Annual Report

GalaCoralGroup

AnnualReport2007

Gala Coral Group LimitedGlebe HouseVicarage DriveBarkingEssex IG11 7NS

www.galacoral.com

Section 1: Overview

Gala Coral Group

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Annual Report 2007

Contents

The Gala Coral Group is the pre-eminent integrated bettingand gaming group in Europe. It is the only gambling companyin the UK which operates in the bookmaking, bingo andcasino markets, both on the high street, as well as online.The Group also has a growing international business,with a newly-established betting business in Italy. Gala Coralis also the leading gambling company in the field of socialresponsibility and the first gambling company to have receivedfull accreditation from GamCare across all its UK divisions.

� Increase in turnover of £83.2 million(6.8%) from £1,226.7 million in 2005-06to £1,309.9 million

� Group EBITDA (pre-exceptionals) of£401.8 million, up £7.2 million (1.8%)from £394.6 million in the prior year

� Cash generated from operations of£391.3 million, up £89.4 million (29.6%)from £301.9 million in the prior year

� At the year end, the Group had1,566 Coral shops, 170 bingo clubs,31 casinos and two greyhound stadia

� Over 19,000 Group employees

� First ever £1 million bingo game

� Launch of Gala TV

� 403 sports and horserace bettinglicences acquired in Italy

� Joint venture signed to open bingoclubs in China

� The Group has 3.25 millionactive players

Gala Coral History Financial Highlights Operational Highlights

1997In1997 a managementbuy-in, led by John Kelly,purchased 130 Gala Bingo

Clubs from Bass.The deal was backed by

PPM Ventures.

2000InDecember 2000, the GalaGroup, backed by CSFB PrivateEquity, acquired 26 casinosfrom the Hilton Group.

Gala Bingo also became theleading bingo operator thatyear on the back of a number

of acquisitions.

2003Private equity firms,Candover and Cinven,acquired the Groupin February 2003for £1.24 billion.

2005InAugust 2005 a third investor,Permira, bought a stake inthe Company valuing Galaat nearly £1.9 billion.

In October 2005, Gala Groupacquired Coral Eurobet in a dealthat created Europe’s pre-eminentintegrated betting and gaming

company with an enterprise valueof approximately £4 billion.

2006In January 2006, the Group

acquired the County Clubs Bingochain in Scotland. At the 2006UK Gambling Awards, Coral wasnamed “Bookmaker of the Year”.

Gala Coral was namedgambling operator of the yearand leisure group of the year.We also won a CSR award within

the leisure industry.

2007In2007, the Group

commenced the rolloutof betting shops in Italyfollowing its success in

December 2006 in winning403 sports and horseracebetting licences, througha government-led auction.The Group also set up ajoint venture in China.

Section 1: Overview 1-31 Gala Coral Group2 Gala Coral at a Glance3 Chairman’s Statement

Section 2: Business Review 4-284 Chief Executive’s Review6 Corporate Social Responsibility8 Gala Coral’s People10 Divisional Review20 Board of Directors22 Financial Review25 Directors’ Report27 Corporate Governance Report

Section 3: Financial Statements and Notes 29-6929 Statement of Directors’ Responsibilities in Respect of the Annual Report

and the Financial Statements30 Independent Auditors’ Report to the Members of Gala Coral Group Limited31 Group Profit and Loss Account32 Group Statement of Total Recognised Gains and Losses

and Reconciliation of Movement in Shareholders’ Funds33 Group Balance Sheet34 Company Balance Sheet35 Group Cash Flow Statement36 Reconciliation of Net Cash Flow to Movement in Net Debt37 Notes to the Accounts69 Other Information

Group Turnover by Division

Gala Bingo 34.9%Gala Casino 13.1%Coral 43.4%E-Commerce 8.6%

Operating Profit by Division

Gala Bingo 31.9%Gala Casino 5.9%Coral 50.3%E-Commerce 11.9%

2007

2006

1,309.9

1,226.7

Group Turnover (£million)

2007

2006

401.8

EBITDA pre-exceptionals (£million)

394.6

2007

2006

391.3

Cash Flow from Operations (£million)

301.9

Gala Bingo is the UK’s market leader inbingo with a market share of 43% andemploying over 6,000 people in 170 bingoclubs. The Group also operates, in itsE-Commerce division, the UK’s mostsuccessful online bingo site.

Gala Casino operates 30 UK casinos andone in Gibraltar, with 1.3 million members.

Gala Coral E-Commerce is the onlinebetting and gaming arm of the Group,and is responsible for the development,management and operation of allE-Commerce activities within the Group,including Gala TV which can be accessedthrough the Sky platform.

International

E-Commerce

Section 1: Overview

Chairman’s Statement

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Annual Report 2007 Annual Report 2007

Section 1: Overview

Gala Coral at a Glance

The Group’s Five Divisions I am delighted to report that in its first full year as a combinedGroup, Gala Coral delivered record profits in a year of significantchallenge. The Group had four revenue-generating divisionsduring the financial year and three delivered record tradingresults. The land-based bingo business remained the mostchallenging part of the business, primarily due to the effect ofthe smoking ban in the Group’s Scottish region and more latterlythe smoking ban in England and Wales. However, I am delightedthat the overall bingo revenue across all media grew year on year.

The Board believes that the long-term prospectsfor the Group continue to be excellent, despitethe challenging conditions in which some of itsbusinesses operate. The smoking ban in Englandand Wales will inevitably affect the Group’s bingobusiness, in the same way as it has in Scotland; itscasinos business operates in a highly-competitiveenvironment; and there are many new and energetic

entrants to the online market.The Group is confident, however,that the new and excitingstrategies it is developingto meet these challenges will

enable it to continue to leadthe industry.

Gala Coral recognisesthat these challengeswill require the fullcommitment ofmanagement and staffthroughout the Groupduring the period ahead.The Board believes,however, that theoutstandingcontributionmade by everyonewithin the Group overmany years is proof that

they are the best in thesector and are more thancapable of rising to sucha challenge. The Boardthanks all the Group’sdedicated employeesfor their unstinting hard work;it is equally indebted to itsprivate equity sponsors –Candover, Cinven and Permira –who have given the Group

superb supportthroughout the year.

I thank all my colleagues on the Board for theircontinuing support to the business. In particular,I express my gratitude to Dick Munton who left theBoard during the year to pursue other interests onbehalf of Cinven, and welcome Guy Davison whoreplaced Dick as a non-executive director. I wouldalso like to welcome Charles Sherwood of Permira,who also joined the Board during the year. I alsopay tribute to Vaughn Ashdown and Mick Mariscottifor all their work over the years in developing Coral.

Good companies become great companies whensetting sector standards in challenging marketconditions. Gala Coral, as Europe's most dynamicintegrated betting and gaming group, will continueto provide outstanding service to its customers,value to its shareholders, and security and welfareto its employees. The Board looks to the futurewith confidence.

John Kelly OBEChairman

Coral is the fastest growing bookmakerin the UK with almost 1,600 bettingshops across the country and employing11,000 people with a dedicated telephoneand internet business.

Gala Coral International was officiallyformed on 1 October 2007 and is taskedwith developing an international footprint.The Group has already been awardedover 400 licences in Italy and is lookingat expanding into other key marketsincluding China.

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In the 2007 Budget the Government delivereda surprise for the casino industry, with a sharpincrease on gaming duty. This was delivered withoutconsultation with the casino industry, and the netcost for the business between March and September2007 was £2.5 million. I am therefore pleased toreport that in spite of this increased taxation, Gala’scasino division grew year-on-year. The modernisationand investment programme that is in place in thedivision’s key casinos around the country hasproved popular with customers and the Groupis well placed to take advantage of new casinolicences under the Gambling Act 2005.

One of the great successes of the Gala Coral mergerhas been the development of the Group’s newE-Commerce division which, in particular, hassignificantly grown the Group’s online bingobusiness into the most successful bingo sitein the UK.

2006-07 was a very eventful year for the Group’sInternational business, now formed into theGroup’s fifth division. The Group was delightedto have been awarded over 400 betting licencesin Italy. Over the next three years the Group aimsto have an exciting International division thatwill be able to leverage the great strengths ofthe Gala Coral Group in markets across the globe.

Gala Coral is a people business and I am delightedthat the Group continues to be recognised as oneof the best places to work in the UK, and is formallyrecognised as an Investor in People. The Groupprides itself on the vast array of talented individualsit has in the Company and the investment thatit makes in developing their careers and skills.

The Group has recently launched the TalentDevelopment Group, to identify and nurturetomorrow’s leaders within the Group.

The FutureGoing into 2008, the economic climate for retailand leisure looks more challenging than it has formany years. The Group hopes that the regulatorylandscape will be more balanced over the next yearand that Government policy will recognise the socialresponsibility of the industry and that for the 70%of the adult population who like to gamble it is anenjoyable and sociable leisure activity. For the yearahead the Group’s priorities remain to outperformits peer group across all five divisions, to continueto lead the industry in operating with the higheststandards of social responsibility, and to maximisethe Group’s position as Europe’s pre-eminentbetting and gaming company, taking advantageof an ever-changing market. The Group is lookingforward to the challenge.

Neil GouldenChief Executive

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Annual Report 2007

Section 2: Business Review

Chief Executive’s Review

I am delighted to report that in its first full year of trading,Gala Coral delivered EBITDA (pre-exceptionals) of £401.8 million.This represents solid growth year-on-year and in the currentregulatory and trading climate I am pleased that the Grouphas continued to grow despite a difficult trading environment.Gala Coral has created the pre-eminent betting and gamingcompany in Europe, employing over 19,000 people, with almost1,800 retail outlets, serving over three million customers.

major beneficiaries from the new gamblinglegislation. Early signs are that customers havewelcomed the increased opening hours in bettingshops, as well as the investment that has gone intoits new Electronic Point of Sale (EPOS) system andFOBT product range. Over the past two years theGroup has added over 300 betting shops to theCoral portfolio, and it will continue to support thebusiness strategically through targeted acquisitions.

In the past year the Group’s retail bingo businesshas been chiefly influenced by two external factors.The first has been the smoking ban, first inScotland, then in England and Wales. Whilst GalaCoral welcomed the smoking ban, it has affectedthe pattern of customer behaviour where smokersin bingo clubs account for approximately 40% ofthe division’s customer base. The second factorhas been the removal of section 21 machines.Together with the smoking ban, this has led tosome significant market adjustments taking placewithin the industry. Whilst the division is currentlytrading in line with expectations, these two externalinfluences have impacted growth within clubs.Despite this, bingo remains a vibrant business anda key component of the Gala Coral Group, and thedecisions that the Group made two years ago todiversify and invest in other platforms, especiallyonline, have led to an overall growth in bingo forthe Group.

The Group is also concerned at the level of taxationthe Group pays and in particular it will continueto lobby the Government for the introduction ofa fairer taxation system for bingo; whilst it is thesoftest form of gambling, it remains the mostheavily taxed, paying both VAT and GPT.

MarketGovernment decisions both in the UK and abroadhave had a major impact on the shape of theindustry; some decisions had been expected,others not. The Group welcomed the GamblingAct 2005 and the establishment of the GamblingCommission, which it expects to provide muchneeded regulatory clarity for the business.The Group was also pleased that the Gambling

Commission’s prevalence study hasshown that there had been no increasein the rate of problem gambling inthe UK since 1999. Gala Coral is aleading presence in the industry in

ensuring that there is adequatefunding for research, educationand treatment of problemgambling. Despite thelow levels of problemgambling there mustbe no complacency withinthe industry. The industryhas shown that it takesits social responsibilityseriously and the Groupbelieves that, with a newregulator in place, it cancontinue to move forward

to grow the businessin a responsible andaccountable manner.

The BusinessI am pleased that Coralcontinues to show very solidgrowth and the Group expectsthe business to be one of the

Responsibility In Gambling Trust

On 1 September 2007 the Gambling Act 2005 wasintroduced. The Act, which has three licensingobjectives, has a consistent message of responsiblegambling. The licensing objectives focus on keepingthe gambling industry crime free, ensuring thatgambling is fair and open, and protecting children andother vulnerable people from harm or exploitation.Gala Coral has developed a Responsible GamingStrategywhich incorporates and reflects theobjectives.

Promoting responsible gambling is paramountto Gala Coral. The Group has reviewed its operatingprocedures to ensure compliance with the new Act,and has integrated the Gambling Commission’srequirements into its procedures and processes.These include extensive training of all employees.

Contribution to Local CommunitiesThe Group continued to demonstrate itscommitment to local communities and nationalcharities. It delivered 22 community projects,amounting to almost 3,000 hours of employeetime; time spent on community projects to datenow totals more than 11,000 hours.

The Group worked closely with schools inNottingham in their “Right to Read” programmeand has donated over 2,500 hours of employeetime since the programme began in 2004.

Gala Coral began to work with Business in theCommunity’s Business Action on Homelessnessscheme and took eight people on work placements.Six of these were subsequently offered full-timejobs and the Group will be extending thescheme to more locations during the next year.The Group’s work with the NSPCC, Comic Reliefand Breakthrough Breast Cancer has raisedover £885,000 during the year.

Environmental Impact of the BusinessThe Group has begun the process of measuringits carbon footprint and has undertaken a formalevaluation exercise with the aim of becomingcarbon neutral. The Group has appointed a GroupEnergy Manager, who will conduct a full carbonfootprint analysis during 2007-08.

1 The Group actively raises money for a rangeof charities across our business.

2 In 2007, Gala Coral raised over £220,000for Comic Relief, with its customers as wellas employees.

3 Gala Coral’s employees delivered over11,000 hours of community projects to date.

4 The Group encourages its employees towork with local communities to support localprojects – in this case the Liverpool LighthouseCommunity in Anfield.

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3

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Gala Coral’s approach to Corporate Social Responsibility (CSR)is based firmly on the Company’s four core values: working inhigh-performing teams, a very real customer focus, being resultsdriven and acting as an ethical operator at all times. The Groupsees itself as being very much a part of the communities inwhich it operates, with CSR an important part of its legacy.

During 2006-07 the Group continued to focuson its commitment to responsible gambling,a continued contribution to local communities,charitable fundraising, and the environmentalimpact of its business.

Commitment to Responsible GamblingGala Coral actively supports GamCare, the UK’sleading authority on support, advice and counsellingfor people affected by gambling problems. In May2007, as a result of audits of the Group’s retail andonline businesses, GamCare accredited all GalaCoral’s gaming and betting channels, making itthe first operator to achieve this accolade.

“Gala Coral is an exemplar in responsible gamblingand we are delighted that they have receivedfull GamCare accreditation across their fourUK divisions.”Geoffrey Godbold, Chief Executive of GamCare

During the year the Group made a furthercontribution to support the Responsibility inGambling Trust’s work in funding gambling treatmentagencies, education and wider research into thesocial effects of gambling. The Group also gave theUniversity of Glasgow’s researchers access to itscustomers in order to understand gambling andgamblers better. Gala Coral continues to be a keymember of the University’s Research Advisory Groupand provides full support to facilitate its research.

“Gala Coral has led the industry in its commitmentto providing resources for research, education andtreatment into problem gambling.”John Greenway MP, Chairman of RIGT

Corporate Social ResponsibilitySection 2: Business Review

Annual Report 2007

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1 Bristol Cares working with the InternationalBalloon Fiesta 2007.

