease)

 
Business revenue:                  
Retail:                  
  Voice   £ 214.6   £ 233.7   (8.2 )%
  Data     170.6     156.9   8.7 %
  Other     67.3     55.8   20.6 %
   
 
 
 
      452.5     446.4   1.4 %
Wholesale     189.3     210.4   (10.0 )%
   
 
 
 
Total business revenue   £ 641.8   £ 656.8   (2.3 )%
   
 
 
 

        For the year ended December 31, 2007, Cable segment OCF increased by 1.5% to £1,162.3 million from £1,145.2 million on a pro forma basis for the year ended December 31, 2006. Lower consumer and business revenues have been more than offset by savings in operating costs and selling, general and administrative costs. Cost savings resulting from the integration activities since the reverse acquisition of Telewest, including improvements in bad debt expense, lower company bonus scheme payments and a reduction in share based compensation expense were partially offset by marketing and advertising costs incurred in connection with the rebrand to Virgin Media in the first quarter of 2007.

59


    Summary Cable Statistics

        Selected statistics for residential cable customers of Virgin Media, excluding customers off our network and Virgin Mobile customers, for the three months ended December 31, 2007 as well as the four prior quarters, are set forth in the table below. The total number of cable customers directly connected to our network fell by 117,200 during the six months ended June 30, 2007 partly as a result of the increase in competition in the marketplace together with the removal of BSkyB's basic channels from our platform and increased during the second half of the year by 37,400 reflecting our focus on reducing customer churn during this period, particularly in the fourth quarter during which our average monthly churn fell to 1.4%. The total number of Cable RGUs grew to 10,923,400 at December 31, 2007 from 10,526,400 at December 31, 2006, representing an increase in net RGUs of 397,000, of which 206,200 were added in the fourth quarter of 2007.

 
  Three months ended
 
 
  December 31,
2007

  September 30,
2007

  June 30,
2007

  March 31,
2007

  December 31,
2006

 
Opening customers     4,750,300     4,737,300     4,807,600     4,854,500     4,891,500  
Customer additions     225,100     256,500     191,900     184,300     213,500  
Customer disconnects     (200,700 )   (243,500 )   (262,200 )   (231,200 )   (250,500 )
  Net customer movement     24,400     13,000     (70,300 )   (46,900 )   (37,000 )
Closing customers     4,774,700     4,750,300     4,737,300     4,807,600     4,854,500  
Cable churn(1)     1.4 %   1.7 %   1.8 %   1.6 %   1.7 %
Cable Revenue Generating Units(2)(3)                                
Television     3,478,100     3,417,000     3,396,600     3,390,000     3,353,900  
  DTV (included in Television)     3,253,500     3,167,000     3,125,300     3,081,100     3,005,900  
Telephone     4,031,400     3,992,500     3,993,800     4,050,600     4,114,000  
Broadband     3,413,900     3,307,700     3,191,900     3,146,400     3,058,500  
Total Cable Revenue Generating Units     10,923,400     10,717,200     10,582,300     10,587,000     10,526,400  
Cable RGU/Customer     2.29 x   2.26 x   2.23 x   2.20 x   2.17 x
Triple-play penetration     49.5 %   47.0 %   45.2 %   42.9 %   40.6 %
Cable Average Revenue Per User(4)   £ 42.24   £ 41.55   £ 42.16   £ 42.75   £ 42.82  
Cable ARPU calculation:                                
On-net Cable revenues (millions)   £ 604.7   £ 590.5   £ 603.1   £ 620.0   £ 626.7  
Average customers     4,771,700     4,737,100     4,768,000     4,834,900     4,878,800  

(1)
Customer churn is calculated by taking the total disconnects during the month and dividing them by the average number of customers during the month. Average monthly churn during a quarter is the average of the three monthly churn calculations within the quarter.

(2)
Each telephone, television and broadband internet subscriber directly connected to our network counts as one RGU. Accordingly, a subscriber who receives both telephone and television service counts as two RGUs. RGUs may include subscribers receiving some services for free or at a reduced rate in connection with promotional offers.

(3)
Data cleanse activity in the second quarter of 2007 did not result in a change in customer numbers but did result in an increase of 4,200 RGUs comprised of an increase of approximately 4,400 Television and 100 Telephone RGUs and a decrease of approximately 300 Broadband RGUs.

(4)
The monthly cable average revenue per user, or Cable ARPU, is calculated on a quarterly basis by dividing total revenue generated from the provision of telephone, television and internet services to

60


    customers who are directly connected to our network in that period together with revenue generated from our customers using our virginmedia.com website, exclusive of VAT, by the average number of customers directly connected to our network in that period divided by three.

        Selected statistics for our residential customers that are not connected directly through our cable network are set forth in the table below.

 
  Three months ended
 
  December 31,
2007

  September 30,
2007

  June 30,
2007

  March 31,
2007

  December 31,
2006

Broadband RGUs   287,300   282,300   275,200   270,500   260,800
Telephone RGUs   103,900   90,500   75,500   65,100   44,500

Mobile Segment

        Virgin Mobile was acquired on July 4, 2006, and its results of operations have been consolidated from that date. The summary combined results of operations of our Mobile segment were as follows (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(From Acquisition)

 
Revenue   £ 597.6   £ 292.1  
Segment OCF     108.7     30.2  
Depreciation, amortization and other charges     (87.4 )   (41.7 )
Operating income (loss)   £ 21.3   £ (11.5 )

    Revenue

        Our Mobile segment revenue was comprised of (in millions):

 
  Year ended December 31,
 
  2007
(Actual)

  2006
(From Acquisition)

  Increase/
(Decrease)

Revenue:                
  Service   £ 567.6   £ 274.3   106.9%
  Equipment(1)     30.0     17.8   68.5%
   
 
 
Total revenue   £ 597.6   £ 292.1   104.6%
   
 
 

(1)
Equipment revenue is stated net of discounts earned through service usage.

        For the year ended December 31, 2007 revenue increased to £597.6 million from £292.1 million for the year ended December 31, 2006. The increase was primarily attributable to the acquisition of Virgin Mobile in 2006 and the inclusion of its revenue from July 4, 2006 compared to the inclusion of revenue for a full year in 2007.

        Mobile ARPU increased to £10.69 for the three months ended December 31, 2007 from £10.59 for the three months ended December 31, 2006. The increase is primarily due to the increased proportion of our contract customers, relative to the total number of mobile customers, rising to 8.4% at December 31, 2007 from 4.2% at December 31, 2006, partially offset by lower prepay usage in the three months ended December 31, 2007.

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        For the year ended December 31, 2007, Mobile segment OCF was £108.7 million compared with £30.2 million for the period from acquisition to December 31, 2006, due to a full year of operating activity, compared with 180 days in 2006, along with our shift towards more efficient sales channels, such as cross-selling with our Cable segment products and other direct channels with lower subscriber acquisition costs.

    Summary Mobile Statistics

        Selected statistics for Virgin Mobile are set forth in the table below. In the year ended December 31, 2007, the number of mobile customers decreased by a net 31,400. Contract customer gains of 184,200 were offset by net losses of 215,600 prepay customers. The growth in contract customers reflects the drive for "quad-play" packages through cross-selling with our Cable segment products. The decline in prepay customers reflects increased competition in the prepay market, although the decline was halted in the latter half of the year following our decision to re-engage in a more favorable prepay market.

