Contents. Group Highlights 01 Store Guide 02 Introduction 03 Chairman s Statement 04

Home Retail Group plc Annual Report & Financial Statements 2007

Contents Group Highlights 01 Store Guide 02 Introduction 03 Chairman s Statement 04 Business Review> Strategy & Progress 06 Business Review> Principal Risks & Uncertainties 15 Business Review> Argos 16 Business Review> Homebase 20 Business Review> Financial Services 24 Business Review> Central Activities/New Development 26 Business Review> Financial Summary 27 Business Review> Financial Review 28 Business Review> Corporate Responsibility 32 Board of Directors 38 Directors Report 40 Corporate Governance 42 Directors Remuneration Report 47 Statement of Directors Responsibilities 57 Independent Auditors Report - Group 58 Consolidated Income Statement 59 Consolidated Statement of Recognised Income and Expense 60 Consolidated Balance Sheet 61 Consolidated Cash Flow Statement 62 Notes to the Financial Statements 64 Independent Auditors Report - Parent 97 Parent Company Balance Sheet 98 Notes to the Parent Company Financial Statements 99 Group Two Year Summary 103 Shareholder Information 104 Detailed Index 105 Certain statements made in this report are forward looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward looking statements.

Group Highlights 01 Home Retail Group, the UK s leading home and general merchandise retailer, publishes its first Annual Report for the financial period ended 3 March 2007. The financial period is shorter than a full year due to the change in year-end and it also includes certain financial impacts of GUS plc s ownership of Home Retail Group up to the point of demerger on 10 October 2006. To assist with analysis and comparison, certain pro forma information has therefore been provided to eliminate the distortions of these two impacts on the performance of Home Retail Group. Operating highlights Delivered on each element of the strategy for growth Expanded product choice, improved ranges and enhanced the customer offer Extended our leading market share in UK home and general merchandise Driven gross margin benefits through leverage of purchasing scale and ongoing supply chain initiatives Enlarged the combined portfolio by 38 stores to reach 990 Capitalised on clear multi-channel retail leadership Established further initiatives and operational improvements to continue driving sustainable growth Financial highlights Pro forma sales up 6% in total to 5,851m (2006: 5,510m) with like-for-like sales up 2.4% at Argos and down 1.4% at Homebase; reported sales of 5,607m Pro forma benchmark operating profit up 8% to 359.4m (2006: 331.8m) with growth at both Argos and Homebase; reported operating profit of 305.2m Pro forma benchmark profit before tax up 12% to 376.7m (2006: 337.1m); reported profit before tax of 296.9m Pro forma basic benchmark earnings per share up 14% to 29.3p (2006: 25.6p); reported basic earnings per share of 21.6p Benchmark pre-tax return on invested capital up 150 basis points to 12.0% Final dividend of 9.0p recommended, making 13.0p for the year 6000 5000 4000 3,297 3000 4,927 5,313 5,510 5,851 500 400 300 230 386 422 332 359 15 11.1% 12 9 13.6% 13.4% 12.0% 10.5% 200 6 2000 1000 03 04 05 06 07 0 100 03 04 05 06 07 0 3 03 04 05 06 07 0 Sales - continuing operations ( m) Benchmark operating profit - continuing operations ( m) Pre-tax return on invested capital 05 onwards under IFRS, 06 and 07 are on a 52-week pro forma basis The basis of preparation of pro forma restatements is set out on page 26, and benchmark measures on pages 28 and 29 Home Retail Group share price performance (454p closing price for 2 May 2007) 470p 450p 430p 410p 390p 11 October 2006 +15% +10% +5% 0% -5% 2 May 2007 HOME RETAIL GROUP Annual Report 07 > Group Highlights Home Retail Group FTSE 100 FTSE 350 General Retail

02 Store Guide Combined portfolio of 990 stores as at 3 March 2007 680 Argos stores across the UK and Eire 310 Homebase stores across the UK and Eire Scotland Argos 60 Homebase 33 Total Argos store space of 9.1m sq ft, including 2.4m sq ft of customer area Locations with both Argos and Homebase stores Total Homebase selling space of 14.6m sq ft, including 3.3m sq ft of garden centre and 1.8m sq ft of mezzanine space Northern Ireland Argos 26 Homebase 8 Eire Argos 31 Homebase 10 England Argos 527 Homebase 249 Wales Argos 36 Homebase 10 This map is a graphical representation of the Home Retail Group store profile.

Introduction 03 Who? We are the UK s leading home and general merchandise retailer. Our customers know us better as Argos and Homebase two household names and highly successful retail formats. Argos sells a broad range of products consumer and household electrical goods; a comprehensive range of furniture and housewares; equipment and other goods for sporting and leisure pursuits; DIY, gardening and outdoor equipment; toys for all ages; and jewellery. Homebase also sells across a broad range of home-related categories to help people improve their homes and gardens Homebase s offer includes all the products needed for doit-yourself, decorating and gardening projects as well as fitted kitchens and bathrooms; furniture, housewares and accessories. Both businesses are supported by an in-house financial services operation that provides customers with a range of credit and insurance products. Both Argos and Homebase use catalogues, websites, brochures and stores to present their extensive product ranges and make it easy for customers to shop. This multichannel approach has helped Home Retail Group gain a market-leading 10% share in the 58 billion home and general merchandise market with strong market positions in each of the categories we sell. How many? We are the 53,000 colleagues that make a winning team focussed on delivering customers what they want for their homes and gardens. We are the store staff, the buyers and merchandisers, the home delivery and logistics personnel and all the supporting functions that make a highly successful retailer. We are also each and every one of our stakeholders, including our customers who shop with us over 200 million times a year our investors, commercial partners and the wider communities in which we operate. 1973 Launch of Argos 1981 Launch of Homebase 1998 Acquisition of Argos by GUS plc Launch of www.argos.co.uk Where? Our 990 stores are located throughout the UK and Eire. Supporting these stores are central operations in Milton Keynes, Buckinghamshire, together with logistics and support operations across the country. We also have our own sourcing operations in overseas locations. We are more than just store locations. We offer our customers extensive Internet and telephone ordering services, supported by a home delivery service which delivers direct to customers homes more than seven million times a year. Why? Home Retail Group is new we demerged from our former parent company GUS plc in October 2006. That made us a standalone, independent business and a FTSE 100 company in our own right. We have a long and trusted heritage. Argos has been building its position as the UK s most successful catalogue retailer since 1973, and Homebase became a new, distinctive DIY format in 1981. Our vision is to be a leading retailing group that delivers sustainable returns for all our stakeholders. We aim for sectorleading sales and profit growth, while acting responsibly and ethically towards all those with whom we have a relationship. We look forward to a bright future. We have grown strongly, and have a clear strategy in place to continue driving our business forward for further success. 2002 Acquisition of Homebase by GUS plc 2003 Launch of Argos Extra 17,000 SKU catalogue 2004 Launch of Homebase Furniture Extra Terry Duddy Chief Executive 2005 Acquisition of 33 Index stores Argos online sales reached 1 billion Argos Extra rolled out nationally Homebase Furniture Extra rolled out nationally 2006 Demerger of Home Retail Group from GUS plc HOME RETAIL GROUP Annual Report 07 > Store Guide and Introduction

04 Chairman s Statement These results represent a strong start to Home Retail Group s new life as an independent company. They are particularly pleasing in a year during which we achieved the successful demerger from GUS plc and were faced with some difficult conditions in our markets. In presenting Home Retail Group s first annual report to shareholders, I am delighted to report a successful trading performance over the past year. I am pleased to highlight that we have achieved a 10% share of the 58 billion home and general merchandise market, extending our leading position. This has been delivered through the successful combination and leverage of Argos and Homebase, two distinctive, complementary retail brands that are household names in the UK. We have also successfully demerged from GUS plc to become a standalone FTSE 100 company. Financial performance The results you will see in this report cover periods both before and after the demerger. They include certain financial impacts of GUS ownership of our business up to the point of demerger. The most recent reported statutory results also cover a shorter period than a full year, due to a change in our year-end. We have therefore included pro forma measures to provide greater comparability. On a pro forma basis, sales grew by 6% to 5,851m, benchmark operating profit by 8% to 359.4m, pre-tax profit by 12% to 376.7m and earnings per share by 14% to 29.3p. The improvement in year-end net cash to 60m, against a pro forma net debt of 200m at 31 March 2006, includes the effect of strong working capital management and improved profit performance, together with an approximate 100m benefit as a result of the change in year-end. Your Board is recommending a final dividend of 9.0p per Home Retail Group share, making 13.0p for the year. This trading performance represents a strong start to Home Retail Group s life as an independent company and is, I believe, particularly commendable for having been achieved in the face of difficult market conditions. Strategy for growth As presented at the time of demerger, we have a very clear strategy for driving the growth of our business. We believe our extensive product portfolio, market leadership and purchasing scale provide us with opportunities to develop our product range and offering in core areas. This also allows us to ensure the most efficient and cost-effective sourcing of products and services. We intend to use the strength of the Argos and Homebase brands, the flexibility of their formats and the advantage of their shared infrastructure to increase our market share in targeted large product markets. We are also planning to broaden our customer reach through the opening of around 30 new Argos stores and 15 new Homebase stores a year. The combined Argos and Homebase portfolios are already approaching 1,000 stores. Finally, we will extend and exploit our leadership in the multi-channel service pioneered so successfully by Argos - combining stores, Internet and telephone ordering and home delivery, to provide the highest level of convenience. Over one-third of all Argos sales are now ordered and delivered across more than one channel, and we are also using our skill and scale to support Homebase s multi-channel development. Underpinning all of this is a strong commitment to customers which is an important driver of financial performance in the retail sector. Through Argos and Homebase, Home Retail Group works hard to provide the highest quality of service. Argos now has more than 1,000 quick pay kiosks across its store portfolio

05 Strengthening the team At the time of the demerger we were fortunate to have John Coombe and Andy Hornby join the Board of Home Retail Group. I am also delighted to welcome Penny Hughes as a further non-executive director. Penny, who joined in December 2006, has a wealth of experience in retail and consumer marketing and is already proving a strong addition to the Board. One of the strengths of Home Retail Group is the experience of its management team, without which the transition period to a public company would undoubtedly have been more difficult. We are therefore particularly grateful to our group human resources director, Mike Sibbald, who, after providing the Group with 11 years of commitment, expertise and guidance, supported the business through the demerger prior to his retirement in April 2007. I am very pleased to welcome David Guise as his successor, who joins us from Diageo. Corporate responsibility We continue to make good progress in the management of the complex environmental, ethical and social issues that affect our business. For example, we are moving forward in delivering against stretching recycling targets across the business and in reducing energy consumption. You will find more information about our approach to corporate responsibility later in this report. Home Retail Group plays an active role in community activities, supporting charities and working directly with local and national projects. Taking part in these activities is popular with our colleagues, who feel that they are contributing to their communities and that the Group is supporting them in doing so. Looking forward These strong results, delivered in a challenging market and while going through a successful demerger process, are further testament to our colleagues dedication led by chief executive, Terry Duddy. I would therefore like to thank Terry and the team for their hard work throughout the year. Home Retail Group currently employs some 53,000 people across the business. The performance of our business rests upon the passion and commitment of all our colleagues. I am therefore extremely pleased that over 30,000 employees are now shareholders in Home Retail Group and are able to share in the Group s long term success. Home Retail Group is approaching the new financial year from a position of operational strength. This, together with our strategy for growth, means that we are well placed to make further progress in what we expect to be another challenging year. Oliver Stocken Chairman Oliver Stocken Chairman HOME RETAIL GROUP Annual Report 07 > Chairman s Statement

06 Business Review > Strategy & Progress 2% 27% 71% Group sales 2007 (%) Argos Homebase Financial Services We are pleased to report that both Argos and Homebase have performed well, benefiting from the shared infrastructure and capabilities of the Group while continuing to invest for future growth. The combination of a strong operational performance, together with a clear strategy for growth, means we are well positioned and confident of making further progress in what we expect to be another challenging year for UK consumer spending. 1% 14% Terry Duddy Chief Executive 85% Group benchmark operating profit 2007 (%) Argos Homebase Financial Services This data is on a 52-week pro forma basis Home Retail Group s vision is to be a leading retailing group that delivers long-term, sector-leading sales and profit growth. We will do this by leveraging our combined strengths to support our retail brands Argos and Homebase. Key elements of this strategy are: developing world-class, low cost sourcing capabilities that enables Home Retail Group to deliver even greater value to customers; and delivering end-to-end solutions that give our customers convenient ways to order, pay for and obtain the goods we sell. The corporate objective of Home Retail Group is to deliver sustainable returns for all its stakeholders. Our aim is to deliver growth in total shareholder return that at least matches the top quartile of comparable listed companies over the medium to long-term. Home Retail Group aims to achieve this by delivering sales and profit growth throughout the group, supported by investment programmes that give returns in excess of our cost of capital. We recognise that these objectives can be affected in the short-term by external economic, social and political factors. However, we believe that consistent investment in businesses with competitive advantage will provide sustainable returns to stakeholders. We also plan to grow dividends for shareholders broadly in line with earnings, subject to the investment needs of the business and an acceptable level of dividend cover. We will seek to maintain an appropriate capital structure, financing our operations through a combination of retained profits, bank borrowings and property leases. We aim to act responsibly and ethically towards all of our stakeholders, including our customers, colleagues, suppliers and business partners and the communities around us. Our approach to corporate responsibility is summarised later in the Business Review. We believe that this approach will assist Home Retail Group in achieving its objectives for shareholder return. Home Retail Group is the number one retailer of housewares in the UK

07 Nature of business Home Retail Group is the UK s leading home and general merchandise retailer with pro forma annual sales of over 5.8 billion. It sells products under two distinctive and complementary retail brands, Argos and Homebase, which are both household names in the UK. Argos is a unique retailer recognised for choice, value and convenience. It sells over 17,000 general merchandise products for the home, all of which are set out in its twice-yearly 1,700 page catalogue which is at the heart of its proposition. Customers can purchase products through its network of 680 stores, online and over the phone, with the option of picking up their purchases from a store or having them delivered direct. Argos Internet site, www.argos.co.uk, is the second most visited Internet retail site in the UK. Argos serves over 130 million customers per year through its stores and takes 4 million customer orders per year either online or over the phone. On average, 17 million UK households, or around twothirds of the population, have an Argos catalogue at home at any time. Homebase is the UK s second largest home improvement retailer and is recognised for choice, style and customer service across the wider home enhancement market. It has 310 large, out-of-town stores, which sell over 30,000 products, as well as a growing Internet offering. It also offers its customers the convenience of home delivery for bulky, high value items. Homebase serves over 70 million customers per year through its stores. Argos and Homebase are supported by an in-house financial services business, which provides a range of credit and insurance products to their customers through all customer facing channels of stores, online and over the phone. Home Retail Group Financial Services is one of the largest store card providers in the UK, with over one million active store card customers. Home Retail Group has a leading 10% share of the home and general merchandise market in the UK, giving it significant purchasing scale and the opportunity to further increase market share. This scale, combined with its global sourcing skills, ensures value for the customer whilst supporting profitability. The shared infrastructure in the Group provides support for Argos and Homebase s customer propositions, reduces their overall operating costs and enables speedy development of profitable routes to growth. This has enabled the Group to increase its market share in a competitive retail market place. Markets in which we operate Home Retail Group operates in the growing general merchandise and home enhancement markets in the UK and Eire. According to leading research sources in 2006, the UK general merchandise market had sales of 26 billion and the home enhancement market had sales of 32 billion. The categories and the overlap between the Argos and Homebase businesses are summarised in the following table: Product markets Argos Homebase Group position Market size Home Enhancement Housewares Number 1 8.9bn Furniture Number 1 8.4bn Home Improvement Number 2 11.4bn (DIY/fitted kitchens/bathrooms) Horticulture, Garden Furniture Number 2 3.1bn and Outdoor Living General Merchandise Small Domestic Appliances Number 1 1.4bn Consumer Electronics Number 3 14.8bn Large Domestic Appliances Number 3 4.0bn Toys Number 1 1.8bn Jewellery Number 1 3.1bn Sports and Leisure Equipment Number 1 1.2bn Note: all market positions are for calendar year 2006 and by retail sales value except jewellery, which is measured by volume. HOME RETAIL GROUP Annual Report 07 > Business Review > Strategy & Progress

08 Our leading market positions provide significant purchasing scale which help contribute to excellent value for the customer. For example, Home Retail Group is the UK s leading retailer of housewares, furniture, small domestic appliances, sports and leisure equipment, jewellery and toys. We are also the UK s second largest retailer of home improvement goods and gardenrelated products, and the third largest retailer of consumer electronics and large domestic appliances. Many products are sold through both the Argos and Homebase businesses. Home Retail Group sold more than a quarter of a million televisions in the run up to the 2006 World Cup

Business Review > Strategy & Progress continued 09 Competitive position Home Retail Group faces competition from many players in many different product categories. They can be summarised as: specialist multiples, such as B&Q in home improvement, Currys and Comet in consumer electronics and domestic appliances, Woolworths in toys and wider general merchandise and H. Samuel in jewellery; specialist independents, such as regional and local chains selling single product ranges, such as toys and jewellery. With some exceptions, this group of competitors is generally losing share; supermarkets, such as Tesco, J Sainsbury and ASDA, which have been growing share in certain parts of the non-food, non-clothing market, building on their regular footfall and the increased space given to these ranges; and online retailers. Currently represent only a small but growing share of the non-food, non-clothing market. Home Retail Group s markets are expected to continue to be highly competitive. Our leading market position, together with our successful formats (such as using catalogues and mezzanines, for example), may represent attractive opportunities for some of our competitors. By leveraging the strengths of our businesses and by delivering on our strategy for growth, the Board believe that Home Retail Group will continue to strengthen its competitive position. Key strengths The Board believe that Home Retail Group s key strengths include: Strong retail brands with large customer bases The Group operates two of the UK s strongest retail brands with Argos being the leading general merchandise retailer and Homebase being the second largest home improvement retailer. Although there is some overlap between their customer bases, each business is strong in distinct consumer segments. The two retail brands allow the Group to reach a broad range of customers in the UK and to present similar product ranges to them in two different shopping environments, thus maximising the opportunity to increase market share. Market-leading position Sales of over 5.8 billion in the last full financial year ranked Home Retail Group as the leading home and general merchandise retailer in the UK. The Group has market-leading positions in a wide range of product categories: it is the UK s leading retailer of housewares, furniture, small domestic appliances, toys, jewellery and sports and leisure equipment. It is also the UK s second largest retailer of home improvement goods and garden related products and third largest retailer of consumer electronics and large domestic appliances. Purchasing, sourcing and supply chain scale Home Retail Group s market-leading position means it has the scale of merchandise procurement that enables it to develop important and long-term relationships with suppliers. This leads to enhanced cost benefits and the ability to source exclusive products or to obtain advantageous quantities of products that are in short supply. These scale efficiencies and supplier relationships have been used by the Group to deliver value for money to consumers across the broad range of products it sells, while supporting profitability in a highly competitive market place. The Board believe that Home Retail Group s scale, sourcing advantage and supply chain infrastructure will be a key determinant of its long-term success in the UK retail market. 34% 16% Group sales mix 50% Home enhancement Electrical goods Toys, jewellery, sports and leisure equipment 23% 46% Argos sales mix Home enhancement Electrical goods Toys, jewellery, sports and leisure equipment 5% 31% 33% 40% 22% Homebase sales mix DIY/decorating Gardening Other home enhancement Other This data is on a 52-week pro forma basis 27% 27% 27% 71% 71% 71% HOME RETAIL GROUP Annual Report 07 > Business Review > Strategy & Progress

8 7 6 10 Business Review > Strategy & Progress continued 796 273 523 3,297 1000 03 04 05 06 07 0 7.8% 7.0% 230 1000 879 834 800 278 600 556 400 200 03 04 05 06 07 0 5,851 6000 5,313 5,510 4,927 5000 4000 3000 2000 Sales - continuing operations ( m) Argos Homebase Financial Services Sales increased at both Argos and Homebase in the year, despite some difficult market conditions 500 422 386 300 100 287 592 Number of stores 7.9% 952 297 655 6.0% 332 400 200 990 310 680 Argos Homebase Expanding the store networks is a key driver of growth, with a further 38 stores added in the year 359 03 04 05 06 07 6.1% Benchmark operating profit ( m) and margin (%)-continuing operations Argos Homebase Financial Services Central Activities The increase in operating profit in the year reflects both a strong operational and financial performance 0 Choice and value-led product offering Home Retail Group s proposition is to offer customers choice and value across a wide range of products. Argos offers a breadth of product categories and a level of choice within each product market that the Board consider is not equalled by any UK competitor. As a catalogue based retailer, Argos is able to present a very broad range of products to its customers cost effectively. Homebase also offers a wide choice within the product ranges that it sells. Under Home Retail Group ownership, Homebase has broadened its product offering to encompass products that were already being sold by Argos and has significantly improved the range of products it sells as well as the level of availability within its stores. Integrated multi-channel offering The fully integrated nature of Argos multi-channel offering differentiates it from almost all of its UK retail competitors. A fully integrated multichannel retail offering requires the support of a substantial and highly complex supply chain system, which the Board believe is difficult for competitors to replicate. Within Argos, regardless of whether the customer has made a purchase in store, online or over the phone, and irrespective of which delivery method the customer prefers, the overall experience is integrated and considered highly efficient by customers. Home Retail Group is positioned to benefit from continued strong growth in retail Internet sales, as the Internet is an integral part of its multi-channel offering and therefore fully supported by the Group s supply chain infrastructure. This multi-channel capability is also increasingly a source of competitive advantage for Homebase. These products are delivered using the Group ordering and home delivery infrastructure. In addition, the Argos online capability has been leveraged to provide Homebase with a cost-efficient, transactional Internet site providing a range of home-related products to the Homebase customer. Shared infrastructure and logistics expertise Argos and Homebase derive significant competitive advantage from their ability to leverage a shared infrastructure in the Group. This infrastructure supports their brand propositions, reduces their overall operating costs and increases the speed with which each business can develop profitable routes to growth. It has enabled the Group businesses to enter new product categories quickly and cost effectively and to rapidly build market share. Key areas of shared infrastructure include: global sourcing operations, supplier management and related services and processes; home delivery services; customer service operations; catalogue production; financial services; and other support functions including property and information systems. Experienced management team delivering a long-term track record of growth Home Retail Group s management team includes a wealth of experience of service, built from both within the Group and across the wider retail sector. As well as a long-term track record of growth, the management team has successfully restructured the Group while at the same time integrating the Homebase business. Argos has a long-term track record of growth under the existing management. Since the financial year of the acquisition by GUS plc on 31 March 1999, sales have grown from 1.9 billion to 4.2 billion and operating profit before exceptional items has increased from 122m to 325m for the year to 3 March 2007. Following its acquisition, Homebase s total sales have been increased by 13% between 2004 and 2007. 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis

11 Home delivery provides convenience for the customer and underpins the Group s strategy to increase market share in a number of product markets including furniture, sports and leisure equipment, large consumer electronics, large domestic appliances, kitchens and bathrooms. Making over seven million deliveries a year, equivalent to one in six UK homes, Home Retail Group is the largest non-food retailer by number of deliveries. We do this through five dedicated warehouses covering space of over two million square feet, and for larger goods via our fleet of Argosowned delivery vehicles. Home Retail Group uses a fleet of delivery vehicles to ensure swift delivery of products to Homebase and Argos customers HOME RETAIL GROUP Annual Report 07 > Business Review > Strategy & Progress

12 Business Review > Strategy & Progress continued Strategy for growth Home Retail Group seeks to take advantage of four factors to drive sustainable growth. 1. Leverage extensive product portfolio, market leadership and purchasing scale by: building upon market leading positions by enhancing and developing both the product range and the offering in core areas using shared scale and expertise in sourcing and logistics as well as joint product ranges to provide value for money and wide choice Our businesses have continued to carry out extensive range reviews, introducing thousands of new products over the last year. The level of direct importing has grown to over 28% of Group sales. Nearly half of this is now being sourced directly from the manufacturer by the Group s overseas buying offices. This represents more than 5,000 products across Argos and Homebase. 2. Increase market share in targeted large product markets by: capitalising upon the strength of the Argos and Homebase brands to identify opportunities in product markets (particularly large, fragmented markets) utilising the inherent flexibility of the Argos and Homebase formats using shared infrastructure efficiently to make these products available to customers quickly and easily Argos and Homebase have this year both expanded their trials of furniture and housewares catalogues in order to extend the Group s leading position in these fragmented markets. The growth in sales of furniture and other large products will see the Group start work in the current financial year on its fourth two-man home delivery warehouse. Homebase s utilisation of the shared supply chain and home delivery infrastructure has brought it the scale and cost advantage of the UK s largest home delivery operation of large, bulky products. 3. Expand Argos and Homebase s store networks by: opening approximately 30 Argos stores per year opening approximately 15 Homebase stores per year, with a further small number of existing Homebase stores also supporting a mezzanine level The Group s store base is approaching 1,000 stores and we continue to see the opportunity over time for Argos to exceed 800 stores and Homebase to exceed 450 stores. We also continue to develop formats and store presentations in both businesses, and run property as a central function for leverage and space management opportunities. 4. Extend and exploit multi-channel leadership by: driving incremental sales growth over and above that which is achieved through new store openings continuing with a customer focused, fully integrated approach to ensure that whether customers shop with Argos in store, online or over the phone they are able to find, order and receive goods seamlessly across the different channels leveraging skills, scale and infrastructure to support the Homebase proposition The leadership of Argos in terms of fully integrated multi-channel convenience is such that over one-third of its sales are ordered and delivered across more than one channel. Skills and ecommerce infrastructure at Argos have led to the re-launch of the Homebase website which is growing sales strongly and profitably. Both businesses also benefit from our in-house financial services business which provides appropriate credit offers to drive product sales and is fully enabled across all customer channels.