2 Community project – Young Bristol.

3We ensure that our senior management arealways close to the operation. We host “Backto the Floor” days in our casinos, where seniormanagers engage with employees and customers.

4 Gala Coral employees raise money for a numberof charities including NCH.

1 2

3

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Annual Report 2007

Section 2: Business Review

Gala Coral’s People

Gala Coral’s People goal is simple: to become the employerof choice in the leisure sector. The Group believes that,by continually striving to be the best employer in thesector, it will continue to grow and develop the businessby encouraging and recruiting the best employees.

Gala Coral has developed and pursues four keyareas: human resource planning, management andpeople development, reward structures and effectivecommunication strategy.

The Group’s human resource planning is centredon ensuring, in particular, that its employees haveaccess to high-quality training. Each division hasa training structure in place to deliver trainingappropriate to each employee’s role. For example,the Group has teamed up with Blackpool and FyldeCollege to offer a Gala Coral specific BTEC Diplomain Casino Management. This provides Gala Coralemployees with bespoke training that helps developtheir skills as leaders in their roles. Additionally,the Group operates a Learning Voucher andScholarship scheme whereby employees canaccess courses at colleges local to them. Gala Coralhas invested £100,000 in this scheme since itbegan and supported over 400 employees in theirprivate studies.

The Group also recognises the value of regular andstructured communication. It produces publicationssuch as the Gala Coral People magazine, which keepsits employees informed of news and upcomingevents. All employees have access to forums whichoperate on a divisional basis and allow employeesand management to meet regularly at a regionaland local level in order to ensure their views arebeing heard. The Group also runs regular EmployeeSurveys conducted through a professional employeeopinion consultancy to maintain a strongemployee dialogue.

The Group’s reward structure is based on ensuringit has a competitive pay structure with flexibility andbonus schemes that reward employees for reachinggoals that support the Group’s business objectives.

Gala Coral has a dedicated team focusing on itsmanagement and people development strategy,ensuring succession plans are in place and careerprogression is clear and achievable. The Group hasintroduced a talent pool of top managers (and thoseaspiring to be) and provides them with a cleardevelopment path in order to further grow anddevelop their roles within the business.

The Group’s management and people developmentstrategy is already delivering excellent results.In 2006, and again in 2007, the Gala Bingo divisionwas awarded a top 20 place in the Sunday Times BestCompanies to Work For listings. This achievementwas further supported during the year by LeisureReport Awards, who voted Gala Coral the BestLeisure Operator in the UK. The Group has also beenan Investor in People (IIP) for over seven years.

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Annual Report 2007

Section 2: Business Review

Divisional Review

Coral is one of the leading betting andgaming brands in the UK, employing almost11,000 people and operating (at the financial

year end) 1,566 licensed betting offices throughout the country,telephone and internet betting businesses based in Barkingand Woking, and two greyhound stadia at Hove and Romford.

Trading ReviewThe division performed well in 2006-07, achievingEBITDA (pre-exceptionals) of £194.3 million. Thisrepresented a growth of £33.6 million (20.9%) overthe previous trading year driven by continuedinvestment in acquiring betting offices, launchingnew licences and from underlying growth withinexisting shops.

During the year, 60 shops were acquired, 28 newlicences were opened, and a further 180 shopprojects (relocations and upgrades) were completedto ensure Coral continued to grow its retail businessat pace.

Market Overview and OutlookThe Gambling Act 2005, which came into forceon 1 September 2007, will be positive for Coral.Extended opening hours are now available in thewinter months, and Coral is leading the way witha universal policy of 8.30am to 9.30pm openingin all betting shops daily. This is driving improved

footfall and consequently good over the counterturnover growth. In addition, the division is nowpermitted to better meet customer demand formore varied and improved machines through ourjackpot multi-line slots content.

The Act also removes the “demand criterion” forgranting of betting shop licences, which will leadto more fluid competition in the High Street.

Online betting and gaming has been a major growtharea over the past few years, and there are greateropportunities for Coral to grow, leveraging its HighStreet brand compared to its competitors. In aneffort to better link Coral’s distribution channelsand thereby improve marketing efforts, coral.co.ukis now the responsibility of the Coral division ratherthan the E-Commerce division. Plans are beingimplemented to deliver a new platform which willserve both coral.co.uk and telephone betting ina single customer account by late 2008. This willdrive improvements in both revenues and costs.

The Coral-Eclipse Stakes is thedivision’s flagship sponsorshipand is a Group 1 contest forthe best racehorses in Europe,staged annually in July atSandown Park.

Coral is the fastest growing bookmakerin Britain, and currently has

betting shops

1 5 6 6

More than three million peopleplay bingo regularly in the UK– more than all the people thatattended football matches inboth the English and Scottishfootball leagues.

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Annual Report 2007

Section 2: Business Review

Divisional Review

Gala Bingo is the market leader in UK bingo with amarket share of 43%. Employing over 6,000 people,the division operates 170 bingo clubs visited by

1.6 million people per annum. The Group also operatesgalabingo.com – the UK’s largest online bingo site – as well

as Gala TV, the UK’s first bingo TV channel.

Gala Bingo is the best known bingo brand in theUK with a spontaneous awareness of 95%, drivenby consistent brand marketing including nationaltelevision advertising. In 2007, Gala Bingo achieveda top 20 ranking in the prestigious Sunday Times“Best Big Companies To Work For” for the secondyear running.

Trading ReviewGala Bingo delivered £136.7 million of EBITDA(pre-exceptionals) in the year ended 2007.This represents a 10.7% reduction in the yearended 2007 as the division felt the impact of therespective smoking bans in Scotland (March 2006),Wales (April 2007) and England (July 2007).

Bingo is especially vulnerable to the impact of asmoking ban, since approximately 40% of bingocustomers smoke compared to a national averageof 24%. Furthermore, customers who spend timesmoking outside the club reduce the size of theprizes available to those in the club.

A further downside in 2006-07 came as the newGambling Act outlawed Section 21 (S21) gamingmachines from bingo clubs. These had been verypopular with customers but were removed on31 August 2007 to comply with the new law.That said, Gala Bingo is trading in line withexpectations and, whilst a market adjustment wasinevitable, the business is both robust and wellpositioned to take advantage of long-term growth.

Gala Bingo has been successful in developing astrategic plan to help customers through this periodof change through investments in customer friendlysmoking shelters, electronic Bingo terminals anda collaboration with the market-leading loyaltycard, Nectar – a first for the gambling sector.

Most recently, following the introduction of thenew Gambling Act in September 2007, Gala Bingolaunched its High 5 stake retention jackpot product,offering customers the chance to win larger,life-changing amounts of money daily at Gala Bingo.

Market Overview and OutlookGala Bingo has always been at the forefront ofinnovation in the bingo industry and the divisionhas ensured that this continues. In the clubs,Gala Bingo is innovating to keep bingo fresh andappealing. The division has introduced a newbespoke gaming platform (Gala Gaming Platform)to ensure Gala Bingo is offering its customers themost innovative and modern electronic products.As the largest bingo operator, Gala Bingo is alsoable to provide the leading jackpot prizes in themarket place.

Gala Bingo has a database of customers totalling7.8 million. The customer mix is 75% female and25% male and the age profile of customers isgetting younger, as the offer of new games, theinvestment into clubs and a modern food andbeverage offering continues to appeal to a widerrange of younger customers, which will helpsupport future growth.

In what has been a very tough 12 months for bingoclubs, Gala Bingo is proud that the brand (whichincludes online and TV) has grown year-on-year.Gala Bingo is uniquely placed to offer our customersthe opportunity to play bingo wherever andwhenever they want – either in the clubs, online orthrough TV and respond to both external challengesand growing customer demand.

Source: Mintel

Roulette is the most popular gameby far at our casinos, accountingfor 63% of gaming income.

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Annual Report 2007

Section 2: Business Review

Divisional Review

Gala’s Casino division has 30 casinos in the UK andone casino in Gibraltar. The 2007 results benefitedfrom the two new casinos that were added in 2006,in Bristol Harbourside and Liverpool.

Trading ReviewOver the last 12 months the division has recruitedover 300,000 new members, and now has a UKcustomer base that totals nearly 900,000 activecustomers. At the year end our UK market sharestood at 23.7%. Gala Casino is pleased thatcustomer service, as measured by an independentcustomer research programme, has shown anincrease in overall satisfaction ratings of 5%,from 80% to 85%.

The division achieved EBITDA (pre-exceptionals)of £33.2 million in 2007, which was a 10.7%increase, despite the unexpected duty increaseimposed by the Government in April 2007, whichcost £2.5 million in the year.

Like many other businesses in the leisure industry,the division has been affected by the smoking bansthat were introduced 18 months ago in Scotland, andmore recently in England and Wales. To address this,the division has introduced a facility which catersfor smokers. This facility is known as the Air Loungeand it provides a comfortable space for smokers,close to both the bar and gaming product areas.

The new Gambling Act required, from the beginningof September 2007, the removal of Section 21(S21) gaming machines, which were very popularwith customers. The division has developed androlled out its Gala Gaming Platform and Terminals.As a result, the machines in our casinos allow usto provide attractive products to our customers.In addition, the product on these machines canbe updated easily, providing new content to satisfycustomer demand.

Market Overview and OutlookThe casino market place has seen a number ofchanges over the past 12 months. Seven newcasinos have opened, taking the number of casinosin the UK to 143. Gala Casino is currently lookingto expand the size of its estate by applying for newlicences under the 2005 and 1968 Acts, as well asrelocating and extending existing licences.

In order for the division to outperform itscompetitors, Gala Casino will focus on a numberof areas over the next 12 months. The division willcontinue to grow the customer base by attractingnew customers to the business, whilst retainingexisting customers, and developing new gamingproducts. During the first quarter of the newfinancial year Gala Casino will launch Casino Magic,which is a low stake introduction to table gamingspecifically aimed at attracting new customers intothe business.

The division will also be rolling out its Fortuneloyalty scheme to more casinos, which will allowGala Casino to make promotions more customerspecific, and therefore help maintain customerloyalty. Within 12 months Fortune will be in allthe division’s UK casinos.

Gala Casino is also providing its customers with a“journey of discovery” in its casinos, by creatingeight themed zones in the casinos. These themesare Club Lounge, Jackpot, Casino Magic, PokerMagic, Epernay, 18 Degrees Below Zero, Chargrilland Air Lounge.

Improving margin per customer is anotherimportant area for revenue growth. The divisionwill look to achieve this by retaining existingcustomers through increased loyalty offers,improved customer services and offeringcompetitive products and services over thenext 12 months.

Gala TV is the first UK televisiongaming channel which enablespeople to play bingo from home.

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Annual Report 2007

Section 2: Business Review

Divisional Review

During the year 2006-07, the Gala Coral E-Commerce divisionwas responsible for the development, management and operationof all the E-Commerce activities of the Group. This included thewebsites of the Group’s UK brands. Other services operated bythe division include Gala TV.

The E-Commerce division is the online betting andgaming arm of the Gala Coral Group, offering a widevariety of products and betting opportunities bothin the UK and internationally through the Group’sbranded services galabingo.com, Gala TV,galacasino.co.uk, coral.co.uk and eurobet.com.

Trading ReviewThe division enjoyed another year of underlyinggrowth to September 2007, with EBITDA(pre-exceptionals) increasing by £0.9 millionto £44.9 million (2006: £44.0 million excludinga one-off receipt from a supplier for terminationof a contract).

Galabingo.com has enjoyed great success inits first full year of operation, capitalising on itsstrong brand image and excellent platform toachieve market dominance with a 30% shareof the UK market.

Gala TV was launched in October 2006, offeringautomated and live bingo on Sky Channel 841.

In July 2007, the online site and TV channel playedhost to the award winning “Kerchingo” promotion,which involved over 20,000 customers and createdthe UK’s first bingo millionaire.

In its first full year of operation the galacasino.co.uksite performed in line with expectations, and willlook to leverage the retail casino membershipfurther over the coming year.

Internationally, the URL block imposed by theItalian government in May 2006 had an adverseimpact on eurobet.com revenues. However,recognising the great potential of the betting andgaming market in Italy, the division participated inthe tender process for new betting licences issuedby the Italian government, winning 403 licencesand making it the fifth-largest operator in Italy.The rollout of new licensed outlets is now underway,and will be managed by the International divisiongoing forward.

The various sites offered by the Group appeal toa broad customer base. Over the year the divisionwelcomed over 574,000 unique players to its sites,who made over 13 million visits in total.

Market Overview and OutlookCompetition continues to be intense across allchannels, particularly following events in the USwhich have led operators to focus even more onEurope and the rest of the world. In response tothis the division continues to focus on innovationin product, promotional offerings and improvingthe customer experience. The division will continueto target those segments and countries where itsees the greatest opportunities.

Eurobet sponsors Genoafootball club in Italy’sSerie A league.

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Annual Report 2007

Section 2: Business Review

Divisional Review

The International division of Gala Coral was formally establishedon 1 October 2007. In the past year any business relating toInternational activities was reported through the E-Commercedivision – this consisted of the start-up Italian retail businessand online activity in a number of territories, mainly European.

The aim of the International division is to developan integrated multi-brand “bricks and clicks”strategy. The first example of this is Italy withEurobet retail and eurobet.it.

Currently, only a very small percentage of theGroup’s earnings comes from non-UK territories.The long-term strategy of the International divisionis to leverage the Group’s existing brand name andservices across many territories, helping to createa truly international business, both on and offline.

The division will target high-growth markets wherethere is greater regulatory certainty, and the benefitof a diverse range of expertise in both online andoffline in betting, bingo and casinos means it willbe able to assess the best product and opportunityfor each locality.

Current Markets – ItalyThe Group won 403 betting licences in the openmarket tender in December 2006 under its Eurobetbrand. These licences are a mix of shop, corner andhorserace licences permitting the business to opena total of 360 outlets. These outlets are being rolledout across Italy via a franchise network. As of14 November 2007, there were 178 open and theremainder are expected to be open by 31 March 2008.

The overall strategy for Italy is to gradually expandthe events available for customers to bet on(in agreement with the Italian government) andto strengthen the Eurobet brand both on and offline.The division also plans to launch bingo and skillgames online during 2008, in line with the relaxationof government legislation.

Current Markets – ChinaThe Group set up a joint venture to launchland-based bingo in China, with bingo being seenas the most appropriate point of entry for the Groupinto this hugely promising market. Whilst gamingis currently prohibited in China unless throughone of the national lottery organisations, the Groupis currently working with its joint venture partnerto make bingo an approved lottery product and iscentral to defining the bingo model for the territory.

In China the Group areworking on a joint ventureto develop new bingo clubs

The Group won 403 bettinglicences in Italy, in anopen market tender inDecember 2006

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5 Peter Catterall, non-executive directorPeter was appointed to the Board on 17 March 2003.He is a partner at Cinven and a member of itsBusiness and Financial Services and Retail, Leisureand Consumer Sector teams. He has been involvedwith transactions including Gondola, Camaieu,Amadeus and Frans Bonhomme, in addition to theacquisition of Coral Eurobet by Gala. Peter previouslyspent seven years at PricewaterhouseCoopers,where he worked in the Transaction Services Group,providing due diligence and transaction advice toprivate equity companies.