 
  Three months ended
 
 
  December 31,
2007

  September 30,
2007

  June 30,
2007

  March 31,
2007

  December 31,
2006

 
Opening mobile customers(1):                                
  Prepay     4,102,100     4,115,900     4,215,200     4,330,700     4,390,900  
  Contract     328,800     299,100     246,300     192,100     120,800  
   
 
 
 
 
 
      4,430,900     4,415,000     4,461,500     4,522,800     4,511,700  

Net mobile customer additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Prepay     13,000     (13,800 )   (99,300 )   (115,500 )   (60,200 )
  Contract     47,500     29,700     52,800     54,200     71,300  
   
 
 
 
 
 
      60,500     15,900     (46,500 )   (61,300 )   11,100  

Closing mobile customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Prepay     4,115,100     4,102,100     4,115,900     4,215,200     4,330,700  
  Contract     376,300     328,800     299,100     246,300     192,100  
   
 
 
 
 
 
      4,491,400     4,430,900     4,415,000     4,461,500     4,522,800  

Mobile average revenue per user(2)

 

£

10.69

 

£

11.11

 

£

10.70

 

£

10.07

 

£

10.59

 
Mobile ARPU calculation:                                
Mobile service revenue (millions)   £ 142.0   £ 147.3   £ 142.3   £ 136.0   £ 141.8  
Average mobile customers     4,429,200     4,417,900     4,434,700     4,499,300     4,465,400  

(1)
Mobile customer information is for active customers. Prepay customers are defined as active customers if they have made an outbound call or text in the preceding 90 days. Contract customers are defined as active customers if they have entered into a contract with Virgin Mobile for a minimum 30-day period and have not been disconnected.

(2)
Mobile monthly average revenue per user, or Mobile ARPU, is calculated on service revenue for the period, divided by the average number of active customers for the period, divided by three.

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Content Segment

        The summary combined results of operations of our Content segment were as follows (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(Pro Forma)

 
Revenue   £ 348.1   £ 362.1  
Inter segment revenue     24.4     22.7  
Segment OCF     12.5     25.7  
Depreciation, amortization and other charges     (19.4 )   (18.5 )
Operating (loss) income   £ (6.9 ) £ 7.2  

    Revenue

        Our Content segment revenue for the years ended December 31, 2007 and 2006 was as follows (in millions):

 
  Year ended December 31,
 
 
  2007
(Actual)

  2006
(Pro Forma)

  Increase/
(Decrease)

 
Revenue:                  
  Virgin Media TV   £ 109.5   £ 135.6   (19.2 )%
  Sit-up     238.6     226.5   5.3 %
   
 
 
 
Total revenue   £ 348.1   £ 362.1   (3.9 )%
   
 
 
 

        For the year ended December 31, 2007, Content segment revenue decreased by 3.9% to £348.1 million from £362.1 million on a pro forma basis for the year ended December 31, 2006. This decrease is driven largely by reduced subscription revenue in Virgin Media TV mainly as a result of a new satellite television carriage contract entered into at the end of 2006 which has lower pricing, partially offset by increased advertising revenues together with increased retail revenue from our sit-up channels.

        For the year ended December 31, 2007, Content segment OCF decreased by 51.4% to £12.5 million from £25.7 million on a pro forma basis for the year ended December 31, 2006. The decrease in Content segment OCF is mainly due to the reduction in subscription revenue referred to above and increased programming costs, partially offset by the settlement of certain long standing contractual issues totaling £13.0 million.

        We own 50% of the companies that comprise UKTV, a group of joint ventures formed with BBC Worldwide. UKTV produces a portfolio of television channels based on the BBC's program library and other acquired programming and which are carried on Virgin Media's cable platform and also satellite. Some channels are also available on Freeview. UKTV is the second largest pay television operator in the U.K. by viewing share.

        We account for our interest in UKTV under the equity method and recognized a share of net income of £18.7 million and £12.3 million for the years ended December 31, 2007 and 2006, respectively. At December 31, 2007 our investment in UKTV is carried on the balance sheet at £367.7 million, which includes an outstanding loan totaling £145.6 million.

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        UKTV receives financing through a loan from Virgin Media, which was £145.6 million at December 31, 2007. This loan effectively acts as a revolving facility for UKTV. We received cash payments from UKTV in the form of loan capital repayments of £16.4 million for the year ended December 31, 2007. We also received dividends, interest payments and payments for consortium tax relief from UKTV totaling £21.9 million during 2007.

Consolidated Results of Operations for the Years Ended December 31, 2006 and 2005

Revenue

        For the year ended December 31, 2006, revenue increased by 85.0% to £3,602.2 million from £1,947.6 million for 2005. This increase was primarily due to the reverse acquisition of Telewest and the inclusion of its revenues from March 3, 2006, and to the acquisition of Virgin Mobile and the inclusion of its revenues from July 4, 2006.

        Cable ARPU increased steadily through the year, reflecting our drive to encourage "triple-play" bundling and a focus on better quality customers. Our focus on acquiring new bundled customers and on cross-selling to existing customers is shown by Cable RGUs per customer increasing from 1.99 at December 31, 2005 to 2.17 at December 31, 2006 and by the percentage of our customers with triple-play services growing from 29.3% at December 31, 2005 to 40.6% at December 31, 2006. These increases arose primarily because the number of Cable RGUs per customer and the percentage of customers were higher in the legacy Telewest business than in NTL.

Expenses

        Operating costs.    For the year ended December 31, 2006, operating costs, including network expenses, increased by 94.6% to £1,572.8 million from £808.3 million during the same period in 2005. This increase was primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile. Operating costs as a percentage of revenue increased to 43.7% for the year ended December 31, 2006, from 41.5% for the same period in 2005, in part due to the inclusion of the Telewest content segment subsequent to the reverse acquisition of Telewest and the new Mobile segment subsequent to the acquisition of Virgin Mobile, since these segments have lower margins than our Cable segment.

        Selling, general and administrative expenses.    For the year ended December 31, 2006, selling, general and administrative expenses increased by 87.8% to £906.9 million from £483.0 million for the same period in 2005. This increase was primarily attributable to the reverse acquisition of Telewest and to the acquisition of Virgin Mobile. Selling, general and administrative expenses as a percentage of revenue increased slightly to 25.2% for the year ended December 31, 2006, from 24.8% for the same period in 2005, partly due to costs incurred in connection with the integration of NTL and Telewest and increased stock based compensation expense offset by savings from lower employee related costs as a result of involuntary employee terminations in the year ended December 31, 2006.

Other charges

        Other charges of £67.0 million in the year ended December 31, 2006 related primarily to employee termination costs and lease exit costs in connection with our restructuring programs initiated in respect of the reverse acquisition of Telewest.

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        The following table summarizes our historical restructuring accruals (in millions):

Historical Restructuring Accruals

  Involuntary Employee Termination and Related Costs
  Lease Exit Costs
  Total
 
Balance, January 1, 2006   £   £ 45.3   £ 45.3  
Charged to expense         4.0     4.0  
Utilized         (5.9 )   (5.9 )
   
 
 
 
Balance, December 31, 2006   £   £ 43.4   £ 43.4  
   
 
 
 

        The following table summarizes our restructuring accruals resulting primarily from the reverse acquisition of Telewest (in millions):

Acquisition Restructuring Accruals

  Involuntary Employee Termination and Related Costs
  Lease Exit Costs
  Total
 
Balance, January 1, 2006   £   £   £  
Accruals resulting from business acquisition recognized under EITF 95-3     43.2     45.9     89.1  
Charged to expense     40.3     22.7     63.0  
Utilized     (64.8 )   (3.9 )   (68.7 )
   
 
 
 
Balance, December 31, 2006   £ 18.7   £ 64.7   £ 83.4  
   
 
 
 

Depreciation expense

        For the year ended December 31, 2006, depreciation expense increased to £799.1 million from £541.7 million for the same period in 2005. This increase was primarily attributable to the reverse acquisition of Telewest and related fair value adjustment to the property and equipment acquired, and to the acquisition of Virgin Mobile. Excluding the impact of the reverse acquisition of Telewest and of the acquisition of Virgin Mobile, depreciation expense decreased due to the absence of depreciation on some assets that became fully depreciated in 2005.

Amortization expense

        For the year ended December 31, 2006, amortization expense increased to £246.6 million from £109.5 million for the same period in 2005. The increase in amortization expense related to additional intangible assets arising from the reverse acquisition of Telewest and from the acquisition of Virgin Mobile.