13 Sourcing, supply chain and distribution infrastructure are critical to the efficiency of a world class retailer. We have more than 4,000 employees in these functions, including around 150 in overseas buying offices. More than 30% of Argos sales are directly imported from overseas, and over 20% for Homebase. We receive over 45,000 containers a year, and have over five million square feet of distribution space that receive all goods, before transportation to around 1,000 stores. Argos has been the No.1 toy retailer in the UK for the last 13 years HOME RETAIL GROUP Annual Report 07 > Business Review > Strategy & Progress

14 Business Review > Strategy & Progress in 2007 continued Factors affecting performance The principal factor that affects performance is UK consumer spending. Over the long-term, growth of the general merchandise and home enhancement market is expected to continue to be driven by factors including: increasing number of households; rising overall household disposable income; technology change and development; falling prices of necessary items such as food and clothing leaving consumers with more discretionary spend for home and leisure-related products; and expanding sources of low cost supply which will stimulate further consumer expenditure across these product categories. The UK retail market is, however, undergoing significant change. This change is in part driven by the recent slowdown in consumer spending, but is underpinned by an overall structural shift in favour of large scale retailers such as Home Retail Group. This has led to an increasingly competitive market where scale, value and cost management are believed to be the key determinants of success. Retailers that cannot offer a differentiated service or shopping experience and are unable to compete with the large scale retailers on price are likely to continue to underperform, with some being forced to exit the market as has been seen over recent years. The Board believe that there are opportunities for the Group to benefit from the weakness of other retailers, by continuing to take market share as a result of structural changes in the retail market. The Board believe that market conditions in the UK are likely to remain challenging during the 2007 calendar year and possibly beyond, particularly for discretionary, high value or housingrelated product categories. It is anticipated that the future underlying volume and value growth rates for most product markets, although positive, will be below the levels seen in the last five years. However, within this there will continue to be areas of relatively higher growth, either due to new product innovation or consumers need to renew or replace existing products. The Board believe that Home Retail Group is well positioned to take advantage of these higher growth markets. Additionally, the Group also has leading positions in many fragmented markets where the Board expect that both Argos and Homebase can continue to increase market share. With its strong brands, wide choice across a broad range of products markets, multichannel offering, strong retail credit propositions and ability to open new stores, the Board believe that Home Retail Group is well positioned to trade through any continued cyclical retail downturn and to successfully benefit from renewed consumer confidence through the cycle. The support provided to the business by its purchasing scale, global sourcing capability, supply chain infrastructure, and the shared service platform further underpins the competitive position of the Group within the UK retail market.

Business Review > Principal Risks & Uncertainties 15 There are a number of risks and uncertainties which could impact the performance of the Group. The Group operates a structured risk management process which identifies, evaluates and prioritises risks and uncertainties and reviews mitigation activity. Further information on the risk management process can be found on page 45 of the Corporate Governance Statement, reference to risk is also made throughout the Business Review. The principal risks and uncertainties are set out below: Area of potential risk / uncertainty Outline Examples of mitigating activity Sales growth Delivering sales growth impacted by: Choice and value-led product offering Economic conditions Driving market share growth in high Consumer preferences headroom product categories Competitor activity Multi-channel development Seasonality Store service standards Expansion and development of Development of delivery proposition store networks Property pipeline Mezzanine investment and format enhancement Profit growth Increase in product and operating Purchasing, sourcing and supply-chain costs including: scale leveraging Cost of raw materials Forward fixed contractual supply General level of inflation agreements Property / energy / labour costs Cost productivity initiatives Product supply Delay or interruptions in the supply of Product substitution planning products from third-party suppliers including Management of supplier relationships products sourced overseas. Improvements in planning process Business interruption Failure or unavailability of operational Business continuity planning and IT infrastructure. IT recovery plans Delay or interruptions in the services Key third-party supplier management provided by third-party suppliers. Infrastructure development / projects Delay or failure to manage and implement Project management major business and infrastructure Board review of status / progress projects effectively. Post project implementation reviews People Reliance on key personnel. Succession planning Competitive remuneration packages Management development and training programmes Regulatory environment Changes in UK and European legislation Engagement with government and and regulation e.g. consumer protection, regulators directly and through environmental regulation. industry representative groups Changes in UK fiscal / employment policy e.g. minimum wage. Currency Purchase of products in currencies other than Forecasting currency requirements sterling, principally the US dollar and the euro. Hedging policy HOME RETAIL GROUP Annual Report 07 > Business Review > Principal Risks & Uncertainties

16 Business Review > Argos 20000 15000 13,000 13,300 11,600 10000 5000 0 17,200 17,200 03 04 05 06 07 Number of lines in the main catalogue (Spring/Summer) Argos customers have the choice of over 17,000 lines via its catalogue 25 20 24 15 10 5 0 27 30 32 35 03 04 05 06 07 % of sales across more than one channel The multi-channel convenience of Argos has become even more popular in the last year 20 15 10 4 5 0 6 9 12 16 03 04 05 06 07 % of sales ordered via Internet Argos was again the most visited high street retail website during the year 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis Business Reviews To assist with analysis and comparison, the following business reviews are based upon pro forma information. The basis of preparation of pro forma restatements is set out on page 26. Argos - operational review As the UK s leading general merchandise retailer, Argos provides a highly successful and unique offer of choice, value and convenience. Further market share gains achieved. With sales growing 8% to 4.2 billion, Argos continued to extend its share of the overall home and general merchandise market. Argos was named as the UK s biggest furniture retailer by Verdict Research. Once again, Argos was the number one toy retailer in the UK for 2006, and increased its lead over the second player according to NPD Group. Share gains also continued within other categories, including the broad electrical goods category. More catalogue prices lowered. The price reduction on reincluded lines in the Spring/Summer 2007 catalogue is approximately 3%. Argos has lowered prices on reincluded lines in every catalogue since 1999 to constantly reinforce its value proposition for customers. Prices lowered further during life of catalogue. Argos employs a dynamic pricing approach, continuing to lower around 20% of prices during the sixmonth life of the catalogue. Since the launch of the current catalogue in January, over 3,000 prices have been lowered. Prices are either lowered permanently or through a series of promotions throughout the year with between 500 and 1,000 prices typically cut each time. In addition to television, newspaper and online promotional messaging, every month up to 10 million flyers or brochures are delivered to homes to further communicate price reductions. A unique facility also allows customers to use text messaging to check both the latest price as well as the stock level in an individual store, and then to reserve goods for immediate or later collection. Widest ever customer choice. The current Argos catalogue offers over 17,000 lines across all stores and channels. Since national roll-out of the additional Argos Extra ranges, awareness of the wider offering has continued to build. At the end of the financial period, there were 238 stores that stocked-in the additional 3,000 lines; this is an increase of nearly 50 stores compared to the same time last year and is driven by a roughly equal mix of new stores and existing store conversions. All the remaining stores offer customers the option to either order-in for later collection from store or to have goods delivered to home. Argos Home catalogue trial extended. The latest edition of this separate catalogue was in 228 stores by the end of the period. It features 348 pages and 3,200 products, with over 100 new lines now exclusive to this catalogue. Research has shown that the Home catalogue is helping Argos further define itself as the clear market leader, raise awareness and increase quality perception. The catalogue is supported in store with a comprehensive marketing package and a virtual brochure on the Internet. Multi-channel leadership further strengthened. Internet orders grew 45% to represent over 16% of total Argos sales; online reservations for later collection in store now represent over half of this, and grew 60% in the year. A further 8% of total sales are via telephone or text. In addition, of the 22% of total sales that are delivered to home, around half of these are still ordered in store. Together, this means that over onethird of all Argos sales are ordered or received by customers using more than one channel. In the recent Hitwise UK Online Performance Awards, www.argos.co.uk was the second most visited site within the Shopping & Classifieds category, behind only Amazon and therefore ahead of all other UK retailers. Argos was also the third most searched for brand during 2006, behind only ebay and Bebo.

17 Argos multi-channel offering is a major point of differentiation. Developed over many years and supported by a high level of capital and resource investment, multi-channel at Argos means an experience that is fully integrated and considered highly efficient by customers. With the ability to see the stock levels of all goods in every single store, customers can use the Internet, telephone or store itself to reserve products for collection. Similarly, through all channels, customers also have the opportunity to order any product for delivery to home. Argos is the UK s leading supplier of artificial Christmas trees, while Homebase is the leading supplier of real trees HOME RETAIL GROUP Annual Report 07 > Business Review > Argos

18 Business Review > Argos continued 5000 4,164 3,859 4000 3,652 3,384 3,017 3000 2000 1000 03 04 05 06 07 0 Argos sales ( m) Argos has added over 1 billion to annual sales in the last four years 13 6 15 12 12 7 9 8 6.1 7.9 7 6 5 5.5 7.5 5 3 3 2.4 03 04 05 06 07 0 (1.4) Argos sales trend (% change) Like-for-like New space Argos produced good like-for-like growth as well as a further sales contribution from new stores Home delivery convenience enhanced. Argos Direct is the largest two-man delivery infrastructure in the UK, with around five million products delivered in the last year. Using a fleet of around 800 vehicles, it now makes deliveries in three slots across the day morning, midday and afternoon. This leading level of service also includes drivers calling ahead to customers to confirm delivery. Argos delivery of smaller products through the third-party provider Home Delivery Network is also now operated on morning or afternoon delivery slots. Argos Direct is completing its roll out of a new warehouse management solution. Originally implemented at the purposebuilt Faverdale distribution centre near Darlington that was opened in 2005, the system has now been implemented in Marsh Leys, with a final roll out to Acton Gate beginning shortly. The system is bringing benefits in terms of enhanced operational efficiency, improved order accuracy levels and reduced clerical work. New stores extending customer reach. There were 30 store openings and 5 store closures during the year, bringing the total at the end of the year to 680 stores. Of the 30 store openings, 3 were relocations and 10 were in new catchments, with the remainder being additional stores in an existing catchment. The openings included 26 Argos Extra stocked-in stores. Kiosks further improving customer convenience and efficiency. Average sales participation in stores with kiosks is now approximately 12%, with some stores reaching as high as 40%. There are now over 1,000 kiosks across just over half of the store portfolio. In-store operational improvements. The vast majority of stores carry the full 10,000 products that represent the core stocked-in range. Goods that are collected in store account for 78% of total sales. Ongoing improvements in the unique systems, processes and layouts of stockrooms have further enhanced customer choice, service and convenience. Infrastructure changes for network optimisation. In the financial year just begun, Argos will implement changes to its infrastructure that will lead to greater network optimisation and less complexity. The direct importing element of the Argos Direct home delivery operation will be moved from Corby to the purpose-built direct importing facility opened last year at Kettering. This will enable a rented central distribution facility at Wolverhampton to be closed, as its operations will be relocated to the capacity released at Corby. 8.0% 10 8.8% 8 8.8% 7.7% 7.8% 241 6 350 297 300 250 150 100 320 200 297 325 50 03 04 05 06 07 0 Benchmark operating profit ( m) and margin (%)-continuing operations There was growth in profit and a small increase in the operating margin in the year 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis

19 Argos - financial review Sales in the 52 weeks to 3 March 2007 increased by 7.9% in total; like-for-like sales grew 2.4%. There was exceptional growth in TVs and video games systems throughout the year, driven by new digital technology and gaming platforms, together with a further boost in relation to the World Cup in the first half of the year. This offset some continued market weakness in the audio, DVD/VCR and compact digital camera categories. Other areas that had good growth during the year included white goods, bedroom furniture, in-car child safety and other nursery-related lines. Benchmark operating profit for the 52 weeks to 3 March 2007 grew 9% to 325m. Growth excluding 11m of oneoff charges incurred in the first half of the previous year was 6%. Underlying operating cost inflation continued to be approximately 4%. A further 4% growth in operating costs (excluding the 11m of one-off charges) reflects the direct costs of higher sales, new space including the incremental operating costs of the acquired Index stores and additional supply chain infrastructure, partially offset by robust cost control. The contribution to sales growth from net new space was 5.5%, boosted in the first half of the year by the 33 Index stores acquired in 2005. This factor, together with the larger total sales base, leads to a lower expected contribution to sales growth of between 3% and 4% going forward from continuing to open around 30 new stores a year. The stronger sales performance in the first half was substantially offset by a related reduction in gross margin of approximately 100 basis points, driven by the shift in the product mix and the popularity of Argos promotional offers. In the second half of the year, gross margin was ahead by around 50 basis points as a result of ongoing supply chain initiatives, a less promotional stance during the key seasonal period and improved management of stock clearance activity. The resulting gross margin for the full year was therefore in line with the prior year. Argos Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales ( m) 4,164.0 3,858.8 Benchmark operating profit ( m) 325.0 297.0 Benchmark operating margin 7.8% 7.7% Like-for-like change in sales 2.4% (1.4%) New space contribution to sales change 5.5% 7.5% Total sales change 7.9% 6.1% Benchmark operating profit change 9% n/a Number of stores at period end 680 655 Of which Argos Extra stocked-in 238 189 HOME RETAIL GROUP Annual Report 07 > Business Review > Argos

20 Business Review > Homebase 150 120 121 120 90 60 30 0 350 250 278 300 287 297 211 176 153 200 150 100 165 50 144 111 0 67 04 05 06 07 2000 1,483 1,580 1,559 1,594 1500 1000 500 04 05 06 07 0 112 109 04 05 06 07 Homebase sales per square foot ( ) Sales per square foot (which includes mezzanine and garden centre space) declined, driven by a further difficult year in the DIY market 310 145 Homebase number of stores Non-mezzanine With mezzanine Mezzanine floors are now in over half of all Homebase stores Homebase sales ( m) Sales growth was driven by successfully adding new stores 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis Homebase - operational review Homebase is positioning itself as the UK s leading home enhancement retailer. Successful trading strategy. Following a step-up in promotional activity in the prior year, Homebase successfully reverted to its previous levels of promotions. This, together with improved stock management and the continued benefit from supply chain initiatives, resulted in gross margins being strongly ahead in the year. Good execution of this trading strategy and margin management was a key operational highlight given a further year of challenging market conditions. New space improving reach and product offering. Homebase opened 17 new stores and closed 4 (including two store relocations), bringing the total number of stores to 310. The majority of the new stores were of a smaller store format and in new catchments. As a result of the opening programme since acquisition, Homebase now has 10% of its portfolio in a smaller store format (around 20,000 sq feet internal ground floor sales area, typically with an 8,000 square foot mezzanine and an 8,000 square foot garden centre). These smaller stores are able to offer an authoritative range across the broader home enhancement categories, and are often the only national retailer in smaller catchments such as market towns for categories including core DIY, garden and showroom. Mezzanine floors in over half the store portfolio. There are 165 mezzanines, with 7 of the 21 increase in the year coming from existing store conversions and the balance from new store openings. The latest mezzanine floors continue to reinforce the Homebase brand as a destination for kitchens, bathrooms and furniture which are typically displayed on the mezzanine, while creating an improved environment for retailing homewares, furnishings and accessories on the ground floor space beneath. Most new stores will continue to be opened with a mezzanine, with a limited number of existing stores remaining to be converted. Latest format roll out trials progressing to plan. Trials are in place to evaluate rolling out the proven home enhancement offering throughout the Homebase chain. The opportunity remains to provide a comprehensive and compelling set of merchandise ranges in a more consistent manner throughout the store portfolio. Around one-third of the portfolio has received minimal or no store refurbishment investment for a number of years. As a result, only around half of the store portfolio carries a comprehensive display of the Homebase kitchen range and a similar number of stores have a significant Furniture Extra display in place. Initial trials began in late 2006 to review how best to reconfigure space for additional ranges and improve customer perception in these stores. These trials will be fully evaluated after Homebase s key selling months in the first half of the current financial year.

21 Homebase is the UK s second largest DIY retailer and is recognised for choice, style and customer service across the wider home enhancement market. This wider market encompasses DIY, housewares, furniture, fitted kitchens and bathrooms, and the horticulture, garden furniture and outdoor living product markets. Mezzanine levels have allowed Homebase to introduce and display more effectively many of these product ranges, and together with the scale and supporting infrastructure of the Group, Homebase is successfully positioning itself to be the leading destination for the home and garden enhancer. Kitchen installation trial progressing well HOME RETAIL GROUP Annual Report 07 > Business Review > Homebase

22 Business Review > Homebase continued 8 7 6 6 5 3 5 2 4 2.2 0.0 3.6 3 3 3 3.1 2 1 04 05 06 07 0 (3.1) (1.4) Homebase sales trend (% change) Like-for-like New space Homebase s like-for-like performance reflected the weak DIY market, offset by good growth in other categories. 6.9% 102 7.2% 8 7 6 5 4 3 114 0 120 1 2 100 80 60 40 51 3.3% 53 20 04 05 06 07 0 3.4% Benchmark operating profit ( m) and margin (%) There was growth in profit and a small increase in the operating margin in the year Differentiation through broader home enhancement offer. Homebase s enhanced and extended home furnishing offer continues to successfully differentiate it from the competition. The big book of furnishings trial, which has been extended to 100 stores, now has 1,700 of the Furniture Extra products and a further 1,300 other home enhancement products across a total 276 pages. As well as products that are cutting edge and new stylish designs, there are also Smart Buy design-led lines offering value for money and WOW deals that offer great value at low prices. The initiative is a further example of leveraging the existing Group sourcing and supply chain skills. The Homebase Ideas magazine reinforces its style-led home enhancement ranges. With a circulation of over 400,000, it is one of the UK s top consumer magazines and it extended its leadership of the home interests category in the latest ABC circulation figures. New product ranges. A further 50 range reviews have been completed in the last year. These have included homewares and furnishings, horticulture and core DIY and decorating categories. One of the most recent launches has been a new own brand paint range Flawless which has been specially formulated for ease of application, coverage, durability and consistent finish. The range will help Homebase gain additional market share in a core category that represents an 800m market. It will give further authority alongside the leading Dulux and Crown brands, together with specialist paint ranges from Farrow & Ball, Fired Earth and Laura Ashley, as well as a broad offer of other Homebase own-brands. Kitchen installation trial progressing well. Approximately one-third of the store base now offers a full kitchen installation service to customers, helping to capture additional orders from those customers seeking installation and also supporting the sale of higher priced ranges and accessories. Opportunity remains to roll out further to more stores and potentially to other product categories. Leveraging multi-channel skills, scale and infrastructure. Furniture has been a strong sales category during the year, enabled by the shared supply chain and home delivery infrastructure. Visits to www.homebase.co.uk have also risen strongly; the website is now the third most popular in the house and garden category according to the Hitwise 2006 UK Annual Online Performance Awards. Further products are being added in order to better reflect the in-store ranges and allow customers to research individual products or ranges. Recent additions also include virtual bathroom and kitchen brochures. 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis

23 Further operational improvements. Rationalising the many ways that different stores approach a process into the single most efficient way began with the Homebase Way programme launched in 2003 and has continued in the latest 300 to 1 store operations consistency programme. As part of this, store management teams were restructured during the year to reflect a clear focus on delivering sales through better customer service, the wider product range that Homebase now sells and improved systems and processes. Operational improvements leading to positive employee feedback. In the 2007 all-employee opinion survey, 60 out of 64 measures improved on the year before. The level of overall employee engagement has risen from less than 20% in the first survey in 2003 to over 59% in the latest survey; this is a score double that of a UK benchmark of other comparable organisations. Homebase - financial review Sales in the 52 weeks to 3 March 2007 increased by 2.2% in total; like-for-like sales declined 1.4%. Sales of furniture and kitchens were strong over the year, while core DIY and decorating ranges were weak particularly in the first half. There were good performances in seasonal categories at relevant selling times during the year, including air conditioning, horticulture and garden maintenance. The contribution to sales growth from net new space was 3.6%. In the new financial year, while Homebase still expects to open a similar number of new stores, the contribution to sales growth is expected to be between 2% and 3% as a result of the planned size and phasing of store openings. Gross margin was ahead by approximately 200 basis points in the first half of the year as a result of a reduced level of promotional activity together with the benefits from supply chain initiatives. This continued in the second half, together with improved stock management. As a result, gross margin for the full year was ahead by approximately 300 basis points. Homebase Benchmark operating profit for the 52 weeks to 3 March 2007 grew 4% to 53.4m. In total, operating costs grew 9% in the year. Underlying cost inflation continued to be approximately 4%, with the remaining 5% being driven by additional investment in new space, together with the costs of strategic and operational initiatives. Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales ( m) 1,594.2 1,559.0 Benchmark operating profit ( m) 53.4 51.4 Benchmark operating margin 3.4% 3.3% Like-for-like change in sales (1.4%) (3.1%) New space contribution to sales change 3.6% 3.1% Total sales change 2.2% 0.0% Benchmark operating profit change 4% n/a Number of stores at period end 310 297 Of which contain a mezzanine floor 165 144 HOME RETAIL GROUP Annual Report 07 > Business Review > Homebase

24 Business Review > Financial Services 155 500 252 300 100 349 378 400 200 448 03 04 05 06 07 0 Gross store card receivables ( m) Growth in gross store card receivables continued in the year driven by promotional credit 634 0 634 1200 765 28 737 887 62 825 1,044 1,068 100 84 1000 960 968 800 600 400 200 03 04 05 06 07 0 Number of active store card holders (000) Argos Homebase Success of promotional credit products are a key driver in the increase in active store card holders 15 0 9% 9% 9% 9% 9 8 7 8% 12 6 5 9 4% 5% 4 3% 3% 3 6 2 1 0 03 04 3 05 06 07 % sales 03 funded 04 by 05store 06 cards 07 Argos 0 Homebase Credit offers have supported initiatives in both retail businesses 05 onwards under IFRS 06 and 07 are on a 52-week pro forma basis Financial Services - operational review Financial Services works in conjunction with Argos and Homebase to provide their customers with the most appropriate credit offers to drive product sales, and to ensure the maximum possible profit from the transaction for Home Retail Group. Credit offers support initiatives in the retail businesses. For example, the trial of the Home catalogue in Argos and growing kitchen sales in Homebase benefit from in-house financial services. While approximately 50% of existing gross receivable balances as at 3 March 2007 are promotional credit offer-based, approximately 70% of credit sales have been driven by promotional credit offers during the year. Financial Services financial objective is to achieve a return on the revolving (i.e. non-promotional) element of receivables in line with financial services industry norms and to recover costs on the provision of promotional credit products to Argos and Homebase customers. The retail businesses are therefore receiving a competitive advantage in the form of the provision of promotional credit products at cost. The Financial Services offering is fully multi-channel. Customers can apply for credit and use the account during the same online visit. The Internet is the fastest growing channel for card applications and 1 of every 6 spent on the Argos website is spent using the Argos store card. Development of the Financial Services product portfolio continues. An Argos credit card was launched in May 2007 as part of the joint venture arrangement with Barclays Bank PLC. This will offer a unique three-month interest-free credit period on all purchases and access to a new exclusive loyalty scheme. Financial Services Financial Services - financial review Store card gross receivables grew by 70m versus the previous balance sheet date, driven by the continued success of the range of promotional credit products offered. The store cards funded 8% of Group retail sales. The continued planned run-off in personal loans saw a 31m reduction in gross receivables over the period. Growth in benchmark operating profit before financing costs was held back by reduced income of about 2m relating to the lowering of customer late payment fees from December 2006. A further impact from late payment fees of around 5m is expected in the current year. Pro forma 52 weeks to 3 March 2007 4 March 2006 Sales ( m) 93.2 92.5 Benchmark operating profit before financing costs 22.8 23.9 Financing costs (17.8) (17.8) Benchmark operating profit ( m) 5.0 6.1 3 March 2007 31 March 2006 Store card gross receivables 448 378 Personal loans gross receivables 24 55