6 Marek Gumienny, non-executive directorMarek joined the Board on 17 March 2003, andis a senior managing director at Candover and amember of Candover's executive committee. He hasbeen involved in many transactions, including thebuyouts of Ontex, Vetco International and GalaGroup, the delisting of DX and its merger with SMSServices, and the buyouts of Swissport, Ferretti andParques Reunidos. Marek qualified as a charteredaccountant with Price Waterhouse.

7 Charles Sherwood, non-executive directorCharles joined the Board on 8 February 2007.He has been a partner of Permira since 1985 andhas worked on numerous transactions, particularlyin the consumer sector, including the AA, Birthdays,Dinasol, Homebase, Provimi and the Tetley Group.Prior to joining Permira, Charles worked as astrategy consultant with the Boston ConsultingGroup in London.

8 Guy Davison, non-executive directorGuy was appointed to the Board on 8 February2007. He joined Cinven in 1988 and is a memberof its Retail, Leisure and Consumer Sector team.Guy has been involved in many transactionsincluding Ahlsell, Maxeda, Unique Pub Company,Foseco, William Hill and the acquisition of CoralEurobet by Gala. Before joining Cinven, Guy workedat the private equity company Larpent Newtonfor four years, after spending five years at KPMG.Guy is a chartered accountant.

9 Gerard Conway, non-executive directorGerard was appointed to the Board on 6 April 2006.Following a period as an associate director atMorgan Grenfell Private Equity, working ontransactions including Giraudy and Skyrock inFrance and Grupo Grifols in Spain, Gerard joinedCandover in 2000. Whilst at Candover, he has beeninvolved in the buyout of Gala Group, subsequentrefinancings and its acquisition of Coral Eurobet.Gerard is a chartered accountant.

10 Martin Clarke, non-executive directorMartin joined the Board on 22 September 2005,and is a partner at Permira, heading up itsConsumer Sector. He has worked on a numberof transactions including Gala Coral Group,New Look, Principal Hotels and Telepizza.Martin has over 20 years’ experience in privateequity and prior to joining Permira was a directorof PPMV, the private equity arm of Prudential plc.His early career was spent at Cinven.

20

1 John Kelly, ChairmanJohn became Chairman of Gala Coral in April 2004,having led a management buy-in from Bass plc asChief Executive. He is also Chairman of Trainline.John serves on the board of “Business in theCommunity” (a Prince of Wales initiative) and isChair of the East Midlands Advisory Board. In 2002he helped launch the Nottinghamshire “CARES”BITC programme and was appointed the Princeof Wales’s Ambassador for BITC in the East Midlandsin June 2005.

2 Neil Goulden, Chief ExecutiveNeil joined the Group in 2000 and was appointedChief Executive in April 2004. He was formerly ChiefExecutive of Allied Leisure plc and has also heldboard positions at Compass Group and Ladbrokes.Neil is currently Chairman of Business In Sport andLeisure which represents the interests of privatesector companies in the sport, leisure andhospitality industry; Chairman of the South CentralNHS Ambulance Trust; and is a member of theLow Pay Commission, which advises the Governmenton the national minimum wage. Neil is a Companionof the Chartered Institute of Management.

3 Matthew Roberts, Chief Financial OfficerMatthew joined the Group in July 2004 as ChiefFinancial Officer and in 2005 was responsible forthree refinancings and a number of acquisitions.He was also responsible for the integration of theCoral Eurobet business into Gala following theacquisition of Coral Eurobet for £2.1 billion in October2005. Matthew is a former finance director of TopShop and Debenhams, and whilst at Debenhamshe led the de-merger from the Burton Group in1997 and was responsible for the flotation process.Matthew qualified as a chartered accountant withCoopers & Lybrand in London.

4 Dominic Harrison, Chief Operating OfficerDominic became Chief Operating Officer on1 February 2007. He joined the Group in June 2004as Trading Director and became a member of theBoard in September 2005. Dominic was laterappointed Managing Director of the E-Commercedivision in November 2005 with responsibilityfor all the Group’s online betting and gaming.His former roles include International MarketingDirector for Bass Brewers and Commercial Directorat Ladbrokes. Dominic qualified as a charteredaccountant with KPMG.

Section 2: Business Review

Board of DirectorsAnnual Report 2007

1 2 3 4 5 6 7 8 9 10

23

Exceptional items of £5.4 million largely comprisethe ongoing integration costs in respect of theCoral Eurobet business, redundancy costs primarilyrelating to the current restructuring of the bingobusiness and legal and licensing costs. These arepartially offset by the release of property provisionswhich are no longer required.

Depreciation of £89.6 million in the year includesthe amortisation costs of the intangible assetsarising from the acquisition of the Eurobet businessand the Italian LBO licences.

The net profit on disposal of assets of £3.1 millionprimarily relates to the disposal of the Group’scasino, bingo and hotel operations in the Isle of Man,which were sold in May 2007.

As a result, profit before interest and tax increasedby 10.6% or £29.8 million to £309.9 million from£280.1 million in the prior year. A further analysisof turnover and operating profit by segment canbe found in note 2 to the financial statements onpages 42 to 43.

CashflowThe Group remains highly cash-generative. Duringthe year to 29 September 2007, net cash inflowfrom operations increased by £89.4 million to£391.3 million, compared with £301.9 millionin the previous year.

Of this cash inflow from operations, £154.0 millionwas re-invested in the Group to fund capitalexpenditure (as summarised below) and£235.3 million was utilised to meet the cashinterest and other financing costs of the Group’sbank borrowings. In addition, the Group made a£160.0 million voluntary debt repayment in theyear, generated £21.7 million from the disposalof assets (primarily the Isle of Man business),raised net £64.6 million through the refinancingof the Group’s specific property-backed bank debtand made a £71.7 million draw down from theGroup’s capital investment facility.

The Group’s targeted capital expenditureprogramme is aimed at developing and maintainingeach of the LBO, bingo and casino estates, as wellas introducing new gaming products and offeringsacross all the Group’s businesses, both online andretail. All proposed capital projects are separatelyappraised both operationally and financially, andthe Group sets clear project returns targets to assistin assessing the viability and prioritisation of capex

projects. The principal capital expenditure projectsundertaken in the financial year included:£44.3 million to acquire competitor betting offices,develop new LBO licences and to transfer/upgradeexisting Coral shops; £32.8 million to acquire LBOlicences in Italy and to develop that business andthe online offering of the Group; and £17.4 millionto develop the bingo and casino estates throughnew builds and refurbishment projects.

Bank BorrowingsAt the end of September 2007, net bank debt was£2,842.2 million compared with £2,845.2 millionat the end of September 2006. The net bank debtat the year end comprised senior bank debt of£2,072.8 million, mezzanine debt of £495.1 millionand bank debt secured on certain of the propertiesin the Group of £374.9 million, which is partiallyoffset by cash at bank and in hand of£100.6 million.

The Group’s bank borrowings are available undera bank debt loan agreement and a mezzaninedebt agreement, both of which were put in placeon 27 October 2005. The bank debt and mezzaninedebt are long term and have various repaymentdates. The bank loan agreement and the mezzanineagreement require the Group to comply with certainfinancial and non-financial covenants. The financialcovenants include annual limitations on capitalexpenditure and require the maintenance of certainminimum ratios of earnings before interest, taxes,depreciation and amortisation to both net interestpayable and net debt. In addition, there is arequirement that the net operating cash flowsgenerated are not less than the Group’s cash costof funding the bank debt. The bank loan andmezzanine debt are secured by a fixed and floatingcharge over certain of the Group’s assets. Furtherdetail on the Group’s borrowings is set out in notes17 to 20 of the financial statements.

The Group has a revolving facility of £50 million,which is available to finance working capitalrequirements and for general corporate purposes,and a capital investment facility of £300 million.As at 29 September 2007, £11.4 million has beendrawn down from the revolving facility as securityagainst letters of credit issued by the Group, and£237.9 million had been drawn down on the capitalinvestment facility.

In addition, the Group has investor-funded debt(including preferred ordinary shares and preferenceshares) of £1,337.2 million.

22

Annual Report 2007

Section 2: Business Review

Financial Review

The year to 29 September 2007 was a challenging period forthe Group from a trading perspective, across all its divisions,primarily as a result of the impact of a number of external factors.

The impact of interest rates rises and consumerconfidence on the Group’s customers’ spendinghabits; the continued impact of the smoking banin Scotland and the introduction of smoking bansin England and Wales; changes in the legislativeenvironment in the UK (which led, for example,to increased casino competition and the removalof Section 21 machines from the Group’s bingoand casino estates); the full year impact ofincreased taxation on FOBT machines introducedin the 2006 Budget; and increased UK taxationon the casino business all had an adverse affecton the performance of the business.

However, the Group has benefited from thecontinued strong growth in both the Coral Licensed

Betting Office (LBO) estate andthe Gala Bingo online site,from the rollout of theGroup’s licensed bettingshop estate in Italy and theintroduction of both theFortune and Nectar loyaltyschemes in casino andbingo respectively.These matters have beendiscussed in more detailin the Chief Executive’sreview on pages 4 to 5and the divisional reviewon pages 10 to 19.

Overall, the Group hascontinued to meet thetrading challengesoutlined above and theGroup has performed

satisfactorily.

The financial highlightsfor 2006-07 are:

� Increase in turnovercompared to 2005-06of £83.2 million (6.8%)to £1,309.9 million

� Group EBITDA(pre-exceptionals) of£401.8 million, up£7.2 million (1.8%)on the prior year

� Cash generated from operations of £391.3 million,up £89.4 million on the prior year

� Capital investment of £154.0 million duringthe year

� Early repayment of bank debt in the year of£160.0 million

� Cash at bank and in hand at year end of£100.6 million

Group Turnover and Profit Before Interest and Tax

2007 2006 Growth£m £m +/(-) £m

Turnover 1,309.9 1,226.7 83.2

EBITDA (pre-exceptionals):Coral 194.3 160.7 33.6Bingo 136.7 153.1 (16.4)Casino 33.2 30.0 3.2E-Commerce 44.9 54.1 (9.2)Overheads (18.5) (13.3) (5.2)Other operatingincome 11.2 10.0 1.2

Group EBITDA(pre-exceptionals) 401.8 394.6 7.2Exceptional items (5.4) (28.3) 22.9Depreciation (89.6) (86.2) (3.4)Profit on disposalof assets 3.1 – 3.1

Profit before interestand tax 309.9 280.1 29.8

Group turnover increased by £83.2 million (6.8%)to £1,309.9 million, compared with the prior year(£1,226.7 million), driven primarily by the impactof a full year’s trading from the acquired CoralEurobet business, and strong growth in the CoralLBO business and Gala Bingo online. This has beenpartially offset by the decline in turnover in thebingo clubs, largely as a result of the introduction ofthe smoking ban and weakening customer spending.

Group EBITDA (pre-exceptionals) was £401.8 millioncompared with £394.6 million in the prior year,primarily for the reasons set out above.

25

Section 2: Business Review

Directors’ Report

The directors present their report and the auditedfinancial statements of Gala Coral Group Limited(the “Company”) together with its subsidiaries(the “Group”) for the year ended 29 September 2007.The Group prepares its financial statements to thelast Saturday in September. Consequently, the 2007results comprise 52 weeks trading, whereas the2006 results comprise 53 weeks trading.

Principal ActivitiesThe principal activities of the Group are the operationof Licensed Betting Offices (LBOs), bingo clubs,casinos and an online betting and gaming businesspredominantly in the UK. The principal activityof the Company is that of a holding company.

During the year the Group also started to operatelicensed betting outlets in Italy. More informationregarding this can be found in the divisional reviewon page 18.

Results and DividendsThe results of the Group for the year ended29 September 2007 are set out on page 31 andshow an operating profit before other operatingincome and exceptional items of £301.0 million(2006: £288.3 million).

No dividends have been paid or proposed(2006: £nil).

Business ReviewThe Chairman’s statement, the Chief Executive’sreview, the divisional review and the financialreview on pages 3 to 24 review the Group’sbusiness and performance during the year andthis information is incorporated into this reportby reference.

Supplier Payment PolicyFrom 1 October 2006 the Group standardisedsupplier payment terms of 56 days from receiptof invoice. At 29 September 2007, trade creditorsoutstanding represented approximately 50 dayspurchases from suppliers (2006: 36 days purchases).

Disabled EmployeesApplications for employment by disabled personsare always considered, bearing in mind theaptitudes of the applicant concerned. In the eventof members of staff becoming disabled, every effortis made to ensure that their employment with theGroup continues and that appropriate training isarranged. It is the policy of the Group that allemployees be given equal opportunities in respectof training, career development and promotion.

Employee InvolvementThe Group places considerable value on theinvolvement of its employees and has continuedits practice of keeping them informed on mattersaffecting them as employees and on the variousfactors affecting the performance of the Group.There are widely established arrangementsinvolving briefings, Group consultancy committeesand the publication of Group newsletters.

It is Group policy that there shall be nodiscrimination in respect of age, sex, colour, religion,race, nationality or ethnic origin and that equalopportunity shall be given to all employees.

Political and Charitable ContributionsCharitable contributions in the year amountedto £0.5 million (2006: £0.4 million), of which£0.4 million was donated to the Responsibilityin Gambling Trust, and the remaining donationswere mainly to national charities and otherindustry-related charities. No political contributionswere made (2006: £nil).

DirectorsThe following served as directors during the year:

V T Ashdown (resigned 28 October 2006)P A C CatterallM ClarkeG P A M ConwayG B Davison (appointed 8 February 2007)N G GouldenM S GumiennyD S HarrisonJ M KellyM G Mariscotti (resigned 28 October 2006)R J Munton (resigned 19 October 2006)E M G RobertsC N C Sherwood (appointed 8 February 2007)

Employee Share TrustThe employee share trust was established in 2004to issue share options and shares to eligibleemployees of the Group. In order to fulfil thispurpose, the employee share trust acquires sharesin the Company. In the financial statements theseare shown as “own shares”. Further information canbe found in note 23.

Principal Risks and UncertaintiesThe management of the business and the executionof the Group’s strategy are subject to a numberof risks, the occurrence of any one of which mayadversely impact the management of the Groupand the execution of its growth strategies.

24

Annual Report 2007

Section 2: Business Review

Financial Review Annual Report 2007

Financial RiskThe Group’s overall risk management programmefocuses on the unpredictability of financial marketsand seeks to minimise potential risks for the Group.The Group’s funding, liquidity and exposure tointerest rate risk is managed by the Group’s financedepartment and is subject to internal controlprocedures. All significant financing transactionsare authorised by the Board of directors. The mostimportant components of financial risk impactingthe Group are interest rate risk, credit risk, liquidityrisk and, to a lesser extent, foreign currency risk –these are discussed in turn below.

Interest Rate Risk The Group’s trading income andoperating cash flows are independent of changesin interest rates. The Group primarily finances itsoperations through a variety of bank borrowings,including syndicated bank facilities and the privatedebt markets. The Group’s bank borrowings areprimarily denominated in sterling and are borrowedat floating interest rates. The Group utilises interestrate swaps and interest rate caps to manage itsexposure to interest rate fluctuations. At the yearend, 79.2% of the Group’s borrowings were hedgedand the remaining unhedged borrowings weresubject to interest rate caps.