Interest income and other

        For the year ended December 31, 2006, interest income and other increased to £34.7 million from £29.4 million for the year ended December 31, 2005, primarily as a result of increased interest rates and additional cash balances throughout the year.

Interest expense

        For the year ended December 31, 2006, interest expense increased to £457.4 million from £235.8 million for the same period in 2005, primarily as a result of the additional borrowings as a result of the reverse acquisition of Telewest and the acquisition of Virgin Mobile.

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        We paid cash interest of £327.1 million for the year ended December 31, 2006, and £216.8 million for the year ended December 31, 2005. The increase in cash interest payments resulted from the effects of the new senior credit facility and senior bridge facility in respect of the reverse acquisition of Telewest and the acquisition of Virgin Mobile, and changes in the timing of interest payments.

Loss on extinguishment of debt

        For the year ended December 31, 2006, loss on extinguishment of debt was £32.8 million, and related primarily to the write off of deferred financing costs on the senior credit facility that was repaid upon completion of the refinancing of the reverse acquisition of Telewest.

        For the year ended December 31, 2005, loss on extinguishment of debt was £2.0 million, and related to the redemption of the $100 million floating rate senior notes due 2012 on July 15, 2005.

Foreign currency transaction gains (losses)

        For the year ended December 31, 2006, foreign currency transaction losses were £90.1 million as compared with gains of £5.3 million for 2005. The foreign currency losses in the year ended December 31, 2006 were largely comprised of foreign exchange losses of £70.8 million on U.S. dollar forward purchase contracts that were entered into to economically hedge the repayment of the U.S. dollar denominated bridge facility. The repayment of $3.1 billion of this facility on June 19, 2006 resulted in an offsetting gain during the period of £120.7 million that was recorded as a component of equity. The foreign currency transaction gains in the year ended December 31, 2005 included gains of £43.7 million on the forward rate contracts and collars taken out in December 2005 in connection with £1.8 billion of the expected cash purchase price of Telewest offset by losses on the revaluation of foreign currency denominated long term debt and related forward contracts.

Income tax expense (benefit)

        For the year ended December 31, 2006, income tax benefit was £11.8 million as compared with income tax expense of £18.8 million for the same period in 2005. The 2006 and 2005 (benefit)/expense is composed of (in millions):

 
  2006
  2005
 
U.S. state and local income tax   £   £ (1.3 )
Foreign tax     (2.7 )    
Deferred U.S. income tax     (8.6 )   18.7  
Alternative minimum tax     (0.5 )   1.4  
   
 
 
Total   £ (11.8 ) £ 18.8  
   
 
 

        In 2006, we received refunds of £1.3 million of the U.S. alternative minimum tax and £0.1 million of U.S. state and local tax. We also paid £3.1 million of U.S. federal income tax in respect of pre-acquisition periods of Telewest. In addition, we paid £4.6 million of U.K. tax expense in respect of pre-acquisition periods of Virgin Mobile. In 2005, we paid £2.2 million of the U.S. alternative minimum tax.

Loss from continuing operations

        For the year ended December 31, 2006, loss from continuing operations was £509.2 million compared with a loss of £241.7 million for the same period in 2005. The increase in loss from continuing operations was primarily attributable to the reverse acquisition of Telewest and the acquisition of Virgin Mobile together with the associated increases in depreciation, amortization,

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interest expense, foreign exchange losses and loss on extinguishment of debt partially offset by increased income from those acquisitions during the year.

Cumulative effect of changes in accounting principle

        In June 2005, the Financial Accounting Standards Board issued FASB Staff Position ("FSP") 143-1, Accounting for Electronic Waste Obligations, or FSP 143-1, addressing the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive adopted by the European Union. FSP 143-1 requires that the commercial user should apply its provisions to certain obligations associated with historical waste (as defined by the Directive), since this type of obligation is an asset retirement obligation. The Directive was adopted by the U.K. on December 12, 2006, and was effective January 2, 2007. Management reviewed their obligations under the law and concluded that an obligation existed for certain of our customer premises equipment. As a result we recognized a retirement obligation of £58.2 million and fixed assets of £24.4 million on the balance sheet and a cumulative effect change in accounting principle of £33.8 million in the consolidated statement of operations.

Loss from continuing operations per share

        Basic and diluted loss from continuing operations per common share for the year ended December 31, 2006 was £1.74 compared to £1.13 for the year ended December 31, 2005. Basic and diluted loss from continuing operations per share was computed using a weighted average of 292.9 million shares issued in the year ended December 31, 2006 and a weighted average of 213.8 million shares issued for the same period in 2005. Options and warrants to purchase shares along with shares of restricted stock held in escrow outstanding at December 31, 2006 and 2005, were excluded from the calculation of diluted net loss per share since the inclusion of such options, warrants and restricted stock are anti-dilutive.

Segmental Results of Operations for the Years Ended December 31, 2006 and 2005

        A description of the products and services, as well as year-to-date financial data, for each segment can be found in note 19 to Virgin Media's consolidated financial statements. The segment results for the year ended December 31, 2006 included in our consolidated financial statements were reported on an actual basis and included the results of Telewest from March 3, 2006 and the results of Virgin Mobile from July 4, 2006.

        The results of operations of each of our Cable and Content segments for the years ended December 31, 2006 and 2005 are reported in this section on a pro forma combined basis as if the reverse acquisition of Telewest had occurred at the beginning of the periods presented and combine Telewest's historical Content and sit-up segments into the combined company's Content segment. The pro forma data has been calculated on a basis consistent with the pro forma financial information filed with the Securities and Exchange Commission under our Form 8-K/A on May 10, 2006. We believe that a pro forma comparison of these segments is more relevant than a historic comparison as: (a) in respect of our Cable segment, the size of the acquired legacy Telewest cable business would obscure any meaningful discussion of changes in our Cable segment if viewed on a historical basis; and (b) we did not have a Content segment prior to March 3, 2006. Comparative pro forma results of our Mobile segment have not been presented.

        The reportable segments disclosed in this Form 10-K are based on our management organizational structure as of December 31, 2006. Future changes to this organizational structure may result in changes to the reportable segments disclosed.

        Segment operating income before depreciation, amortization and other charges, which we refer to as Segment OCF, is management's measure of segment profit as permitted under FAS 131, Disclosures

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about Segments of an Enterprise and Related Information. Our management, including our chief executive officer who is our chief operating decision maker, considers Segment OCF as an important indicator of the operational strength and performance of our segments. Segment OCF excludes the impact of costs and expenses that do not directly affect our cash flows. Other charges, including restructuring charges, are also excluded from Segment OCF as management believes they are not characteristic of our underlying business operations.

Cable Segment

        The summary pro forma combined results of operations of our Cable segment were as follows (in millions):

 
  Year ended December 31,
 
 
  2006
  2005
 
Revenue   £ 3,225.4   £ 3,205.2  
Inter segment revenue     3.0     2.6  
Segment OCF     1,145.2     1,191.7  
Depreciation, amortization and other charges     (1,134.9 )   (1,139.6 )
Operating income   £ 10.3   £ 52.1  

    Revenue

        Our pro forma Cable segment revenue by customer type for the years ended December 31, 2006 and 2005 was as follows (in millions):

 
  Year ended December 31,
 
 
  2006
  2005
  Increase/
(Decrease)

 
Revenue:                  
  Consumer   £ 2,568.6   £ 2,527.4   1.6 %
  Business     656.8     677.8   (3.1 )%
   
 
 
 
Total revenue   £ 3,225.4   £ 3,205.2   0.6 %
   
 
 
 

        Consumer:    For the year ended December 31, 2006, pro forma revenue from residential customers increased by 1.6% to £2,568.6 million from £2,527.4 million for the year ended December 31, 2005. This increase was driven largely by growth in the number of broadband internet subscribers together with television and telephony price rises partially offset by lower telephony usage. Cable ARPU increased steadily through the year, reflecting our drive to encourage triple-play bundling and a focus on better quality customers. Our focus on acquiring new bundled customers and on cross-selling to existing customers resulted in Cable RGUs per customer increasing from 2.06 on a pro forma basis at December 31, 2005 to 2.17 at December 31, 2006 and by triple-play penetration growing from 32.4% on a pro forma basis at December 31, 2005 to 40.6% at December 31, 2006.