2321 25 Argos and Homebase are supported by an in-house financial services business, which provides a range of credit and insurance products to their customers through all customer-facing channels of stores, online and over the phone. We are one of the largest store card providers in the UK, having over one million active store card customers. Making product easier to afford is an intrinsic element of the retail offer, and is particularly important for purchases of high value items such as furniture, consumer electronics, kitchens and bathrooms, for which we offer a range of promotional credit deals. 70% of all credit sales have been driven by promotional credit offers during the year HOME RETAIL GROUP Annual Report 07 > Business Review > Financial Services

26 Business Review > Central Activities/New Development/Financial Summary Central Activities Pro forma 52 weeks to 3 March 2007 4 March 2006 Central Activities ( m) (24.0) (22.7) Central Activities represents the cost of central corporate functions and, going forward, the investment costs of new development opportunities. Cost growth in the year was slightly ahead of previous expectations as a result of recording 1m loss on the disposal of Whiteaway Laidlaw Bank. Central Activities are expected to include an additional 5m of costs in each of the next two years in relation to the investment in new development opportunities. New development opportunities In February 2007, Home Retail Group signed heads of terms to develop the Argos retail format in India through a franchise arrangement with a joint venture company owned by leading Indian retailers Shopper s Stop Ltd and Hypercity Retail India Private Ltd. Under the terms of the arrangement, Argos will be providing its brand, catalogue and multi-channel expertise and IT support. The business will be launched towards the end of the year under the HyperCITY- Argos brand name, initially in the Mumbai region. At this stage, it is envisaged that the proposition will be based largely on the existing Argos multichannel proposition. On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in home store + more, the Irish retailer. home store + more is an out-of-town homewares format, currently with two stores in the Dublin area. The investment of around 7m ( 10m) will be used to fund an agreed plan to expand the outof-town homewares chain in Ireland. It expects to open approximately three stores a year over the next few years. Separate from this investment, the management team of home store + more will also support Home Retail Group in its own development of a homewares format in the UK. Home Retail Group expects the initial pilot phase to include up to three UK stores in the next 12 months. Outlook The Group has performed strongly for the financial year just completed. However, we remain cautious on a retail environment that is still expected to be challenging. In addition, comparatives for the retail market as a whole, and particularly Argos, become tougher as we start to face last year s positive impacts of the World Cup as well as certain other product categories that boosted the first and particularly second financial quarters last year. Home Retail Group continues to position its businesses accordingly, and has entered the new financial year from a position of operational strength. Financial summary - pro forma reporting The change in both the year-end and the Group s capital structure on demerger result in statutory reported results that are non-comparable. Reporting periods Home Retail Group previously reported as part of GUS plc on a calendar year-end to 31 March. Within this, to avoid distortion in the financial results relating to the timing of Easter, Homebase was consolidated on a non-coterminous 12 months to 28 February basis. At the Interim Results, Homebase was therefore consolidated on a seven months to 30 September basis, with the second half of its financial year comprising only a five month period. As a result of the change in year-end, Home Retail Group is this year reporting on a statutory basis the financial period ended 3 March 2007. This includes the results for Homebase from 1 March 2006 (approximately 12 months) and the results for the rest of the Group from 1 April 2006 (approximately 11 months). For comparative purposes, 2006/07 restated on a pro forma basis is the 52-week period commencing 5 March 2006 and ending on 3 March 2007, and 2005/06 on a pro forma basis is the 52-week period commencing 6 March 2005 and ending on 4 March 2006. Central Activities Central Activities represents the cost of central corporate functions. As part of GUS, Home Retail Group was not recharged for these types of costs. However, for the purposes of preparing demerger financial information, an approximation was made of the amount of GUS corporate head office costs to apportion to Home Retail Group. These apportioned costs were not representative of either the historical costs Home Retail Group would have incurred or the costs it will incur going forward. As part of the pro forma restatements, Home Retail Group has therefore approximated the additional costs of central corporate functions it would have incurred over and above that apportioned to it by GUS. This has been done on the basis it had operated as a standalone plc through the periods being restated. Capital structure and net interest As part of the demerger, Home Retail Group was allocated pro forma net debt as at 31 March 2006 of 200m. For the purposes of preparing pro forma results, net interest income has been calculated to illustrate the impact on the Group s financial performance as if this capital structure had existed at 31 March 2006 and had been achieved based on the underlying cash flows prior to 31 March 2006. The additional net interest costs attributable to the actual GUS capital structure that was in place over the periods are shown separately. Other income statement items Other non-trading income statement items have not been restated as they are not impacted by the change of year-end. These are principally exceptional items and costs related to demerger incentive schemes.

Financial Summary 27 52-week pro forma to Statutory reported to 3 March 2007 4 March 2006 3 March 2007 31 March 2006 (short period) (12 months) m Argos 4,164.0 3,858.8 3,912.8 3,892.6 Homebase 1,594.2 1,559.0 1,606.3 1,561.8 Financial Services 93.2 92.5 87.6 93.6 Sales 5,851.4 5,510.3 5,606.7 5,548.0 Cost of sales (3,852.2) (3,654.6) (3,680.5) (3,686.5) Gross profit 1,999.2 1,855.7 1,926.2 1,861.5 Operating expenses before exceptional items and costs related to demerger incentive schemes (1,639.8) (1,523.9) (1,592.5) (1,515.5) Argos 325.0 297.0 300.9 296.0 Homebase 53.4 51.4 51.2 51.8 Financial Services 5.0 6.1 4.5 6.1 Central Activities (24.0) (22.7) (22.9) (16.2) Adjustment on merger accounting - - - 8.3 Benchmark operating profit 359.4 331.8 333.7 346.0 Pro forma net interest income (see below) 16.6 9.5 n/a n/a Share of post-tax results of associates 0.7 (4.2) 0.7 (4.2) Benchmark PBT 376.7 337.1 n/a n/a Net interest costs attributable to GUS capital structure (see below) (39.2) (40.9) (21.0) (45.3) Exceptional items included in operating profit (22.7) (24.7) (22.7) (24.7) Costs related to demerger incentive schemes (5.8) - (5.8) - Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0) Financing impact on retirement benefit balances 12.3 2.6 12.1 2.6 Profit before tax 321.2 271.7 296.9 272.4 Taxation (117.5) (94.9) (109.5) (96.0) of which: taxation attributable to pro forma benchmark PBT (122.1) (114.5) n/a n/a Profit for the period 203.7 176.8 187.4 176.4 Basic benchmark EPS 29.3p 25.6p n/a n/a Basic EPS n/a n/a 21.6p 20.3p Number of shares for basic EPS 869.6m 869.0m 869.6m 869.0m Net interest reconciliation: Pro forma net interest expense (1.2) (8.3) n/a n/a Financing costs charged to Financial Services 17.8 17.8 n/a n/a Pro forma net interest income 16.6 9.5 n/a n/a Interest costs attributable to GUS capital structure (46.1) (40.9) (44.3) (49.2) Exceptional finance income 6.9-6.9 - Adjustment on merger accounting - - - (14.0) Financing costs charged to Financial Services - - 16.4 17.9 Net interest costs attributable to GUS capital structure (39.2) (40.9) (21.0) (45.3) Financing fair value remeasurements (0.1) (2.4) (0.1) (2.0) Financing impact on retirement benefit balances 12.3 2.6 12.1 2.6 Income statement net financing costs (10.4) (31.2) (9.0) (44.7) Financial information has been prepared in accordance with the basis of preparation as set out in Note 2 to the Financial Statements. The basis of preparation for pro forma restatements is set out on page 26. HOME RETAIL GROUP Annual Report 07 > Business Review > Central Activities/New Development/Financial Summary

28 Business Review > Financial Review Sales and operating profit Pro forma sales for the Group grew 6% to 5,851m (2006: 5,510m) and pro forma benchmark operating profit grew 8% to 359.4m (2006: 331.8m). Group pro forma benchmark operating margin was 6.1% (2006: 6.0%). The drivers of this performance have been analysed as part of the preceding divisional reviews. The definition of pro forma benchmark operating profit is operating profit before amortisation of acquisition intangibles, store impairment charges, exceptional items and costs related to demerger incentive schemes. As with pro forma sales, it is calculated on a 52-week basis. This represents the 52 weeks to 3 March 2007 and the comparable 52 weeks to 4 March 2006. Net interest costs Pro forma net interest income for the year was 16.6m. This reflects 1.2m of estimated net interest expense on Home Retail Group s net debt/cash position during the course of the year on the basis of a pro forma allocation of 200m net debt as at 31 March 2006, improving to a net cash position of 60m as at 3 March 2007. Against this is the credit of 17.8m reflecting the financing costs charged within Financial Services benchmark operating profit. Interest costs attributable to the GUS capital structure prior to the demerger were 46.1m (2006: 40.9m) and have been excluded from pro forma benchmark PBT. Share of post-tax results of associates These amounted to income of 0.7m (2006: loss of 4.2m). The improvement is principally due to the costs incurred in the previous year associated with the wind-down of AAGUS, a consumer finance company in The Netherlands in which Home Retail Group has a 33% holding. Exceptional items Demerger-related costs of 11.3m were incurred by Home Retail Group. As previously disclosed, these included costs in relation to early vesting of GUS plc share incentive schemes, banking set-up fees and other professional fees. An additional exceptional cost on demerger of 7.3m in relation to the waiver of a loan due from Experian was also taken in the first half of the financial year. Store impairment charges in respect of the Homebase store portfolio were 4.1m (2006: 12.8m). Within net financing costs, exceptional finance income of 6.9m was recorded in the second half of the financial year. This relates to the gain made on the transfer of an interest rate swap associated with the 225m fixed rate financing facility novated from GUS plc on demerger. Financing fair value remeasurements Changes in the fair value of certain financial instruments are recognised in the income statement within net financing costs. These amounted to charges of 0.1m (2006: 2.4m). Financing impact on retirement benefit balances The credit through net financing costs in respect of the excess of expected return on retirement benefit assets over the interest expense on retirement benefit liabilities amounted to 12.3m (2006: 2.6m). The increase in the credit is principally as a result of the special contribution of 100m made in March 2006. The ongoing accounting charge, which Home Retail Group believes to be a fairer reflection of the cost of providing retirement benefits, is already reflected in benchmark operating profit.

29 Profit before tax Pro forma benchmark profit before tax for the year grew 12% to 376.7m (2006: 337.1m). Reported profit before tax was 296.9m (2006: 272.4m). The definition of pro forma benchmark profit before tax is profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, costs related to demerger incentive schemes, financing fair value remeasurements, financing impact on retirement benefit balances and taxation. Net interest income within pro forma benchmark PBT is calculated to illustrate the Group s financial performance as if the demerger capital structure had existed at 31 March 2006 and had been achieved based on underlying cash flows prior to 31 March 2006. Benchmark PBT also includes Home Retail Group s share of post-tax results of associates. It is calculated on a 52-week basis. Taxation Taxation attributable to pro forma benchmark PBT for the year was 122.1m (2006: 114.5m), representing an effective tax rate (excluding associates) of 32.5% (2006: 33.5%). The improvement in the effective rate largely reflects a lower level of disallowable expenditure for tax purposes. The reported effective tax rate (excluding associates) is 37.0% (2006: 34.7%), representing a total tax expense for the period of 109.5m (2006: 96.0m). Number of shares and earnings per share On demerger, Home Retail Group was admitted to the Official List and to trading on the London Stock Exchange's market for listed securities with 877.4m issued ordinary shares. The number of shares for the purpose of calculating earnings per share in the prior year has been taken as 869.0m, representing the number of shares in issue at the date of demerger, excluding 8.4m ordinary shares held in Home Retail Group s Employee Share Ownership Trust ( ESOT ). For the financial period just ended, the weighted average number of shares since demerger has been used, which, excluding shares held in the ESOT, was 869.6m. The calculation of diluted EPS reflects the potential dilutive effect of employee share incentive schemes in place post demerger. This increases the number of shares for diluted EPS purposes by 7.6m to 877.2m (2006: 876.6m). Pro forma basic benchmark EPS is 29.3p (2006: 25.6p), with pro forma diluted benchmark EPS of 29.0p (2006: 25.4p). Reported basic EPS is 21.6p (2006: 20.3p), with reported diluted EPS of 21.4p (2006: 20.1p). Balance sheet and return on capital Reported net assets amounted to 3,078.7m, an increase of 128.8m on the previous balance sheet date. This is equivalent to 354p per share, excluding shares held in the ESOT (2006: 339p). Benchmark pre-tax return on invested capital, based on benchmark operating profit plus share of post-tax results of associates of 360.1m and invested capital of 3,011.8m, was 12.0%, representing a 150 basis point improvement on the previous balance sheet date. The improvement represents the combination of the 32.5m improvement in profit, together with the 95.4m reduction in invested capital. Balance sheet As at 3 March 2007 31 March 2006 Goodwill 1,878.9 1,878.9 Intangible assets 73.4 61.5 Property, plant and equipment 691.6 696.8 Inventories 906.4 881.0 Instalment receivables 416.8 398.5 Other trading assets 188.3 169.6 4,155.4 4,086.3 Trade and other payables (1,059.1) (890.5) Other trading liabilities (84.5) (88.6) (1,143.6) (979.1) Invested capital 3,011.8 3,107.2 Retirement benefit assets 9.3 25.5 Net tax liabilities (2.6) (4.8) Pro forma net cash / (debt) 60.2 (200.0) Pro forma net assets 3,078.7 2,927.9 Net GUS group balances - 22.0 Reported net assets 3,078.7 2,949.9 HOME RETAIL GROUP Annual Report 07 > Business Review > Financial Review

30 Business Review > Financial Review continued Dividends As indicated at the time of demerger, a policy whereby the full year dividend is ordinarily covered at least twice by basic benchmark EPS has been established by the Board. For the financial period to 3 March 2007, the Board are now proposing to pay the final dividend based on the higher figure of the 52-week pro forma basic benchmark EPS, rather than on a lower statutory reporting period basis as had previously been indicated. A final dividend of 9.0p is therefore being recommended, making 13.0p for the year. Based on pro forma benchmark EPS of 29.3p, this represents cover of 2.25 times. Based on reported basic EPS of 21.6p, it represents cover of 1.66 times. The final dividend, subject to approval by shareholders at the AGM, will be paid on 25 July 2007 to shareholders on the register at the close of business on 25 May 2007. Cash flow and net debt As part of the demerger, Home Retail Group was allocated pro forma net debt of 200m as at 31 March 2006. Cash flows from operating activities (before incurring outflows related to interest, tax, investing and financing activities) were 604.5m in the period (2006: 367.4m). The principal drivers of the strong cash generation have been good management of working capital, together with the non-repeat of the prior year 100m special pension contribution to the Argos UK defined benefit pension scheme. As the cash generation is for a short period (i.e. circa 11 months) as a result of the change in year-end, there is also a benefit within it from the exclusion of March, historically a cash outflow month. It is estimated, based on previous cash flows for the month of March, that cash generation would therefore have been approximately 100m lower on a full year basis. There has also been a lower level of capital expenditure at 162.4m in the period (2006: 254.9m). This is partly as a result of approximately 25m of capital expenditure that would ordinarily have occurred in the month of March, together with approximately 25m of capital expenditure delayed into the next financial year. At 3 March 2007, the Group had a net cash position of 60.2m. Disposals The disposal of Whiteaway Laidlaw, a commercial bank which offers banking facilities to small businesses and personal customers, was completed in January 2007. Cash consideration was approximately 5m, resulting in a loss on disposal of 1m which was charged within Central Activities. Retirement benefit assets The Group provides a number of postemployment benefit arrangements covering both funded defined benefit and defined contribution schemes. Pension arrangements are operated principally through the Argos UK defined benefit scheme together with the GUS defined contribution scheme, which was replaced post year-end by the Home Retail Group defined contribution scheme. The last actuarial valuation of the Argos UK defined benefit scheme was carried out as at 31 March 2006. The IAS 19 surplus as at 3 March 2007 for the UK defined benefit scheme was 9.3m (2006: 25.5m). Capital structure The Group finances its operations through a combination of retained profits, bank borrowings and property leases. The Group has significant liabilities through its obligations to pay rents under property leases. The capitalised value of these liabilities is 2.6 billion based upon a simple eight-times multiple of the operating lease charge, or 2.9 billion based upon discounted cash flows of the expected future operating lease charges. The Group, in common with the credit rating agencies, treats its lease liabilities as debt when evaluating financial risk and investment returns. The Group s net debt varies significantly throughout the year due to trading seasonality.

31 Liquidity and funding Liquidity is achieved through arranging funding ahead of requirements and maintaining sufficient un-drawn committed facilities to meet short term needs. At 3 March 2007, the Group had un-drawn committed borrowing facilities available of 700m which expire in 2011. These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes. Treasury policy and risk management The Group s treasury function seeks to reduce exposures to foreign exchange, interest rate and other financial risks, and to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Policies and procedures are subject to review and approval by the Board as well as subject to audit review. Counterparty credit risk management The Group s exposure to credit risk is managed by dealing only with banks and financial institutions with strong credit ratings and within limits set for each organisation. Dealing activity is closely controlled and counterparty positions are monitored daily. Interest rate risk management The Group s interest rate exposure is managed by the use of fixed and floating rate borrowings and by the use of interest rate swaps to adjust the balance of fixed and floating rate liabilities. Currency risk management The Group s key objective is to reduce the effect of exchange rate volatility on profits. Transactional currency exposures that could significantly impact the Income Statement are hedged using forward purchases of foreign currencies. Post balance sheet event On 25 April 2007, Home Retail Group completed the acquisition of a 33% stake in home store + more, the Irish retailer, for a consideration of around 7m ( 10m). Share price and total shareholder return The share price of Home Retail Group ranged from a low of 399.25p to a high of 444.5p during the financial year post demerger. On 2 March 2007, the mid market price was 420.0p, giving a market capitalisation of 3.7bn at that date. Total shareholder return (the increase in the value of a share including reinvested dividends) has been 3.4% in the approximate five-month period since demerger. This compares favourably with the total shareholder return for the FTSE 100, which was 1.5% over the same period. Accounting standards and use of non-gaap measures The Group has prepared its consolidated financial statements under International Financial Reporting Standards for the period ended 3 March 2007. Accounting policies are outlined in Note 3 to the Financial Statements. Home Retail Group has identified certain measures that it believes provide additional useful information on the underlying performance of the Group. These measures are applied consistently but as they are not defined under GAAP they may not be directly comparable with other companies adjusted measures. The non-gaap measures are outlined in Note 3 to the Financial Statements. HOME RETAIL GROUP Annual Report 07 > Business Review > Financial Review

32 All wood used in the Home Retail Group garden furniture range is either certified by the Forest Stewardship Council (FSC) or comes from suppliers who are members of the WWF Global Forestry and Trade Network (GFTN) Argos and Homebase support the FSC as Forests matter 1996 Forest Stewardship Council www.fsc.org SA-COC-8888

Business Review > Corporate Responsibility 33 Growing and developing our business depends on the continued support and trust of five important groups of people: Customers those who buy our products Colleagues those who work in the Group Investors those who own our shares and provide us with capital Commercial partners those who supply us with goods and services Community those who live around our sites and wider society as a whole We have responsibilities with regard to each of these groups some set out in law, but many arising from their expectations of us. For Home Retail Group, being a responsible retailer means understanding their expectations and living up to them, often having to balance their competing demands. Our key responsibilities are: serving customers to their complete satisfaction providing a working environment that is conducive to the recruitment and retention of the widest possible range of talented staff providing a safe and healthy place of work providing products of the appropriate quality, including responsible product sourcing and retailing, product safety and reliability encouraging responsible labour, environmental and social practices in the Group's supply chain improving the Group's environmental performance, principally our use of energy, the impact of our transport fleet, materials use and waste management developing strong community relationships in support of our business objectives Failure in any of these areas could damage our brands and business performance. However, our approach to corporate responsibility also presents us with opportunities. Our ability to identify changes in society and social trends means we can quickly adapt our business to take advantage of new markets as issues emerge, leading to commercial and social benefit. Customers Customers satisfaction with both the product and their shopping experience - is one of the strongest drivers of our performance. We have processes dedicated to understanding and responding to our customers views and treating our customers fairly, and have developed a range of policies and standards in response. First and foremost, customers judge us on product range, shopping experience and our value proposition. They also want assurances on product safety and quality. In addition, evidence suggests that customers increasingly consider other issues like ethics, integrity and responsibility in product sourcing and manufacture in their overall view of a retailer. We aim to ensure these factors are positively associated with our brands. We also need to ensure that we meet changing consumer demands, which are increasingly for efficient, eco-friendly products. For example: In response to the summer drought of 2006, we introduced our WaterWise campaign at Homebase. This campaign provided useful information on water restrictions and clearly labelled products that made it easier for customers to adapt to the water shortage (for example, drought tolerant plants and mulches). We have a comprehensive policy on sourcing wood products. We aim to increase the amount we buy from independently certified well-managed forests and reduce the risk of illegal or undesirable materials anywhere within our supply chain. Further information on these and other initiatives and our policies relating to product issues can be found on our website www.homeretailgroupcr.com. HOME RETAIL GROUP Annual Report 07 > Business Review > Corporate Responsibility

34 Business Review > Corporate Responsibility continued Colleagues The quality of any business depends strongly on its people. To operate successfully we need people who are well trained, informed and motivated. Providing the right working environment helps us attract good people and motivate and retain the valuable colleagues we have. There are also sound reasons to train and develop our people: it makes them better at their job and enables us to fill more of our vacancies through internal promotion rather than recruiting externally. Finally, we have ethical and legal obligations to ensure that our colleagues work in safe conditions and to contribute as far as possible to their health and wellbeing. We set out our standards through a number of policies, including: Equal opportunities Disability Bullying and harassment Grievance Health and safety Training and development Whistleblowing Employee involvement As an example, disabled persons have equal opportunities when applying for vacancies, with due regard to their aptitudes and abilities. We have procedures to ensure that disabled employees are fairly treated and that their training and career development needs are carefully managed. We offer all our salaried staff a competitive remuneration package together with a range of additional employee benefits. These include bonus payments depending upon individual and company performance. Schemes offering shares, share options and the acquisition of shares are available for employees. This encourages their contribution to the Group s performance. We also offer colleagues a childcare scheme that provides working parents the chance to enjoy savings on their childcare costs. Investors Effective management of corporate responsibility can increase shareholder value. For example, in the area of ecoefficiency, rising prices for energy and waste disposal make efficiency savings increasingly attractive. We have annual targets to reduce energy consumption, transport impacts, materials use and waste volumes. In addition, we have an overall aspiration towards zero landfill waste by 2010 which is supported by an extensive recycling programme in our stores and distribution centres. We have achieved a milestone in the period under review by reversing the trend of increasing amounts of waste going to landfill as our recycling has increased from 26% to over 40%. We have increased our use of renewable and low carbon energy. This together with lower energy consumption reduced our CO2 emissions from building energy use by over 20%. We aim to motivate and keep staff informed on matters that concern them at work and involve them through local consultative procedures. Where there are recognition agreements with trade unions, the consultation process is established through national and local trade union representatives and through joint consultation committees. Business information (for example on financial and economic topics) is also disseminated through management channels, conferences, meetings, publications and Internet sites.