Credit Risk Credit risk is the risk that a counterpartywill be unable to pay amounts in full, when due.Surplus cash is invested in short-term financialinstruments and the counterparty credit riskexposures are minimised by dealing with only alimited range of financial institutions with securecredit ratings. Counterparty credit ratings areregularly monitored, and there is no significantconcentration of credit risk with any singlecounterparty.

Liquidity Risk Liquidity risk is the risk that cashmay not be available to pay obligations when theyfall due. Cash forecasts identifying the liquidityrequirements of the Group are produced frequentlyand are regularly reviewed to ensure that sufficientfinancial headroom exists for at least a 12-monthperiod. The Group maintains banking facilities,which are long term with a range of maturity dates,to mitigate any liquidity risk it may face.

Foreign Currency Risk The Group has limitedexposure to foreign currency risk. The Group’sfunctional reporting currency is sterling. All assetsand liabilities are reported in sterling, with theexception of the franchise operation in Italy, anda number of foreign currency denominated bankaccounts to facilitate the international operationsof the Group’s E-Commerce division. The functionalcurrency of the Italian franchise operation is theeuro, and the Group has partially hedged theexposure to the euro on the establishment of thatbusiness by funding the investment in Italy througha euro-denominated bank loan. The Group hasreviewed the net exposure to foreign currency riskand has concluded that no further hedging isrequired. This policy is subject to periodic review.

Going ConcernThe directors have prepared the financialstatements on a going concern basis consistentwith their view, formed after reviewing the Group’scash flow forecasts and trading budgets, and aftermaking appropriate enquiries, that the Groupis operationally and financially robust, and willgenerate sufficient cash to meet its borrowingrequirements for the next 12 months.

Matthew RobertsChief Financial Officer

27

Section 2: Business Review

Corporate Governance Report

Corporate Governance ReportThe Company believes that effective corporategovernance is a fundamental aspect of a well runcompany and is committed to maintaining highstandards. The following paragraphs set out theCompany’s key governance structures and internalcontrols. Through the processes that are in placethe directors believe that this complies with thespirit of the Financial Reporting Council’s CombinedCode on Corporate Governance in a manner thatis appropriate to its ownership structure.

Board Constitution and ProceduresThe Board comprises the non-executive Chairman,three executive directors and six non-executivedirectors, two from each of Candover, Cinvenand Permira.

The Chairman is responsible for the effectiverunning of the Board and for communications withall directors and shareholders. He ensures that theBoard receives sufficient information on financialtrading and corporate issues prior to boardmeetings. The Chief Executive, assisted by the otherexecutive directors, is responsible for day-to-dayoperations and the development of strategic plansfor consideration by the Board as a whole.

The Board has a schedule of matters which arereserved for its decision. Such matters include,but are not limited to, the final approval of theannual budget and strategy, major acquisitionsand disposals, material contracts, and any changesto the Company’s financing arrangements andfinancial policies. Meetings are held formally sixtimes a year, usually bi-monthly. Where urgentdecisions are required on matters specificallyreserved for the Board in between meetings,there is a process in place to facilitate discussionand decision making. The directors also haveaccess to the advice and services of the GroupCompany Secretary.

Appropriate induction and subsequent trainingis available for new directors.

Board CommitteesThe Board has two principal committees: an auditand compliance committee, and a remuneration andnominations committee. Both have clearly-definedduties with written terms of reference that areapproved by the Board.

Audit and Compliance CommitteeThe members of the audit and compliancecommittee are Peter Catterall (the committeeChairman), Gerard Conway and Charles Sherwood,all of whom are non-executive directors. All membershave recent and relevant experience for their roles.

The committee meets at least twice during thefinancial year at appropriate times in the reportingand audit cycle. In addition, it will meet at suchother times as the Board or the committeeChairman requires, or if requested by the externalauditor or by two members. Only committeemembers have the right to attend meetings butother individuals, including the Chief Executive,Chief Financial Officer and heads of riskmanagement, compliance and internal audit,can be, and regularly are, invited to attend all orany part of any meeting, as and when appropriateto their area of expertise. External auditors attendcommittee meetings on a regular basis.

The committee has access to sufficient resourcesto carry out its duties, including the services of theGroup Company Secretary, who acts as secretaryto the committee. Independent legal or professionaladvice can be taken by the committee if it believesit is necessary to do so.

The committee’s responsibilities include the reviewand approval of:

i) the Company Annual and Interim Reports;ii) any announcements regarding financial

performance; andiii) significant financial returns to regulators.

The committee oversees the relationship with theexternal auditors. It meets with them regularly,reviews their audit plan and discusses audit findingswith them. In addition, the committee approves thepolicy on the supply of non-audit services by theexternal auditors, taking into account any relevantethical guidance on the matter. The auditors haveconfirmed for the year under review that theyconsider themselves to be independent in theirprofessional judgement.

In addition, the committee reviews the effectivenessof the Company’s internal controls and riskmanagement systems and also ensures that thereis proportionate and independent investigation

26

Annual Report 2007

Section 2: Business Review

Directors’ Report

Business and regulatory risks are formally reviewedby the Group’s Executive Committee and reportedto the Board on a regular basis. The directors believeappropriate processes are in place to monitor andmitigate these risks and their potential adverseconsequences to the Group. Such risks include:

Financial Risk The Group is exposed to financial risk.This is summarised, together with the actions takenby the Group to mitigate any significant exposures,in the financial review on page 24.

Competition The Group operates in a highlycompetitive market both from:

i) national and independent betting and gamingoperators including online and interactiveoperators; and

ii) leisure activities/product offerings from otheroperators who are also competing with Gala Coralfor a share of the consumer “leisure pound”.

To mitigate this risk, staff are trained to provideexcellent customer service. The Group’s localmanagers and central marketing teams activelypromote the business to existing and potentialcustomers through a varied and wide range ofpromotional activities and the Group routinelyundertakes market research across each ofits businesses to understand its customers’expectations and whether their needs are being met.

Gaming Risk The Group’s products, with the exceptionof the core bingo offering due to its “pari-mutuel”nature, are exposed to a varying degree to gamingrisk, whereby the outcome of one, or a number, ofevents upon which customers overall have placedsignificant bets can go against the Group’s interest.However, the Group’s exposure to this risk ismitigated by the following factors:

i) the broad product range offered;ii) the national and international scale of its

operations;iii) there are clear pricing policies in place across

the casino and the LBO estate which limit themaximum amounts which can be staked onindividual casino table games or sportingevents respectively; and

iv) the trading risk within the LBO estateis pro-actively monitored and managedby a dedicated trading team.

Employee Retention The Group’s performancedepends largely on its divisional, regional and localmanagement and its local staff. The resignation ofkey individuals and/or the inability to recruit staffwith the appropriate experience, skills or aptitude,could adversely impact the Group’s results.To mitigate these issues, the Group has introducedtraining and learning programmes for all employeesand has also implemented a number of local,divisional and group incentive and bonus schemesto motivate staff and retain key employees.

General Economic and Regulatory EnvironmentThe disposable income of customers and theirleisure activity preferences are and will be affectedby both these matters. The Group regularly reviewsits product offering and engages with its customersto ensure it provides value for money and meets itscustomers’ needs.

The regulatory environment is currently undergoingsignificant change both:

i) in the UK, with for example the implementationof the Gambling Act 2005, changes to thetaxation regime on casinos and the government’sattitude to smoking, which has resulted insmoking bans being introduced in Scotland,Wales and, most recently, England; and

ii) overseas, in terms of local governments’approach to gambling regulation. Futurechanges to the legislative, regulatory and fiscalenvironments both in the UK and overseas mayimpact the Group’s operations.

Disclosure of Information to AuditorsFor all the directors at the time this report wasapproved, the following applies:

a) so far as each director is aware, there isno relevant audit information of which theCompany’s auditors are unaware; and

b) each director has taken all the steps that theyought to have taken as director in order to makethem aware of any relevant audit informationand to establish that the Company’s auditorsare aware of that information.

By order of the Board

J J T CronkSecretary22 November 2007

Annual Report 2007

28

Annual Report 2007

Section 2: Business Review

Corporate Governance Report

of any matters that are brought to its attention.The committee monitors and reviews theeffectiveness of the Company’s internal auditfunction (which is outsourced to KPMG) in thecontext of the overall risk management system,ensuring it has adequate resources and appropriateaccess to information to enable it to perform itsfunction effectively. Management’s responsivenessto the findings and recommendations of theinternal auditors is also monitored.

In addition to financial, internal control and auditmatters the committee is also responsible formonitoring regulatory and legal compliancematters. It reviews the structure and effectivenessof the Group’s compliance reporting team, ensuringin particular that it allows for assessment andreporting of all material legal and complianceactivity independently of operational management.On a regular basis the Group Company Secretaryprovides briefings on developments and changes tothe regulatory and legal environment, requirementsof regulatory bodies (in particular the UK GamblingCommission), licensing, health and safety issuesand other issues as requested by the committee.

If the committee’s activities reveal any issuesof concern or scope for improvement, it willmake recommendations to the Board on actionsneeded to address the issue raised or make thenecessary improvement.

Remuneration and Nominations CommitteeThe remuneration and nominations committeeis chaired by Martin Clarke and its other membersare Marek Gumienny and Guy Davison, all of whomare non-executive directors.

The committee meets at least once a year and willalso meet at such other times as the Board orcommittee Chairman may require or at the request oftwo members. Only members of the committee havethe right to attend meetings but other individuals,such as the Chief Executive, may be invited toattend from time to time, when appropriate.

In respect of remuneration issues, the committee’sremit includes determining and agreeing with theBoard the policy for the remuneration of the ChiefExecutive, non-executive Board Chairman and the

executive directors. The objective of such policy isto ensure that the executive directors are providedwith appropriate incentives to encourage enhancedperformance and are, in a fair and responsiblemanner, rewarded for their individual contributions tothe Company’s success. In doing this the committeewill ensure that contractual terms and payments ontermination are fair to individual executive directorsand the Company and, importantly, that failure isnot rewarded. The committee will also review thedesign of share incentive and performance-relatedpay plans for approval by the Board and will reviewthe Group’s remuneration policies as a whole andremuneration trends across the Group.

In respect of nomination issues the committee’sremit includes:

i) reviewing the size, structure and compositionof the Board on a regular basis and makingappropriate recommendations to the Board;

ii) considering succession planning for directors;iii) identifying and nominating candidates to fill

Board vacancies as and when they arise; andiv) keeping under review the leadership needs of

the organisation with a view to ensuring thecontinued ability of the organisation to competeeffectively in the marketplace.

The committee is authorised to obtain, at theexpense of the Company, outside legal orprofessional advice on any matters within its termsof reference, and has access to the services of theGroup Company Secretary.

Internal ControlsThe Board has overall responsibility for the systemsof internal control, which are designed to managethe risk of failure to achieve the objectives of thebusiness, where such risk cannot be eliminated.The Board has considered the systems of internalcontrol for the accounting year under review andreceived reports from KPMG, the internal auditors,on the processes and systems in place. A programmeof work has been devised by KPMG, in collaborationwith Executive’s risk management committee toinvestigate and report on existing and new controlsas the business develops. This programme ismonitored by the audit and compliance committeeto ensure that it is proceeding to plan.

29

Section 3: Financial Statements and Notes

StatementofDirectors’Responsibilities inRespectof theAnnualReportandtheFinancialStatements

The directors are responsible for preparing theAnnual Report and the financial statements inaccordance with applicable law and regulations.

Company law requires the directors to prepareaccounts for each financial period. Under that lawthe directors have elected to prepare the financialstatements in accordance with United KingdomGenerally Accepted Accounting Practice (UnitedKingdom Accounting Standards and applicable law).The financial statements are required by law to givea true and fair view of the state of affairs of theCompany and Group and of the profit or loss of theGroup for that period. In preparing those financialstatements, the directors are required to:

� select suitable accounting policies and thenapply them consistently;

� make judgements and estimates that arereasonable and prudent;

� state whether applicable UK accountingstandards have been followed, subject to anymaterial departures disclosed and explainedin the financial statements; and

� prepare the financial statements on the goingconcern basis unless it is inappropriate topresume that the Group will continue in business.

The directors confirm that they have compliedwith the above requirements in preparing thefinancial statements.

The directors are responsible for keeping properaccounting records that disclose with reasonableaccuracy at any time the financial position of theCompany and of the Group and to enable them toensure that the financial statements comply withthe Companies Act 1985. They are also responsiblefor safeguarding the assets of the Company andthe Group and hence for taking reasonable stepsfor the prevention and detection of fraud andother irregularities.

The directors are responsible for the maintenanceand integrity of the Company’s website. Legislationin the United Kingdom governing the preparationand dissemination of financial statements maydiffer from legislation in other jurisdictions.

J J T CronkCompany Secretary22 November 2007

Annual Report 2007

30

Annual Report 2007

Section 3: Financial Statements and Notes

Independent Auditors’ Report to the Membersof Gala Coral Group Limited

We have audited the Group and Companyfinancial statements (the ‘‘financial statements’’)of Gala Coral Group Limited for the year ended29 September 2007 which comprise the Group profitand loss account, the Group and Company balancesheets, the Group cash flow statement, the Groupstatement of total recognised gains and losses, thereconciliation of movement in shareholders’ fundsand the related notes. These financial statementshave been prepared under the accounting policiesset out therein.

Respective Responsibilities of Directorsand AuditorsThe directors’ responsibilities for preparing theAnnual Report and the financial statements inaccordance with applicable law and United KingdomAccounting Standards (United Kingdom GenerallyAccepted Accounting Practice) are set out in thestatement of directors’ responsibilities.

Our responsibility is to audit the financialstatements in accordance with relevant legaland regulatory requirements and InternationalStandards on Auditing (UK and Ireland). This report,including the opinion, has been prepared for andonly for the Company’s members as a body inaccordance with Section 235 of the Companies Act1985 and for no other purpose. We do not, in givingthis opinion, accept or assume responsibility for anyother purpose or to any other person to whom thisreport is shown or into whose hands it may comesave where expressly agreed by our prior consentin writing.

We report to you our opinion as to whether thefinancial statements give a true and fair view andare properly prepared in accordance with theCompanies Act 1985. We also report to you whetherin our opinion the information given in the directors'report is consistent with the financial statements.The information given in the directors’ reportincludes that specific information presented in theChairman’s statement, the Chief Executive’s review,the divisional review and the financial review that iscross referenced from the business review section ofthe directors’ report. In addition we report to you if,in our opinion, the Company has not kept properaccounting records, if we have not received all theinformation and explanations we require for ouraudit, or if information specified by law regardingdirectors’ remuneration and other transactions isnot disclosed.

We read other information contained in the AnnualReport and consider whether it is consistent with theaudited financial statements. This other informationcomprises only the directors’ report, the Chairman’sstatement, the Chief Executive’s review, the corporatesocial responsibility report, the report on Gala Coral’speople, the divisional review, the financial review andthe corporate governance report. We consider theimplications for our report if we become aware of anyapparent misstatements or material inconsistencieswith the financial statements. Our responsibilitiesdo not extend to any other information.

Basis of Audit OpinionWe conducted our audit in accordance withInternational Standards on Auditing (UK andIreland) issued by the Auditing Practices Board.An audit includes examination, on a test basis,of evidence relevant to the amounts and disclosuresin the financial statements. It also includes anassessment of the significant estimates andjudgements made by the directors in thepreparation of the financial statements, and ofwhether the accounting policies are appropriateto the Group’s and Company’s circumstances,consistently applied and adequately disclosed.