        Business:    For the year ended December 31, 2006, pro forma revenue from business customers decreased by 3.1% to £656.8 million from £677.8 million for the year ended December 31, 2005. This decrease was attributable to declines in telephony voice revenue and lower wholesale and other revenues, partially offset by greater data installation and rental revenue.

        For the year ended December 31, 2006, pro forma Cable segment OCF decreased by 3.9% to £1,145.2 million from £1,191.7 million for the year ended December 31, 2005. The decrease in OCF

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was primarily due to increased selling, general and administrative expenses, which included pre-acquisition charges of £20.9 million relating to the reverse acquisition of Telewest, consisting of legal and professional charges of £11.7 million and executive compensation costs and insurance expenses of £9.2 million, together with integration costs incurred since the acquisition.

Mobile Segment

        Virgin Mobile was acquired on July 4, 2006, and its results of operations have been consolidated from that date. Total Mobile segment revenue for the period since acquisition to December 31, 2006 was £292.1 million, of which £274.3 million was service revenue and £17.8 million was equipment revenue. Equipment revenue is stated net of discounts earned through service usage. Mobile segment OCF was £30.2 million for the period since acquisition.

        Net customer additions in the three months ended December 31, 2006 were 11,100 compared to 122,700 in the three months ended September 30, 2006. Customer growth was lower due to increased price competition, and higher advertising spend from our mobile competitors. We continued to grow the number of higher mobile ARPU contract customers.

Content Segment

        The summary pro forma combined results of operations of our Content segment were as follows (in millions):

 
  Year ended December 31,
 
  2006
  2005
Revenue   £ 362.1   £ 287.2
Inter segment revenue     22.7     20.6
Segment OCF     25.7     26.7
Depreciation, amortization and other charges     18.5     25.6
Operating income   £ 7.2   £ 1.1

    Revenue

        For the year ended December 31, 2006, pro forma Content segment revenue increased by 26.1% to £362.1 million from £287.2 million for the year ended December 31, 2005. This increase was driven largely by the inclusion in the year ended December 31, 2006 of sit-up. sit-up was acquired by Telewest in May 2005 and contributed revenue of £226.4 million in 2006. Increased revenue from Virgin Media TV of £14.0 million was principally due to an increased share of the TV advertising revenue market as a result of the cumulative effect of the relative strength of the viewing performance of the Virgin Media TV channels, and increased subscription revenue arising from contractual price increases.

        For the year ended December 31, 2006, pro forma Content segment OCF decreased by 3.7% to £25.7 million from £26.7 million for the year ended December 31, 2005. The decrease in pro forma Content segment OCF was primarily due to lower gross margins being achieved in 2006 compared with 2005, particularly in sit-up trading.

Consolidated Statement of Cash Flows

Years Ended December 31, 2007 and 2006

        For the year ended December 31, 2007, cash provided by operating activities decreased to £716.0 million from £786.1 million for the year ended December 31, 2006. This decrease is primarily

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attributable to an increase in cash paid for interest. For the year ended December 31, 2007, cash paid for interest, exclusive of amounts capitalized, increased to £486.9 million from £327.1 million during the same period in 2006. This increase resulted from the higher levels of borrowings and repayment of existing facilities following the reverse acquisition of Telewest and the acquisition of Virgin Mobile.

        For the year ended December 31, 2007, cash used in investing activities was £509.8 million compared with cash used in investing activities of £2,954.0 million for the year ended December 31, 2006. The cash used in investing activities in the year ended December 31, 2007 mainly represented purchases of fixed assets. The cash used in investing activities in the year ended December 31, 2006 included £2,004.6 million for the reverse acquisition of Telewest, net of cash acquired of £294.9 million, and £418.5 million for the acquisition of Virgin Mobile, net of cash acquired of £14.1 million. Purchases of fixed and intangible assets decreased to £536.2 million for the year ended December 31, 2007 from £554.8 million for the same period in 2006 reflecting a higher utilization of finance leases.

        Cash used in financing activities for the year ended December 31, 2007 was £302.5 million compared with cash provided by financing activities of £1,865.2 million for the year ended December 31, 2006. For the year ended December 31, 2007, the principal uses of cash were the part repayments of our senior credit facilities and capital lease payments, totaling £1,170.8 million, and the principal components of cash provided by financing activities were new borrowings under our credit facilities, net of financing fees, of £874.5 million. For the year ended December 31, 2006, the principal components of cash provided by financing activities for the year ended December 31, 2006 were the new £5.3 billion senior credit facility and the $550 million senior notes due 2016, and the principal uses of cash were the repayment of our previous senior credit and bridge facilities utilizing the new borrowings and cash provided by operations. See further discussion under Liquidity and Capital Resources—Senior Credit Facility.

Years Ended December 31, 2006 and 2005

        Cash flow information provided below is for our continuing operations.

        For the year ended December 31, 2006, cash provided by operating activities increased to £786.1 million from £263.6 million for the year ended December 31, 2005. This increase was primarily attributable to the reverse acquisition of Telewest and the acquisition of Virgin Mobile, offset by an increase in cash paid for interest. For the year ended December 31, 2006, cash paid for interest, exclusive of amounts capitalized, increased to £327.1 million from £216.8 million during the same period in 2005. This increase resulted from the higher levels of borrowings and repayment of existing facilities following the reverse acquisition of Telewest and the acquisition of Virgin Mobile.

        For the year ended December 31, 2006, cash used in investing activities was £2,954.0 million compared with cash provided by investing activities of £1,172.0 million for the year ended December 31, 2005. The cash used in investing activities in the year ended December 31, 2006 included £2,004.6 million for the reverse acquisition of Telewest, net of cash acquired of £294.9 million, and £418.5 million for the acquisition of Virgin Mobile, net of cash acquired of £14.1 million. The cash provided by investing activities in the year ended December 31, 2005 included £1.229 billion from the sale of our Broadcast operations. Purchases of fixed assets increased to £544.8 million for the year ended December 31, 2006 from £288.1 million for the same period in 2005 primarily because of the timing of cash payments and the reverse acquisition of Telewest.

        Cash provided by financing activities for the year ended December 31, 2006 was £1,865.2 million compared with cash used in financing activities of £895.6 million in the year ended December 31, 2005. The principal components of cash provided by financing activities for the year ended December 31, 2006 were the new £5.3 billion senior credit facility and the $550 million senior notes due 2016. The principal uses of cash during 2006 were the repayment of our previous senior credit and bridge facilities.

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        The principal components of the cash used in financing activities for the year ended December 31, 2005 were the repurchases of our common stock in the open market in February and April 2005 for £114.0 million, the prepayment of £723.0 million on our senior credit facility and redemption of the floating rate senior notes due 2012.

Liquidity and Capital Resources

        As of December 31, 2007, we had £5,958.5 million of debt outstanding, compared to £6,099.8 million as of September 30, 2007 and £6,159.1 million as of December 31, 2006, and £321.4 million of cash and cash equivalents, compared to £364.0 million as of September 30, 2007 and £418.5 million as of December 31, 2006. The decrease in debt since the previous year is primarily attributable to a mandatory prepayment of our senior credit facility of £73.6 million in May 2007 as a result of cash flow generated in 2006, a voluntary prepayment of £200 million in December 2007 from existing cash balances, and exchange rate movements on our debt denominated in currencies other than the pound sterling.

