ii - Adjusted earnings per share is calculated using adjusted earnings after tax which exclude the impairment of goodwill and Poland debtor provision disclosed above, and the writedown of investments of £321,000 (2001: £283,000).

OVERVIEW
During 2002 we have focused on managing the business for a good financial performance against a background of considerable uncertainty and highly competitive conditions. We can do little to influence the wider business climate, and the activities of customers and competitors. During the period we have continued to invest in product development & support and the global distribution and delivery capability. Against this background I am therefore pleased to report that Intec has delivered the level of revenue growth we expected at approximately 20%, increased EBITDA, with positive operating cash flows of £2.8 million achieved by focused credit control and cash management. We consider this to be a major achievement given the severe trading conditions in our sector.

REVENUE
In the twelve months ended 30 September 2002, our fifth year of operations and our second full year as a public company, revenue increased by 19% to £47.5 million, against £39.8 million for the equivalent period in 2001. Several substantial acquisitions were made early in 2001, against two relatively small ones in 2002, so the figures are not directly comparable. In that context, and against a difficult industry background, the achieved growth has been a strong performance. Our continuing ability to be successful in licence sales is directly attributable to continuing investment in our product set. Our customers consider them to be truly convergent, and thus able to meet the challenges of emerging technologies such as 3G. Increased investment in global product support infrastructure has enhanced customer service and our customer retention strategy.

Intec’s stable business model has been an important factor in helping us to meet our forecast revenue objectives. Intec has a strong recurring revenue line generated by support and upgrade charges from our large installed base, and a growing professional services business. We have also worked hard to maintain and improve revenues from new licence sales, undoubtedly the most challenging part of the revenue mix in a difficult and cost-sensitive market. Major deals signed with companies such as COLT and SBC have been important successes in 2002, in addition to our ability to sell multiple licences from an expanded product line to both existing and new customers.

REVENUE ANALYSIS
Intec has five principal sources of revenue in its core OSS business - sales of software licences for its two major product families, Settlement (InterconnecT & InterconnecT CABS) and Inter-mediatE, and associated products in related areas; recurring revenues from annual support contracts; ASP and bureau services; volume-based licence upgrades; and revenues from implementation, consultancy, education and training services. In addition, Intec derived a small proportion (approximately 6%) of revenues from hardware and non-OSS communications products and services. Revenues from the majority of software licence contracts and ASP/bureau services are based on the volume of traffic processed by our software for each customer. In 2002, licences represented 33% of turnover at £15.5 million (2001: £14.2 million), an increase of just under 10%. Strong pricing pressure in software licences has been felt in 2002, and this has impacted both total revenue growth and margins, although increased contract values from multiple licence sales and larger deals have offset this to a degree. However, the important fact is that Intec has won these new contracts and has thus increased its long-term recurring revenue stream.

Revenues from professional services amounted to a total of £12.3 million (2001: £9.6 million) or 26% of turnover. This revenue stream has grown by 27% in 2002, primarily due to a good number of implementation projects resulting from contracts signed in late 2001 and through 2002. Margins on professional services have shown reasonable resilience in the current climate. A new feature we see in professional services, particularly concerning mediation and the requirement to address network change, is repeat business from the existing customer base. We expect this trend to continue as the telecoms market develops.

Recurring revenues come from annual fees for maintenance and support, from volume-based licence upgrades, and from ASP/bureau services. Similar support and upgrade policies exist across all key product lines. Recurring revenues grew, as expected, over the 2001 figure of £10.7 million to £15.0 million, reflecting both the growth in our software user base since 2001 and the very high quality customer base of Tier One and Tier Two customers that Intec OSS software supports. Turnover from ASP and bureau services, which are included in recurring revenues, grew from £1.7 million in 2001 to £2.8 million in 2002, as a result of a growing contribution from US InterconnecT CABS bureau operations. We expanded our Dallas office facilities substantially in 2002 to cope with this demand. In total, recurring income represented a very satisfactory 41% of turnover. In our contract negotiations we avoid extending licence discounts to support & maintenance contracts wherever possible.

On a regional basis, all operations made a contribution to revenues, with North America as the largest contributor, at £21.1 million (2001: £12.6 million) or 44% of turnover, showing the benefit of a full year’s contribution from acquisitions (2001: approximately 9 months contribution). The EMEA region at £16.9 million or 37% of turnover was the second largest operation. This was down on 2001 (£19.7 million), as a result of large contracts signed in the UK in the previous year. Both the Middle East and Africa regions showed good growth over 2001 as our investment in these developing markets began to show results. Turnover also grew 11% in the Asia-Pacific region to £5.5 million (2001: £5.0 million). CALA (Caribbean and Latin America) continues to be a successful market for us, with revenue up 55% to £4.0 million, despite the economic and political difficulties in parts of the region.