We planned and performed our audit so as to obtainall the information and explanations which weconsidered necessary in order to provide us withsufficient evidence to give reasonable assurancethat the financial statements are free from materialmisstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentationof information in the financial statements.

OpinionIn our opinion:

� the financial statements give a true and fair view,in accordance with United Kingdom GenerallyAccepted Accounting Practice, of the stateof the Group’s and the Company’s affairs asat 29 September 2007 and of the Group’s lossand cash flows for the year then ended;

� the financial statements have been properlyprepared in accordance with the CompaniesAct 1985; and

� the information given in the directors’ reportis consistent with the financial statements.

PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsLondon22 November 2007

31

Section 3: Financial Statements and Notes

2007 2006Notes £m £m

Turnover 2 1,309.9 1,226.7Cost of sales (286.3) (281.5)

Gross profit 1,023.6 945.2Administrative expenses (728.0) (685.2)

Operating profit before other operating income 3 295.6 260.0

Operating profit before other operating income, analysed as:Before exceptional items 301.0 288.3Acquisition and integration costs 5 (2.4) (23.8)Restructuring and reorganisation costs 5 (2.5) –Property related income/(costs) 5 2.2 (4.5)Legal and licensing costs 5 (2.7) –

Operating profit before other operating income 295.6 260.0

Other operating income 3 11.2 20.1

Operating profit 2, 3 306.8 280.1Profit on disposal of subsidiary undertaking 5 4.5 –Loss on disposal of fixed assets 5 (1.4) –

Profit before interest and tax 309.9 280.1Interest payable and similar charges 7 (445.1) (400.2)Interest receivable and similar income 7 7.7 4.5Other finance (costs)/income 28 (0.1) 0.7

Loss on ordinary activities before tax (127.6) (114.9)Tax credit 8 7.5 0.6

Loss for the financial year 24 (120.1) (114.3)

These financial statements are drawn up to the last Saturday in September. Consequently, the 2007 resultscomprise 52 weeks trading, whereas the 2006 results comprise 53 weeks trading. All operations are continuing.

Group Profit and Loss Accountfor the year ended 29 September 2007

Annual Report 2007Annual Report 2007

32 33

Annual Report 2007

Section 3: Financial Statements and Notes Section 3: Financial Statements and Notes

2007 2006Notes £m £m

Fixed assetsIntangible assets 9 1,506.7 1,472.0Tangible assets 10 2,382.8 2,376.7

3,889.5 3,848.7

Current assetsStocks 13 4.2 4.1Debtors 14 77.4 45.1Cash at bank and in hand 100.6 100.8

182.2 150.0Creditors: amounts falling due within one year 15 (185.2) (184.1)

Net current liabilities (3.0) (34.1)

Total assets less current liabilities 3,886.5 3,814.6Creditors: amounts falling due after more than one year 16 (4,192.6) (3,994.1)Provisions for liabilities and charges 22 (13.0) (20.4)

Net liabilities excluding pension asset/(liability) (319.1) (199.9)Pension asset/(liability) 28 17.0 (1.1)

Net liabilities including pension asset/(liability) (302.1) (201.0)

Capital and reservesCalled up share capital 23 0.4 0.4Share premium account 23 33.6 33.6Reserve for own shares 23 (0.8) (0.8)Profit and loss account 24 (335.3) (234.2)

Shareholders’ deficit (302.1) (201.0)

The financial statements were approved by the Board of directors on 22 November 2007 and are signedon its behalf by:

E M G Roberts22 November 2007

Group Statement of Total Recognised Gains and Losses2007 2006

Notes £m £m

Loss for the year (120.1) (114.3)Net foreign exchange adjustments offset in reserves 0.4 –Actuarial gain on pension schemes 28 26.1 3.1Movement on deferred tax relating to pension scheme (7.8) –

Total recognised losses for the year (101.4) (111.2)

Reconciliation of Movement in Shareholders’ Funds2007 2006£m £m

Total recognised losses for the year (101.4) (111.2)Proceeds of new shares issued for cash – 20.6Purchase of own shares – (0.1)Share-based payments 0.3 –

Total reduction in shareholders’ funds during the year (101.1) (90.7)Opening shareholders’ deficit (201.0) (110.3)

Closing shareholders’ deficit (302.1) (201.0)

Group Statement of Total Recognised Gainsand Losses and Reconciliation of Movementin Shareholders’ Fundsfor the year ended 29 September 2007

Group Balance Sheetat 29 September 2007

Annual Report 2007

34 35

Annual Report 2007

Section 3: Financial Statements and Notes Section 3: Financial Statements and Notes

2007 2006Notes £m £m

Net cash inflow from operating activities 25(a) 391.3 301.9Returns on investments and servicing of financeInterest received 6.6 3.6Interest paid (231.9) (217.6)Finance costs incurred in raising debt (10.0) (59.4)

Net cash outflow from returns on investments and servicing of finance (235.3) (273.4)

TaxationCorporation tax (paid)/repaid (0.3) 2.8Capital expenditure and financial investmentPayments to acquire tangible and intangible fixed assets (130.7) (123.2)Receipts from sales of tangible fixed assets 2.7 7.6

Net cash outflow for capital expenditure and financial investment (128.0) (115.6)

Acquisitions and disposalsDisposal of business 5 34.8 –Net cash disposed of with business 5 (15.8) –Purchase of subsidiary undertakings 12(c) (23.6) (2,444.6)Net cash acquired with subsidiary undertakings 12(c) 0.3 46.1

Net cash outflow for acquisitions and disposals (4.3) (2,398.5)

Net cash inflow/(outflow) before financing 23.4 (2,482.8)

FinancingIssue of ordinary share capital – 20.5Increase in long-term loans 25(c) 451.1 2,551.5Repayment of long-term loans 25(c) (474.7) (74.1)

Net cash (outflow)/inflow from financing (23.6) 2,497.9

(Decrease)/increase in cash 25(b) (0.2) 15.1

2007 2006Notes £m £m

Fixed assetsInvestments 11 685.6 684.5Current assetsDebtors 14 4.4 5.5

Net current assets 4.4 5.5

Total assets less current liabilities 690.0 690.0Creditors: amounts falling due after more than one year 16 (878.4) (756.5)

Net liabilities (188.4) (66.5)

Capital and reservesCalled up share capital 23 0.4 0.4Share premium account 23 33.6 33.6Reserve for own shares 23 (0.8) (0.8)Profit and loss account 24 (221.6) (99.7)

Shareholders’ deficit (188.4) (66.5)

The financial statements were approved by the Board of directors on 22 November 2007 and are signedon its behalf by:

E M G Roberts22 November 2007

Company Balance Sheetat 29 September 2007

Group Cash Flow Statementfor the year ended 29 September 2007

Annual Report 2007

36

Annual Report 2007

Section 3: Financial Statements and Notes

2007 2006Notes £m £m

(Decrease)/increase in cash 25(b) (0.2) 15.1Decrease/(increase) in long-term loans net of debt issue costs 25(b) 33.6 (2,418.0)

Change in net debt resulting from cash flows 33.4 (2,402.9)Other non-cash movements 25(b) (208.6) (179.4)

Movement in net debt (175.2) (2,582.3)Opening net debt 25(b) (3,931.6) (1,349.3)

Closing net debt 25(b) (4,106.8) (3,931.6)

Reconciliation of Net Cash Flow to Movementin Net Debtfor the year ended 29 September 2007

37

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

1 Accounting Policies

Basis of Preparation and Change in Accounting PolicyThe financial statements are prepared under the historical cost convention, the accounting policies setout below, and in accordance with applicable accounting standards and the Companies Act 1985, exceptas regards the specific provisions of the Act relating to the amortisation of goodwill and trademarks asexplained below.

The Company has utilised the exemption from disclosing intra-group transactions which is offeredby FRS 8 “Related Party Transactions”.

For the year ended 29 September 2007 the Group has adopted FRS 20 “Share-Based Payment”.The comparatives have not been restated following the adoption of FRS 20 as the effect of thisis not considered to be material. Further information on the current year impact on the Group’sfinancial statements is contained in Note 23.

Basis of ConsolidationThe Group accounts comprise the accounts of the Company and its subsidiaries. All significantinter-company balances and transactions have been eliminated on consolidation. No profit and lossaccount is presented for Gala Coral Group Limited as permitted by section 230 of the CompaniesAct 1985. The loss dealt with in the accounts of the Company was £122.2 million (2006: £99.7 million).

TurnoverTurnover results from the operation of bookmakers, bingo clubs, online gaming and casinos. Gamingrevenue is net win, which is calculated as bets placed less amounts won by customers. Gaming revenueis stated net of any VAT, but before the deduction of gaming duty. Revenues from the sale of food andbeverages are recorded net of VAT. Turnover also results from the Italian franchisee operations.

Cost of SalesCost of sales primarily comprises the costs of gaming duties, goods provided as bingo prizes and revenueshare payments. Cost of sales also results from the Italian franchisee operations.

GoodwillGoodwill is the difference between the amount paid on the acquisition of a business and the aggregatefair value of its separable net assets. Except as noted below, goodwill is capitalised and amortised overits estimated useful life of up to 20 years. Where a business is sold, or where goodwill has been impaired,the net book value of goodwill allocated to the business at the date of acquisition or the amount of impairedgoodwill, as applicable, is charged through the profit and loss account as part of the profit or loss ondisposal in the year of disposal or impairment.

The directors have concluded that goodwill arising on the acquisition of its “bricks and mortar” gaming andLicensed Betting Office (LBO) businesses should not be amortised as it has an indefinite useful economiclife. The goodwill is considered to have indefinite durability that can be demonstrated and its value can bereadily measured.

The acquired businesses operate in longstanding and profitable market sectors, which have shown steadygrowth over the last 40 years. The directors do not consider that the industry is threatened by new entrantsor competing products. The Group has a strong position in the market and there are barriers to entry dueto the requirement to demonstrate that the applicant is a fit and proper person and has the “know-how”required to run such operations. The regulation of the industry also restricts the games that can be offeredand consequently reduces the risk of product obsolescence.

Annual impairment reviews of this goodwill are carried out and any resulting write down is charged to theprofit and loss account.

Annual Report 2007

39

1 Accounting Policies continued

For both tangible and intangible assets the future cash flows are based on the forecasts and budgetsof the income generating unit or business. The key assumptions within the budgets for the bingo andcasino divisions are the admissions levels, spend or drop per head, win percentage for the casino business,wage increases and the fixed costs of the bingo club or casino. The key assumptions within the budgetsfor the Coral division are the average number of machines per shop, gross win per shop per week, wageincreases and the fixed costs of the licensed betting offices. The key assumptions within the budgetsfor the E-Commerce division are the number of active customers, turnover per head, win percentage,revenue shares and operating costs.

StocksStocks are valued at the lower of cost and net realisable value.

Deferred TaxationDeferred tax is recognised in respect of all timing differences that have originated but not reversed at thebalance sheet date where transactions or events have occurred at that date which will result in an obligationto pay more, or a right to pay less or to receive more, tax with the following exceptions:

� provision is made for tax on gains arising from the revaluation (and similar fair value adjustments) offixed assets, and gains on disposal of fixed assets that have been rolled over into replacement assets,only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assetsconcerned. However, no provision is made where, on the basis of all available evidence at the balancesheet date, it is more likely than not that the taxable gain will be rolled over into replacement assetsand charged to tax only where the replacement assets are sold;

� provision is made for deferred tax that would arise on remittance of the retained earnings of overseassubsidiaries only to the extent that, at the balance sheet date, dividends have been accrued asreceivable; and

� deferred tax assets are recognised only to the extent that the directors consider it is more likely thannot that there will be suitable taxable profits from which the future reversal of the underlying timingdifferences can be deducted.

Deferred tax is calculated on an undiscounted basis at the tax rates that are expected to apply in the periodsin which timing differences reverse, based on tax rates and laws enacted or substantively enacted at thebalance sheet date.

Leasing and Hire Purchase CommitmentsRentals paid under operating leases are charged to income on a straight line basis up to the date of the nextrental review. There are no assets held under finance leases.

Rentals receivable under operating leases are recognised in the profit and loss account within otheroperating income when earned.

Lease incentives are spread over the period up to the first rent review where market rate rents are applied.

38

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

1 Accounting Policies continued

The non-amortisation of this goodwill constitutes a departure from the Companies Act 1985 4 Sch21, forthe purpose of giving a true and fair view of the Group’s results for the reasons outlined above. If goodwillarising on these acquisitions had been amortised over a 20 year period, the operating profit would havedecreased by £41.2 million for the year ended 29 September 2007 (2006: £34.9 million). Cumulatively,goodwill would have been amortised by £128.8 million (2006: £87.6 million).

TrademarksThe Group capitalises trademarks at their fair value on acquisition. The Coral trademarks are not amortisedas their useful life has been assessed as indefinite. An indefinite useful life has been chosen for the samereasons as detailed in the accounting policy for goodwill. If the Coral trademarks had been amortised overa 20 year period, the operating profit would have decreased by £8.3 million for the year ended 29 September2007 (2006: £8.3 million). Cumulatively, trademarks would have been amortised by £16.6 million(2006: £8.3 million).

Licences Held as Intangible AssetsThe Group capitalises licences at cost. The licences are amortised over their initial term, which is nine years.

Tangible Fixed Assets and DepreciationFor buildings that have been acquired as part of a business acquisition, the initial carrying value andresidual value include the trading potential of the properties, which includes the benefit of the gaminglicenses. Subsequent additions to tangible fixed assets are stated at cost. Depreciation is provided on alltangible fixed assets, with the exception of freehold land and trading potential, at rates calculated to writeoff the cost, less estimated residual value, of each asset evenly over its expected useful life, as follows:

Freehold buildings 50 yearsLeasehold land and buildings shorter of 50 years and unexpired term of leaseFixtures, fittings and office equipment over three to ten yearsComputer hardware and software over three to ten yearsVehicles over three to five years

The residual values of buildings are estimated on the following basis, having regard to the constructiontype and salvage values:

Listed buildings 80%Buildings of traditional construction 50%Steel framed buildings 0%

Impairment ReviewsTangible Assets The need for any fixed asset impairment provision is assessed by comparison of thecarrying value of an income generating unit, which normally comprises bingo clubs, casinos or LBOswhich operate as a team within a market place, against the higher of the net realisable value or valuein use. The value in use is determined from the estimated discounted future cash flows of the incomegenerating unit.

Intangible Assets The need for any intangible asset impairment provision is assessed by comparison ofthe carrying value of the aggregate of all the income generating units acquired in a single acquisition andthe related intangible assets with their combined value in use. The value in use is determined from theestimated discounted future cash flows of the acquired business. The discount rate applied is the Group’sweighted average cost of capital.

41

1 Accounting Policies continued

Financial InstrumentsThe Group uses financial instruments to hedge the risk associated with interest rates. Interest differentialson financial instruments are recognised by adjusting net interest payable. Gains or losses on the hedgesare recognised in the period to which they relate.

Borrowings are carried at their issue proceeds net of finance costs, less amounts repaid. Finance costs areamortised over the life of the related borrowing.