        Our business is capital intensive and we are highly leveraged. We have significant cash requirements for operating costs, capital expenditure, interest expense and debt amortization requirements. The level of our capital expenditures and operating expenditures are affected by the significant amounts of capital required to connect customers to our network, expand and upgrade our network, offer new services and integrate our billing systems and customer databases. We expect that our cash on hand, together with cash from operations and undrawn credit facility, will be sufficient for our cash requirements through December 31, 2008. However, our cash requirements after December 31, 2008 may exceed these sources of cash. For instance, debt amortization repayments under our senior credit facility increase significantly in 2010. We believe that we will need to address these scheduled principal payments in part through means other than reliance on cash flow from operations, such as raising additional debt or equity, refinancing our existing facility, possible sales of assets, or other means. We may not be able to obtain financing, or sell assets at all, or on favorable terms, or we may be contractually prevented by the terms of our senior notes or our senior credit facility from incurring additional indebtedness or selling assets.

        We are a holding company with no independent operations or significant assets other than our investments in our subsidiaries. As a result, we will depend upon the receipt of sufficient funds from our subsidiaries to meet our obligations. In addition, the terms of our existing and future indebtedness and the laws of the jurisdictions under which our subsidiaries are organized limit the payment of dividends, loan repayments and other distributions to us under many circumstances.

        Our debt agreements contain restrictions on our ability to transfer cash between groups of our subsidiaries. As a result of these restrictions, although our overall liquidity may be sufficient to satisfy our obligations, we may be limited by covenants in some of our debt agreements from transferring cash to other subsidiaries that might require funds. In addition, cross default provisions in our other indebtedness may be triggered if we default on any of these debt agreements.

Senior Credit Facility

        During 2006, we entered into a new senior credit facility in an aggregate principal sterling equivalent amount of £5,275 million, comprising a £3,350 million 5 year amortizing Tranche A term loan facility, a £175 million 5 year amortizing Tranche A1 term loan facility, a £300 million 61/2 year bullet Tranche B1 term loan facility, a £351 million 61/2 year bullet Tranche B2 term loan facility, a €500 million 61/2 year bullet Tranche B3 term loan facility, a $650 million 61/2 year bullet Tranche B4 term loan facility, a £300 million 7 year bullet Tranche C term loan facility and a £100 million 5 year multi-currency revolving loan facility.

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        On April 13, 2007, we amended the senior credit facility and borrowed an additional £890 million under a 51/2 year bullet Tranche B5 term loan facility and a 51/2 year Tranche B6 term loan facility. We used the net proceeds to repay some of our obligations under the Tranche A and Tranche A1 term loan facilities. In April 2007, we also amended our senior credit facility to among other things, (i) enable us to issue this £890 million of additional indebtedness, (ii) relax certain of our financial covenants, and (iii) provide us with additional flexibility, including permitting our Board of Directors, if they so determine, to pay increased levels of dividends on our common stock.

        On May 15, 2007, we made a mandatory prepayment of £73.6 million under our senior credit facility as a result of cash flow generated in 2006. On December 17, 2007, we made a voluntary prepayment of £200 million utilizing available cash reserves.

        At December 31, 2007, the principal payments are scheduled as follows (in millions):

Date

  Amount
September 30, 2009   £ 265.1
March 31, 2010   £ 526.5
September 30, 2010   £ 579.4
March 3, 2011   £ 966.0
September 3, 2012   £ 2,167.8
March 3, 2013   £ 300.0

        The senior credit facility (other than for Tranche C) has the benefit of a full and unconditional senior secured guarantee from Virgin Media Finance PLC as well as first priority pledges of the shares and assets of substantially all of the operating subsidiaries of Virgin Media Investment Holdings Limited or VMIH and of receivables arising under any intercompany loans to those subsidiaries. The senior secured guarantee of Virgin Media Finance PLC is secured by a first priority pledge of the entire capital stock of VMIH and the receivables under any intercompany loans from Virgin Media Finance PLC to VMIH. The guarantee of Tranche C of the senior credit facility will share in the security of Virgin Media Finance PLC granted to the senior credit facility, but will receive proceeds only after the other tranches and will not benefit from guarantees or security granted by other members of the group.

        The annual rate of interest payable under our senior credit facility is the sum of (i) the London Intrabank Offer Rate (LIBOR), US LIBOR or European Intrabank Offer Rate (EURIBOR), as applicable, plus (ii) the applicable interest margin and the applicable cost of complying with any reserve requirement.

        The applicable interest margin for Tranche A, A1 and the revolving facility depends upon the net leverage ratio then in effect as set forth below:

Leverage Ratio

  Margin
Less than 3.00:1   1.250%
Greater than or equal to 3.00:1 but less than 3.40:1   1.375%
Greater than or equal to 3.40:1 but less than 3.80:1   1.500%
Greater than or equal to 3.80:1 but less than 4.20:1   1.625%
Greater than or equal to 4.20:1 but less than 4.50:1   1.750%
Greater than or equal to 4.50:1 but less than 4.80:1   1.875%
Greater than or equal to 4.80:1 but less than 5.00:1   2.125%
Greater than or equal to 5.00:1   2.250%

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        The applicable interest margins for Tranche B and Tranche C are as follows:

Facility

  Margin
B1   2.125%
B2   2.125%
B3   2.000%
B4   2.000%
B5   2.125%
B6   2.125%
C   2.750%

Senior Notes

        On July 25, 2006, Virgin Media Finance PLC issued U.S. dollar denominated 9.125% senior notes due 2016 with a principal amount outstanding of $550 million. The senior notes due 2016 are unsecured senior obligations of Virgin Media Finance PLC and rank pari passu with Virgin Media Finance's outstanding senior notes due 2014. The senior notes due 2016 bear interest at an annual rate of 9.125% payable on February 15 and August 15 of each year, beginning February 15, 2007. The senior notes due 2016 mature on August 15, 2016 and are guaranteed by Virgin Media, Virgin Media Group LLC, VMIH and certain other intermediate holding companies of Virgin Media.

        The U.S. dollar denominated 8.75% senior notes due 2014 were issued by Virgin Media Finance PLC on April 13, 2004 and have a principal amount outstanding of $425 million. The sterling denominated 9.75% senior notes due 2014 were issued by Virgin Media Finance PLC on April 13, 2004 and have a principal amount outstanding of £375 million. The euro denominated 8.75% senior notes due 2014 were issued by Virgin Media Finance PLC on April 13, 2004 and have a principal amount outstanding of €225 million. The senior notes due 2014 mature on April 15, 2014 and are guaranteed by Virgin Media, Virgin Media Group LLC, VMIH and certain of the intermediate holding companies in the group.

Restrictions under our Existing Debt Agreements

        The agreements governing the senior notes and the senior credit facility significantly and, in some cases absolutely, restrict our ability and the ability of most of our subsidiaries to:

    incur or guarantee additional indebtedness;

    pay dividends or make other distributions, or redeem or repurchase equity interests or subordinated obligations;

    make investments;

    sell assets, including the capital stock of subsidiaries;

    enter into sale and leaseback transactions or certain vendor financing arrangements;

    create liens;

    enter into agreements that restrict the restricted subsidiaries' ability to pay dividends, transfer assets or make intercompany loans;

    merge or consolidate or transfer all or substantially all of their assets; and

    enter into transactions with affiliates.

        We are also subject to financial maintenance covenants under our senior credit facility. These covenants require us to meet financial covenants on a quarterly basis and the required levels increase

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over time. As a result, we will need to continue to improve our operating performance over the next several years to meet these levels. Failure to meet these covenant levels would result in a default under our senior credit facility.

Debt Ratings

        To access public debt capital markets, we rely on credit rating agencies to assign corporate credit ratings. A rating is not a recommendation by the rating agency to buy, sell or hold our securities. A credit rating agency may change or withdraw our ratings based on its assessment of our current and future ability to meet interest and principal repayment obligations. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. The corporate debt ratings and outlook currently assigned by the rating agencies engaged by us are as follows:

 
  Corporate Rating
  Outlook
Moody's Investors Service Inc.    Ba3   Negative
Standard & Poor's   B+   Stable

        On August 9, 2007, Moody's changed the outlook for Virgin Media to "Negative", citing increased competitive pressure in the telephony and mobile businesses. The Company's ratings were unchanged. On November 15, 2007, Standard & Poor's raised the outlook for Virgin Media to "Stable", and affirmed the Company's ratings.