COSTS
Gross margin has remained largely unchanged at 67% (2001: 68%) with the slight decline largely due to increased third party payments for implementation services, mainly in large US projects. Going forward we have the internal resources in the necessary geographies to deliver these projects ourselves.

Distribution costs of £9.9 million compare to last year’s £9.2 million. Of the total increase of 8.6%, around 3% is attributable to acquisitions. The remainder is due to increased resources being deployed in the US, Malaysia and Middle-East offset by savings in the EMEA region where distribution channels have been re-organised in Germany, Denmark and Portugal. Our global distribution channel is largely in place now to support both the current and expected business levels, but will, like all other major cost areas, be regularly reviewed with activity changes around the world.

Development costs of £8.0 million compare to 2001 costs of £5.9 million. The increase of 35% is attributable in part (14%) to acquisitions. The remaining increase is from continuing investment in core product areas, both in functionality and support capability to service our increased customer base, and also from expanding our product portfolio.

New products developed in the period include Inter-activatE, our service activation solution. As highlighted in the product section, Intec is reviewing development expenditure carefully across each product line or proposed development, with a view to maximising return on each one. Cost growth in future periods will be at a lower level as a result of initiatives to restructure our development centres and from general cost saving and productivity measures. Intec incurs a proportion of its development expenditure for InterconnecT in South Africa, and we have therefore continued to benefit from lower Sterling costs throughout the period.

Other administrative expenses of £12.1 million compare to prior year expenses of £10.1 million. The increase of 20% is attributable to a number of factors, namely the impact of acquisitions (15% of the increase), nonrecurring expenditure associated with the legal costs of BT litigation which has now been successfully concluded, and a foreign exchange loss in our CALA region as a direct result of the Argentinean currency crisis. Net of provisions, underlying administrative expenses have reduced from the prior year.

EARNINGS
Earnings performance in 2002 has been impacted by pricing pressure caused by competitor activity and capital expenditure sensitivity among telecoms customers. We have also made a strategic decision to maintain expenditure wherever sensible on product development and business infrastructure that we regard as critical to sustained performance now and in the future. Neverthless, through a combination of higher revenues and careful cost management Intec has been able to deliver EBITDA before exceptional items of £3.7 million (2001: £3.4 million) and positive operating cash inflow of £2.8 million (2001: outflow £3.7 million). Adjusted earnings per share were 0.46p per ordinary share (2001: 1.14p).

In 2001, like many technology companies, we recorded a substantial writedown of goodwill due to both impairment and normal amortisation of goodwill in acquisitions. In 2002, no further impairment has been identified on our US acquisitions of Compgen and CABS. However, we made a relatively small writedown of £7.5 million on the acquisitions of Dataphone and i2i, which with normal amortisation of goodwill and intangibles of £7.1 million, results in an actual group operating loss of £13.3 million (2001: £140.0 million).

EXCEPTIONAL ITEMS
During the year, our Polish associate failed to meet its obligations to Intec. We have instituted legal proceedings in Poland to recover the outstanding amount due to us and have in the meantime provided for the trading exposure of £0.8 million. In addition we have provided an amount of £0.15 million against the investment in the Group balance sheet.

TAXATION
The major trading companies in the UK and the US have not incurred corporate tax liabilities. However, we have suffered corporate taxation is a number of our overseas trading subsidiaries and branches amounting to £0.7 million, of which £0.3 million is in respect of previous years. The remainder of the tax charge is in respect of withholding tax, which is deducted at source in certain jurisdictions and which we cannot recover, amounting to £0.6 million.

The US operations have substantial ongoing tax benefits arising from goodwill allowances which will continue to ameliorate tax charges against profits in future periods. In addition, there are significant losses brought forward in the US.

CASH FLOWS
Given the concerns around the telecoms sector we have focused additional effort on improving our trade debtors collections and we achieved a significant improvement in the annualised debtor-days ratio of 105 days compared to 147 days at 30 September 2001, amounting to a 29% reduction. Post year-end cash collections have continued at a satisfactory level.

We are pleased to report a positive operating cash inflow of £2.8 million compared to a cash outflow of £3.7 million in 2001, being operating positive for the last three quarters. Overall our cash resources moved from £17.7 million at the start of the year to £13.3 million at 30 September 2002, after funding £5.2 million in acquisitions.

BALANCE SHEET
Our cash balance of £13.3 million is more than sufficient to meet the Group’s operating requirements. A significant proportion of our liquid funds are invested in a cash plus fund to spread risk and improve yields. The carrying amount of goodwill is £61.9 million which is stated after an impairment write down of £7.5 million, reflecting reduced market values in acquired companies. This impairment charge was reported at the end of the third quarter of 2002, and no further impairment has been considered necessary.