Foreign CurrenciesTransactions denominated in foreign currencies are translated into sterling at the prevailing rate ofexchange on the transaction date. Monetary assets and liabilities denominated in foreign currencies aretranslated into sterling at period end rates of exchange. Exchange differences are taken to the profit andloss account.

The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rates.Profit and loss accounts of such undertakings are consolidated at the average rates of exchange duringthe year. Gains and losses arising on these translations are taken to reserves.

Share-Based PaymentsCertain employees of the Group (including directors) with more than one years service receive remunerationin the form of equity settled share-based payment transactions, whereby employees render services inexchange for share options. The options are exercisable upon a change of control of the Group.

The cost of equity settled transactions is measured by reference to the fair value at the date at whichthey are granted. The fair value of the employee services received, which is determined by use of theBlack-Scholes Option Pricing Model, is recognised as an expense in the profit and loss account with acorresponding increase in equity over the vesting period. At each balance sheet date, the Group revisesits estimates of the number of share options that are expected to vest, with any revisions being recognisedin the profit and loss account.

Franchise OperationsDuring the year, the Group has opened 123 betting establishments in Italy under a franchise arrangement.Under the terms of the franchise agreement, the Group bears the risks and rewards of the operations andtherefore the Group acts as principal. As a result, the Group recognises the full gross win generated fromthese operations in turnover, and the revenue share payments to franchisees are included in cost of sales.

40

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

1 Accounting Policies continued

Lease ProvisionsProvision has been made for vacant and partly sub-let leasehold properties and for onerous leases. For thevacant and sub-let properties, provision has been made for the shorter of the remaining period of the lease,which at 29 September 2007 is an average of 16 years (2006: 17 years), and the period until in the directors’opinion the Group will be able to exit the lease commitment. The amount provided is based on the futurerental obligations, together with other fixed outgoings, net of any sub-lease income. Sub-lease income hasonly been taken into account where sub-leases are currently in place.

Provision has been made on a discounted cash flow basis for onerous leases based on the element of therental payments which are considered to be onerous.

In determining the provision for the properties, the cash flows have been discounted on a pre-tax basisusing a risk free rate of return.

Other Property ProvisionsProvision has been made for the cost of carrying out remedial works in respect of the Group’s freeholdor leasehold properties when the Group is legally obligated to rectify the matter.

PensionsThe Group operates two pension schemes, the Gala Group scheme and the Coral pension plan. Both schemeshave a defined benefit section and a defined contribution section. The assets of both schemes are managedseparately from those of the Group. The defined benefit section of both the Gala Group scheme and theCoral pension plan are closed to new entrants.

For the defined benefit pension schemes, the Group has adopted the provisions of FRS17 “RetirementBenefits” in that the amounts charged to operating profit are the current service costs. They are includedas part of staff costs. Past service costs are recognised immediately in the profit and loss account if thebenefits have vested. If the benefits have not vested immediately, the costs are recognised over the perioduntil vesting occurs. The interest cost and the expected return on assets are shown as a net amount withininterest. Actuarial gains and losses are recognised immediately in the statement of total recognised gainsand losses.

Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis usingthe projected unit method and discounted at a rate equivalent to the current rate of return on a high-qualitycorporate bond of equivalent currency and term to the scheme liabilities. A full actuarial valuation ofthe Gala Group scheme was carried out on April 2005 and of the Coral pension plan on 31 March 2006.Actuarial valuations are obtained every three years and are updated at each balance sheet date.

For defined contribution pension schemes, the amounts charged to the profit and loss account in respectof pension costs and other post-retirement benefits, represents the contributions payable in the period asper the payment certificates. Differences between contributions payable in the period and contributionsactually paid are shown as either accruals or prepayments.

43

2 Segmental Analysis continued

Geographical Area2007 2006£m £m

Turnover by originUnited Kingdom 1,267.9 1,177.1Europe 42.0 49.6

1,309.9 1,226.7

Operating profitUnited Kingdom 339.7 312.7Europe 7.9 27.4

Segment operating profit 347.6 340.1Group administrative expenses (46.6) (41.7)Group other operating income 11.2 10.0Exceptional items (5.4) (28.3)

Operating profit 306.8 280.1

Net Assets/(Liabilities) by Segment2007 2006£m £m

Coral 1,408.5 1,553.7Gala Bingo 394.7 486.9Gala Casino 230.4 249.0E-Commerce 14.2 7.4

2,047.8 2,297.0Parent company and non-operational net liabilities (2,349.9) (2,498.0)

Total net liabilities (302.1) (201.0)

Parent company and non-operational net liabilities comprise goodwill, certain accruals and prepayments,net debt and taxation.

42

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

2 Segmental Analysis

The Group operates in four principal areas of activity, Gala Bingo clubs, Coral bookmakers, Gala Casinoand E-Commerce. The E-Commerce segment operates online sports betting, casinos and other gamingproducts. The E-Commerce segment also incorporates the Italian franchise business.

The revenue of Gala Bingo and Coral arises solely within the United Kingdom. The revenue of Gala Casinoarises in the United Kingdom, Isle of Man (until 11 May 2007) and Gibraltar, but has been presented asa single geographical segment because the revenue and profit of the Isle of Man and Gibraltar operationsare not significant. The revenue of the E-Commerce business arises in Europe. Its customers are primarilylocated in the United Kingdom and Mainland Europe. Due to the nature of the E-Commerce business,it is not possible to split the net assets by geographical category.

Turnover and Group operating profit and net assets are analysed as follows:

Area of Activity2007 2006£m £m

TurnoverCoral 567.9 499.2Gala Bingo 456.6 476.6Gala Casino 171.8 165.5E-Commerce 113.6 85.4

1,309.9 1,226.7

Operating profitCoral 174.8 141.1Gala Bingo 110.8 128.0Gala Casino 20.5 17.8E-Commerce 41.5 53.2

Segment operating profit 1 347.6 340.1Group administrative expenses (46.6) (41.7)Group other operating income 11.2 10.0Exceptional items (note 5) (5.4) (28.3)

Operating profit 306.8 280.1

EBITDA before exceptional items 2 401.8 394.6

1 Segment operating profit is stated before amortisation, which relates to the E-Commerce division.2 Operating profit before depreciation, amortisation and the exceptional items shown in note 5.

45

4 Directors’ Remuneration2007 2006£m £m

Aggregate emoluments 1.7 10.7Company pension contributions 0.2 0.3

1.9 11.0

2007 2006Number Number

Members of defined benefit schemes 1 2

Emoluments of highest paid director are as follows:2007 2006£m £m

Emoluments (excluding pension contributions) 0.5 2.1Company contributions to money purchase schemes 0.1 0.1

5 Exceptional Items

Exceptional Items Charged/(Credited) to Operating Profit2007 2006£m £m

Acquisition and integration costs (a) 2.4 23.8Restructuring and reorganisation costs (b) 2.5 –Property related (credits)/costs (c) (2.2) 4.5Legal and licensing costs (d) 2.7 –

Total charged to operating profit 5.4 28.3

Taxation credit on exceptional itemsItems charged to operating profit 1.2 5.9

(a) Continuing fees and costs in relation to the acquisition of Coral. The prior year comprises bonuses, fees and redundancy costs incurredon the acquisition and integration of the Coral business acquired in October 2005.

(b) Fees and redundancy costs incurred primarily on the Bingo restructuring in the year.(c) Release of property provision due to favourable rent review. In the prior year the cost comprised property related costs arising from

an assigned lease reverting to the Group.(d) One-off costs incurred as a result of changes in the licensing regime and due to the Gambling Act which became effective on

1 September 2007.

44

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

3 Operating Profit

This is stated after charging:2007 2006£m £m

Depreciation of owned assets

Gala Bingo 25.9 25.1Coral 19.5 19.6Gala Casino 12.7 12.2E-Commerce 3.4 0.9

61.5 57.8Amortisation of intangible assets 28.1 28.4Operating lease rentals – land and buildings 51.9 63.5Hire of plant and machinery 39.7 16.2

Other operating income in the current year comprises property rents receivable and payments received onthe assignment of leasehold properties. In the prior year, other operating income relates to property rentsreceivable and payment received on the termination of a supplier contract.

Services Provided by the Group’s AuditorsDuring the year the Group obtained the following services from the Group’s auditorsPricewaterhouseCoopers LLP and their associates as detailed below:

2007 2006£m £m

Audit services:Fees payable for the audit of the Company and Group accounts 0.1 0.1Other services:The audit of the Company’s subsidiaries pursuant to legislation 0.2 0.2Compliance services 0.1 –Advisory services 0.1 0.2

0.5 0.5

47

7 Interest2007 2006£m £m

Bank loan interest (185.9) (181.3)Mezzanine interest (66.1) (58.2)Loan note interest (58.1) (49.7)Dividends on preferred ordinary and C preference shares (121.9) (99.7)Amortisation of debt issue costs (13.0) (10.7)Unwinding of discount in provisions (0.1) (0.1)Other interest payable – (0.5)

Interest payable and similar charges (445.1) (400.2)

Bank interest 6.3 3.6Other interest receivable 1.4 0.9

Interest receivable 7.7 4.5

Net interest payable (437.4) (395.7)

8 Tax on Loss on Ordinary Activities

a) The taxation credit is made up as follows:2007 2006£m £m

UK Corporation tax at 30% (2006: 30%):Current year 0.4 0.2Prior years (0.1) –

Total current tax 0.3 0.2

Deferred taxation: origination and reversal of timing differencesCurrent year (7.8) (0.8)

Total deferred tax (7.8) (0.8)

Tax credit on loss on ordinary activities (7.5) (0.6)

46

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

5 Exceptional Items continued

Exceptional Items Charged After Operating Profit1) Profit on Disposal of Subsidiary Undertaking On 11 May 2007 the Group disposed of its entireshareholding in Gala Hotel and Casino (Isle of Man) Limited. Proceeds received on disposal were£37.4 million, comprising £34.8 million cash, £1 million shares and £1.6 million deferred consideration.Net assets at completion were £32.5 million, including unamortised trading potential at the date of disposalof £5.1 million and £15.8 million of cash. Total professional fees relating to the disposal were £0.4 million.Total profit on disposal is £4.5 million. Gala Hotel and Casino (Isle of Man) Limited contributed £1.1 millionto the net operating cash flows, £0.2 million in respect of net returns on investments and servicing offinance and paid £0.3 million in respect of taxation.

2) Loss on Disposal of Fixed Assets includes the loss on disposal of property improvements on two leaseholdproperties and the profit on disposal of one freehold property.

6 Staff Costs2007 2006£m £m

Wages and salaries 270.5 256.0Redundancies 2.0 1.0

272.5 257.0Social security costs 20.7 20.1Other pension costs 10.2 10.6Share-based payment charge 0.3 –

303.7 287.7

The monthly average number of employees during the period was made up as follows:2007 2006

Number Number

Coral 9,234 8,051Gala Bingo 6,293 6,345Gala Casino 3,223 3,500E-Commerce 185 131Support Staff 457 353

19,392 18,380

All the Bingo and Coral employees are based solely in the United Kingdom. The employees of the Casinos,E-Commerce and Support staff are principally based in the United Kingdom with a small number ofCasino and E-Commerce employees and associated support staff in the Isle of Man (until 11 May 2007)and Gibraltar. The E-Commerce figures also include 16 staff (2006: two) based in Italy relating to thefranchise operation.

The Company did not have any employees during the year (2006: nil).

49

9 Intangible Assets

GroupLicences Goodwill Trademarks Total

£m £m £m £m

Cost:At 30 September 2006 – 1,334.4 166.0 1,500.4Acquisitions (note 12(c)) 26.3 9.1 – 35.4Fair value adjustments (notes 12(a) and 12(b)) – 27.4 – 27.4

At 29 September 2007 26.3 1,370.9 166.0 1,563.2

Amortisation:At 30 September 2006 – 28.4 – 28.4Provided during the year 2.1 26.0 – 28.1

At 29 September 2007 2.1 54.4 – 56.5

Net book value at 29 September 2007 24.2 1,316.5 166.0 1,506.7

Net book value at 30 September 2006 – 1,306.0 166.0 1,472.0

10 Tangible Fixed Assets

GroupFixtures,

Freehold Leasehold Fittings,Land and Land and Tools andBuildings Buildings Equipment Total

£m £m £m £m

Cost:At 30 September 2006 607.4 1,622.4 251.3 2,481.1Additions 1.5 44.7 66.1 112.3Write off fully written down assets – – (3.9) (3.9)Fair value adjustments (notes 12(a) and 12(b)) – (12.1) (11.4) (23.5)Disposals (15.6) (3.2) (9.6) (28.4)

At 29 September 2007 593.3 1,651.8 292.5 2,537.6

Depreciation:At 30 September 2006 6.1 26.0 72.3 104.4Provided during the year 4.3 11.2 46.0 61.5Write off fully written down assets – – (3.9) (3.9)Disposals (0.1) (0.1) (7.0) (7.2)

At 29 September 2007 10.3 37.1 107.4 154.8

Net book value at 29 September 2007 583.0 1,614.7 185.1 2,382.8

Net book value at 30 September 2006 601.3 1,596.4 179.0 2,376.7

48

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

8 Tax on Loss on Ordinary Activities continued

b) Factors affecting current tax chargeThe effective tax rate for the period is higher than the standard rate of corporation tax in the UK (30% forthe years ended 29 September 2007 and 30 September 2006). The differences are reconciled below:

2007 2006£m £m

Loss on ordinary activities before tax (127.6) (114.9)

Loss on ordinary activities at standard rate of corporation tax in the UK of 30% (38.3) (34.5)Adjustments to tax in respect of prior periods (0.1) –Amortisation of intangible assets and accrued dividendsnot deductible for tax purposes 47.3 48.0Lower taxes on overseas earnings – (1.4)Capital allowances in excess of depreciation (3.4) (5.1)Other timing differences (5.2) (5.7)Tax losses utilised – (1.1)

Current tax charge for the period 0.3 0.2

Deferred tax movement in period (7.8) (0.8)

Tax credit on loss on ordinary activities (7.5) (0.6)

c) Tax on recognised gains and losses not included in the profit and loss account2007 2006£m £m

Deferred tax charge relating to pension scheme 7.8 –

d) Factors that may affect future tax chargesUnrecognised deferred tax is calculated at 28%, the tax rate applicable to future periods.

The Group expects to be able to claim capital allowances in excess of depreciation in future periods.

The Group has an unrecognised deferred tax asset of £76.9 million (2006: £63.3 million) (see note 22).

No provision has been made for deferred tax on gains recognised on revaluing properties to fair valueson acquisition or on the sale of properties where potentially taxable gains have been rolled over intoreplacement assets. Such tax would become payable only if the properties were sold without it beingpossible to claim rollover relief. The total amount unprovided is £267.9 million (2006: £278.7 million).At present it is not envisaged that any such tax will become payable in the foreseeable future.

Provision is only made for deferred tax that would arise on remittance of the retained earnings of overseassubsidiaries to the extent that, at the balance sheet date, dividends have been accrued as receivable.No dividends have been accrued as receivable at either 29 September 2007 or 30 September 2006.The total amount unprovided is £0.8 million (2006: £5.8 million).