Cash Dividends

        We commenced the payment of regular quarterly dividends in June 2006. During the years ended December 31, 2007 and 2006, we paid the following dividends:

Board Declaration Date

  Per Share
Dividend

  Record Date
  Payment Date
  Total
Amount

 
   
   
   
  (in millions)

Year ended December 31, 2006:                    
May 18, 2006   $ 0.01   June 12, 2006   June 20, 2006   £ 1.6
August 28, 2006     0.02   September 12, 2006   September 20, 2006     3.5
November 28, 2006     0.02   December 12, 2006   December 20, 2006     3.4

Year ended December 31, 2007:

 

 

 

 

 

 

 

 

 

 
February 27, 2007   $ 0.02   March 12, 2007   March 20, 2007   £ 3.3
May 16, 2007     0.03   June 12, 2007   June 20, 2007     5.0
August 15, 2007     0.04   September 12, 2007   September 20, 2007     6.5
November 27, 2007     0.04   December 12, 2007   December 20, 2007     6.4

        Future payments of regular quarterly dividends by us are at the discretion of the Board of Directors and will be subject to our future needs and uses of cash, which could include investments in operations, the repayment of debt, and share repurchase programs. In addition, the terms of our and our subsidiaries' existing and future indebtedness and the laws of jurisdictions under which those subsidiaries are organized limit the payment of dividends, loan repayments and other distributions to us under many circumstances.

Off-Balance Sheet Arrangements

        As of December 31, 2007, we had no off-balance sheet arrangements.

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Contractual Obligations and Commercial Commitments

        The following table includes aggregate information about our contractual obligations as of December 31, 2007, and the periods in which payments are due (in millions).

 
   
  Payments Due by Period
Contractual Obligations

  Total
  Less than
1 year

  1–3 years
  3–5 years
  More than
5 years

Long Term Debt Obligations   £ 5,841.6   £ 1.8   £ 1,373.1   £ 3,134.2   £ 1,332.5
Capital Lease Obligations     201.2     34.7     38.1     40.1     88.3
Operating Lease Obligations     365.3     62.4     76.7     70.0     156.2
Purchase Obligations     724.1     354.2     202.4     117.7     49.8
Interest Obligations     1,982.0     459.3     824.3     517.2     181.2
   
 
 
 
 
Total   £ 9,114.2   £ 912.4   £ 2,514.6   £ 3,879.2   £ 1,808.0
   
 
 
 
 
Early termination charges         £ 47.1   £ 71.9   £ 30.3   £ 4.9
         
 
 
 

        Early termination charges are amounts that would be payable in the above periods in the event of early termination during that period of certain of the contracts underlying the purchase obligations listed above.

        The following table includes information about our commercial commitments as of December 31, 2007. Commercial commitments are items that we could be obligated to pay in the future. They are not required to be included in the consolidated balance sheet (in millions).

 
   
  Amount of Commitment Expiration per Period
Other Commercial Commitments

  Total
  Less than
1 year

  1–3 years
  3–5 years
  More than
5 years

Guarantees   £ 10.0   £ 1.7   £   £   £ 8.3
Lines of Credit                    
Standby Letters of Credit     21.4     4.7     15.3         1.4
Standby Repurchase Obligations                    
Other Commercial Commitments                    
   
 
 
 
 
Total Commercial Commitments   £ 31.4   £ 6.4   £ 15.3   £   £ 9.7
   
 
 
 
 

        Guarantees relate to performance bonds provided by banks on our behalf as part of our contractual obligations. The fair value of the guarantees has been calculated by reference to the monetary value of each bond.

Derivative Instruments and Hedging Activities

        We have a number of derivative instruments with a number of counterparties to manage our exposures to changes in interest rates and foreign currency exchange rates. We account for these instruments as hedges under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, or FAS 133, when the appropriate eligibility criteria has been satisfied, and to the extent that they are effective. Ineffectiveness in our hedges, and instruments that we have not elected for hedge accounting, are recognized through the statement of operations through gains or losses on derivative instruments. The derivative instruments consist of interest rate swaps, cross-currency interest rate swaps and foreign currency forward contracts.

        We are subject to interest rate risk because we have substantial indebtedness at variable interest rates. As of December 31, 2007, interest is determined on a variable basis on £4.8 billion, or 81%, of

75



indebtedness. An increase in interest rates of 0.25% would increase our gross interest expense by £12 million per year, before giving effect to interest rate swaps.

        We are also subject to currency exchange rate risks, because substantially all of our revenues and operating expenses are paid in U.K. pounds sterling, but we pay interest and principal obligations with respect to a portion of our indebtedness in U.S. dollars and euros. To the extent that the pound declines in value against the U.S. dollar and the euro, the effective cost of servicing our U.S. dollar and euro denominated debt will be higher. Changes in the exchange rate result in foreign currency gains or losses. As of December 31, 2007, £807.9 million, or 14% of our indebtedness, was denominated in U.S. dollars and £522.1 million, or 9% of our indebtedness, was denominated in euros.

Interest Rate Swaps

        We have entered into a number of interest rate swaps to hedge the variability in future interest payments on our senior credit facility, which accrues interest at variable rates based on LIBOR. The interest rate swaps allow us to receive interest based on LIBOR in exchange for payments of interest at fixed rates between 4.68% and 5.38%.

        We have designated some of the interest rate swaps as cash flow hedges under FAS 133 because they hedge against changes in LIBOR. The interest rate swaps are recognized as either assets or liabilities and measured at fair value. Changes in the fair value are recorded within other comprehensive income (loss).

Cross-currency Interest Rate Swaps

        We have entered into a number of cross-currency interest rate swaps to hedge the variability in the pound sterling value of interest payments on the U.S. dollar denominated 8.75% senior notes due 2014, interest payments on the euro denominated 8.75% senior notes due 2014, interest payments on the U.S. dollar denominated senior notes due 2016 and interest payments on the U.S. dollar and euro denominated tranches of our senior credit facility. Under these cross-currency interest rate swaps, we receive interest in U.S. dollars at various fixed and floating rates and in euros at various fixed and floating rates in exchange for payments of interest in pound sterling at various fixed and floating rates.

        We have designated some of the cross-currency interest rate swaps as cash flow hedges under FAS 133, because they hedge against changes in the pound sterling value of the interest payments on the senior notes that result from changes in the U.S. dollar and euro exchange rates. The cross-currency interest rate swaps are recognized as either assets or liabilities and measured at fair value. Changes in the fair value are recorded within other comprehensive income (loss) where designated as a hedge, or through (loss) gain on derivatives where not designated as a hedge.

Foreign Currency Forward Contracts

        We have entered into a number of forward contracts maturing on April 14, 2009 to purchase a total of $425 million. These contracts economically hedge changes in the pound sterling value of the U.S. dollar denominated principal obligation of the 8.75% senior notes due 2014 caused by changes in the U.S. dollar and pound sterling exchange rates. The principal obligations under the €225 million 8.75% senior notes due 2014, the $550 million 9.125% senior notes due 2016, and the $628 million and €485 million principal obligations under the senior credit facility are hedged via the cross-currency interest rate swaps, and therefore separate forward rate contracts for these debt instruments were not necessary.

        These foreign currency forward rate contracts have not been designated as hedges under FAS 133. As such, the contracts are carried at fair value on our balance sheet with changes in the fair value recognized immediately in the income statement. The foreign currency forward rate contracts do not

76



subject us to material volatility in our earnings and cash flows because changes in the fair value directionally and partially mitigate the gains or losses on the remeasurement of our U.S. dollar denominated debt into our functional currency pound sterling in accordance with FASB Statement No. 52, Foreign Currency Translation. Changes in fair value of these contracts are reported within foreign currency transaction gains (losses).