35 We are committed to high standards of employment practice and wish to be recognised as a good employer. We aim to provide a working environment that is conducive to the recruitment and retention of the widest possible range of talented staff. We aim to reward people fairly, to provide equality of opportunity, personal development and training and a safe and healthy workplace. We work with kidsunlimited to offer colleagues a childcare salary sacrifice scheme HOME RETAIL GROUP Annual Report 07 > Business Review > Corporate Responsibility

36 Business Review > Corporate Responsibility continued We are now recycling more than 40% of our waste Commercial partners Labour standards and human rights within the supply chain are one of the most important responsibilities for a retailer. Home Retail Group s network of suppliers and agents is extensive and includes a number of regions where these issues may present challenges. We are responsible for understanding our supply chain and the conditions within it, for dealing with active or conspicuous abuses and for engaging with suppliers to communicate our customers concerns on these matters and to support them as they improve standards. The Group has a set of Supply Chain Principles which are published on our website. They are supported by a detailed code of practice and by a supplier manual, both of which explain and illustrate the standards we expect. We made a number of small changes in the period under review including revisions to our terms on workers freedom of association to encourage better consultation mechanisms and support the right to collective bargaining. The supplier manual has been translated into Chinese and presented face-to-face to key overseas suppliers. Over the past three years, we have audited 85% of our direct overseas suppliers. Whilst the process of audit and re-audit is an effective way to find and deal with the worst abuses, such as the use of forced or child labour, we are increasingly concluding that our scope to influence the background culture is limited. This is particularly relevant when dealing with issues such as working hours, wage rates and access to independent worker representation. We are therefore seeking new approaches to the problem, based on closer relationships with our suppliers and engagement with non-governmental organisations and other interested parties. Community Our community and charity work offers significant opportunities. At the most basic level, healthy communities make for healthy businesses so we aim to play our part in them. There are also clear benefits from improvements to our public profile and reputation. But perhaps the strongest motivator is internal; taking part in community activities is popular with our staff. In a competitive environment for recruitment and retention, this kind of positive experience can make an important difference to our performance. We have invested over 800,000 in community initiatives (including 336,000 from the GUS Charitable Trust). Our community work is focused on two charity partnerships: one working with Argos and one with Homebase. Each is selected for a period of two years: Argos is just reaching the end of a very successful two-year partnership with Help the Hospices whilst Homebase is embarking on year two with Marie Curie Cancer Care. The Argos Tick to Give initiative also enabled Argos customers to elect to add 20p to their purchase which was then donated to Help the Hospices on their behalf.

37 Each charity partner is selected from a shortlist by a staff vote, and then becomes the focus for fundraising and giving for stores. In July 2007, Argos is launching a new partnership with Leukaemia Research (UK) and Barretstown (Republic of Ireland) who both focus on cancer-related illnesses and dedicate their resources to improving the quality of life for those affected. The GUS Charitable Trust was funded by GUS plc prior to the demerger in October 2006 with such donations funding projects in the period under review. The community programme in future years will be financed through direct contributions recorded and spent in the relevant year. Management and governance of Corporate Responsibility ( CR ) CR is the responsibility of the company secretary. The Board receives regular updates, focusing on the significance of and risks associated with CR issues. The Operating Board plays an important role in policy approval and also in agreeing significant initiatives and investments. A sub-committee of the Operating Board has been formed to act as a corporate responsibility steering group. The steering group s terms of reference include: reviewing external developments and emerging best practice monitoring implementation of policies recommending corporate responsibility policies to the Operating Board monitoring corporate responsibility risks overseeing external corporate responsibility reporting Charitable donations k Cash donations 264 GUS Charitable Trust 336 Volunteering 64 Gifts in Kind 37 Management resources 100 Company donations 801 Monies raised by colleagues 1,204 Tick to Give 119 Donations generated from others 1,323 Total donations 2,124 The Group s corporate responsibility policies and performance have been assessed by a number of independent third parties in the past year: The Group is listed in the FTSE4Good Index, meeting all the relevant social and environmental criteria. The Group is also listed in the Dow Jones Sustainability Index, which selects the top 10% from a universe of 3,000 global companies, based on comprehensive sustainability criteria. The Group was one of only three retailers short listed for the 2007 Retail Week CSR Award. The Group produces a comprehensive on-line CR Report each year, and all disclosures are independently verified. Full data can be found at www.homeretailgroupcr.com. HOME RETAIL GROUP Annual Report 07 > Business Review > Corporate Responsibility

38 Board of Directors Oliver Stocken Chairman Oliver was a director of NM Rothschild and Sons and held several roles within Barclays Group culminating in his appointment as group finance director of Barclays PLC. In 2000, he was appointed to the GUS Board where he chaired the audit committee and subsequently the remuneration committee. He is deputy chairman of 3i plc, a nonexecutive director of Standard Chartered plc and chairman of Rutland Trust plc, Stanhope plc and Oval Limited. Terry Duddy Chief Executive Terry began his career at Letraset in 1978. Initially he worked in personnel management and later in product management. In 1984 he joined the Dixons Stores Group where he held a variety of commercial positions, including sales director of Currys, product marketing director of the Dixons Stores Group and, latterly, managing director of PC World. Terry joined GUS in August 1998 as chief executive of the newly acquired Argos, becoming a GUS director later that year. In 2000 he was appointed chief executive of Argos Retail Group. Richard Ashton Finance Director Richard started his career at PricewaterhouseCoopers LLP where he trained as a chartered accountant. In 1994 he joined GE where he spent eight years and held a variety of positions. These included chief financial officer of GE Capital's pan-european equipment financing business, headquartered in The Netherlands, assistant to GE Capital's chief financial officer in the US and various finance roles in the UK. Richard joined Argos Retail Group as finance director in November 2001. John Coombe Non-Executive Director John held a number of senior finance roles within Charterhouse Group plc and Charter Consolidated plc before joining Glaxo Holdings in 1986. He was ultimately chief financial officer of GlaxoSmithKline for five years before retiring in 2005. He joined the GUS Board in 2005. He is a member of the supervisory board of Siemens AG, a non-executive director of HSBC Holdings, chairman of Hogg Robinson and a member of the Code Committee of the Panel on Takeovers and Mergers. John is the senior independent director and chairs the audit committee of Home Retail Group. Andy Hornby Non-Executive Director Andy began his career at Boston Consulting Group before joining Blue Circle as business development director, Blue Circle Home Products. Following a move to ASDA he held a number of senior general management roles including managing director of the George clothing business. In 1999, Andy joined the Board of Halifax as chief executive, Halifax Retail. Since August 2006, he has been chief executive of HBOS plc. Andy joined the GUS Board in 2004. Andy chairs the remuneration committee of Home Retail Group. Penny Hughes Non-Executive Director Penny spent ten years with Coca Cola, initially as marketing director and ultimately as president of Coca Cola UK & Ireland. Over the last decade she has held a number of non-executive roles on the Boards of international businesses such as Vodafone, Trinity Mirror and Body Shop. Currently she serves on the Board of Reuters, GAP and the Swedish bank, Skandinaviska Enskilda Banken. She also belongs to the Advisory Board of Bridgepoint Venture Capital and is president of the Advertising Association. Penny joined the Board of Home Retail Group in December 2006.

Operating Board 39 Greg Ball Managing Director, Financial Services Sarah Carpenter Director of Strategic Development Mike Sibbald Human Resources Director (retired April 2007) Gordon Bentley Company Secretary Peter Connor IS Director Maria Thompson Commercial Director Eugene Brazil Managing Director, Customer Services Committees NOMINATION COMMITTEE Oliver Stocken (Chairman) John Coombe Terry Duddy Andy Hornby Penny Hughes Paul Loft Managing Director, Homebase REMUNERATION COMMITTEE Andy Hornby (Chairman) John Coombe Penny Hughes Oliver Stocken Sara Weller Managing Director, Argos AUDIT COMMITTEE John Coombe (Chairman) Andy Hornby Penny Hughes HOME RETAIL GROUP Annual Report 07 > Board of Directors & Operating Board

40 Directors Report The directors present their report and the audited Financial Statements for the period from 1 April 2006 to 3 March 2007 ( the Period ). To assist with analysis and comparison, certain pro forma information has been provided to illustrate the effect of the change in year-end and the demerger from GUS plc on the performance of Home Retail Group. Principal activities and business review The Group s principal activities comprise home and general merchandise retailing. The Chairman s Statement, Business Review and Financial Statements report on performance of the business during the Period, the position at the Period end, likely future developments, the principal risks and uncertainties facing the Group and financial key performance indicators. There were no material acquisitions or disposals during the Period. The Group s statement on corporate governance is set out on pages 42 to 46. Details of charitable donations, employee involvement and policy on the employment of disabled persons are set out in the Business Review on pages 32 to 37. Profit and dividends The Group s consolidated income statement on page 59 shows a profit for the Period of 187.4m. The directors recommend the payment of a final dividend of 9.0p per ordinary share to be paid on 25 July 2007 to shareholders on the register on 25 May 2007. An interim dividend of 4.0p per ordinary share was paid on 24 January 2007 giving a total dividend for the year of 13.0p per ordinary share. Directors The names and biographical details of the directors are shown on page 38. Particulars of directors remuneration and service contracts are shown in the report on directors remuneration and related matters on pages 47 to 56. Penny Hughes joined the Board on 11 December 2006. The directors retiring at the 2007 Annual General Meeting are Oliver Stocken, John Coombe, Andy Hornby, Penny Hughes, Terry Duddy and Richard Ashton who, each being eligible, offer themselves for re-election. During the Period, the Group maintained liability insurance and third party indemnification provisions for its directors. Directors interests The beneficial interests of the directors, together with non-beneficial interests in Home Retail Group shares, are shown below: Number of ordinary shares Number of ordinary shares as at 3 March 2007 at 6 April 2007 Terry Duddy 526,773 526,773 Richard Ashton 166,690 166,690 John Coombe 16,469 16,469 Andy Hornby 9,311 9,311 Penny Hughes Oliver Stocken 54,021 54,021 Substantial shareholdings As at 2 May 2007, the Company had been notified of the following interests in its total voting rights and share capital in issue: Total number of Percentage of voting rights total voting (ordinary shares) rights (%) AXA S.A. and its group of companies 87,940,363 10.02 Legal & General Group Plc 60,057,962 6.84 Aviva plc and its subsidiaries 51,866,357 5.91 Standard Life Investments Ltd 45,188,304 5.15 Barclays PLC 27,363,156 3.12 Save for the above, no person has reported any notifiable interest of 3% or more, or a 1% fall or rise above that 3%, or any non-material interest equal to/or more than 10% of the nominal value of the voting and share capital in issue of the Company.

Directors Report continued 41 Purchase of own shares At the Extraordinary General Meeting of the Company held on 11 September 2006, authority was given for the Company to purchase, in the market, up to 131,500,000 ordinary shares of 10 pence each. The Company did not use this authority to make any purchases of its own shares during the Period. At the Annual General Meeting to be held on 3 July 2007, shareholders will be asked to give a similar authority, details of which are contained in the accompanying circular to shareholders. Details of the Company s interests in its own shares are set out on Note 29 to the Financial Statements on page 89. Two redeemable preferences shares issued in connection with the process of demerger from GUS plc were redeemed on 26 February 2007 and, pursuant to article 8.2.5 of the articles of association, the nominal amount of such redeemable preference shares comprised in the Company s authorised share capital was sub-divided and converted into ordinary shares of 10p each. Political donations The Group has made no political donations and incurred no items of political expenditure. Creditor payment For all trade creditors, it is Group policy to: agree and confirm the terms of payment at the commencement of business with that supplier; pay suppliers in accordance with applicable terms; and continually review the payment procedures and liaise with suppliers as a means of eliminating difficulties and maintaining a good working relationship. Trade creditors of the Group at 3 March 2007 were 49 days based on the ratio of Group trade creditors at the end of the year to the amounts invoiced during the year by trade creditors. The Company has no trade creditors. Annual General Meeting The first Annual General Meeting of the Company will be held at the London Marriott Hotel, Grosvenor Square, London W1K 6JP commencing at 11.30am on Tuesday, 3 July 2007. The Notice of Meeting is included in a separate circular to shareholders which accompanies this Annual Report. It is also available on the Company s website: www.homeretailgroup.com. Relevant audit information As at 2 May 2007, so far as each director is aware, there is no relevant audit information of which the auditors are unaware and each director has taken all steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to ensure that the auditors are aware of that information. Auditors The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and a resolution that they be re-appointed will be proposed at the Annual General Meeting. By Order of the Board Gordon Bentley Secretary 2 May 2007 Registered Office: Avebury 489-499 Avebury Boulevard Milton Keynes MK9 2NW HOME RETAIL GROUP Annual Report 07 > Directors Report

42 Corporate Governance The Board is responsible for the Group s system of corporate governance and is committed to maintaining high standards. Prior to demerger the system of corporate governance was ultimately the responsibility of the Board of GUS plc. In preparation for the Company s listing following the demerger from GUS plc, a full review of corporate governance arrangements was undertaken. These arrangements were summarised in the prospectus relating to the Company s listing published on 14 September 2006 ( the prospectus ). Since the demerger, Home Retail Group has complied fully with the main and supporting principles set out in Section 1 of the Combined Code on Corporate Governance published by the Financial Reporting Council in 2003 ( the Code ) except in relation to the following requirements: the requirements for the audit committee and the remuneration committee to comprise of at least three independent non-executive directors, and for the nomination committee to have a majority of independent non-executive directors, were not satisfied until the appointment of Penny Hughes on 11 December 2006 (sections B.2.1, C.3.1 and A.4.1 of the Code). The appointment of Oliver Stocken to the remuneration committee in November 2006 complied with the revised version of the Code published in June 2006 but not the Code that applied in respect of the period under review; and given the limited period since the demerger in October 2006, a full evaluation of the performance of the Board, its committees and its individual directors and the Chairman has not yet been conducted (section A.6.1 of the Code). It is intended that such evaluations and meetings will take place during the current financial year. The Company has fully complied with the remainder of the Code during the period under review by applying its principles as follows. The Board The Board consists of the chairman Oliver Stocken, chief executive Terry Duddy, finance director Richard Ashton, and three nonexecutive directors: John Coombe (the senior independent director), Andy Hornby and Penny Hughes. The biographical details of the directors are shown on page 38. The three non-executive directors are all determined by the Board to be independent and there are no relationships or circumstances which could affect, or appear to affect, a non-executive director s judgement. They are appointed for three-year renewable terms. The Board is satisfied that the chairman s other Board appointments and commitments do not place constraints on his ability to fulfil properly his role as chairman of Home Retail Group. The chairman maintains an office at Home Retail Group s registered office in Milton Keynes and is available as needed to carry out his responsibilities. The Board has six scheduled meetings each year and meets more frequently, as required. Following incorporation of the Company for the purposes of the demerger, the Board met on five occasions during the period under review. The time commitment expected of non-executive directors is not restricted to meetings of the Board and Board committees (as defined below). They are available for consultation on specific issues related to their particular fields of expertise and additional time is spent visiting the Group s businesses and stores and meeting informally with the chairman, executive directors, and senior management. There is a formal schedule of matters specifically reserved to the Board. The Board has responsibility for: the overall management of the Group, approval of the Group s long term objectives and commercial strategy, and the review of performance, ensuring that any necessary corrective action is taken; the approval of preliminary announcements of interim and final results, including dividends, and the Annual Report and accounts, including the corporate governance statement, remuneration report and statement on internal controls; the approval of documentation to be put forward to shareholders at general meeting, all circulars and prospectuses other than routine documents; the approval of all appointments to the Board and of the company secretary following recommendations by the nomination committee, ensuring adequate succession planning for the Board and senior management, and approving the terms of reference of the Board committees (as defined below). It has approved the appointment of John Coombe as senior independent director and has determined the independence of the other non-executive directors; and determining the responsibilities of the chairman and of the chief executive. The chairman is responsible for the leadership of the Board and ensuring its effectiveness, for effective communication with shareholders and for facilitating the effective contribution of the non-executive directors and their constructive relationship with the executive directors. The chief executive is responsible for the day-to-day business of the Group, and is supported by the Operating Board which includes the finance director and the managing directors of the main businesses and shared services functions (members of the Operating Board are shown on page 39). Members of the Operating Board meet informally with the chairman and non-executive directors and regularly attend and present at board meetings when relevant agenda items are under consideration. There is in place a procedure under which the directors, in furtherance of their duties, are able to take independent professional advice, if necessary, at the Company s expense. The company secretary, who has been appointed by the Board, is responsible for advising the Board on all corporate governance matters and for ensuring that board procedures are followed and all directors have access to this professional advice.

Corporate Governance continued 43 All directors received briefings from the Company s legal advisers on their responsibilities at the time of demerger. Each of the non-executive directors undertook a programme of meetings with senior management and store and site visits. Penny Hughes has undergone a customised induction programme since her appointment to the Board in December 2006, taking into account her particular experience and background. This programme included meetings with all members of the Operating Board, other members of senior management, detailed information on the Group and its activities, and store visits. All directors are subject to re-election by shareholders at the first opportunity after their appointment and, thereafter, in accordance with the Company s articles of association. All directors will be required to submit themselves for re-election at least once every three years. All directors, being appointed within the last year, will be eligible for re-election at the Annual General Meeting to be held on 3 July 2007. As indicated earlier, the non-executive directors are appointed for specified terms, each currently being in their first three year term. The letters of appointment for non-executive directors, including the chairman, are available for inspection by any person at the Company s registered office during normal business hours and at the Annual General Meeting (for 15 minutes prior to the meeting and during the meeting). Board committees The Board has appointed the following principal committees: remuneration committee, nomination committee and audit committee ( the Board committees ). The terms of reference of each of these committees are available on the Company s website www.homeretailgroup.com. In order to facilitate better communication with Board members and the provision of information to the Board, all independent non-executive directors serve on each of the Board committees. The attendance of directors at meetings of the Board and the Board committees was as follows: Board member Board meetings (5) Audit committee (2) Remuneration committee (4) Mr Oliver Stocken (Note 1) 5 2 4 Mr Terry Duddy (Note 2) 4 2 3 Mr John Coombe 5 2 4 Mr Richard Ashton (Note 2) 5 2 Mr Andy Hornby 5 2 4 Ms Penny Hughes (Note 3) 2 1 2 Notes: 1. Two of the meetings of the remuneration committee that Oliver Stocken attended were prior to his appointment to the committee. Oliver Stocken is not a member of the audit committee. 2. Terry Duddy and Richard Ashton are not members of the audit committee or the remuneration committee. 3. Penny Hughes was appointed to the Board and the Board committees on 11 December 2006. There were no formal meetings of the nomination committee during the period under review. The appointment of Penny Hughes was considered at a Board meeting. Remuneration committee The remuneration committee is chaired by Andy Hornby and its other members are John Coombe, Penny Hughes and Oliver Stocken. In accordance with the Code, the committee will meet not less than three times a year. Details of its responsibilities and of compliance with Section B of the Code regarding remuneration are set out on pages 47 to 56. Nomination committee The Board has established a nomination committee to lead the process for Board appointments. The committee is chaired by Oliver Stocken and its other members are John Coombe, Terry Duddy, Andy Hornby and Penny Hughes. The nomination committee will meet not less than twice a year and has responsibility for making recommendations to the Board on the composition of the Board and its committees, on retirements, appointments of additional and replacement directors and ensuring compliance with the Code. At the time of the demerger, the Board stated that it intended to appoint a further independent non-executive director and external advisers were appointed to facilitate the search for such an individual. The members of the nomination committee discussed the balance of skills, knowledge and experience that would be appropriate for the appointment also taking into account the need to ensure that the appointee would have enough time available to devote to the position. From a range of potential candidates, Penny Hughes was identified as a suitable individual and was appointed by the Board on 11 December 2006. HOME RETAIL GROUP Annual Report 07 > Corporate Governance

44 Corporate Governance continued Audit committee The audit committee is chaired by John Coombe and its other members are Andy Hornby and Penny Hughes. John Coombe was chief financial officer of GlaxoSmithkline plc and was chairman of the GUS plc audit committee prior to the demerger in October 2006. The Board considers that he has the recent and relevant financial experience required to chair the audit committee. Andy Hornby and Penny Hughes offer a wide range of experience from positions at the highest level of business. Further details of all the members of the audit committee are set out on page 38. The audit committee will meet no fewer than three times a year and its principal responsibilities cover internal control and risk management, internal audit, external audit (including auditor independence) and financial reporting. The chairman, chief executive and finance director are normally expected to attend meetings of the committee. The committee has a structured programme linked to the Group s financial calendar. During the period under review, the committee undertook the following activities: reviewed the preliminary announcement, Annual Report and Financial Statements and the interim announcement and considered reports from the external auditors identifying any accounting or judgemental issues requiring its attention; reviewed the statement in the Annual Report on the system of internal control; reviewed and approved audit plans for the external and internal auditors; considered quarterly reports from the head of internal audit on the results of internal audit reviews, significant findings, management action plans and timeliness of resolution; reviewed reports on the Group s risk management process and risk profile; reviewed presentations on risk and its identification, management and control with senior management; reviewed, at each scheduled meeting, a report on any material litigation involving Group companies; reviewed management of fraud risk and incidences of fraud; and reviewed arrangements by which Group employees may, in confidence, raise concerns about possible improprieties in financial reporting, dishonesty, corruption, breaches of business principles and other matters. One of the primary responsibilities of the audit committee is to make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditors. A number of factors were taken into account by the committee in assessing whether to recommend the external auditors for re-appointment. These include: the quality of reports provided to the audit committee and the Board and the quality of advice given; the level of understanding demonstrated of the Group s businesses and the retail sector; and the objectivity of the external auditors views on the controls around the Group. The audit committee recognises that auditor independence is an essential part of the audit framework and the assurance it provides. Audit fees paid to the Company s auditors, PricewaterhouseCoopers LLP, in respect of the period under review, exceeded non-audit fees. The audit committee has established control procedures to safeguard the objectivity and independence of the external auditors and to ensure that the independence of the audit work undertaken by the external auditors is not compromised. The committee has established a policy covering the type of non-audit work that can be assigned to the external auditors. The auditors may only provide such services provided that these do not conflict with their statutory responsibilities and ethical guidance. These services are: further assurance services where the external auditors knowledge of the Group s affairs means that they may be best placed to carry out such work. This may include, but is not restricted to, shareholder and other circulars, regulatory reports and work in connection with acquisitions and divestments; taxation services where the external auditors knowledge of the Group s affairs may provide significant advantages to the Group s tax position and where this is not the case, the work is put out to tender; general in other circumstances, the external auditors may provide services, provided that proposed assignments which exceed financial limits set out in the policy are put out to tender and decisions to award work are taken on the basis of demonstrable competence and cost effectiveness. However, certain areas of work are specifically prohibited, including work related to accounting records and Financial Statements that will ultimately be subject to external audit and management of, or significant involvement in, internal audit services. The committee chairman s pre-approval is required before the Company uses non-audit services that exceed financial limits set out in the policy.