51

12 Acquisitions

a) The Coral Eurobet GroupOn 7 October 2005, the Group acquired Coral Eurobet, the bookmaker and internet gaming operator fora cash consideration of £2,240.2 million (including repayment of pre-existing Coral debt of £1,248 million)and fees of £12.4 million. The purchase has been accounted for under acquisition accounting. Goodwilland trademarks arising on the acquisition are included in intangible assets.

The provisional fair values for net assets acquired have been revised as follows:Adjustments Final

Provisional to Initial Fair ValueFair Value Fair Value to Group

£m £m £m

Intangible fixed assets 166.0 – 166.0Tangible fixed assets 1,244.3 (11.4) (a) 1,232.9Stock 0.3 – 0.3Debtors 23.0 – 23.0Cash at bank and in hand 25.9 – 25.9

Total assets 1,459.5 (11.4) 1,448.1

Creditors due within one year (56.4) (1.0) (b) (57.4)Creditors due after one year (3.4) (2.2) (b) (5.6)Provisions for liabilities and charges (3.1) (0.7) (c) (3.8)

Total liabilities (62.9) (3.9) (66.8)

Net assets 1,396.6 (15.3) 1,381.3Goodwill arising on acquisition 856.0 15.3 871.3

Consideration (including fees of £12.4 million) 2,252.6 – 2,252.6

Notes:(a) Write down of tangible fixed assets.(b) Provision for corporation tax.(c) Provision for legal fees.

50

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

10 Tangible Fixed Assets continued

The net book value of leasehold land and buildings comprises:2007 2006£m £m

Long leasehold 243.6 247.1Short leasehold 1,371.1 1,349.3

1,614.7 1,596.4

Included in freehold and leasehold land and buildings is land and trading potential at a value of£1,964.0 million (2006: £1,939.3 million) which is not depreciated.

11 Investments

CompanySubsidiary

Undertakings£m

Cost:At 30 September 2006 684.5Increase in investment in subsidiary 1.1

At 29 September 2007 685.6

The following information relates to those subsidiary undertakings whose results or financial position,in the opinion of the directors, principally affect the results or financial position of the Group(the “principal subsidiaries”).

Name of Company Nature of Business

Coral Racing Limited Provision of leisure activitiesCoral Stadia Limited Provision of leisure activitiesEurobet (Gibraltar) Limited Provision of leisure activitiesEurobet UK Limited Provision of leisure activitiesGala (Alderney) Limited Provision of leisure activitiesGala Casinos Limited Provision of leisure activitiesGala County Clubs Limited Provision of leisure activitiesGala Leisure Limited Provision of leisure activitiesPatmor Limited Provision of leisure activitiesGala Casinos (Gibraltar) Limited Provision of leisure activitiesRomford Stadium Limited Provision of leisure activitiesGala Group Finance Limited Finance companyGala Group Two Limited Finance companyGala (Holdings) Limited Holding companyEventday Limited Holding company

All of the principal subsidiaries are registered in Great Britain with the exception of Eurobet (Gibraltar)Limited, Gala (Alderney) Limited and Gala Casinos (Gibraltar) Limited. All of the principal subsidiaries are100% owned with all voting rights held within the Group. Gala Group Two Limited is directly owned by theparent company. The directors consider that to give full particulars of all subsidiary undertakings wouldlead to a statement of excessive length.

53

13 Stocks

Group2007 2006£m £m

Finished goods 4.2 4.1

14 Debtors

Group2007 2006£m £m

Trade debtors 0.6 4.4Deferred tax asset (note 22) 6.6 –Other debtors 11.7 7.9Prepayments and accrued income 58.5 32.8

77.4 45.1

Company2007 2006£m £m

Amounts owed by subsidiary undertakings 4.4 5.5

52

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

12 Acquisitions continued

b) Other Acquisitions (Prior Year)The Group acquired County Properties and Developments Limited, an operator of Bingo clubs in Scotland,on 21 December 2005 and Leo Management Limited, a casino operator, on 10 February 2006. During theprior year the Group also acquired several chains of LBOs. The purchases have been accounted for underacquisition accounting. A valuation of the tangible fixed assets acquired was undertaken and the provisionalfair values for net assets acquired have been revised as follows:

Adjustments FinalProvisional To Initial Fair ValueFair Value Fair Value to Group

£m £m £m

Intangible fixed assets – – –Tangible fixed assets 130.5 (12.1) 118.4Stock 0.1 – 0.1Debtors 2.1 – 2.1Cash at bank and in hand 20.2 – 20.2

Total assets 152.9 (12.1) 140.8

Creditors due within one year (11.4) – (11.4)

Net assets 141.5 (12.1) 129.4Goodwill arising on acquisition 50.5 12.1 62.6

Consideration (including fees of £3.2 million) 192.0 – 192.0

Adjustments to initial fair value relate to the revaluation of trading potential held in tangible fixed assets.

c) Other Acquisitions (Current Year)During the year the Group acquired several LBOs and an Italian software company. The purchases havebeen accounted for under acquisition accounting. Goodwill arising on the acquisitions is included inintangible assets.

ProvisionalBook Fair Value ProvisionalValue Adjustments Fair Value£m £m £m

Tangible fixed assets – 15.0) (a) 15.0Debtors 0.2 – 0.2Cash at bank and in hand 0.3 – 0.3

Total assets 0.5 15.0 15.5

Creditors due within one year (1.3) 0.3) (b) (1.0)

Net (liabilities)/assets (0.8) 15.3 14.5Goodwill arising on acquisition 9.1

Consideration (including fees of £0.3 million) 23.6

Notes:(a) Provisional fair value of licences acquired held as trading potential in tangible fixed assets.(b) Write off of deferred tax liability.

These acquisitions contributed £2.6 million to the Group’s operating profit for the year. This contributionis not considered material to the Group and therefore the results of these acquisitions have not beenseparately presented on the face of the profit and loss account.

In addition, the Group paid £26.3 million for 403 Italian betting licences in an open market tenderin December 2006.

55

17 Bank Loans

Group2007 2006£m £m

Amounts falling due:In one year or less or on demand 16.0 34.2In more than one year but not more than two years 85.5 77.1In more than two years but not more than five years 583.8 286.4After more than five years 1,762.4 2,069.6

2,447.7 2,467.3Less: issue costs (58.0) (58.6)

2,389.7 2,408.7Less: included in creditors: amounts falling due within one year (16.0) (34.2)

2,373.7 2,374.5

The loan agreement in place at 29 September 2007 provides the Group with a term loan of £530 million,repayable in instalments and maturing in 2012, a term loan of £710 million maturing in 2013, a termloan of £710 million maturing in 2014, a term loan of £150 million maturing in 2015, a revolving facilityof £50 million until 2012 and a capital investment facility of £300 million until 2012.

In addition, the Group has a term loan of £388.1 million maturing in 2014, which is secured on certainGroup properties.

All facilities bear an interest rate of LIBOR plus a margin that ranges from 1.05% to 5.00%. The Group alsopays a 0.75% facility fee in respect of the unused portion of the revolving facility and capital investmentfacility. The revolving facility is available to finance working capital requirements and for general corporatepurposes. Whilst no amounts have been drawn down on the revolving facility, £11.4 million has beenutilised through the issuance of letters of credit. £237.9 million has been drawn down on the capitalinvestment facility.

The loan agreements and the Mezzanine agreement (see note 18) require the Group to comply with certainfinancial and non financial covenants. The financial covenants include limitations on capital expenditureand require the maintenance of certain minimum ratios of earnings before interest, taxes, depreciation andamortisation to interest payable, and cash flows to total funding costs. The bank loan and Mezzanine debtare secured by a fixed and floating charge over the Group’s assets.

54

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

15 Creditors: Amounts Falling Due Within One Year

Group2007 2006£m £m

Current instalments due on bank loans (note 17) 16.0 34.2Guaranteed loan notes – 4.1Bank and loan note interest 3.4 0.9Trade creditors 28.6 13.7Corporation tax 10.1 7.3Other taxation and social security 31.5 34.0Other creditors 21.8 29.6Accruals and deferred income 73.8 60.3

185.2 184.1

16 Creditors: Amounts Falling Due After More Than One Year

Group2007 2006£m £m

Bank loans (note 17) 2,373.7 2,374.5Mezzanine debt (note 18) 482.9 465.0Loan notes (note 19) 1,334.9 1,154.6Other creditors 1.1 –

4,192.6 3,994.1

Company2007 2006£m £m

C preference shares (note 23) 619.4 619.4Preferred ordinary shares (note 23) 37.4 37.4Dividends on C preference and preferred ordinary shares 221.6 99.7

878.4 756.5

57

20 Financial Instruments

For the purposes of the disclosures which follow in this note, short-term debtors and creditors which arisedirectly from the Group’s operations have been excluded. The Group’s lease provisions are included in thefollowing disclosures because, in establishing the lease provisions, the cash flows have been discounted andthe discount rate is reappraised at each year end to ensure that it reflects the current market assessmentof the time value of money.

Interest Rate Risk Profile of Financial LiabilitiesThe interest rate risk profile of the Group’s financial liabilities at 29 September 2007 and at 30 September2006, after taking account of the interest rate swaps and interest rate caps used to manage the interest rateprofile of financial liabilities, was:

Fixed Rate Financial LiabilitiesFloating Rate Fixed Rate Weighted Weighted

Financial Financial Average AverageTotal Liabilities Liabilities Interest Term of£m £m £m Rate % Fix Years

At 29 September 2007 4,072.6 859.1 3,213.5 9.89 3.0

At 30 September 2006 4,028.0 859.6 3,168.4 9.74 4.2

Interest Rate Risk Profile of Financial AssetsCash held at bank earns interest at 0.25% below base.

The Gambling Commission, which regulates the gambling industry in Great Britain, requires the Group tomaintain a gaming reserve to cover potential gaming losses. As part of the gaming reserve the Group holdsa restricted cash deposit of £2.5 million at 29 September 2007 (2006: £2.5 million).

In addition, the Group has issued £11.4 million of letters of credit in favour of the Italian Government.

56

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

18 Mezzanine

Group2007 2006£m £m

Amounts falling due after more than five years, including rolled up interest 495.1 478.7Less: issue costs (12.2) (13.7)

482.9 465.0

The Mezzanine agreement in place at 29 September 2007 provides the Group with a term loan facility of£460.0 million maturing in 2015. The Mezzanine facility bears interest at LIBOR plus 8.25% of which 4.25%is unpaid and added to the principal.

19 Loan Notes

Group2007 2006£m £m

Amounts falling due:In one year or less:Guaranteed loan notes – 4.1After more than five years:PIK Notes (a) 237.1 202.7Discounted loan notes (b) 210.7 188.2Rolled up interest notes (c) 11.0 9.8C preference shares (note 23) 619.4 619.4Preferred ordinary shares (note 23) 37.4 37.4Dividends on C preference and preferred ordinary shares 221.6 99.7

1,337.2 1,161.3Less: issue costs (2.3) (2.6)

1,334.9 1,158.7Less: included in creditors: amounts falling due within one year – (4.1)

1,334.9 1,154.6

(a) The PIK (Payment in Kind) notes were issued in October 2005. Interest accrues on the notes at 17% and is payable when the notesare redeemed. The notes are unsecured and redeemable on 31 October 2015, or on the sale or public listing of the Group, if earlier.They rank behind other secured debt.

(b) The discounted loan notes were issued between 17 March 2003 and 10 April 2003 at an issue price of 28.75% of the price onredemption. The difference between the issue price and the redemption price is being accrued over the life of the discounted loan notes.The discounted loan notes are unsecured and redeemable on 17 September 2015.

(c) The rolled-up interest notes were issued on 17 March 2003. Interest accrues on the notes at 12% and is payable when the notes areredeemed. The notes are unsecured and redeemable on 17 September 2015. They rank pari passu with the discounted loan notes.

59

21 Obligations Under Leases

Annual commitments under non-cancellable operating leases are as follows:

GroupLand and Land andBuildings Other Buildings Other

2007 2007 2006 2006£m £m £m £m

Operating leases which expire:within one year 0.7 0.1 1.0 0.3between two and five years 8.8 16.8 6.9 1.3over five years 55.9 – 51.0 –

65.4 16.9 58.9 1.6

There are no operating leases in the Company.

22 Provisions for Liabilities and Charges

GroupProvision forLegal FeesRelating

Property to Coral LoyaltyProvisions Acquisition Scheme Total

£m £m £m £m

At 30 September 2006 20.4 – – 20.4Arising during the year – 0.7 0.1 0.8Utilised (5.5) (0.2) – (5.7)Released (2.6) – – (2.6)Unwinding of discount 0.1 – – 0.1

At 29 September 2007 12.4 0.5 0.1 13.0

The basis of the above property provisions is described in the accounting policies (note 1).

Deferred TaxationDeferred taxation provided in the accounts is as follows:

2007 2006£m £m

Capital allowances in advance of depreciation 17.7 18.5Other timing differences 59.2 44.8Deferred tax asset not recognised in the accounts (76.9) (63.3)

– –Deferred tax asset shown in debtors 6.6 –Deferred tax liability recognised against pension asset (note 28) (6.6) –

Deferred tax position – –

The deferred tax asset has not been fully recognised in the accounts as the Group does not expect to paycorporation tax for the foreseeable future. The increase in the deferred tax asset arises mainly due to taxlosses not utilised in the year and disclaimed capital allowances. Deferred tax has been calculated at 28%(2006: 30%), the tax rate applicable in future periods.

58

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

20 Financial Instruments continued

Maturity Profile of Financial InstrumentsThe maturity profile of the carrying amount of the Group’s financial liabilities at 29 September 2007 andat 30 September 2006 was as follows:

Amounts falling due:Other Other

Financial FinancialDebt Liabilities Total Debt Liabilities Total2007 2007 2007 2006 2006 2006£m £m £m £m £m £m

In one year or less, or on demand 16.0 3.1 19.1 38.3 5.0 43.3In more than one year but not morethan two years 85.5 0.7 86.2 77.1 0.6 77.7In more than two years but not morethan five years 583.8 2.7 586.5 286.4 0.8 287.2In more than five years 3,373.2 12.2 3,385.4 3,605.8 18.1 3,623.9

4,058.5 18.7 4,077.2 4,007.6 24.5 4,032.1Finance charges allocated tofuture periods – (4.6) (4.6) – (4.1) (4.1)

Total financial liabilities 4,058.5 14.1 4,072.6 4,007.6 20.4 4,028.0Unamortised issue costs (72.5) – (72.5) (74.9) – (74.9)

3,986.0 14.1 4,000.1 3,932.7 20.4 3,953.1

The Group maintains banking facilities to mitigate any liquidity risk it may face. The Group has £100.7 millionundrawn borrowing facilities available at 29 September 2007 (2006: £183.6 million). These facilities incurcommitment fees at 0.75%. The capital investment facility is available until April 2009 and the revolvingfacility is available until April 2015.

Fair Value of Financial Assets and Financial LiabilitiesThe fair value of the Group’s bank borrowings is broadly in line with their carrying value with the exceptionof the swaps and caps. The carrying value and fair value of these are disclosed below. The fair value is basedon market price.

Book Fair Book Fairvalue value value value2007 2007 2006 2006£m £m £m £m

Derivative financial instruments held to manageinterest rate exposure:Interest rate swaps (1.0) 28.5 (2.1) 22.4Interest rate cap 3.9 5.3 – –

61

23 Share Capital and Reserve for Own Shares continued

C Preference SharesThe C preference shares are redeemable at the option of the Company upon 30 days’ prior written noticeor on a listing or sale of the Company, at £1.00 per share.