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, like foreign currency exchange and interest rates. As some of our indebtedness accrues interest at variable rates, we have exposure to volatility in future cash flows and earnings associated with variable interest rate payments.

        Also, substantially all of our revenues and operating costs are earned and paid in pounds sterling but we pay interest and principal obligations on some of our indebtedness in U.S. dollars and euros. As of December 31, 2007, £807.9 million, or 14% of our indebtedness, was denominated in U.S. dollars and £522.1 million, or 9%, of our indebtedness was denominated in euros. As a result, we have exposure to volatility in future cash flows and earnings associated with changes in foreign exchange rates on payments of principal and interest on a portion of our indebtedness.

        To mitigate the risk from these exposures, we have implemented a cash flow hedging program. The objective of this program is to reduce the volatility of our cash flows and earnings caused by changes in underlying rates. To achieve this objective we have entered into a number of derivative instruments. The derivative instruments utilized comprise interest rate swaps, cross-currency interest rate swaps and foreign currency forward contracts. We do not enter into derivative instruments for trading or speculative purposes. See note 10 to Virgin Media's consolidated financial statements—Derivative Financial Instruments and Hedging Activities, and Management's Discussion and Analysis of Financial Condition and Results of Operations—Derivative Instruments and Hedging Activities.

        The fair market value of long term fixed interest rate debt and the amount of future interest payments on variable interest rate debt are subject to interest rate risk.

77


        The following table provides information as of December 31, 2007 about our long term fixed and variable interest rate debt that are sensitive to changes in interest rates and foreign currency exchange rates (in millions).

 
  Year ended December 31,
   
   
   
 
 
   
   
  Fair Value December 31, 2007
 
 
  2008
  2009
  2010
  2011
  2012
  Thereafter
  Total
 
Long term debt (including current portion)                                      
U.S. Dollars                                      
Fixed rate             $425.0   $ 425.0   $ 418.6  
Average interest rate                       8.75 %            
Average forward exchange rate                       0.53              
Pounds Sterling                                      
Fixed rate             £375.0   £ 375.0   £ 358.6  
Average interest rate                       9.75 %            
Euros                                      
Fixed rate             €225.0   225.0   218.8  
Average interest rate                       8.75 %            
Average forward exchange rate                       0.72              
U.S. Dollars                                      
Fixed rate             $550.0   $ 550.0   $ 541.8  
Average interest rate                       9.125 %            
Average forward exchange rate                       0.52              
Pounds Sterling                                      
Variable Rate     £265.1   £1,105.9   £966.0   £2,167.8   £300.0   £ 4,804.8   £ 4,804.8  
Average interest rate   LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
2.00-2.13


%
LIBOR
plus
2.75


%
           

Currency swap agreements related to long term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Receipt of U.S. Dollars                                      
  Notional amount     $425.0       $650.0   $550.0   $ 1,625.0   £ (82.9 )
  Average contract exchange rate       0.60           0.54   0.55              
  Average sterling
interest rate paid
      9.42 %         LIBOR
plus 2.11

%
8.54 %            
Receipt of Euros                                      
  Notional amount     €225.0       €500.0     725.0   £ 28.9  
  Average contract exchange rate       0.69           0.69                  
  Average sterling
interest rate paid
      10.26 %         LIBOR
plus 2.16

%
               

Interest rate derivative financial instruments related to long term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Sterling Interest Rate Swaps                                      
  Notional amount     £3,184.0           £ 3,184.0   £ 15.4  
  Average sterling interest rate paid       5.25 %                            
  Sterling interest rate received       LIBOR                              

78


        The following table provides information as of December 31, 2006 about our long term fixed and variable interest rate debt that are sensitive to changes in interest rates and foreign currency exchange rates (in millions).

 
  Year ended December 31,
   
   
   
 
 
   
   
  Fair Value December 31, 2006
 
 
  2007
  2008
  2009
  2010
  2011
  Thereafter
  Total
 
Long term debt (including current portion)                                      
U.S. Dollars                                      
Fixed rate             $975.0   $ 975.0   $ 1,023.9  
Average interest rate                       8.97 %            
Average forward exchange rate                       0.51              
Pounds Sterling                                      
Fixed rate             £375.0   £ 375.0   £ 398.6  
Average interest rate                       9.75 %            
Euros                                      
Fixed rate             €225.0   225.0   240.8  
Average interest rate                       8.75 %            
Average forward exchange rate                       0.71              
Pounds Sterling                                      
Variable Rate   £124.0   £474.0   £740.0   £1,107.0   £967.0   £1,612.6   £ 5,024.6   £ 5,024.6  
Average interest rate   LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.25


%
LIBOR
plus
1.25-2.75


%
           

Currency swap agreements related to long term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Receipt of U.S. Dollars                                      
  Notional amount       $425.0       $1,200.0   $ 1,625.0   £ (79.3 )
  Average contract exchange rate           0.60           0.54              
  Average sterling
interest rate
paid
          9.42 %         8.54% and LIBOR
plus 2.11

%
           

Receipt of Euros

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Notional amount       €225.0       €500.0   725.0   £ (20.1 )
  Average contract exchange rate           0.69           0.69              
  Average sterling
interest rate paid
          10.26 %         LIBOR
plus 2.16

%
           

Interest rate derivative financial instruments related to long term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Sterling Interest Rate Swaps                                      
  Notional amount       £3,184.0         £ 3,184.0   £ 7.1  
  Average sterling interest rate paid           5.25 %                        
  Sterling interest rate received           LIBOR                          

79


Item 8.   Financial Statements and Supplementary Data

        Our consolidated financial statements, the notes thereto and the report of the independent auditors begin on page F-1 of this annual report and are incorporated in this annual report by reference. The following is a summary of the unaudited selected quarterly results of operations for the years ended December 31, 2007 and 2006 (in millions, except per share data):

 
  2007
 
 
  Three months ended
 
 
  March 31,
  June 30,
  September 30,
  December 31,
 
 
  (unaudited)

 
Statement of Operations Data:                          
Revenue   £ 1,021.9   £ 995.0   £ 1,006.2   £ 1,050.6  
Operating (loss) income     (15.3 )   3.0     46.7     (17.8 )
Net loss     (120.3 )   (119.0 )   (61.0 )   (163.2 )
Basic and diluted loss per share   £ (0.37 ) £ (0.37 ) £ (0.19 ) £ (0.50 )
 
 
  2006
 
 
  Three months ended
 
 
  March 31,
  June 30,
  September 30,
  December 31,
 
 
  (unaudited)

 
Statement of Operations Data:                          
Revenue   £ 611.4   £ 884.3   £ 1,024.9   £ 1,081.6  
Operating income (loss)     3.9     6.3     (9.6 )   9.2  
Net loss     (119.9 )   (195.8 )   (96.1 )   (122.1 )
Loss from continuing operations     (121.1 )   (195.8 )   (104.2 )   (88.1 )
Basic and diluted loss from continuing operations per share   £ (0.49 ) £ (0.68 ) £ (0.32 ) £ (0.27 )

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

(a)   Disclosure Controls and Procedures

        Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, these controls and procedures are effective to ensure that information required to be disclosed by the registrant in the reports the registrant files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits is accumulated and communicated to the registrant's management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)   Management's Annual Report on Internal Control Over Financial Reporting for Virgin Media Inc.

        Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control

80



over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Virgin Media Inc.'s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

        Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework described in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the COSO framework, our management has concluded, and hereby reports, that our internal control over financial reporting was effective as of December 31, 2007. This annual report includes an attestation report of Ernst & Young LLP, our registered public accounting firm, on the effectiveness of internal control over financial reporting of Virgin Media Inc.

(c)   Management's Annual Report on Internal Control Over Financial Reporting for Virgin Media Investment Holdings Limited

        Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Virgin Media Investment Holdings Limited's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

        Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework described in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the COSO framework, our management has concluded, and hereby reports, that VMIH's internal control over financial reporting was effective as of December 31, 2007.