Corporate Governance continued 45 The committee receives half-yearly reports providing details of assignments and related fees carried out by the external auditors in addition to their normal work. Fees in respect of such assignments carried out in the period under review were: Further assurance services 0.2m Taxation services 0.2m Accountability and audit The Board acknowledges that it is responsible for the Group s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide reasonable, but not absolute, assurance against material misstatement or loss. The Board has reviewed the effectiveness of the key procedures which have been established to provide internal control. The Board confirms that the Company has in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group including risks relating to environmental, social and governance matters. This process was in place throughout the period under review and up to the date of approval of the Annual Report and meets the requirements of the guidance entitled Internal Control: Guidance for Directors on the Combined Code issued by the Institute of Chartered Accountants in England and Wales in 1999. The audit committee has kept under review the effectiveness of this system of internal control and has reported regularly to the Board. As part of the process that the Company has in place to review the effectiveness of the internal control system, there are procedures designed to capture and evaluate failings and weaknesses, and in the case of those categorised by the Board as significant, procedures exist to ensure that necessary action is taken to remedy the failings. The key procedures which were operational in the period under review were as follows: Risk assessment the Group s risk factors were reviewed with its advisers as part of the demerger process and were published in the prospectus; risks were reviewed by management and updated as part of a bi-annual process. The risks identified were then reviewed by a risk committee chaired by the finance director and comprising of all divisional finance directors and the company secretary. The head of internal audit also attended its meetings; those risks classified as high level risks by the risk committee were then reported to the Operating Board and audit committee. The schedule of high level risks was used as the basis for a programme of internal audit and assurance; the audit committee has delegated responsibility from the Board for considering operational, financial and compliance risks on a regular basis and received its Annual Report on the controls over these risks. This included risks arising from environmental, social and governance matters. Control environment and control activities the Group has established procedures for delegating authority which ensures that decisions that are significant, either because of the value or the impact on other parts of the Group, are taken at an appropriate level; the Group has implemented appropriate strategies to deal with each significant risk that has been identified. These strategies include internal controls, insurance and specialised treasury instruments; the Group sets out principles, policies and standards to be adhered to. These include risk identification, management and reporting standards, ethical principles and practice and accounting policies. Information and communication the Group has a comprehensive system of budgetary control including monthly performance reviews by the Operating Board. The Operating Board also reviews a range of financial and non-financial performance indicators. These indicators were regularly reviewed to ensure that they remain relevant and reliable; the Group had whistleblowing procedures in place for employees to report any suspected improprieties. Monitoring a range of procedures was used to monitor the effective application of internal control in the Group, including management assurance through confirmation of compliance with standards, and independent assurance through internal audit reviews and review by specialist third-parties; the internal audit department s responsibilities include reporting to the audit committee on the effectiveness of internal control systems with a particular focus on those areas identified as being the greatest risk to the Group; follow-up processes were used to ensure there was an appropriate response to changes and developments in risks and the control environment. HOME RETAIL GROUP Annual Report 07 > Corporate Governance

46 Corporate Governance continued Relations with institutional shareholders The Company recognises the importance of communicating with its shareholders and will do so through a variety of channels including the Annual Report, the Annual General Meeting and the processes described below. Although the majority of shareholder contact is with the chief executive and the finance director (supported by management specialising in investor relations), it is the responsibility of the Board as a whole, led by the chairman, to ensure that a satisfactory dialogue with shareholders takes place. As part of the demerger process, a programme of investor meetings was held by the chief executive and finance director. These meetings took place with investors in the UK, the USA and other major financial centres in Europe. Since then, meetings with investors have been held following the interim results announcement. A monthly summary of all important or relevant issues raised by shareholders during the course of meetings and discussions is circulated to the Board and reviewed as appropriate at scheduled Board meetings. The shareholders have a direct line of communication to the chairman particularly if there are areas for concern, whether it be about performance, strategy or governance. The chairman has written to the Company s largest shareholders explaining the importance the Board attaches to open communications and confirming his availability to meet with them. It is proposed to commission independent research by a third party later in 2007 in order to provide the Board with an insight on the views of major shareholders. All directors, including the chairmen of the audit and remuneration committees, intend to be present at the Annual General Meeting and be available to answer shareholders questions. Voting at the Annual General Meeting will be by way of a poll by members present at the meeting and following each vote the level of proxies lodged on each resolution, the balance for and against the resolution and the number of votes withheld will be displayed. The results of voting at the Annual General Meeting will also be added to the Company s website as soon as possible after each meeting.

Directors Remuneration Report 47 Chairman s statement I am pleased to present the first Home Retail Group report on directors remuneration. The last year has been both exciting and challenging with Home Retail Group being created from the GUS demerger in October 2006. Prior to this date, the demerger remuneration arrangements and a remuneration policy for the future were approved by GUS shareholders. This policy for the newly formed company is competitive and has a significant proportion of the reward package based on performancerelated elements along with appropriate and stretching performance conditions. In writing this report the remuneration committee has adopted the principles of good governance relating to directors remuneration as set out in the Combined Code. The report complies with the Companies Act 1985, amended by the Directors Remuneration Report Regulations 2002 and the Listing Rules of the Financial Services Authority. The report has been prepared by the remuneration committee on behalf of the Board. Committee details Role and membership The remuneration committee is a committee of the Board. The members of the committee are: Andy Hornby (Chairman) John Coombe Oliver Stocken (from 14 November 2006) Penny Hughes (from 11 December 2006) Andy Hornby and John Coombe were appointed to the remuneration committee on 5 July 2006, the date they were appointed to the Home Retail Group Board. The remuneration committee is responsible for making recommendations to the Board on the Group s policy on the remuneration of the Operating Board and specific remuneration packages for each of the executive directors and the members of the Operating Board, including pension rights and any compensation payments. The remuneration of the non-executive directors and the chairman is reserved for consideration by the Board as a whole. No director is involved in any discussions about his or her own remuneration. The committee met on five occasions during the year. Attendance at these meetings is set out in the Corporate Governance statement on page 43. Advisers At the invitation of the chairman of the committee, the chief executive, Terry Duddy, attended meetings to give background information on remuneration matters. During the year, the committee was advised by Linklaters on legal matters and Towers Perrin on matters relating to performance conditions for long term incentive plans, executive remuneration issues and to provide salary survey data. Towers Perrin did not provide Home Retail Group with any other services. Linklaters also provide corporate legal advice to Home Retail Group. In addition, Watson Wyatt provided information on retirement benefits. The committee was also advised by Mike Sibbald, group human resources director, and the secretary to the committee was Gordon Bentley, company secretary. The terms of reference of the committee can be found on the Company website www.homeretailgroup.com. Company policy statement The current remuneration policy was determined in advance of the demerger from GUS and was disclosed in the shareholder circular dated 26 July 2006. The objective of Home Retail Group is to perform consistently in the upper quartile of the general retail sector. The purpose of the remuneration strategy is to support this corporate objective through a structure which reflects not only the progress of the Home Retail Group share price but also its relative performance against other retailers. Home Retail Group operates in a competitive environment which continues to be influenced by private equity funds (which have been particularly active in the retail sector) offering significant investment and employment opportunities. Home Retail Group has therefore adopted an incentive structure of: setting base salary at median supporting upper quartile performance through annual participation in performance share plans and the opportunity for voluntary deferral of annual bonus to participate in a co-investment plan increasing the proportion of variable pay with seniority HOME RETAIL GROUP Annual Report 07 > Directors Remuneration Report

48 Directors Remuneration Report continued The reward strategy will continue to be reviewed to enable Home Retail Group to recruit, retain and motivate employees. In addition, employees will be encouraged to participate in Home Retail Group as shareholders through all-employee share plans. Elements of remuneration The remuneration package is weighted toward the performance-related variable elements with more than 50% of the total potential proportion of pay (excluding pensions and benefits) being performance-related. The elements of the executive remuneration package are detailed below, each supporting the overall objectives of the remuneration policy. Element Purpose Performance measure Base pay Reflects competitive market level Individual performance for annual pay award and individual performance Annual bonus Achievement of annual financial targets Benchmark profit before tax Co-Investment Plan Encourage re-investment of bonus in shares, To be set in early 2008 following the agreement with matching opportunities of the relevant three-year business plan Performance share plan Rewards over-performance compared Relative TSR against a retail comparator to peer group group over a three year period and subject to overall satisfactory financial performance External consultants will be used to calculate whether and the extent to which such performance conditions have been met. The methodology for this will be disclosed at the appropriate time. Base salary and benefits Salaries are reviewed annually and adjustments are made to reflect external market movements and individual performance. A benchmarking process is undertaken using external consultants to provide data about market salary levels. In addition, executive directors receive other benefits including a car or car cash alternative, private health cover, pension and life insurance. All are offered in line with competitive practice. The only element of the package that is pensionable is base pay. Annual bonus To reward annual performance, executive directors are eligible for an annual incentive with a nil payment at the agreed target for the relevant year and a maximum of 150% of base salary for substantially exceeding the target. The remuneration committee sets annual bonus targets by reference to the Board-approved budget and external expectations of financial results. Bonuses for the financial year 2007/08 are based on growth in benchmark profit before tax. Co-investment plan Executive directors are given the opportunity to defer receipt of their bonus and invest it in shares under the co-investment plan to reward sustained business performance. As previously disclosed, in respect of the bonus awarded for the period to 3 March 2007, the rules of the GUS co-investment plan will apply; thereafter the rules of the Home Retail Group co-investment plan (detailed below) will apply. The receipt of matching shares is subject to the satisfaction of a performance condition measured over a three-year period, the retention of invested shares and continued employment. The performance condition and matching ratio will be set by the remuneration committee in early 2008 at a time when the three year business plan for the period over which the Home Retail Group co-investment plan will first operate has been agreed by the Board and will be sufficiently stretching to drive sustained Company performance. The number of shares acquired on behalf of the executive director is matched on a sliding scale and will vary from a ratio of zero to one (0:1), to a maximum ratio of two to one (2:1) where targets are substantially exceeded. Dividend equivalent payments will be made on matching awards at the time of vesting. If an executive director resigns during the three-year period, they will forfeit the right to the matching shares and any associated dividends. If an executive director leaves due to redundancy or retirement during the three-year period, the matching shares are subject to the performance condition at the end of the measurement period being met and are time pro-rated.

Directors Remuneration Report continued 49 Performance share plan The performance share plan gives executive directors the right to acquire shares after a three-year vesting period at no cost, subject to the satisfaction of certain conditions and continued employment. It underpins the longer term incentive structure by providing a share-based reward which vests only when Home Retail Group outperforms its peers. Under the current remuneration policy, performance under this plan is assessed in terms of three year weighted total shareholder return (TSR) in relation to the following peer group of companies who operate in the general retail sector. Alliance Boots Group Kesa Electricals Tesco Carphone Warehouse Kingfisher Topps Tiles Debenhams Next W H Smith DSG International Marks & Spencer Group Woolworths Group Halfords Group J Sainsbury Morrisons Signet Group None of the awards vest if the Home Retail Group s total shareholder return is below the median return for the comparator group. Once Home Retail Group achieves median performance, 25% of the award may vest, while 100% of the award may be earned for a return at the 81st percentile or better. The maximum grant normally available to executive directors is 100% of salary, converted to shares at the price prevailing at the time the awards are made. In exceptional circumstances the remuneration committee has discretion to grant a higher amount. The awards vest, to the extent that the performance tests are met, after three years. Dividend equivalent payments will be made after vesting in respect of the relevant three-year period. If an executive director resigns during the three-year period, the award lapses at the date of termination. If an executive director is made redundant or retires during the three-year period the award is subject to the performance condition being met at the end of the measurement period and is then time pro-rated. All-employee share plans Home Retail Group encourages all employees to become shareholders through the operation of all-employee plans. In 2006, as part of the demerger, all employees, including executive directors were offered 200 worth of shares in a one-off free share grant under an HMRC approved Share Incentive Plan, with some 30,000 employess taking up the share grant. During 2007 Home Retail Group will also invite employees, including executive directors, to participate in a Sharesave plan approved by HMRC. Employees will be invited to apply for options to acquire Home Retail Group shares. The number of shares over which the option is granted is determined by the amount which the employee commits to save under a savings contract. The option price will be 80% of the market value of a Home Retail Group share calculated as the average price over the three previous business days before the date of invitation. Employees can elect for a savings contract to run over a period of three or five-years with a maximum saving of 250 per month. Options will be exercisable during six months after the end of a savings contract. Non-executive directors The Home Retail Group policy on non-executive directors remuneration is as follows: non-executive directors should not receive any benefits in kind remuneration should be in line with recognised best practice and sufficient to attract and retain high calibre non-executive directors remuneration should be set by reference to the responsibilities undertaken by the non-executive director, taking into account that each director is expected to be a member of the audit, remuneration and nomination committees remuneration should be a combination of cash fees paid monthly and Home Retail Group shares, issued twice each year non-executive directors are obliged to retain shares awarded until retirement from the Board. Any tax liability connected to these arrangements is the responsibility of the individual director non-executive directors should not participate in share plans operated by Home Retail Group HOME RETAIL GROUP Annual Report 07 > Directors Remuneration Report

50 Directors Remuneration Report continued The fees of non-executive directors are reviewed every two years, with the next review in 2009. The review is based on market practice of FTSE 100 companies, anticipated number of days worked and responsibilities. The remuneration with effect from 1 April 2007 is as follows: Fees Ordinary 000 shares Chairman 175 23,000 Non-executive base fee 40 6,000 Senior independent director 10 Chair of audit/remuneration committee 10 4,500 Demerger background Until 11 October 2006, Home Retail Group (formerly ARG) was part of the GUS Group. At that time, GUS demerged its two businesses, ARG (now Home Retail Group) and Experian. As a result of the demerger, a number of outstanding options and awards granted under the GUS share plans either vested early or rolled over into equivalent options and awards over Home Retail Group shares (either on a voluntary or compulsory basis). The impact of the demerger on outstanding options and awards over GUS shares was detailed in the shareholder circular dated 26 July 2006, and is summarised below: Share options GUS operated executive share option schemes ( ESOS ). Non-approved options granted under the GUS ESOS in 2005 and 2006 were subject to compulsory rollover at the time of the demerger. All options granted in 2004 and approved options granted in 2005 were eligible for voluntary rollover at that time. Where options were subject to performance conditions, the rolled over options are subject to equivalent performance conditions. All options granted prior to 2004 vested as normal prior to the demerger. Co-investment plan Under the GUS co-investment plan, the executive directors had the opportunity to invest some or all of their annual bonus in GUS shares ( invested shares ), which were held on their behalf by a trustee. At the same time, they were granted a matching nil-cost share option ( matching share option ) over an additional number of GUS shares. In normal circumstances, matching share options became exercisable after three years subject to continued employment and retention of the invested shares, and the right to the matching shares was forfeited if a director resigned. In accordance with the rules of the GUS co-investment plan, the executive directors had been invited to participate in the GUS co-investment plan in respect of bonuses payable for the period to 3 March 2007. Awards will be made in June 2007 and will be over Home Retail Group shares, but will otherwise be on the terms of the GUS co-investment plan. Matching share options granted in 2006 were subject to compulsory rollover at the time of the demerger. Awards made to the executive directors in 2004 and 2005 were eligible for reinvestment in a one-off Home Retail Group re-investment plan, which is described further below. Performance share plan Awards under the GUS performance share plan were made in the form of a conditional right to acquire shares after a three-year vesting period, at no cost to the participant. Awards granted in 2005 and 2006 were subject to compulsory rollover at the time of demerger and will vest in accordance with the GUS performance share plan rules. The performance condition for awards granted in 2005 is based on the TSR of GUS against a comparator group for the period from date of grant to the demerger, and the TSR of Home Retail Group against a comparator group from the demerger to the normal vesting date. The performance condition for awards granted in 2006 is based on the TSR of Home Retail Group against its comparator group from the date of demerger to the normal vesting date, a slightly shortened period. Savings-related share option scheme ( SAYE ) All unvested GUS SAYE options vested early at the time of the demerger.

Directors Remuneration Report continued 51 Rollover Where options/awards were subject to rollover, the formula below was used: Number of Home Retail Group shares = x * A y Exercise price of options over Home Retail Group shares = y * B x Where: x = the volume-weighted average price of a GUS share on 6 October 2006 (995.118p) y = the average mid-market closing price of a Home Retail Group share on 11-13 October 2006 (417.17p) A = the number of GUS shares under option B = the exercise price per share of an option over GUS shares Summary The table below summarises the impact of the demerger on each of the GUS share plans: Plan Impact 2004 approved share options Vested early or option for voluntary rollover 2004 non-approved share options 2005 approved share options Voluntary rollover or lapse 2005 non-approved share options Compulsory rollover 2006 non-approved share options 2004 co-investment plan Vested early or option to reinvest in re-investment plan 2005 co-investment plan 2006 co-investment plan Compulsory rollover 2004 performance share plan Vested early 2005 performance share plan Compulsory rollover 2006 performance share plan 2002 5 year save as you earn Vested early 2003 5 year save as you earn 2004 3 year and 5 year save as you earn 2005 3 year and 5 year save as you earn Performance graph The graph below compares the total shareholder return for Home Retail Group against the FTSE 100 Index for the period from demerger to the period ended 3 March 2007. The directors feel that the FTSE 100 Index is the most appropriate index against which TSR should be measured as it is a widely used and understood index of leading UK companies. The graph has been prepared in accordance with the assumptions contained in the relevant legislation. Value of 100 invested on demerger Home Retail Group FTSE 100 103.44 101.53 11 October 2006 3 March 2007 HOME RETAIL GROUP Annual Report 07 > Directors Remuneration Report

52 Directors Remuneration Report continued The following sections are audited directors remuneration, share options, long term incentive plans and retirement benefits Directors remuneration The remuneration of the directors is for the 11 month period 1 April 2006 to 3 March 2007 and therefore includes the period before Home Retail Group was listed. From 11 October 2006 (the date of demerger) the annual salary of Terry Duddy was 800,000 and that of Richard Ashton was 390,000. Shortened period ended 3 March 2007 Year ended 31 March 2006 000 Salary/ Annual Other Taxable Total Salary/ Annual Other Taxable Total fees bonus payments benefits fees bonus payments benefits (Note 4) (Note 2) Executive directors Terry Duddy (Note 1) 708 744 303 38 1,793 710 305 25 1,040 Richard Ashton (Note 1) 336 363 77 17 793 290 145 18 453 Non-executive directors John Coombe (Note 1) 85 85 60 60 Andy Hornby (Note 1) 67 67 58 58 Penny Hughes (Note 3) 13 13 Oliver Stocken (Note 1) 161 161 81 81 Note 1 Prior to the demerger on 11 October 2006, Terry Duddy was an executive director of GUS plc, and Andy Hornby, Oliver Stocken and John Coombe were non-executive directors of GUS plc. Terry Duddy, Richard Ashton, Oliver Stocken, Andy Hornby and John Coombe were all appointed to the Home Retail Group board on 5 July 2006. Note 2 For the year ending 31 March 2006 this figure is a one-off bonus payment which was not part of the annual bonus scheme. Note 3 Penny Hughes was appointed to the Board on 11 December 2006. Note 4 For the period ended 3 March 2007, in accordance with GUS awards from 2004 onwards, these figures are dividend equivalents paid in cash on vested shares under the GUS performance share plan and GUS co-investment plan which vested early at the time of demerger. Share options GUS share options The following options over GUS shares, granted under the GUS executive option scheme, were exercised during the year. Grant date Number of options Options granted Options exercised Total number of Exercise price Share price on Date from which Expiry date at 1 April 2006 during the period during the period options at date of exercise exercisable (Note 1) (Note 1) 3 March 2007 Terry Duddy 11/06/01 150,155 150,155 612.7p 1023.8p 11/06/04 03/04/07 06/06/02 80,398 80,398 653.0p 1023.8p 06/06/05 03/04/07 19/06/03 85,862 85,862 675.5p 1023.8p 19/06/03 03/04/07 01/06/04 82,797 82,797 809.2p 1023.8p 04/10/06 03/04/07 Richard Ashton 17/12/01 59,842 59,842 635.0p 1023.8p 17/12/04 03/04/07 06/06/02 32,159 32,159 653.0p 1023.8p 06/06/05 03/04/07 19/06/03 34,789 34,789 675.5p 1023.8p 19/06/06 03/04/07 01/06/04 32,130 32,130 809.2p 1023.8p 04/10/06 03/04/07 Note 1 2004 options vested early on the date of court sanction, 4 October 2006, due to the demerger, with an expiry date 6 months thereafter.

Directors Remuneration Report continued 53 Home Retail Group share options Following the demerger, Home Retail Group granted the following rolled over options over its shares, which are governed by the rules of the GUS executive share option scheme. Original Number of options Options granted Options exercised Total number of Exercise price Share price on Date from which Expiry date Grant date at 1 April 2006 during the period during the period options at (Note 1) date of exercise exercisable (Note 2) (Note 1) 3 March 2007 Terry Duddy 31/05/05 197,277 197,277 359.9p 31/05/08 30/05/15 02/06/06 193,201 193,201 388.2p 02/06/09 02/06/16 Richard Ashton 31/05/05 80,576 80,576 359.9p 31/05/08 30/05/15 02/06/06 90,159 90,159 388.2p 02/06/09 02/06/16 Note 1 The rollover formula is detailed in the demerger background section. Note 2 There is a performance test based on adjusted earnings per share (EPS). This requires EPS compound annual growth to exceed compound annual retail price inflation by 4% per annum over a continuous three-year period. GUS SAYE The following SAYE options over GUS shares, granted under the GUS savings-related share option scheme, vested during the period ended 3 March 2007. Number of options Options granted Options exercised Options lapsed Number of Exercise price Share price on Date from which Expiry date at 1 April 2006 during the period during the period during the period options at date of exercise exercisable (Note 1) 3 March 2007 (Note 1) Terry Duddy 4,394 4,394 384.0p 1033.0p 01/05/06 31/10/06 Richard Ashton (Note 2) 3,164 2,595 569 523.0p 1010.75p 04/10/06 03/01/07 Oliver Stocken (Note 3) 4,394 4,394 384.0p 1033.0p 01/05/06 31/10/06 On 2 May 2006, Terry Duddy and Oliver Stocken each exercised 4,394 options at an option price of 384.0p under the 2001 scheme resulting in a gain of 28,517 each. The GUS share price on the date of exercise was 1033.0p. Oliver Stocken was responsible for paying tax on the gain. Note 1 Due to the demerger, all unvested SAYE options vested early on the date of court sanction, 4 October 2006 with an expiry date of 3 January 2007. Note 2 Due to the demerger, Richard Ashton s SAYE vested early to the extent of his savings at the date of exercise and as a result 569 options lapsed. Note 3 Oliver Stocken has not participated in any share plans since the 2001 SAYE. Details of the market price of Home Retail Group shares from the date of the demerger to 3 March 2007 are shown in the table below. At the period end 420.0p Highest price during the period 444.5p Lowest price during the period 399.3p Price on first day of trading 410.0p Details of the market price of GUS shares from 1 April 2006 to the date of demerger are shown in the table below. On the last day of trading 990.0p Highest price during the period 1085.0p Lowest price during the period 885.0p HOME RETAIL GROUP Annual Report 07 > Directors Remuneration Report

54 Directors Remuneration Report continued Long term incentive plans Performance share plan Awards to current directors under the plans are as follows: GUS performance share plan The following awards over GUS shares, granted under the GUS performance share plan, vested during the period ended 3 March 2007. Plan shares awarded Plan shares awarded Plan shares released Total plan shares Share price on Share price on Vesting date at 31 March 2006 during the period during the period held at date of award date of release to 3 March 2007 to 3 March 2007 3 March 2007 (Note 1) Terry Duddy 19/06/03 85,862 85,862 675.5p 928.8p 19/06/06 01/06/04 82,797 82,797 809.2p 963.6p 04/10/06 Richard Ashton 19/06/03 17,394 17,394 675.5p 928.8p 19/06/06 01/06/04 16,065 16,065 809.2p 963.6p 04/10/06 Note 1 Includes normal vesting of 2003 awards and early vesting of 2004 awards due to the court sanction of the demerger on 4 October 2006. Home Retail Group performance share plan Following the demerger, Home Retail Group granted rolled over awards over its shares, which are governed by the rules of the GUS performance share plan, and also granted awards under the Home Retail Group performance share plan. All of these awards are included in the table below. Plan shares awarded Plan shares awarded Plan shares released Total plan shares Share price on Share price on Vesting date at 31 March 2006 during the period during the period held at date of award date of release to 3 March 2007 to 3 March 2007 3 March 2007 (Note 1) Terry Duddy 31/05/05 197,277 197,277 417.2p 31/05/08 02/06/06 193,201 193,201 417.2p 02/06/09 16/10/06 57,483 57,483 417.2p 16/10/09 Richard Ashton 31/05/05 40,287 40,287 417.2p 31/05/08 02/06/06 90,159 90,159 417.2p 02/06/09 16/10/06 27,998 27,998 417.2p 16/10/09 Note 1 The rollover formula is detailed in the demerger background section. Co-investment plan and reinvestment plan Home Retail Group shares held on behalf of participants under the GUS co-investment plan and reinvested shares granted under the Home Retail Group reinvestment plan are included in the tables below and in the table of directors interests on page 40. GUS co-investment plan The effect of the demerger on outstanding invested shares and matching share options is explained in the demerger section. The following awards, granted under the GUS co-investment plan, vested during the year. Invested Matching Invested and Matching shares Share price on Vesting date (note 1) shares shares released during period date of release to 3 March 2007 Terry Duddy 20/06/03 40,132 158,193 198,325 929.0p 20/06/06 Richard Ashton 20/06/03 8,989 35,435 44,424 929.0p 20/06/06 Note 1 These matching share options remained exercisable until 4 April 2007. Home Retail Group co-investment plan For the year ending 31 March 2006 Terry Duddy participated in the GUS annual bonus scheme and received a bonus of 305,000 and he chose to invest the whole of this bonus. Richard Ashton participated in the ARG annual bonus scheme and did not receive a bonus and therefore did not participate in the plan.