As a precautionary measure, in light of the current difficulties in the Telecoms market, we have increased our general bad debt provisions over 2001.

ACQUISITIONS
Intec has a long-term policy of business expansion through both organic development and carefully-evaluated and managed acquisitions. Since becoming a public company in mid-2000, Intec has made a series of acqusitions in the OSS sector aimed at either consolidating competitive businesses to generate greater market share, or acquiring and integrating companies with complementary technology. The following progress review considers acquisitions made during the 2002 financial year.

ICL OSS business (UK)
In January 2002 Intec acquired the OSS business unit of ICL (which now operates under the Fujitsu brand). This former competitor had established a position in both interconnect billing and mediation, and had won accounts in some 20 companies. Intec acquired both billing (Prospero) and mediation (SIMS) customer contracts, the IPR to the products, and a small number of primarily technical staff. The agreement with ICL also made it a distribution partner for Intec, as it was not intending to leave the OSS business, but to focus on systems integration and consulting services. The net initial consideration amounted to £2.55 million paid in cash and £1.04 million deferred consideration to be paid over the two year period from the date of acquisition.

Intec’s integration of this acquired business has now been effectively concluded. Intec has identified effective migration strategies to move the acquired ICL customers to Intec’s more established and successful alternatives. Once this transition has been completed, the ICL products will be removed from the marketplace. Support for the products still in operation continues according to the agreement made with ICL. The customer base is generating the expected support revenues and reported £1.5 million from the date of acquisition. Intec has also signed a key contract in Russia in partnership with ICL, and generated additional services business in the UK as a result of the acquired product.

Interconnexxion Africa (Pty) Limited
On 31 July 2002, Independent Technology Systems Limited, a wholly owned subsidiary company of Intec Telecom Systems PLC agreed to acquire its distribution partner in South Africa, Interconnexxion Africa (Pty) Ltd. The total consideration, paid in ordinary shares, amounted to £560,000 plus acquisition costs of £3,000. Pursuant to the agreement, Intec has acquired all assets of Interconnexxion, including customer licensing and support contracts and equipment for payment of £209,000, which has been satisfied by the issue of 822,835 new ordinary shares of 1p each. In addition, an outstanding loan of Interconnexxion of £351,000 was settled by the issue of 1,381,890 new ordinary shares of 1p each.

Acquiring Interconnexion allows Intec to take control of its distribution channel in a key emerging market, eliminate certain costs, invest more effectively in sales resources, and provide closer support to new and existing customers. Africa is a region with high growth potential in telecommunications, particularly in the wireless sector. In 2002, sales in Africa contributed £1.7 million to Intec’s turnover. Following the acquisition Intec had three customers in South Africa: the PTT, Telkom South Africa, and mobile operators MTN and Cell-C. The new operation is also targeting customers in other key emerging markets in Africa such as Nigeria.

Ericsson ‘Settler’ business unit (Sweden) – post balance sheet
In November 2002 Intec announced the post-year end acquisition of Ericsson’s ‘Settler’ business unit, its major competitor in the interconnect billing market. With this acquisition Intec will expand its base of supported customers by approximately 40 carriers. The agreement also covers the Settler development team in Sweden and exclusive worldwide rights to develop and market the Settler product range. The agreement includes further cooperation between the two companies where Ericsson will continue to offer solutions based on Settler as well as Intec’s InterconnecT product suite.

The total consideration amounts to US$5.1 million (£3.3 million). The acquisition is expected to be revenue and earnings enhancing, generating new license revenues, related services work and recurring revenues for support & maintenance. A key benefit of the agreement are the synergies that will be achieved. Ericsson has a direct presence in some countries where Intec has none, enabling a greater reach. In other areas, where the two companies have previously competed fiercely, efforts can be re-directed to other productive opportunities. The agreement enables Ericsson as well as other successful Settler partners to be able to offer their telecom customers Intec billing technology from either the InterconnecT or the Settler range.

FOREIGN CURRENCY AND TREASURY
Intec normally invoices its customers in Sterling, US dollars or Euros, which balances the risk of exposing the group to significant foreign currency gains and losses. The group has a net cash position and so is only exposed to interest rate movements on its cash and cash investments. The group’s policy is currently not to hedge either foreign exchange or interest rate exposures.

FUTURE OUTLOOK
Intec has a sound financial position, which is required in an uncertain economic climate, with our strong cash position providing resilience against seasonal variations in billings and providing reassurance to our customers. In 2003 Intec’s finances will continued to be managed on a sound basis, ensuring good accounting practice and best practice risk management policies are adopted throughout the Group.

We will also continue with stringent cost management policies, balanced against necessary investments, which yield positive returns on investment to improve profitability, now and in the future.

John Arbuthnott FCMA
Finance Director

2 December 2002