        This annual report does not include an attestation report of Ernst & Young LLP, our registered public accounting firm, on the effectiveness of the internal control over financial reporting of VMIH pursuant to temporary rules of the Securities and Exchange Commission that require VMIH to provide only a management's report in this annual report.

(d)   Changes in Internal Control Over Financial Reporting

        On March 3, 2006, we completed the reverse acquisition of Telewest and on July 4, 2006, we completed the acquisition of Virgin Mobile. As a consequence of our integration of these acquisitions, we have made and expect to make further material changes to our internal control over financial reporting. Other than as stated above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(e)   Attestation Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Virgin Media Inc.

        We have audited Virgin Media Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Virgin Media Inc.'s

81



management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management's Annual Report on Internal Control over Financial Reporting for Virgin Media Inc.". Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Virgin Media Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Virgin Media Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

London, England
February 29, 2008

Item 9B.    Other Information

        None.

82



PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this Item is incorporated by reference to our Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 11.    Executive Compensation

        The information required by this Item is incorporated by reference to our Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this Item is incorporated by reference to our Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 13.    Certain Relationships and Related Transactions and Director Independence

        The information required by this Item is incorporated by reference to our Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 14.    Principal Accountant Fees and Services

        The information required by this Item is incorporated by reference to our Proxy Statement for the 2008 Annual Meeting of Stockholders.


PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)


(1)
Financial Statements—See list of Financial Statements on page F-1.

(2)
Financial Statement Schedules—See list of Financial Statement Schedules on page F-1.

(3)
Exhibits—See Exhibit Index.

83



FORM 10K—Item 15(a)(1) and (2)

VIRGIN MEDIA INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

        The following consolidated financial statements of Virgin Media Inc. and Subsidiaries are included in Item 8:

Report of Independent Registered Public Accounting Firm   F-2
Consolidated Balance Sheets—December 31, 2007 and 2006   F-3
Consolidated Statements of Operations—Years ended December 31, 2007, 2006 and 2005   F-4
Consolidated Statements of Cash Flows—Years ended December 31, 2007, 2006 and 2005   F-5
Consolidated Statement of Shareholders' Equity—Years ended December 31, 2007, 2006 and 2005   F-6
Notes to Consolidated Financial Statements   F-7

        The following consolidated financial statement schedules of Virgin Media Inc. and Subsidiaries are included in Item 15(d):

Schedule I—Condensed Financial Information of Registrant   F-60
Schedule II—Valuation and Qualifying Accounts   F-64

        All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

        The following consolidated financial statements of Virgin Media Investment Holdings Limited and Subsidiaries are included in Item 8:

Report of Independent Registered Public Accounting Firm   F-65
Consolidated Balance Sheets—December 31, 2007 and 2006   F-66
Consolidated Statements of Operations—Years ended December 31, 2007, 2006 and 2005   F-67
Consolidated Statements of Cash Flows—Years ended December 31, 2007, 2006 and 2005   F-68
Consolidated Statement of Shareholders' Equity—Years ended December 31, 2007, 2006 and 2005   F-69
Notes to Consolidated Financial Statements   F-70

        The following consolidated financial statement schedules of Virgin Media Investment Holdings Limited and Subsidiaries are included in Item 15(d):

Schedule II—Valuation and Qualifying Accounts   F-108

        All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Virgin Media Inc.

        We have audited the accompanying consolidated balance sheets of Virgin Media Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the index at Item 15(d). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Virgin Media Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

        As discussed in Note 2 to the consolidated financial statements, Virgin Media Inc. changed its method of accounting for stock-based compensation expense as of January 1, 2006 to conform with the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment"; changed its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006 to conform with the provisions of Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans"; and adopted Financial Accounting Standards Board Staff Position FAS 143-1 "Accounting for Electronic Waste Obligations" as of December 12, 2006.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Virgin Media Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
London, England
February 29, 2008

F-2



VIRGIN MEDIA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

 
  December 31,
 
 
  2007
  2006
 
Assets              
Current assets              
  Cash and cash equivalents   £ 321.4   £ 418.5  
  Restricted cash     6.1     6.0  
  Accounts receivable—trade, less allowance for doubtful accounts of £19.5 (2007) and £51.8 (2006)     455.6     461.2  
  Inventory     75.4     65.3  
  Prepaid expenses and other current assets     94.8     87.4  
   
 
 
    Total current assets     953.3     1,038.4  
Fixed assets, net     5,655.6     6,026.3  
Goodwill and other indefinite-lived intangible assets     2,488.2     2,516.5  
Intangible assets, net     816.7     1,120.5  
Equity investments     368.7     371.5  
Other assets, net of accumulated amortization of £45.0 (2007) and £21.8 (2006)     183.6     170.3  
   
 
 
Total assets   £ 10,466.1   £ 11,243.5  
   
 
 
Liabilities and shareholders' equity              
Current liabilities              
  Accounts payable   £ 372.9   £ 379.6  
  Accrued expenses and other current liabilities     406.2     485.5  
  VAT and employee taxes payable     86.1     82.8  
  Restructuring liabilities     89.6     126.8  
  Interest payable     172.5     158.2  
  Deferred revenue     250.3     268.0  
  Current portion of long term debt     29.1     141.9  
   
 
 
    Total current liabilities     1,406.7     1,642.8  
Long term debt, net of current portion     5,929.4     6,017.2  
Deferred revenue and other long term liabilities     238.5     276.2  
Deferred income taxes     81.0     77.2  
   
 
 
Total liabilities     7,655.6     8,013.4  
   
 
 
Commitments and contingent liabilities              
Shareholders' equity              
  Common stock—$.01 par value; authorized 1,000.0 shares (2007 and 2006); issued 328.9 (2007) and 326.4 (2006) and outstanding 327.5 (2007) and 323.9 (2006) shares     1.8     1.8  
  Additional paid-in capital     4,335.9     4,303.4  
  Accumulated other comprehensive income     148.6     116.0  
  Accumulated deficit     (1,675.8 )   (1,191.1 )
   
 
 
    Total shareholders' equity     2,810.5     3,230.1  
   
 
 
Total liabilities and shareholders' equity   £ 10,466.1   £ 11,243.5  
   
 
 

See accompanying notes.

F-3



VIRGIN MEDIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

 
  Year ended December 31,
 
 
  2007
  2006
  2005
 
Revenue   £ 4,073.7   £ 3,602.2   £ 1,947.6  
Costs and expenses                    
  Operating costs (exclusive of depreciation shown separately below)     1,830.0     1,572.8     808.3  
  Selling, general and administrative expenses     960.2     906.9     483.0  
  Other charges     28.7     67.0     24.8  
  Depreciation     924.9     799.1     541.7  
  Amortization     313.3     246.6     109.5  
   
 
 
 
      4,057.1     3,592.4     1,967.3  
   
 
 
 
Operating income (loss)     16.6     9.8     (19.7 )
Other income (expense)                    
  Interest income and other, net     19.5     34.7     29.4  
  Interest expense     (514.2 )   (457.4 )   (235.8 )
  Loss on extinguishment of debt     (3.2 )   (32.8 )   (2.0 )
  Share of income from equity investments     17.7     12.5      
  (Loss) gain on derivative instruments     (2.5 )   1.3     0.9  
  Foreign currency transaction gains (losses)     5.1     (90.1 )   5.3  
   
 
 
 
Loss from continuing operations before income taxes, minority interest and cumulative effect of changes in accounting principle     (461.0 )   (522.0 )   (221.9 )
Income tax (expense) benefit     (2.5 )   11.8     (18.8 )
Minority interest         1.0     (1.0 )
   
 
 
 
Loss from continuing operations     (463.5 )   (509.2 )   (241.7 )
   
 
 
 
Discontinued operations                    
  Income from discontinued operations before income taxes             5.7  
  Income tax expense             (0.2 )
  Gain on disposal of assets         7.9     657.2  
   
 
 
 
  Income from discontinued operations         7.9     662.7  
  Cumulative effect of changes in accounting principle         (32.6 )    
   
 
 
 
Net (loss) income