Directors Remuneration Report continued 55 Following the demerger, Home Retail Group granted rolled over awards over its shares, which are governed by the rules of the GUS co-investment plan. Invested Matching Share price on Invested and Share price on Vesting date shares shares date of award matching shares date of release (Note 1) (Note 1) released during period to 3 March 2007 Terry Duddy 12/06/06 19,513 70,610 417.2p 12/06/09 Note 1 the 2006 awards were subject to compulsory rollover and the share price on date of award is the rollover share price. For the period ended 3 March 2007 Terry Duddy will receive a bonus of 744,000 and Richard Ashton will receive a bonus of 362,700. If invested in Home Retail Group shares, a corresponding matching award will be granted under the GUS co-investment plan as explained above. The bonus payment for the period ended 3 March 2007 is 93% of salary based on a shortened 11-month period due to the change of year-end, which is equivalent to a payment of 100% for a full 12 month year. The matching ratio will therefore be applied on the basis of 2:1. Home Retail Group re-investment plan A one-off plan was offered to executive directors at the time of demerger where 2004 and 2005 invested and matching shares were re-invested into a new plan. Reinvestment Matching award Share price on Invested and Share price on Vesting date Invested shares Matching option date of award matching shares date of release released during period to 3 March 2007 Terry Duddy 76,849 722,576 799,425 417.2p 16/10/09 399,713 417.2p 16/10/10 399,712 417.2p 16/10/11 Richard Ashton 24,571 231,043 255,614 417.2p 16/10/09 127,807 417.2p 16/10/10 127,807 417.2p 16/10/11 The receipt of the matching award is subject to the satisfaction of performance conditions, the retention of reinvested awards and continued employment. This one-off plan granted a matching award of Home Retail Group shares if participants agreed to re-invest the invested shares and/or matching awards from the 2004 and 2005 operation of the GUS co-investment plan. The matching award is calculated on the basis of two Home Retail Group shares for each Home Retail Group share reinvestment by the participant. The first 50% of a matching award will vest subject to satisfaction of performance conditions. Half of this part of the matching award will vest according to the performance of Home Retail Group s total shareholder return relative to a group of comparator companies. None of this part of the award will vest if Home Retail Group s TSR is below median for the comparator group, 25% will vest at median rising on a straight line basis to 100% of this part of the award vesting for performance at the 81st percentile or better. The other half of this part of the matching award will be subject to a return on invested capital measure. This first 50% of the matching award will vest in two equal tranches on the fourth and fifth anniversaries of the grant. The remaining 50% of the matching award is time-based and will vest on the third anniversary of the grant. Retirement Benefits Terry Duddy Prior to 1 April 2006, Terry Duddy was a member of the pension scheme which will provide him on retirement at age 60 with a pension in line with pre 6 April 2006 HM Revenue & Customs limits, with pensionable salary limited to the pension earnings cap. Terry Duddy previously elected to have paid to him a cash sum for investment at his own discretion, which ceased from April 2006. The amount paid in 2006 was 278,024. From April 2006, Terry Duddy has elected to join the Home Retail Group secured unfunded retirement benefits scheme and will receive on retirement at age 60 a pension of one thirtieth of full pensionable salary for each year of service. The pension figures in the table below reflect both his funded and unfunded entitlements. Richard Ashton Richard Ashton is a member of the pension scheme which will provide him on retirement at age 60 with a pension of up to two thirds of the pension earnings cap subject to HM Revenue & Customs limits. In addition, to provide benefits in excess of the pensions earnings cap, Richard Ashton elected to have paid to him a cash sum for investment at his own discretion, which ceased from April 2006. The amount paid in 2006 was 305,469. HOME RETAIL GROUP Annual Report 07 > Directors Remuneration Report

56 Directors Remuneration Report continued From April 2006, Richard Ashton remains a member of the pension scheme with pensionable salary limited to the pension earnings cap. For benefits in excess of the pension earnings cap, he has joined the Home Retail Group secured unfunded retirement benefit scheme from April 2006. The pension figures below reflect both his funded and unfunded entitlements The table set out below provides the disclosure of directors pension entitlements in respect of benefits from tax-exempt schemes and unfunded arrangements: 000 Accrued pension Accrued pension Transfer value at Transfer value at Changes in transfer Additional pension Transfer value of the at 3 March 2007 at 31 March 2006 3 March 2007 31 March 2006 values (less director s earned to increase (less director s per annum per annum contributions) 3 March 2007 contributions) (net of inflation per annum) Terry Duddy 35 13 418 150 267 21 253 Richard Ashton 22 12 150 78 64 9 56 Service contracts Both Terry Duddy and Richard Ashton were appointed as executive directors on 5 July 2006. Terry Duddy Terry Duddy has a service contract dated 27 July 1999, which provides for twelve months notice on the part of the Group and six months by the executive. The contract ends automatically when Mr Duddy reaches the normal retirement age of 60. Under the terms of the contract, the Group reserves the option, in its absolute discretion, to terminate the executive s employment by paying in lieu of notice. Richard Ashton Richard Ashton has a service contract dated 1 March 2005, which provides for twelve months notice on the part of the Group and six months by the executive. The contract ends automatically when Mr Ashton reaches the normal retirement age of 60. No directors service contracts provide for extended notice periods or compensation in the event of a change of control. Chairman and non-executive directors The agreements for the non-executive directors can be terminated without compensation and with one months notice other than the chairman who has a notice period of three months. Non-executive directors are appointed for a specific term of three years and the appointment reviewed at the end of the three-year term. By order of the Board Andy Hornby Chairman Remuneration Committee

Statement of Directors Responsibilities 57 The following statement, which should be read in conjunction with the report of the auditors set out on page 58, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the Annual Report and Financial Statements. The directors are responsible for preparing the Annual Report, the Directors Remuneration Report and the Group and the Company Financial Statements in accordance with applicable law and regulations. Company law requires the directors to prepare Financial Statements for each financial year. Under that law the directors have prepared the Group Financial Statements in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union, and the Company Financial Statements and the Directors Remuneration Report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The Group and Company Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those Financial Statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state that the Group Financial Statements comply with IFRSs as adopted by the European Union and with regard to the Company Financial Statements, that applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; prepare the Group and Company Financial Statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary. The directors confirm that they have complied with the above requirements in preparing the Financial Statements. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group Financial Statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation, and the Company Financial Statements and the Directors Remuneration Report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Company has a website which contains information on Group activities and published financial results. The directors are responsible for the maintenance and integrity of this website. Information published on the Internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. HOME RETAIL GROUP Annual Report 07 > Statement of Directors Responsibilities

58 Independent Auditors Report to the members of Home Retail Group plc - Group We have audited the Group Financial Statements of Home Retail Group plc for the period ended 3 March 2007 which comprise the Consolidated Income Statement, the Consolidated Statement of Recognised Income and Expense, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement and the related notes. These Group Financial Statements have been prepared under the accounting policies set out therein. We have reported separately on the Parent Company Financial Statements of Home Retail Group plc for the period ended 3 March 2007 and on the information in the Directors Remuneration Report that is described as having been audited. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Annual Report and the Group Financial Statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the Group Financial Statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Group Financial Statements give a true and fair view and whether the Group Financial Statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors Report is consistent with the Group Financial Statements. The information given in the Directors Report includes that specific information presented in the Business Review that is cross referred from the Business Review section of the Directors Report. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director s remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company s compliance with the nine provisions of the Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited Group Financial Statements. The other information comprises only the Chairman s Statement, the Business Review, the Board of Directors, the Directors Report, the Corporate Governance Statement and the unaudited part of the Directors Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group Financial Statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group Financial Statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group Financial Statements, and of whether the accounting policies are appropriate to the Group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group Financial Statements. Opinion In our opinion: the Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group s affairs as at 3 March 2007 and of its profit and cash flows for the period then ended; the Group Financial Statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and the information given in the Directors Report is consistent with the Group Financial Statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 2 May 2007

Consolidated Income Statement For the short period 1 April 2006 to 3 March 2007 59 Short period to 3 March 2007 Year to 31 March 2006 Before Before exceptional Exceptional exceptional Exceptional items items 2007 items items 2006 Notes m m m m m m Revenue 5,6 5,606.7 5,606.7 5,548.0 5,548.0 Cost of sales (3,680.5) (3,680.5) (3,686.5) (3,686.5) Gross profit 1,926.2 1,926.2 1,861.5 1,861.5 Net operating expenses 8,10 (1,598.3) (22.7) (1,621.0) (1,515.5) (24.7) (1,540.2) Operating profit 5 327.9 (22.7) 305.2 346.0 (24.7) 321.3 Finance income 55.5 6.9 62.4 45.7 45.7 Finance expense (71.4) (71.4) (90.4) (90.4) Net financing costs 10,11 (15.9) 6.9 (9.0) (44.7) (44.7) Share of post-tax profit/(losses) of joint ventures and associates 18 0.7 0.7 (4.2) (4.2) Profit before tax 312.7 (15.8) 296.9 297.1 (24.7) 272.4 Taxation 12 (104.2) (5.3) (109.5) (103.4) 7.4 (96.0) Profit for the period attributable to equity shareholders 208.5 (21.1) 187.4 193.7 (17.3) 176.4 Earnings per share pence pence Basic 14 21.6 20.3 Diluted 14 21.4 20.1 Short period to Year to 3 March 31 March 2007 2006 Non-GAAP measures Notes m m Reconciliation of profit before tax (PBT) to benchmark PBT Profit before tax 296.9 272.4 Effect of exceptional items 10 15.8 24.7 Effect of financing fair value remeasurements 11 0.1 2.0 Financing impact on retirement benefit balances 11 (12.1) (2.6) Effect of demerger incentive schemes 30 5.8 Benchmark PBT 306.5 296.5 Benchmark earnings per share pence pence Basic 14 23.7 22.2 Diluted 14 23.5 22.1 HOME RETAIL GROUP Annual Report 07 > Consolidated Income Statement

60 Consolidated Statement of Recognised Income and Expense For the short period 1 April 2006 to 3 March 2007 2007 2006 Notes m m Net (expense)/income recognised directly in equity Fair value (losses)/gains in the period (2.7) 5.7 Actuarial (losses)/gains in respect of defined benefit pension schemes 25 (18.3) 5.7 Currency translation differences 0.9 (0.3) Tax credit/(charge) in respect of items taken directly to equity 10.0 (2.3) Net (expense)/income recognised directly in equity for the period (10.1) 8.8 Profit for the period attributable to equity shareholders 187.4 176.4 Total recognised income for the period attributable to equity shareholders 177.3 185.2

Consolidated Balance Sheet At 3 March 2007 61 3 March 31 March 2007 2006 Notes m m ASSETS Non-current assets Goodwill 15 1,878.9 1,878.9 Intangible assets 16 73.4 61.5 Property, plant and equipment 17 691.6 696.8 Investment in joint ventures and associates 18 9.2 0.4 Deferred tax assets 27 74.4 108.8 Trade and other receivables 20 18.0 43.1 Retirement benefit assets 25 9.3 25.5 Other financial assets 26 8.5 5.5 Total non-current assets 2,763.3 2,820.5 Current assets Inventories 19 906.4 881.0 Trade and other receivables 20 569.4 1,478.1 Current tax assets 3.0 6.7 Other financial assets 26 1.8 Cash and cash equivalents 21 283.8 130.0 Total current assets 1,762.6 2,497.6 Total assets 4,525.9 5,318.1 LIABILITIES Non-current liabilities Trade and other payables 22 (34.0) (27.8) Loans and borrowings 23 (222.5) Provisions 24 (57.1) (55.0) Deferred tax liabilities 27 (44.8) (67.2) Total non-current liabilities (135.9) (372.5) Current liabilities Trade and other payables 22 (1,025.1) (862.7) Loans and borrowings 23 (223.6) (1,046.3) Provisions 24 (25.2) (33.6) Other financial liabilities 26 (2.2) Current tax liabilities (35.2) (53.1) Total current liabilities (1,311.3) (1,995.7) Total liabilities (1,447.2) (2,368.2) Net assets 3,078.7 2,949.9 EQUITY Share capital 28, 29 87.7 2,895.6 Merger reserve 29 (348.4) (348.4) Other reserves 29 (11.4) (4.3) Retained earnings 29 3,350.8 407.0 Total equity 3,078.7 2,949.9 The Financial Statements on pages 59 to 96 were approved by the Board of Directors on 2 May 2007 and were signed on its behalf by: Terry Duddy, chief executive Richard Ashton, finance director HOME RETAIL GROUP Annual Report 07 > Consolidated Balance Sheet

62 Consolidated Cash Flow Statement For the short period 1 April 2006 to 3 March 2007 2007 2006 Notes m m Cash flows from operating activities Cash generated from operations 34a 604.5 367.4 Interest received 13.6 19.0 Interest paid (35.0) (65.1) Tax paid (101.6) (91.0) Net cash inflow from operating activities 481.5 230.3 Cash flows from investing activities Purchase of property, plant and equipment (134.1) (231.6) Proceeds from the disposal of property, plant and equipment 3.8 3.0 Purchase of intangible assets (28.3) (23.3) Loan to joint venture (8.1) Disposal of subsidiary net of cash disposed (3.8) Acquisition of businesses (45.1) Net cash used in investing activities (170.5) (297.0) Cash flows from financing activities Purchase of own shares (6.1) (Payment)/receipts of amounts (to)/from GUS plc (50.3) 177.7 Repayment of finance leases (1.2) (1.0) Home Retail Group share of GUS plc final dividend (62.0) Dividends paid (34.6) Net cash used in financing activities (154.2) 176.7 Net increase in cash and cash equivalents 156.8 110.0 Movement in cash and cash equivalents Cash and cash equivalents at the beginning of the period 130.0 20.0 Effect of foreign exchange rate changes (3.0) Net increase in cash and cash equivalents 156.8 110.0 Cash and cash equivalents at the end of the period 283.8 130.0

Analysis of Net Debt For the short period 1 April 2006 to 3 March 2007 63 2007 Non-GAAP Measures Notes m Financing net debt: Cash at bank and in hand 21 283.8 Loans and borrowings 23 (223.6) Total financing net debt 60.2 Operating net debt: Property leases (2,920.1) Total operating net debt (2,920.1) Total net debt (2,859.9) Deduct: Operating leases that are off balance sheet 2,920.1 Total net debt reflected in balance sheet 60.2 The Group uses the term net debt which provides the Group s aggregate net indebtedness to banks and other financial institutions together with debt-like liabilities, notably property leases. The capitalised value of these property leases is 2,920.1m (2006: 2,795.0m) based upon discounting the current rentals at the estimated current long term cost of borrowing of 5.4%. The analysis of net debt has not been provided for the prior year, as it is non comparable given the demerger of the Group from GUS plc in 2006. HOME RETAIL GROUP Annual Report 07 > Analysis of Net Debt

64 Notes to the Financial Statements For the short period 1 April 2006 to 3 March 2007 1. GENERAL INFORMATION Home Retail Group plc ( the Company ), which is the ultimate parent company of Home Retail Group ( the Group ), is a public limited company incorporated and domiciled in England under the Companies Act 1985 and listed on the London Stock Exchange. Home Retail Group is a home and general merchandise retailer. These consolidated financial statements were authorised for issue by the Board of Directors on 2 May 2007. Statement of compliance The consolidated financial statements of Home Retail Group have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) and International Financial Reporting Interpretations Committee ( IFRIC ) interpretations as adopted by the European Union. They also comply with those parts of the Companies Act 1985 applicable to companies reporting under IFRSs. 2. BASIS OF PREPARATION Previously, Home Retail Group (then ARG) prepared its financial information for the financial year for the 12 months to 31 March except for the results of Homebase Limited which were included for the 12 months to 28 or 29 February each year, with adjustments to reflect the balance sheet movements in cash to the end of March. This was done to facilitate comparability of the income statement by avoiding the distortions that would arise relating to changes in the timing of Easter. In order to align the year-end across the Group, the Board of Directors have decided to amend the Group s financial year to a 52-week period ending on the Saturday closest to the end of February. Therefore, following the change of accounting reference date, the audited accounts have been prepared for the short-period ended 3 March 2007 with comparatives for the 12 months to 31 March 2006. Unless otherwise stated, references to 2007 within the notes to the financial statements are for the short period 1 April 2006 to 3 March 2007, in the case of balance sheet notes, as at 3 March 2007 with comparatives at 31 March 2006. The Group consolidated financial statements are presented in sterling, rounded to the nearest hundred thousand. They are prepared on the historic cost basis modified for the revaluation of certain financial instruments. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated, and are in line with the listing particulars. Group reorganisation Home Retail Group demerged from its parent company, GUS plc, with effect from 10 October 2006. Shares in Home Retail Group were admitted to the Official List of the Financial Services Authority and to trading on the London Stock Exchange s main market for listed securities on 11 October 2006. All Home Retail Group companies which were owned by GUS plc prior to demerger were transferred under the new ultimate parent company, Home Retail Group plc, prior to 11 October 2006. The introduction of this new ultimate holding company constitutes a group reconstruction and has been accounted for using merger accounting principles. Therefore, although the Group reorganisation did not become effective until 10 October 2006, these consolidated financial statements of Home Retail Group are presented as if the current Group structure had always been in place. In the prospectus, funding balances between the Group and GUS plc which were interest bearing and had the characteristics of debt, were presented as debt in the balance sheet, with the interest taken to the income statement. Prior to demerger, the net funding balances were reduced by 240.0m by means of a capitalisation and the financial statements reflect this capitalisation as having taken place just prior to 31 March 2005. Basis of consolidation The Group financial statements consist of the financial statements of the ultimate parent company (Home Retail Group plc), entities controlled by the Company (its subsidiaries) and the Group s share of its interests in joint ventures and associates. The accounting policies of subsidiaries are consistent with the policies adopted by the Group for the purposes of the Group s consolidation. Subsidiaries A subsidiary is an entity whose operating and financing policies are controlled by Home Retail Group plc. Subsidiaries are consolidated from the date on which control was transferred to Home Retail Group. Subsidiaries cease to be consolidated from the date that Home Retail Group no longer has control. Intercompany transactions, balances and unrealised gains on transactions between Home Retail Group companies have been eliminated on consolidation. Joint ventures and associates Joint ventures are entities in which the Group holds an interest on a long term basis and which are jointly controlled by the Group and one or more other interested parties under a contractual agreement. Associates are entities over which Home Retail Group has significant influence but not control. The equity method is used to account for investments in joint ventures and associates and investments are initially recognised at cost.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 65 Home Retail Group s share of net assets of its joint ventures and associates are included on the Group balance sheet. Home Retail Group s share of its joint ventures and associates post acquisition profits or losses are recognised in its income statement. The cumulative post acquisition movements are adjusted against the carrying value of the investment. The carrying amount of an investment in a joint venture or associate is tested for impairment by comparing its recoverable amount to its carrying amount whenever there is an indication that the investment may be impaired. Business combinations Under the requirements of IFRS 3, all business combinations are accounted for using the purchase method. The cost of business acquisitions is the aggregate of fair values, at the date of exchange, of assets given, liabilities incurred or assumed, equity instruments issued by the acquirer and any costs directly attributable to the business combination. The cost of a business combination is allocated at the acquisition date by recognising the acquiree s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at that date. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. Intangible assets are recognised if they meet the definition of an intangible asset contained in IAS 38 and its fair value can be measured reliably. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recognised as goodwill. Changes in accounting standards A number of new standards, amendments and interpretations are effective for the short period ended 3 March 2007, but have had no material impact on the results or the financial position of the Group. The impact of IFRIC 4 Determining whether an arrangement contains a lease, has been reflected through both the current period and prior year within Notes 8 and 31. At the balance sheet date a number of IFRSs and IFRIC interpretations were in issue but not yet effective. The Group has not earlyadopted IFRS 7 Financial instruments: Disclosures and the Capital disclosure amendment to IAS 1 Presentation of financial statements, which are applicable for accounting periods commencing on or after 1 January 2007. The Group has not early-adopted IFRS 8 Operating Segments which is effective for accounting periods beginning on or after 1 January 2009. These standards will be fully considered in due course. Critical accounting estimates and assumptions The preparation of Financial Statements requires management to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities. The resulting accounting estimates, which are based on management s best judgement at the date of the financial statements, will, by definition, seldom equal the related actual results. The estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and future periods where appropriate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Taxes The Group is subject to taxes in a number of jurisdictions. Significant judgement is required in determining the provision for income taxes as there are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the results for the year and the respective income tax and deferred tax provisions in the year in which such determination is made. Pension benefits The present value of the defined benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the defined benefit obligations and net pension costs include the expected long-term rate of return on the relevant plan assets and the discount rate. Any changes in these assumptions may impact the amounts disclosed in the Group s balance sheet and income statement. The expected return on plan assets is calculated by reference to the plan investments at the year-end and is a weighted average of the expected returns on each main asset type (based on market yields available on these asset types at the year-end). The Group determines the appropriate discount rate at the end of each year. This is the interest rate used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit obligations. In determining the appropriate discount rate, the Group considers the market yields of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity consistent with the estimated average term of the related pension liability. Other key assumptions for defined benefit obligations and pension costs are based in part on market conditions at the relevant year ends and additional information is disclosed in Note 25. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

66 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 Goodwill Goodwill is allocated to cash generating units ( CGUs ) at the level of each business segment. The recoverable amount of each of the business segments is determined based on value-in-use calculations. The key assumptions for the value-in-use calculation are those regarding discount rates, growth rates as well as expected changes to costs and selling prices in the period. Management have estimated the discount rate taking account of the specific risks inherent within the Group s retail businesses. Changes in selling prices and direct costs are based on past experience and expectations of future change in the markets. These calculations use cash flow projections based on financial budgets approved by management looking forward up to five years. Cash flows are extrapolated using estimated growth rates beyond the budget period. The key assumptions for the value-in-use calculations are: a real growth rate of 2.25% has been used to extrapolate cash flows beyond the budget period; and a post tax discount rate of 7% applied to the cash flow projections which equates to a pre-tax rate of approximately 10%. Provisions Provisions have been estimated for onerous leases, self insurance and other liabilities. These provisions represent the best estimate of the liability at the balance sheet date, the actual liability being dependent on future events such as trading conditions at a particular store or the incidence of insurance claims against the Group. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in which the revision is made. Impairment of assets Assets are subject to impairment reviews whenever changes in events or circumstances indicate that an impairment may have occurred. Assets are written down to the higher of fair value less costs to sell and value-in-use. Value-in-use is calculated by discounting the expected cash flows from the asset at an appropriate discount rate for the risks associated with that asset. This includes estimates of both the expected cash flows and an appropriate discount rate which use management s assumptions and estimates of the future performance of the asset. Differences between expectations and the actual cash flows will result in differences in the level of impairment required. Inventory provisions Inventory is carried at the lower of cost and net realisable value which requires the estimation of the eventual sales price of goods to customers in the future. Any difference between the expected and the actual sales price achieved will be accounted for in the period in which the sale is made. 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Revenue recognition Revenue comprises the fair value of the sale of goods and services to external customers, net of value added tax, rebates, discounts and returns. Revenue is recognised as follows: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. Revenue on goods to be delivered is recognised when the customer accepts delivery. The Group operates a variety of sales promotion schemes that give rise to goods being sold at a discount to the standard retail price. Revenue is adjusted to show sales net of all related discounts. Commissions receivable on the sale of services for which the Group acts as agent are included within revenue. A provision for estimated returns is made representing the profit on goods sold during the year which will be returned and refunded after the year-end. Interest income Interest income on customer store card accounts and loans is recognised as revenue on a time proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate, and continues to recognise the unwinding of the discount as interest income. Foreign currency translation Functional and presentation currency The consolidated financial information is presented in sterling, which is the Group s functional and presentation currency. Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Transactions and balances Transactions in foreign currencies are recorded at the exchange rate prevailing on the date of the transaction. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate prevailing at the balance sheet date. Translation differences on monetary items are taken to the income statement with the exception of differences on transactions that are subject to effective cash flow hedges. Translation differences on non-monetary items are reported as part of the fair value gain or loss and are included in either equity or the income statement as appropriate.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 67 Group companies The results and financial position of overseas Home Retail Group entities are translated into sterling as follows: assets and liabilities are translated at the closing rate at the date of that balance sheet; income and expenses are translated at the average exchange rate for the period; and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. Tax charges and credits attributable to those exchange differences are taken directly to equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing rate. Share-based payments The Group operates a number of equity-settled, share-based compensation plans. The fair value of the shares granted is recognised as an expense after taking into account the Group s best estimate of the number of awards expected to vest. The Group revisits the vesting estimate at each balance sheet date. Non-market performance conditions are included in the vesting estimate. Expenses are incurred over the vesting period. Fair value is measured at the date of grant using whichever of the Black-Scholes, Monte Carlo model and closing market price is most appropriate to the award. Market based performance conditions are included in the fair value measurement on grant date and are not revisited for actual performance. Property, plant and equipment Property, plant and equipment are held at cost being the purchase price and other costs directly attributable to bringing the asset into use less accumulated depreciation and any impairment in value. Depreciation is charged on a straight line basis as follows: freehold properties are depreciated over 50 years; leasehold premises with lease terms of 50 years or less are depreciated over the remaining period of the lease; plant, vehicles and equipment are depreciated over two to 10 years according to the estimated life of the asset; equipment on hire or lease is depreciated over the period of the lease; and land is not depreciated. Goodwill Goodwill is the excess of the fair value of the consideration payable for an acquisition over the fair value of the Group s share of identifiable net assets of a subsidiary, associate or joint venture acquired at the date of acquisition. Fair values are attributed to the identifiable assets, liabilities and contingent liabilities that existed at the date of acquisition, reflecting their condition at that date. Adjustments are made where necessary to bring the accounting policies of acquired businesses into alignment with those of the Group. Goodwill on acquisitions of associates and joint ventures is included in the carrying amount of the investment. Goodwill is stated at cost less any provision for impairment. Goodwill is not amortised and is tested annually for impairment. An impairment charge is recognised where the carrying value of goodwill exceeds its receivable amount, being the higher of the asset s fair value less costs to sell and its value-in-use. Value-in-use calculations are performed using cash flow projections discounted at a rate taking account of the specific risks inherent within the Group s retail businesses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold, allocated where necessary on the basis of relative fair value. Intangible assets Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill, if those assets are separable and their fair value can be measured reliably. Intangible assets acquired separately from the acquisition of a business are capitalised at cost. Certain costs incurred in the developmental phase of an internal project are capitalised as intangible assets provided that a number of criteria are satisfied. These include the technical feasibility of completing the asset so that it is available for use or sale, the availability of adequate resources to complete the development and how the asset will generate probable future economic benefit. The cost of other intangible assets with finite useful economic lives is amortised over that period. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If impaired, they are written down to the higher of fair value less costs to sell and value-in-use. Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Computer software licences are held at cost and are amortised on a straight line basis over three to five years. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits beyond one year, are recognised as intangible assets. Computer software development costs recognised as assets are amortised on a straight line basis over three to five years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