The C preference shares carry a fixed cumulative preferential dividend of 12% per annum on £1.00 for eachC preference share compounded on 27 October each year and payable in cash on the Redemption Date.The shares do not confer any further right of participation in the profits of the Company.

The preference shares hold no voting rights unless 1) the Company fails to redeem the shares on theRedemption Date or 2) the business of a general meeting includes a resolution for the winding up of theCompany or reducing its share capital or a resolution adversely affecting, varying or abrogating any of thespecial rights and privileges attaching to the shares or 3) there is an event or default under the financingdocuments, in which event each holder will be entitled to one vote for each share held.

On a winding up of the Company, in preference to payment to holders of preferred ordinary shares andordinary shares, the C preference shareholders have the right to receive £1.00 per share plus any accruedfixed dividends.

WarrantsThe Company has not issued warrants for preferred ordinary shares during the year (2006: nil) to theholders of the Mezzanine debt (see note 18). The total number of warrants in issue at the year end was1,029,998 (2006: 1,029,998). The warrants can be exercised on the earlier of a sale, listing, changeof control or unremedied breach of the Warrant Instrument, at a subscription price of 0.02 pence per share(2006: 0.02 pence per share).

Share OptionsThe Gala Group Employee Share Trust was established in 2004 to issue share options to eligible employeeswith more than one year’s service. The options are exercisable upon a change of control of the Group.The trust holds 2,137,510 shares.

The share-based payments charge for the year was £0.3 million (2006: £nil).

At 29 September 2007, the following share options were in issue by the trust.

Gala Group Approved Share Option Scheme 2004Exercise

Option Price PriceNumber of Shares per Share per Share

Date of Issue 2007 2006 p £

17 March 2004 1,286,570 1,378,010 Nil 0.211 January 2005 340,442 340,442 Nil 0.311 June 2005 43,301 54,399 Nil 0.3729 July 2005 39,952 39,952 Nil 0.411 June 2006 141,580 164,911 Nil 9.0013 April 2007 138,589 – Nil 9.00

60

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

23 Share Capital and Reserve for Own Shares

Group and Company2007 2006

Number Number 2007 2006000s 000s £000 £000

AuthorisedOrdinary shares of 1 pence each 40,687 40,687 407 407Preferred ordinary shares of 0.02 pence each 45,784 45,784 9 9C Preference shares of 1 pence each 619,368 619,368 6,194 6,194Deferred shares of 0.02 pence each 7,341 7,341 1 1

713,180 713,180 6,611 6,611

Allotted, called up and fully paidPreferred

Ordinary Ordinary CPreferenceShares Shares Shares Total

Number Number Number Number000s 000s 000s 000s

At 30 September 2006 and 29 September 2007 40,687 44,755 619,368 704,810Less: classified as debt (note 19) – (44,755) (619,368) (664,123)

40,687 – – 40,687

Allotted, called up and fully paidShare Premium Account

Preferred PreferredOrdinary Ordinary C Preference Ordinary Ordinary CPreference OwnShares Shares Shares Shares Shares Shares Shares Total£000 £000 £000 £000 £000 £000 £000 £000

At 30 September 2006 407 9 6,194 33,542 37,373 613,174 (753) 689,946Net shares purchased (a) – – – – – – (3) (3)

At 29 September 2007 407 9 6,194 33,542 37,373 613,174 (756) 689,943Less: classified as debt(note 19) – (9) (6,194) – (37,373) (613,174) – (656,750)

Equity share capital 407 – – 33,542 – – (756) 33,193

(a) During the year the Gala Group Employee Share Trust purchased 923,640 ordinary shares and sold 695,250 ordinary shares at pricesbetween 10 pence and £1.

Preferred Ordinary SharesThe preferred ordinary shares carry a cumulative preferential dividend at the rate of 3.625% above LIBORper annum on £9.00 for each share. The dividend compounds on 27 October each year and is payable incash on the Redemption Date (as defined in the Company’s Articles of Association) immediately followingthe redemption of all C preference shares.

The holders of the preferred ordinary shares carry the right at general meetings to one vote for everyshare held.

On a winding up of the Company, following payments to holders of C preference shares but in preferenceto payments to holders of ordinary shares, the preferred ordinary shareholders have the right to receive£9.00 per share plus any accrued dividend.

63

24 Profit and Loss Account

Group£m

At 30 September 2006 (234.2)Loss for the year (120.1)Actuarial gain on pension scheme 26.1Deferred tax arising on gains on the pension scheme (7.8)Net foreign exchange adjustments 0.4Share-based payments 0.3

At 29 September 2007 (335.3)

Company£m

At 30 September 2006 (99.7)Loss for the year (122.2)Share-based payments 0.3

At 29 September 2007 (221.6)

25 Notes to the Cash Flow Statement

a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities2007 2006£m £m

Operating profit 306.8 280.1Depreciation and amortisation 89.6 86.1Profit on disposal of fixed assets – (2.1)Share-based payment charge 0.3 –Increase in debtors (23.6) (4.3)Increase in stocks (0.3) (0.3)Increase/(decrease) in creditors 26.5 (37.4)Decrease in provisions (9.3) (0.2)Non-cash movement relating to pensions 1.3 (20.0)

Net cash inflow from operating activities 391.3 301.9

62

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

23 Share Capital and Reserve for Own Shares continued

Movement in the number of share options are as follows:2007 2006

Number Number

At start of year 1,977,714 1,898,433Granted 143,857 167,545Forfeited (131,137) (88,264)

At end of year 1,990,434 1,977,714

Gala Group Approved Share Option Scheme 2004The fair value of share options granted is determined using the Black-Scholes valuation model.The significant inputs into the model were as follows:

Value ofShares Optionat Date Exercise Estimated Risk Free Fair Valueof Grant Price Vesting Estimated Expected Rate of Dividend per Option

Date of Issue £ £ Period Option Life Volatility Return Yield £

17 March 2004 0.21 0.21 Three years Three years 33.5% 4.45% 0% 0.061 January 2005 0.31 0.31 Three years Three years 28.9% 4.47% 0% 0.081 June 2005 0.37 0.37 Three years Three years 28.2% 4.19% 0% 0.0929 July 2005 0.41 0.41 Three years Three years 27.1% 4.18% 0% 0.101 June 2006 9.00 9.00 Three years Three years 21.6% 4.74% 0% 1.9313 April 2007 9.00 9.00 Three years Three years 20.8% 5.41% 0% 1.98

The expected volatility was determined by reference to historic volatilities taken as at the relevant dateof grant measured over a period of three years for a group of quoted comparator companies. The risk freerate of return is based on UK Government bond yields-to-maturity as at grant date. The expected remaininglife of the options was matched to the time to maturity of the bonds. There is a possibility of employeesceasing employment before the share options have vested, in this instance the options would lapse.There are no performance criteria associated with these share options.

65

26 Capital Commitments

Amounts contracted for but not provided in the accounts amounted to £44.2 million (2006: £41.5 million)for the Group and £nil (2006: £nil) for the Company.

27 Contingent Liabilities

Gala Coral Group Limited has provided guarantees for certain leases entered into by the Company’ssubsidiaries. The directors do not expect these guarantees to crystallise.

28 Pension Schemes

Defined Contribution Pension SchemeThe Group participates in the Gala Coral Group pension scheme, which is a defined contribution pensionscheme with a contributory and a non contributory membership level. The pension charge for the periodrepresents contributions paid by the Group to the scheme in respect of Group employees and amountedto £1.3 million (2006: £1.0 million).

Defined Benefit Pension SchemeThe Group operates two fully funded defined benefit pension schemes which are closed to new entrants,the Gala Group scheme and the Coral pension plan.

A full actuarial valuation of the Gala Group scheme was undertaken at 5 April 2005 and of the Coral pensionplan at 31 March 2006.

The contributions made by the Group during the period were £7.7 million, equivalent to between 17% and38.7% of relevant salaries in the period. An actuarial review of the schemes valuation was carried out bya qualified independent actuary as at 29 September 2007, in order to provide the following informationrequired by FRS 17 “Retirement Benefits”. The major assumptions used by the actuary were:

2007 2006 2005

Rate of salary increases 4.1% 4.0-4.3% 3.8%Rate of pension increases 3.1% 3.0% 2.8%Discount rate 5.8% 5.0% 4.9%Inflation assumption 3.1% 3.0% 2.8%

64

Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

25 Notes to the Cash Flow Statement continued

b) Analysis of Net DebtAt 30 Transfers Other At 29

September Cash Between Non-Cash September2006 Flow Categories Movements 2007£m £m £m £m £m

Cash at bank and in hand 100.8 (0.2) – – 100.6

Debt due within one year (38.3) 38.3 (16.0) – (16.0)Debt due after one year (3,994.1) (4.7) 16.0 (208.6) (4,191.4)

Total debt (4,032.4) 33.6 – (208.6) (4,207.4)

Net debt (3,931.6) 33.4 – (208.6) (4,106.8)

Non-cash movements comprise amortisation and write off of issue costs relating to debt of £12.4 millionand the accrual of interest and dividends on discounted loan notes, mezzanine debt, preferred ordinaryshares and C preference shares of £196.2 million.

c) Movement in Total Debt2007 2006£m £m

New bank loans 451.1 1,427.4New mezzanine debt – 280.6New loan notes – 186.7New preference share capital – 656.8

Net increase in long term loans 451.1 2,551.5Repayment of long term loans (474.7) (74.1)

(Decrease)/increase in borrowings (23.6) 2,477.4Issue costs on new borrowings (10.0) (59.4)

Cash (outflow)/inflow (33.6) 2,418.0

d) Cash Flows Relating to Exceptional Items (note 5)2007 2006£m £m

Included within operating cash flow:Acquisition and integration costs (1.6) (23.8)Legal and licensing costs (2.7) –Re-financing and aborted float costs – (17.7)Restructuring and reorganisation costs (1.3) –Property related costs – (1.4)

(5.6) (42.9)

Disposal of subsidiary undertaking 19.0 –Disposal of fixed assets 2.7 –

21.7 –

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28 Pension Schemes continued

Movement in surplus/(deficit) during the period:2007 2006£m £m

Deficit in scheme at the beginning of the period (1.1) (24.2)Current service cost (8.9) (9.4)Contributions 7.6 27.8Past service costs – (0.2)Other finance (cost)/income (0.1) 0.7Coral acquisition – 1.1Actuarial gain 26.1 3.1

Surplus/(deficit) at the end of the period 23.6 (1.1)

History of experience gains and losses:2007 2006 2005 2004 2003

Difference between expected and actual returnon scheme assets:Amount (£m) 0.9 9.3 4.7 0.4 0.4Percentage of scheme assets 0.4% 4.6% 10.2% 1.2% 1.2%

Experience gains and losses on scheme liabilities:Amount (£m) (0.4) 0.5 2.2 (0.3) 0.7Percentage of scheme liabilities (0.2%) 0.3% 3.2% (0.4%) 1.3%

Total amount recognised in the STRGL:Amount (£m) 26.1 3.1 (0.8) 0.4 (7.6)Percentage of scheme liabilities 13.4% 1.6% (1.2%) 0.6% (14.1%)

The directors do not consider that it is practical to allocate the assets and liabilities of the Group definedbenefit pension scheme between Group companies and therefore it has been recognised in two subsidiarycompanies on the basis that these companies are the employing companies for the majority of thescheme members.

An accrual of £0.5 million (2006: £0.5 million) existed in respect of pension costs at 29 September 2007.

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Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

28 Pension Schemes continued

The assets and liabilities of the schemes and the expected rate of return were:

29 September 2007 30 September 2006 24 September 2005Long-Term Long-Term Long-Term

Rate of Return Rate of Return Rate of ReturnExpected Value Expected Value Expected Value

% £m % £m % £m

Equities 7.0 100.8 6.6 90.0 6.5 34.9Bonds 5.1 34.2 3.8 112.0 3.8 11.0Gilts 4.0 81.4 – –Other (cash) 4.3 1.7 4.0 0.8 3.8 0.6

Total market value of assets 218.1 202.8 46.5Present value of scheme liabilities (194.5) (203.9) (70.7)

Asset/(deficit) in the scheme 23.6 (1.1) (24.2)Related deferred tax (liability)/asset(note 22) (6.6) – 7.2

Net pension asset/(liability) 17.0 (1.1) (17.0)

Analysis of the amount charged to operating profit:2007 2006£m £m

Current service cost 8.9 9.4Past service cost – 0.2

Total operating charge 8.9 9.6

Analysis of the amount charged to other finance costs:2007 2006£m £m

Expected return on pension scheme assets 10.3 9.5Interest on pension liabilities (10.4) (8.8)

Other finance (costs)/income (0.1) 0.7

Analysis of the amount recognised in statement of total recognised gains and losses (“STRGL”):

2007 2006£m £m

Actual return less expected return on scheme assets 0.9 9.3Experience gains and losses on liabilities (0.4) 0.5Changes in assumptions 25.6 (6.7)

Actuarial gain 26.1 3.1

Designed and produced by 85four.The report was printed without the use of harmful, VOC emitting, isopropyl alcohol using pureprint®environmental print technology by Pureprint, a CarbonNeutral® printer registered to environmentalmanagement system ISO 14001.

DirectorsJ M Kelly – ChairmanN G Goulden – Chief Executive OfficerE M G Roberts – Chief Financial OfficerD S Harrison – Chief Operating OfficerP A C CatterallM ClarkeG P A M ConwayM S GumiennyC N C SherwoodG B Davison

SecretaryJ J T Cronk

AuditorsPricewaterhouseCoopers LLP1 Embankment PlaceLondonWC2N 6RH

Registered officeGlebe HouseVicarage DriveBarkingEssexIG11 7NS

Gala Coral Group LimitedRegistered in England and WalesCompany Registered Number: 4639005

Other Information

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Annual Report 2007

Section 3: Financial Statements and Notes

Notes to the Accountsfor the year ended 29 September 2007

29 Related Parties

The Company has taken advantage of the exemption under FRS8 “Related Party Disclosures” not to discloserelated party transactions between companies which are 90% owned by the ultimate parent company.

Funds managed by Candover, Cinven and the Permira Funds together hold a majority of the issued sharecapital of the Company.

In addition, funds managed by Candover and Cinven each hold £29.6 million (at issue price) respectivelyof the Group’s discounted loan notes and the Permira funds hold £30.0 million. Funds managed byCandover and Cinven each hold £141.5 million C preference shares and £8.7 million preferred ordinaryshares. Permira Funds hold £143.7 million C preference shares and £8.8 million preferred ordinary shares.

During the year ended 29 September 2007, the Group paid monitoring fees of £0.2 million, £0.3 million and£0.3 million (2006: £0.2 million, £0.3 million and £0.3 million respectively) to Candover, Cinven and PermiraFunds. The directors appointed by Candover, Cinven and the Permira Funds do not receive emoluments fromthe Group in respect of their services.

The Group also made payments to related parties (by virtue of common directors) of £0.2 million(2006: £0.1 million) to the Association of British Bookmakers and £0.3 million (2006: £0.1 million)to the British Casino Association.

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Annual Report 2007