Following the Acquisition the Board's intention has been to implement a strategy to transform Redstone into a significant player in the wider Telecoms and IT Solutions market place.

In order to give the Company a stable platform for growth the Board identified four core actions that needed to be completed in the short term:

(1) the integration of Xpert and Redstone;
(2) the implementation of all available synergies;
(3) the re-organisation of the business so as to deliver immediate profitability and cash generation; and
(4) the creation of a group structure that allows effective management control of the current business and its planned expansion.

The Company is pleased to be able to report that it has made excellent progress on all of the above.

Re-Organisation

The Group has been restructured into four autonomous operating units supported by a small head office team:

(1) Redstone Telecoms - specialising in selling value added inbound and outbound minutes along with other associated products;
(2) Redstone Converged Solutions - the combination of Xpert Communications and Redstone's Solutions businesses which is a converged IP solutions provider, with expertise in contact centres, voice and video, IP networks and security;
(3) Redstone Managed Solutions - specialising in providing managed IT solutions such as bespoke secure internet access, remote monitoring, back-up and hosting services along with application development and support; and
(4) Redstone Technology - previously Xpert Technology, a HP Elite Partner specialising in providing business critical server solutions, storage area networks and complex server clusters.

The impact of this re-organisation has allowed the Company to significantly reduce its overhead base in terms of headcount and occupancy costs. Redstone has now reduced head count from approximately 460 to 370 personnel through non- replacement and redundancy. In addition, of the 14 sites operated within the UK, 6 will be closed.

The total annualised savings achieved from the above reorganisation are estimated to be approximately £6.5 million, reflecting approximately £5m per annum from headcount related savings and approximately £1.5m per annum from property related savings. The re-organisation commenced in mid July and consultation with staff was completed at the end of August. It is therefore anticipated that the costs savings highlighted above will be fully implemented by the end of October 2005.

Cash

Cash is expected to be between £4 million and £5 million once the restructuring is completed and all headcount costs relating to this have been paid. The empty property costs will be paid quarterly in advance on their normal due dates, and will result in a net cash outflow of approximately £0.5 million per quarter on an ongoing basis. The Company has the ability to exit a significant proportion of these properties within the next two to three years and is actively seeking to sub-let all empty property. On the basis of current projections the Board is confident that the Company has sufficient cash for its needs.

Current Trading

Since the appointment of Martin Balaam the Company has focused on reducing expenditure to allow the business to generate cash from its existing revenue base.

This has been achieved by the re-organisation which has also given Redstone a firm footing from which to develop its strategy for growth.

However, the Company will not achieve the EBITDA in the first half that it had anticipated. During the first half of the current financial year, the Company has focussed on the re-organisation and cost reduction programme and partly as a consequence will not achieve the revenues that it had expected. In addition, this period has not benefited fully from the results of the re-organisation exercise. Consequently the Company expects to report an EBITDA loss for the period of approximately £2 million before exceptional charges. Exceptional charges as a result of the re-structuring are expected to amount to £2 million for headcount and approximately £2 million for the increase in the empty property provision.

Outlook

Having agreed and implemented the re-organisation so as to reduce the cost base by approximately £6.5 million, the Company believes it has now put in place a base from which it can both deliver profitability and grow revenues. As a result, it expects the second half EBITDA to be in line with existing market expectations. It is anticipated that this will be achieved without any revenue or contribution from the Intelligent Network platform which has been further delayed by the supplier.

The Directors are optimistic about the Company's future prospects. The Company is much stronger following this re-organisation and the reduction in the company?s cost base. The Company has developed a strong platform for its future growth, is largely debt free, is expected to be cash generative and is much better positioned to take advantage of a developing and consolidating market place.