68 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 Financial instruments The Group classifies its financial instruments in the following categories: financial assets and liabilities at fair value, loans and receivables and held-to-maturity investments. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at initial recognition and re-evaluates this position at every reporting date. Financial assets and liabilities at fair value through the income statement Financial assets and liabilities are those designated at fair value through the income statement. Derivatives are generally designated as hedges. Items in this category are classified as current assets or current liabilities if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet. Accounting for derivative financial instruments and hedging activities Derivatives are recognised at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as cash flow hedges. The Group documents the relationship between hedging instruments and hedged items at the hedge inception, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Movements on the hedging reserve in equity are shown in the Group statement of recognised income and expense. Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in the income statement within finance costs. Changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognised in the income statement within finance costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity. Cash flow hedges The cash flow hedges are intended to hedge the foreign currency exposures of the future purchases of inventory. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Any gain or loss relating to the ineffective portion would be recognised immediately in the income statement. The hedged cash flow is expected to occur up to one year into the future and will be transferred to the consolidated income statement via inventory carrying value as applicable. Fair value estimation The fair value of financial instruments traded in organised active financial markets is based on quoted market prices at the close of business on the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current offer price. The fair value of financial instruments for which there is no quoted market price is determined by a variety of methods incorporating assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate to their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Trade receivables Trade receivables are recognised and carried at original invoice amount less provision for impairment. The gross margin from the sale of a retail product on extended credit terms is recognised at the time of the sale of the retail product. The finance charges relating to the sale of financial services are included in the income statement as and when instalments are received. Income under instalment agreements is credited to the income statement using the effective interest method. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is recognised in the balance sheet, with the cost of unrecoverable trade receivables recognised in the income statement immediately.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 69 Inventories Inventories are stated at the lower of cost and net realisable value. The cost bases in use within the Group are general retail goods valued on a standard cost or weighted average basis which approximates to actual cost. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventory include the transfer from equity of any gains or losses on qualifying cash flow hedges relating to their purchase. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Borrowings and borrowing costs All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value and other borrowing costs is recognised in the income statement over the period of the borrowings using the effective interest method. Deferred taxation Deferred taxation is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. However, if the deferred taxation arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset when the reimbursement is certain. Provisions are made for onerous lease contracts for stores that have closed or where a decision to close has been announced, and for those stores where the projected future trading revenue is insufficient to cover the lower of exit cost or value-in-use. Leases Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight line basis over the period of the lease. Incentives from lessors are recognised as a systematic reduction of the charge over the life of the lease. Employee benefits The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

70 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the consolidated statement of recognised income and expense. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight line basis over the vesting period. Catalogue costs Costs incurred during the production of the Group s catalogues are deferred on the balance sheet net of any associated advertising revenue and marketing support until the catalogue is launched, at which point the net deferred cost is charged to the income statement. Dividends Dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the Financial Statements until they have been approved by the shareholders at the Annual General Meeting. Dividends are recognised in the Financial Statements when they are paid. Insurance Certain of the Group s insurances are handled by the Group s captive insurance company, Global Guernsey Limited, which accounts for all insurance business on an annual basis and the net consolidated result is dealt with as part of the operating costs in these accounts. Insurance premiums in respect of insurance placed with third parties and re-insurance premiums in respect of risks not retained by the Group s captive insurance company are charged to the income statement in the period to which they relate. Non-GAAP financial information Exceptional items Items which are both material and non-recurring are presented as exceptional items within their relevant income statement line. The separate reporting of exceptional items helps provide a better indication of underlying performance of the Group. Examples of items which may be recorded as exceptional items are impairment charges, restructuring costs and the profits/losses on the disposal of businesses. Benchmark PBT The Group uses the term benchmark profit before tax (PBT) as a measure which is not formally recognised under IFRS. Benchmark PBT is defined as profit before amortisation of acquisition intangibles, store impairment charges, exceptional items, financing fair value remeasurements, financing impact on retirement benefit balances, and one-off demerger incentive costs. This measure is considered useful in that it provides investors with an alternative means to evaluate the underlying performance of the Group s operations. Net debt The Group uses the term net debt which is considered useful in that it provides the Group s aggregate net indebtedness to banks and other financial institutions together with debt-like liabilities, notably property leases. 4. FOREIGN CURRENCY The principal exchange rates used were as follows: Average Closing Period to Year to 3 March 31 March 3 March 31 March 2007 2006 2007 2006 US dollar 1.90 1.79 1.94 1.74 Euro 1.48 1.46 1.48 1.44 Assets and liabilities of overseas undertakings are translated into sterling at the rates of exchange at the balance sheet date and the income statement is translated into sterling at average rates of exchange.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 71 5. SEGMENTAL INFORMATION Primary reporting format - business segments The Group s primary reporting format is by business segment. This is in line with the current management structure, which reflects the different risks associated with the different businesses. The Group is organised into three main business segments: Argos, Homebase and Financial Services together with Central Activities. Revenue earned from sales is disclosed by origin and is not materially different from revenue by destination. Short period ended 3 March 2007 (a) Income statement Financial Central Argos Homebase Services Activities Total Notes m m m m m Revenue 6 3,912.8 1,606.3 87.6 5,606.7 Profit Operating profit before exceptional items 300.9 51.2 4.5 (28.7) 327.9 Exceptional items 10 (4.1) (18.6) (22.7) Segment result 300.9 47.1 4.5 (47.3) 305.2 Finance income 11 55.5 Finance expense 11 (71.4) Exceptional finance income 10 6.9 Net financing costs 11 (9.0) Share of post-tax results of joint ventures and associates 18 0.7 Profit before tax 296.9 Taxation 12 (109.5) Profit for the period 187.4 The result for Financial Services is after deducting funding costs of 16.4m. (b) Balance sheet Financial Central Argos Homebase Services Activities Total Notes m m m m m Segment assets 1,222.8 605.0 439.7 292.9 2,560.4 Investment in associates and joint ventures 18 9.2 9.2 Taxation 77.4 77.4 Goodwill 15 1,152.3 726.6 1,878.9 Total assets 2,375.1 1,331.6 439.7 379.5 4,525.9 Segment liabilities (708.8) (383.7) (49.3) (1.8) (1,143.6) Borrowings (223.6) (223.6) Taxation (80.0) (80.0) Total liabilities (708.8) (383.7) (49.3) (305.4) (1,447.2) Net assets 1,666.3 947.9 390.4 74.1 3,078.7 Less goodwill (1,152.3) (726.6) (1,878.9) Net operating assets 514.0 221.3 390.4 74.1 1,199.8 HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

72 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (c) Other segment items Financial Central Argos Homebase Services Activities Total Notes m m m m m Depreciation of property, plant and equipment 17 (70.2) (59.8) (130.0) Impairment of fixed assets 17 (4.1) (4.1) Amortisation of intangible assets 16 (14.1) (1.8) (0.5) (16.4) Capital expenditure on property, plant and equipment 17 (54.8) (79.3) (134.1) Capital expenditure on intangible assets 16 (27.6) (0.7) (28.3) Year ended 31 March 2006 (d) Income statement Financial Central Argos Homebase Services Activities Total Notes m m m m m Revenue 6 3,892.6 1,561.8 93.6 5,548.0 Profit Operating profit before exceptional items 296.0 51.8 6.1 (7.9) 346.0 Exceptional items 10 (24.7) (24.7) Segment result 296.0 27.1 6.1 (7.9) 321.3 Finance income 11 45.7 Finance expense 11 (90.4) Net financing costs 11 (44.7) Share of post-tax results of Joint venture and associates 18 (4.2) Profit before tax 272.4 Taxation 12 (96.0) Profit for the financial year 176.4 The results for Financial Services are after deducting funding costs of 15.8m. The result for Argos has been restated for the year ended 31 March 2006 by reallocating 5.0m of costs to Central Activities. In addition, Central Activities have been reduced by 8.3m due to a further restatement required as a result of merger accounting principles being applied as set out in Note 2. (e) Balance sheet Financial Central Argos Homebase Services Activities Total Notes m m m m m Segment assets 1,149.2 632.7 432.2 1,109.2 3,323.3 Investment in associates and joint ventures 18 0.4 0.4 Taxation 115.5 115.5 Goodwill 15 1,152.3 726.6 1,878.9 Total assets 2,301.5 1,359.3 432.2 1,225.1 5,318.1 Segment liabilities (589.6) (325.7) (63.1) (0.7) (979.1) Borrowings 23 (1,268.8) (1,268.8) Taxation (120.3) (120.3) Total liabilities (589.6) (325.7) (63.1) (1,389.8) (2,368.2) Net assets 1,711.9 1,033.6 369.1 (164.7) 2,949.9 Less goodwill (1,152.3) (726.6) (1,878.9) Net operating assets 559.6 307.0 369.1 (164.7) 1,071.0

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 73 (f) Other segment items Financial Central Argos Homebase Services Activities Total Notes m m m m m Depreciation of property, plant and equipment 17 (65.4) (52.6) (118.0) Impairment of fixed assets 17 (12.8) (12.8) Amortisation of intangible assets 16 (14.2) (1.8) (0.9) (16.9) Capital expenditure on property, plant and equipment 17 (133.3) (98.3) (231.6) Capital expenditure on intangible assets 16 (22.4) (0.9) (23.3) (g) Geographical segments Home Retail Group trades only in the UK and Eire and consequently all revenues, capital expenditure and segment assets arise there. 6. ANALYSIS OF REVENUE BY CATEGORY 2007 2006 m m Sale of goods 5,519.1 5,454.4 Provision of services by Financial Services 87.6 93.6 Total 5,606.7 5,548.0 7. ACQUISITIONS There have been no acquisitions during the short period to 3 March 2007. On 21 July 2005, Argos acquired the Index brand and 33 former Index stores from Littlewoods Limited for a total consideration of 45m including acquisition costs of 1m. At acquisition, the business had a book value of assets of 6m, against which no fair value was attributed. In addition, the intangible assets were determined to have negligible value, consequently goodwill of 45m was generated on the transaction. This goodwill represents the synergies, assembled workforce and future growth potential of the business acquired. 8. NET OPERATING EXPENSES (a) By function Before Exceptional Before Exceptional exceptional items exceptional Items items (note 10) 2007 items (note 10) 2006 m m m m m m Net operating expenses comprise: Selling costs (1,321.8) (1,321.8) (1,252.6) (1,252.6) Administrative costs (276.5) (22.7) (299.2) (262.9) (24.7) (287.6) Total net operating expenses (1,598.3) (22.7) (1,621.0) (1,515.5) (24.7) (1,540.2) (b) Profit before tax is stated after (charging) 2007 2006 Notes m m Operating lease rental expense Plant and equipment (9.4) (9.9) Property (310.6) (289.3) Cost of inventories recognised as an expense in cost of sales (3,564.0) (3,581.6) Write down of inventories (116.5) (104.9) Exceptional items 10 (15.8) (24.7) Loss on sale of property, plant and equipment (0.9) (1.0) Depreciation of property, plant and equipment 17 (130.0) (118.0) Amortisation of intangible assets 16 (16.4) (16.9) Employee benefit costs 9 (717.2) (696.3) HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

74 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (c) Auditors remuneration 2007 2006 m m Audit services: Fees payable for the audit of the Company and the Consolidated Financial Statements (0.8) Other services: Fees payable to the Company s auditors and its associates for other services the audit of the Company s subsidiaries pursuant to legislation (0.1) (0.6) services relating to taxation (0.2) all other services (0.2) (1.3) Total fees payable to PricewaterhouseCoopers LLP (1.3) (1.9) The above disclosure is presented in accordance with SI 2005/2417, where audit fees in respect of the audit of the Company s subsidiaries pursuant to legislation are included within other services. 9. EMPLOYEE BENEFIT COSTS AND EMPLOYEE NUMBERS (a) Employee costs for the Group were as follows: 2007 2006 Notes m m Wages and salaries (631.9) (616.7) Social security costs (39.8) (40.2) Share-based expense 30 (16.3) (9.2) Post employment benefits 25 (29.2) (30.2) (717.2) (696.3) (b) The average number of employees were as follows: 2007 2006 Number of Full time Number of Full time Employees equivalent employees Equivalent Argos 33,879 18,214 31,410 17,861 Homebase 18,449 10,976 18,784 11,463 Financial Services 268 241 207 190 Central Activities 37 37 21 21 52,633 29,468 50,422 29,535 (c) Key management compensation Short-term employee benefits Post-employment benefits Share-based expenses 2007 2006 m m (4.7) (1.3) (1.4) (0.8) (5.7) (1.3) (11.8) (3.4) Key management compensation in 2007 includes remuneration of the new Home Retail Group plc Board for the period, which is not comparable with 2006. Further information on directors remuneration which forms part of these audited Financial Statements can be found in the Directors Remuneration Report on pages 47 to 56 of the Annual Report.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 75 10. EXCEPTIONAL ITEMS 2007 2006 m m Costs relating to the demerger of Home Retail Group and Experian (a) (11.3) Waiver of loan due from Experian (b) (7.3) Store impairment charges (c) (4.1) (12.8) Re-organisation costs (d) (11.9) Exceptional items in operating profit (22.7) (24.7) Exceptional finance income (e) 6.9 Total exceptional items (15.8) (24.7) (a) (b) (c) (d) (e) Demerger-related expenditure including costs in relation to early vesting of share incentive schemes, banking set up fees and other professional fees. Represents a loan due from Experian which has been waived as part of the demerger process. IFRS requires individual stores to be designated as cash generating units for the purposes of testing for impairment. This resulted in a net impairment charge in respect of the Homebase store portfolio of 4.1m (2006: 12.8m). In 2005, Home Retail Group (then ARG), undertook a re-organisation whereby approximately 500 Homebase roles, including the merchandising and buying functions previously based in Wallington, Surrey, relocated to the Group s head office in Milton Keynes. The costs of the move totalled 11.9m in 2006. Fair value gain made on transfer of interest rate swap novated from GUS plc on demerger. 11. NET FINANCING COSTS 2007 2006 m m Finance income: Bank deposits 13.8 7.9 Expected return on retirement benefit asset 37.8 27.5 Interest receivable from GUS Group companies 3.9 10.3 Total finance income 55.5 45.7 Finance expense: Interest cost of perpetual securities (11.1) (11.2) Discount unwind on provisions (1.9) (0.5) Financing fair value remeasurements (0.1) (2.0) Interest expense on retirement benefit liabilities (25.7) (24.9) Interest expense on OFT fine (1.5) Interest payable to GUS Group companies (47.5) (67.6) Total finance expense (87.8) (106.2) Less: finance expense charged to Financial Services cost of sales 16.4 15.8 Total net finance expense (71.4) (90.4) Net financing costs pre exceptional (15.9) (44.7) Exceptional finance income 6.9 Net financing costs (9.0) (44.7) HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

76 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 12. TAXATION (a) Analysis of charge in period 2007 2006 m m Current tax: UK corporation tax (94.0) (63.0) Double tax relief 3.5 4.0 Adjustments in respect of prior years (0.9) Total current UK tax charge Overseas tax (91.4) (59.0) (4.4) (4.0) Total current tax charge (95.8) (63.0) Deferred tax: Origination and reversal of temporary differences (16.5) (33.0) Adjustments in respect of prior years 2.8 Total tax expense in income statement (109.5) (96.0) (b) Factors affecting the tax charge The effective tax rate for the year of 37.0% (2006: 34.7%) after adjusting for the net income from associates, is higher than the standard rate of corporation tax in the UK of 30.0% (2006: 30.0%). The differences are explained below: 2007 2006 m m Profit before tax 296.9 272.4 Profit before tax multiplied by the standard rate of corporation tax in the UK of 30% (89.1) (81.7) Effects of: Expenses not deductible for tax purposes (25.6) (14.3) Differences in effective tax rates on overseas earnings 3.3 Adjustments to tax charge in respect of prior years 1.9 Total tax expense in income statement (109.5) (96.0) (c) Factors that may effect future tax charges In the foreseeable future, Home Retail Group s tax charge will continue to be influenced by the profile of profits earned in the different tax jurisdictions within the United Kingdom and the Republic of Ireland. (d) Impact of tax on exceptional items Tax on exceptional items of 5.3m relates to tax on current period and prior year exceptional costs. Current period exceptional costs of 15.8m include 7.3m not deductible for tax. Tax payable on prior year exceptional items amounts to 7.8m.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 77 13. DIVIDENDS 2007 2007 2006 2006 pence m pence m Amounts recognised as distributions to equity holders Interim 4.0 34.6 Ordinary dividends on equity shares 4.0 34.6 Proposed final dividend for the short period to 3 March 2007 9.0 78.3 The proposed final dividend was approved by the Board of Directors on 24 April 2007 and is subject to approval by the shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability at 3 March 2007 in accordance with IAS 10 Events after the balance sheet date. It will be paid on 25 July 2007 to shareholders who are on the register of members at close of business on 23 May 2007. In August 2006, 62.0m was paid to GUS plc as Home Retail Group s share of the GUS plc final dividend in respect of the year ended 31 March 2006. The Home Retail Group Employee Share Ownership Trust (ESOT) has waived its entitlement to dividends in the amount of 0.7m. 14. BASIC AND DILUTED EARNINGS PER SHARE (EPS) Basic and diluted EPS for comparative periods have been calculated on the basis of the number of Home Retail Group plc ordinary shares in issue at the date of demerger, excluding ordinary shares held in Home Retail Group s ESOT. Basic and diluted EPS for 2007 have been calculated on the number of shares in issue at the date of demerger for the pre-demerger period together with the weighted average number of shares post demerger, excluding ordinary shares held in Home Retail Group s ESOT. 2007 2006 Earnings m m Profit after tax for the financial period 187.4 176.4 Effect of exceptional items 15.8 24.7 Effect of financing fair value remeasurements 0.1 2.0 Financing impact on retirement benefit balances (12.1) (2.6) Demerger incentive schemes 5.8 Attributable taxation 9.2 (7.2) Benchmark profit after tax for the financial period 206.2 193.3 Weighted average number of shares millions millions Number of ordinary shares for the purpose of basic EPS 869.6 869.0 Dilutive effect of share incentive awards 7.6 7.6 Number of ordinary shares for the purpose of diluted EPS 877.2 876.6 EPS pence pence Basic EPS 21.6 20.3 Diluted EPS 21.4 20.1 Basic benchmark EPS 23.7 22.2 Diluted benchmark EPS 23.5 22.1 HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

78 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 15. GOODWILL Argos Homebase Total m m m At 1 April 2005 1,107.2 726.6 1,833.8 Additions 45.1 45.1 At 31 March 2006 1,152.3 726.6 1,878.9 At 1 April 2006 and 3 March 2007 1,152.3 726.6 1878.9 Goodwill is allocated to cash generating units ( CGUs ) at the level of each business segment. The recoverable amount of each of the business segments is determined based on value-in-use calculations. The key assumptions for the value-in-use calculation are those regarding discount rates and growth rates as well as expected changes to costs and selling prices. Management have estimated the discount rate taking account of the specific risks inherent within the Group s retail businesses. Changes in selling prices and direct costs are based on past experience and expectations of future change in the markets. These calculations use cash flow projections based on financial budgets approved by management looking forward up to five years. Cash flows are extrapolated using estimated growth rates beyond the budget period. The key assumptions for the value-in-use calculations are: a real growth rate of 2.25% which has been used to extrapolate cash flows beyond the budget period; and a post tax discount rate of 7% applied to the cash flow projections which equates to a pre tax rate of approximately 10%. 16. INTANGIBLE ASSETS Cost At 1 April 2006 128.7 Additions 28.3 Disposals (5.0) At 3 March 2007 152.0 Amortisation At 1 April 2006 (67.2) Charge for the year (16.4) Disposals 5.0 Total m At 3 March 2007 (78.6) Net book value at 3 March 2007 73.4 Cost At 1 April 2005 105.4 Additions 23.3 At 31 March 2006 128.7 Amortisation At 1 April 2005 (50.3) Charge for the year (16.9) At 31 March 2006 (67.2) Net book value at 31 March 2006 61.5 Assets in the course of construction included above at 3 March 2007 14.7 Intangible assets principally comprise computer software for internal use. Total m

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 79 17. PROPERTY, PLANT AND EQUIPMENT Leasehold properties Freehold Long Short Plant & properties leasehold leasehold equipment Total m m m m m Cost At 1 April 2006 81.6 5.1 323.2 976.8 1,386.7 Exchange differences (0.1) (0.7) (0.8) Additions 10.0 17.9 106.2 134.1 Disposals (5.3) (27.3) (32.6) At 3 March 2007 91.6 5.1 335.7 1,055.0 1,487.4 Depreciation and impairment losses At 1 April 2006 (8.0) (166.0) (515.9) (689.9) Exchange differences 0.3 0.3 Charge for the year (1.1) (0.7) (17.9) (110.3) (130.0) Impairment losses (1.0) (3.1) (4.1) Disposals 4.1 23.8 27.9 At 3 March 2007 (9.1) (0.7) (180.8) (605.2) (795.8) Net book value at 3 March 2007 82.5 4.4 154.9 449.8 691.6 Assets in the course of construction included above at 3 March 2007 9.4 10.6 39.0 59.0 IFRS requires individual stores to be designated as cash generating units for the purposes of testing for impairment. This resulted in an impairment charge of 4.1m in respect of the Homebase store portfolio in the period ended 3 March 2007. Leasehold properties Freehold Long Short Plant & properties leasehold leasehold equipment Total m m m m m Cost At 1 April 2005 55.0 2.0 288.2 858.8 1,204.0 Exchange differences 0.1 0.1 Additions 28.6 3.0 39.0 161.0 231.6 Disposals (2.0) (4.0) (43.0) (49.0) At 31 March 2006 81.6 5.1 323.2 976.8 1,386.7 Depreciation and impairment losses At 1 April 2005 (8.0) (154.1) (442.0) (604.1) Charge for year (1.0) (14.0) (103.0) (118.0) Impairment losses (0.9) (11.9) (12.8) Disposals 1.0 3.0 41.0 45.0 At 31 March 2006 (8.0) (166.0) (515.9) (689.9) Net book value at 31 March 2006 73.6 5.1 157.2 460.9 696.8 IFRS requires individual stores to be designated as cash generating units for the purposes of testing for impairment. This resulted in an impairment charge of 12.8m in respect of the Homebase store portfolio in the year ended 31 March 2006. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

80 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 18. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES 2007 2006 m m Opening 0.4 4.5 Exchange differences 0.1 Share of profit/(loss) after tax 0.7 (4.2) Loan to joint venture 8.1 Closing 9.2 0.4 Investments in joint ventures and associates are measured at cost because their fair values cannot be measured reliably since their equity instruments are unquoted. The range of values which the fair values are estimated to lie within is not expected to be materially different from their carrying values. The Group s interest in associates is a 33% holding of AAGUS Financial Services Group NV ( AAGUS ), a company incorporated in The Netherlands. The Group s interest in joint ventures is a 50% holding in Home Retail Group Personal Finance Limited, a company incorporated in England. At 3 March 2007, the Group s share of the assets of AAGUS amounted to 28.5m (2006: 37.4m), and its share of liabilities amounted to 27.4m (2006: 37.0m). The Group s share of revenue for the period ended 3 March 2007 is 3.3m (2006: 4.1m), and its share of profit/(loss) after tax is 0.7m (2006: ( 4.2m)). Home Retail Group Personal Finance Limited was incorporated during the period. Apart from the initial loan made to the joint venture and its corresponding liability, it has no other assets and liabilities. Home Retail Group Personal Finance Limited did not have any revenue or profit/(loss) during the period. The Company uses the equity method of accounting for joint ventures and associates. 19. INVENTORIES 2007 2006 m m Goods for resale 906.4 881.0 20. TRADE AND OTHER RECEIVABLES Current Non-current Current Non-current 2007 2007 2006 2006 m m m m Trade receivables: Instalment receivables 405.7 11.1 365.9 32.6 Other trade receivables 70.1 54.7 3.9 Amounts owed by former GUS Group companies 960.8 VAT recoverable 0.2 3.8 Prepayments and accrued income 93.4 6.9 92.9 6.6 569.4 18.0 1,478.1 43.1 The carrying values of current trade and other receivables are a reasonable approximation of their fair values. Fair values of long-term receivables have been discounted where the time value of money is material. All receivables due after more than one year are due within five years from the balance sheet date. There is no concentration of credit risk with respect to trade receivables, as Home Retail Group has a broad customer base.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 81 21. CASH AND CASH EQUIVALENTS 2007 2006 m m Cash at bank and in hand 283.8 130.0 The effective interest rate during the period ended 3 March 2007 for cash and cash equivalents was 4.8% (2006: 2.7%). Under the terms of a re-insurance agreement, bank balances totalling 3.5m (2006: 5.8m) are the subject of custodial agreements and may not be withdrawn without the consent of the re-insured. Home Retail Group has provided letters of credit totalling 22.6m (2006: 28.2m) to AIG Europe (UK) Limited as part of their reinsurance agreement. These letters are secured by cash deposits. 22. TRADE AND OTHER PAYABLES Current Non-current Current Non-current 2007 2007 2006 2006 m m m m Trade payables (466.5) (378.6) Social security costs and other taxes (48.4) (53.2) Accruals and deferred income (446.2) (34.0) (338.5) (27.8) Other payables (64.0) (92.4) (1,025.1) (34.0) (862.7) (27.8) Trade and other payables are non-interest bearing and the fair values are not considered to differ materially from the recognised book values. Long-term payables have been discounted where the time value of money is material. 23. LOANS AND BORROWINGS Current Non-current Current Non-current 2007 2007 2006 2006 m m m m 4.0% Perpetual securities (74.4) (74.9) 4.9% Perpetual securities (148.2) (146.5) Other (0.9) (0.9) GUS Group companies (1,045.2) (223.5) (1,045.2) (222.3) Obligations under finance leases (0.1) (1.1) (0.2) (223.6) (1,046.3) (222.5) For 2006 and 2007, the effective interest rate of the perpetual securities is the nominal rate indicated above, which is fixed for the term of the debt. The maturity date on these facilities is June 2007. All loans are denominated in sterling. All of the borrowings of the Group shown above are unsecured. Lease liabilities are effectively secured as the rights to the leased assets revert to the lessor in the event of default. The maturity of non-current borrowings in 2006 of 222.5m was between one and two years. At 3 March 2007, the Group had undrawn committed borrowing facilities available of 700m (31 March 2006: nil) which expire in 2011. These facilities are in place to enable the Group to finance its working capital requirements and for general corporate purposes. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

82 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 24. PROVISIONS Onerous Insurance Leases OFT fine provisions Other Total m m m m m At 1 April 2006 (37.5) (16.2) (28.5) (6.4) (88.6) Charged to the income statement (7.9) (5.1) (1.3) (14.3) Utilised during the year 6.8 16.2 4.3 0.4 27.7 Discount unwind (2.2) (0.2) (2.4) Transfer from accruals (4.7) (4.7) At 3 March 2007 (40.8) (29.3) (12.2) (82.3) Analysed as: Current Non-current 2007 2006 m m (25.2) (33.6) (57.1) (55.0) (82.3) (88.6) The onerous lease provision covers potential liabilities for onerous lease contracts for stores that have either closed, or where projected future trading revenue is insufficient to cover the lower of exit cost or value-in-use. The provision is based on the present value of expected future cash flows relating to rents, rates and other property costs to the end of the lease terms net of expected sublet income. The majority of this provision is expected to be utilised over the period to 2011. The fine imposed by the Competition Appeal Tribunal was paid during the period. Provision is made at the year end for the estimated costs of claims incurred by Home Retail Group s captive insurance company but not settled at the balance sheet date, including the costs of claims that have arisen but have not yet been reported to Home Retail Group. The estimated cost of claims includes expenses to be incurred in settling claims. The majority of this provision is expected to be utilised over the period to 2011. Other provisions include legal claims and other sundry provisions. The majority of this provision is expected to be utilised within one year. 25. POST EMPLOYMENT BENEFITS Home Retail Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which Home Retail Group pays contributions into an independently administered fund. Home Retail Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The cost of providing these benefits, recognised in the income statement, comprises the amount of contributions payable to the schemes in respect of the period. Pension arrangements for UK employees are operated principally through a defined benefit scheme (the Argos Scheme) and a defined contribution scheme (the GUS Defined Contribution Scheme, now replaced by the Home Retail Group Defined Contribution Scheme). In other countries, benefits are determined in accordance with local practice and regulations and funding is provided accordingly. a) Defined Benefit Schemes (i) The Argos Defined Benefit Scheme The scheme has rules which specify the benefits to be paid and are financed accordingly with assets being held in independently administered funds. A full actuarial valuation of this scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the scheme was carried out as at 31 March 2006 by independent, qualified actuaries, Watson Wyatt LLP, using the projected unit method. Under the projected unit method of valuation the current service cost will increase as members approach retirement due to the ageing active membership of the scheme.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 83 (ii) The movements during the year in the net asset recognised in the balance sheet were as follows: 2007 2006 m m Opening 25.5 (73.0) Total charge recognised in the consolidated income statement as disclosed in (iv) below (11.2) (22.1) Actuarial (loss)/gain recognised in the consolidated statement of recognised income and expense (18.3) 5.7 Contributions paid 13.3 114.9 Closing 9.3 25.5 The contributions paid for 2006 included a special contribution of 100m. The estimated amount of contributions expected to be paid into the Argos Pension Scheme by the Group during the next financial year is 14m. (iii) The amounts recognised in the consolidated balance sheet are determined as follows: 2007 2006 m m Fair value of schemes assets 637.3 604.6 Present value of funded schemes liabilities (617.7) (570.0) Surplus in the funded schemes 19.6 34.6 Present value of unfunded pension arrangements (10.3) (9.1) Retirement benefit asset recognised in the balance sheet 9.3 25.5 (iv) The amounts recognised in the consolidated income statement were as follows: 2007 2006 m m Current service cost (23.3) (24.7) Discount unwind on schemes liabilities (25.7) (24.9) Expected return on schemes assets 37.8 27.5 Total charge to consolidated income statement (11.2) (22.1) (v) The charge is recognised in the following line items in the consolidated income statement: 2007 2006 m m Administrative costs (23.3) (24.7) Finance expense (25.7) (24.9) Finance income 37.8 27.5 Total charge to consolidated income statement (11.2) (22.1) HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

84 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (vi) IAS 19 valuations The valuations used for IAS 19 have been based on the most recent actuarial funding valuations and have been updated by Watson Wyatt LLP to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes at 3 March 2007 and 31 March 2006. The principal actuarial assumptions used to calculate the present value of the defined benefit obligations were as follows: Argos Defined Benefit Scheme 2007 2006 % % Rate of inflation 3.1 2.9 Rate of increases for salaries 4.4 4.9 Rate of increase for pensions in payment 3.0 2.9 Rate of increase for deferred pensions 3.1 2.9 Discount rate 4.9 4.9 The amount charged to the income statement in respect of unfunded pension arrangements was 0.8m (2006: 2.7m). The principal financial assumption is the discount rate. If this assumption is increased/decreased by 0.1%, the defined benefit obligation would decrease/increase by approximately 2.6% and the current service cost would decrease/increase by 3.8%. The discount rate is based on market yields on high quality corporate bonds of equivalent currency and term to the defined benefit obligation. The IAS 19 valuation assumes that mortality will be in line with PA92 Series tables with medium cohort projections for males and females. An allowance is also made for anticipated future improvements in life expectancy assuming that the probability of death occurring at each age will decrease by 0.25% each year. Overall, the average expectation of life on retirement in normal health is assumed to be: 21.3 years at age 65 for a male currently aged 65 (2006: 18.9) 24.2 years at age 65 for a female currently aged 65 (2006: 22.0) 22.2 years at age 65 for a male currently aged 50 (2006: 19.6) 25.0 years at age 65 for a female currently aged 50 (2006: 22.9) (vii) The assets of Home Retail Group s defined benefit schemes and the expected rates of return are summarised as follows: 2007 2006 Expected Expected Percentage long-term Percentage long-term Fair of scheme rate of Fair of scheme rate of value assets return value assets return m % %pa m % %pa Market value of schemes assets: Equities 448.6 70 7.9 428.2 70 7.9 Fixed interest securities 182.0 29 4.4 176.1 29 4.5 Other 6.7 1 4.9 0.3 1 3.7 637.3 100 6.9 604.6 100 6.9 The overall expected rate of return on plan assets is the weighted average of the best estimate of the individual asset categories and their inherent expected rates of return.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 85 (viii) Changes in the present value of the defined benefit obligation are as follows: 2007 2006 m m Opening defined benefit obligation (579.1) (465.5) Current service cost (23.3) (24.7) Interest cost (25.7) (24.9) Contributions paid by employees (6.6) (6.4) Actuarial (loss) on liabilities recognised in Statement of Recognised Income and Expense (0.3) (65.2) Benefits paid 7.0 7.6 Closing defined benefit obligation (628.0) (579.1) (ix) Changes in the market value of the plan assets are as follows: 2007 2006 m m Opening market value of plan assets 604.6 392.5 Expected return 37.8 27.5 Actuarial (loss)/gain on assets (18.0) 70.9 Contributions paid by Home Retail Group 13.3 114.9 Contributions paid by employees 6.6 6.4 Benefits paid (7.0) (7.6) Closing market value of plan assets 637.3 604.6 Cumulative actuarial loss included in Statement of Recognised Income and Expense (39.9) (21.6) The actual return on plan assets was 19.8m (2006: 98.4m). (x) The history experienced adjustments are as follows: 2007 2006 2005 m m m Present value of defined benefit obligation (628.0) (579.1) (465.5) Fair value of scheme assets 637.3 604.6 392.5 Net asset on the scheme 9.3 25.5 73.0 Experience gain on scheme liabilities 20.8 0.2 3.6 Percentage of scheme liabilities 3.3% 0.0% 0.8% Experience (loss)/gain on scheme assets (18.0) 70.9 8.1 Percentage of scheme assets (2.8%) 11.7% 2.1% b) Defined Contribution Schemes The pension cost represents contributions payable by Home Retail Group to the fund and amounted to 5.9m (2006: 5.5m). Contributions totalling nil (2006: 0.5m) were payable to the fund at 3 March 2007 and are included within creditors. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

86 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 26. OTHER FINANCIAL ASSETS AND LIABILITIES Current Non-current Current Non-current 2007 2007 2006 2006 m m m m Other financial assets Cash flow hedge foreign exchange contracts 1.8 Other financial assets 8.5 5.5 Total other financial assets 8.5 1.8 5.5 Other financial liabilities Cash flow hedge foreign exchange contracts 1.7 Fair value hedge interest rate swap 0.5 Total other financial liabilities 2.2 The cash flow hedges are intended to hedge the foreign currency exposures of future purchases of inventory. The hedged cash flows are expected to occur up to one year into the future and will be transferred to the consolidated income statement or inventory carrying value as applicable. Forward foreign exchange contracts Gains and losses recognised in the hedging reserve in shareholders equity on forward foreign exchange contracts as of 3 March 2007 and 31 March 2006 will be released to the income statement within one year from the balance sheet date. The notional principal amounts of the outstanding forward foreign exchange contracts at 3 March 2007 were 473.2m (2006: 241.2m). Interest rate swaps The notional principal amounts of the outstanding interest rate swap contracts as at 3 March 2007 were 225.0m (2006: nil). At 3 March 2007 and 31 March 2006, the main floating rates are based on LIBOR. Gains and losses recognised in the hedging reserve in shareholders equity on interest rate swap contracts as of 3 March 2007 and 31 March 2006 will be continuously released to the income statement until the repayment of the bank borrowings. Home Retail Group s activities expose it to a variety of financial risks and Home Retail Group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on Home Retail Group s performance. (a) Market risk Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. To manage their foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts, transacted with external banks. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity s functional currency. Group Treasury is responsible for managing the net position in each foreign currency by using external forward currency contracts. For segment reporting purposes, each subsidiary designates contracts with Group Treasury as fair value hedges or cash flow hedges, as appropriate. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis. The cash flow hedges are intended to hedge the foreign currency exposure of future purchases of inventory. The hedged cash flows are expected to occur up to one year into the future and will be transferred to the consolidated income statement or inventory carrying value as applicable. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group s foreign operations is not hedged.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 87 (b) Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of financial services products are made to customers with an appropriate credit history. Sales to retail customers are made in cash or via major credit cards. (c) Liquidity risk Home Retail Group manages its cash and committed bank borrowing facilities to maintain liquidity and funding flexibility. (d) Cash flow and fair value interest rate risk Whilst the Group has 24.2m (2006: 54.7m) of gross instalment receivable balances on fixed interest rates, with the remainder on floating rates, the Group s income and operating cash flows are still considered to be substantially independent of changes in market interest rates. The Group s interest rate risk arises from long-term borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group manages its cash flow interest rate risk by using fixed-to-floating interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from fixed rates to floating rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. Fair value estimation The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. 27. DEFERRED TAX 2007 2006 m m The movements on the net deferred tax account are as follows: Opening 41.6 61.3 Income statement charge (13.7) (33.1) Other movements (0.3) 11.4 Tax on pensions and share schemes credited to shareholders equity (refer to Statement of Recognised Income and Expense) 2.0 2.0 Closing 29.6 41.6 The deferred tax amounts recognised are as follows: Deferred tax assets: Deferred tax asset to be recovered after more than 12 months 74.4 108.8 Deferred tax liabilities: Deferred tax liability to be settled after more than 12 months (44.8) (67.2) Net deferred tax asset 29.6 41.6 The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: (a) Deferred tax assets Other Asset temporary provisions differences Total m m m At 1 April 2005 42.0 68.0 110.0 Income statement credit/(charge) (14.1) (1.0) (15.1) Other 11.9 11.9 Tax credited to equity (refer to Statement of Recognised Income and Expense) 2.0 2.0 At 31 March 2006 39.8 69.0 108.8 At 1 April 2006 39.8 69.0 108.8 Income statement credit/(charge) 2.6 (39.0) (36.4) Tax credited to equity (refer to Statement of Recognised Income and Expense) 0.8 1.2 2.0 At 3 March 2007 43.2 31.2 74.4 HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

88 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (b) Deferred tax liabilities Accelerated Property tax valuations depreciation Other Total m m m m At 1 April 2005 (29.7) (15.0) (4.0) (48.7) Income statement credit/(charge) 2.0 (5.0) (15.5) (18.5) At 31 March 2006 (27.7) (20.0) (19.5) (67.2) At 1 April 2006 (27.7) (20.0) (19.5) (67.2) Income statement credit/(charge) 2.7 (0.5) 20.2 22.4 At 3 March 2007 (25.0) (20.5) 0.7 (44.8) Deferred tax assets are recognised for tax loss carry-forwards and other temporary differences to the extent that the realisation of the related tax benefit through the future taxable profits is probable. Home Retail Group did not recognise deferred tax assets of 1.5m (2006: 1.5m) in respect of losses that can be carried forward against future taxable income. In addition, Home Retail Group did not recognise deferred tax assets of 30.0m (2006: 30.9m) in respect of capital losses that can be carried forward against future taxable gains. These losses are available indefinitely. 28. SHARE CAPITAL 2007 2007 30 June 2006 30 June 2006 Number of shares m Number of shares m Authorised: Ordinary share capital of 10p each 2,000,500,000 200.1 2,000,000,000 200.0 Preference share capital of 25,000 each 2 0.1 200.1 200.1 Number Share of shares capital m m Allotted, called-up and fully paid: 1 April 2006 877.4 2,895.6 Reduction in nominal value of shares from 330p to 10p (2,807.9) At 3 March 2007 877.4 87.7 The Group holding company, Home Retail Group plc, was incorporated (as Hackplimco (no. 116) plc) on 30 June 2006 as part of the scheme of arrangement. On incorporation, the Company s authorised share capital was 1,000,050,000 divided into 1,000,000,000 ordinary shares of 1 each and two redeemable preference shares of 25,000 each. Of such shares, two ordinary shares were taken by the subscribers to the memorandum of association, and were paid up in full in cash. The preference shares were allotted for cash and were paid up as to 30% (by virtue of the holder giving an understanding to pay up each share to such amount pursuant to section 738(2) of the Companies Act 1985 (the Act )). On 26 February 2007, these shares were redeemed and pursuant to Article 8.2.5 of the Articles, the nominal amount of such Redeemable Preference Share comprised in the authorised share capital was sub-divided and converted into ordinary shares of 10p each. On 11 September 2006 at an Extraordinary General Meeting, the existing ordinary shares of 1 each were subdivided into 100 ordinary shares of 1p each. Subsequently, a further 460 ordinary shares of 1p each were issued in aggregate and fully subscribed for equivalent in cash by the subscribers to the memorandum of association. The authorised share capital of the Company was increased to 6,600,050,000 by the creation of 560,000,000,000 ordinary shares of 1p each. Finally, all the issued and ordinary shares of 1p each were consolidated into ordinary shares of 330p each. On 10 October 2006, the Company issued 877,444,999 ordinary shares of 330p to the public shareholders of Experian Group Ltd in return for the receipt of shares in Home Retail Group (UK) Ltd and to satisfy the obligations of Experian Group Ltd to its public shareholders pursuant to the reduction of capital of Experian Group Ltd, under the scheme of arrangement. As Home Retail Group plc was not a subsidiary of Experian Group Ltd, section 131 of the Act applied to the transaction and no recognition of share premium was necessary. On 12 October 2006, the nominal amount of the issued ordinary shares was reduced from 330p to 10p by way of a court-approved capital reduction scheme in accordance with section 135 of the Act. 29. RECONCILIATION OF MOVEMENTS IN EQUITY

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 89 Share Merger Other Retained capital reserve reserves earnings Total m m m m m At 1 April 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9 Profit for the financial period 187.4 187.4 Share reduction (2,807.9) 2,807.9 Net (cost) recognised in equity for the financial period (1.0) (9.1) (10.1) Movement in share based compensation reserve 16.3 16.3 Net movement in own shares (6.1) (6.1) Equity dividends paid during the period (34.6) (34.6) Other movements (24.1) (24.1) Total equity at 3 March 2007 87.7 (348.4) (11.4) 3,350.8 3,078.7 Share Merger Other Retained capital reserve reserves earnings Total m m m m m At 1 April 2005 2,895.6 (348.4) (9.2) 217.4 2,755.4 Profit for the financial year 176.4 176.4 Net income recognised in equity for the financial period 4.9 3.9 8.8 Movement in share based compensation reserve 9.2 9.2 Net movement in own shares Equity dividends paid during the year Other movements 0.1 0.1 Total equity at 31 March 2006 2,895.6 (348.4) (4.3) 407.0 2,949.9 Merger reserve The merger reserve arose on the demerger of the Group from GUS plc during 2006 as outlined in Note 2 Group re-organisation. Other reserves Other reserves principally consist of shares held in trust, the hedging reserve and the translation reserve. Net movement in own shares represents shares purchased for the purpose of satisfying obligations arising from Home Retail Group plc sharebased compensation schemes. Shares in Home Retail Group are held in the following Trusts which have been established since demerger: Home Retail Group Employee Share Ownership Trust (ESOT) The ESOT provides for the issue of shares to Group employees under share option and share grant schemes (with the exception of the Share Incentive Plan). At 3 March 2007, the ESOT held 7,449,855 shares with a market value of 31.3m. The shares in the Trust are held in the balance sheet of the Group at nil value. The shares were acquired as part of the demerger from GUS at no cost. Dividends on these shares are waived. Home Retail Group Share Incentive Scheme Trust The Home Retail Group Share Incentive Scheme Trust provides for the issue of shares to Group employees under the Share Incentive Plan. At 3 March 2007, the Trust held 1,477,105 shares with a market value of 6.2m. These shares were purchased during the year at a cost of 6.1m. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

90 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 30. SHARE-BASED PAYMENT ARRANGEMENTS (a) Impact on the Group s share-based payment schemes from the demerger A number of Home Retail Group plc employees participated in old GUS plc share-based payment schemes. As part of the demerger, some of these schemes had early vesting with vesting occurring prior to completion of the demerger, while others were modified by rolling them over to become Home Retail Group plc share-based payment schemes. Additionally, a number of new schemes have been established by Home Retail Group plc after the demerger from GUS plc including a number of schemes specifically related to the demerger ( Demerger Incentive Schemes ). Specifically, all Executive Share Option Schemes in operation following the demerger from GUS plc on 11 October 2006 have been rolled over from a GUS plc share option arrangement to a Home Retail Group plc arrangement. Furthermore, certain share grant schemes (namely Co-investment and Performance Share Plan) which originally operated as GUS share grant schemes, have been rolled over as Home Retail Group plc share grant schemes. Under IFRS 2, these changes have been treated as modifications to the schemes and hence revalued as at the demerger date. During the period of the demerger from GUS plc, Home Retail Group plc employees within the save as you earn (SAYE) scheme had the option of vesting at the demerger date or to continue contributing to the scheme until January 2007. Comparative information is included in the financial statements to assist users in understanding trends and developments from the previous accounting period. Due to the demerger, comparative information is not considered meaningful for all information provided in the share-based payment disclosure note. This is the case for some information relating directly to Home Retail Group plc shares in the current period and GUS plc shares in the comparative period, e.g. key assumptions used for valuing share options and grants such as the share price on grant date, exercise price and expected volatility. Such information would not be comparable as it would compare assumptions relating to two different shares, i.e. Home Retail Group plc and GUS plc shares respectively. As management believes that providing comparative information in these areas is likely to create confusion instead of assisting users, information has been omitted as allowed under IFRS. Where comparative information has been omitted, this has been clearly indicated. (b) Summary of the total cost of share-based compensation in respect of ordinary shares in the Company Share option awards Share grant awards 2007 2006 m m (5.0) (6.4) (11.3) (2.8) Total expense recognised (all equity settled) (16.3) (9.2) The total IFRS 2 charge for 2007 of 16.3m includes an increase in fair value of 0.2m relating to the rolled over share option schemes, 2.4m relating to the accelerated vesting of certain schemes and 5.1m relating to demerger incentive schemes. The accelerated vesting charge due to early vesting has been classified as an exceptional item in line with Home Retail Group plc s accounting policies. The cost of demerger incentive schemes of 5.1m, together with national insurance costs of 0.7m, in total 5.8m, are excluded from benchmark profit before tax. (c) (i) Options in respect of the ordinary shares of the Company Summary of arrangements During the year ended 3 March 2007, Home Retail Group plc had two share option arrangements for its employees. Details of these share option arrangements are as follows: Arrangements The 1998 approved and non-approved Savings related share executive share option schemes option schemes Nature Grant of options (modified scheme) Save as you earn scheme Vesting conditions Service period 3 years 3 or 5 years Performance/other EPS growth performance condition 1 Saving obligation over the vesting period Expected outcome of meeting Condition is satisfied n/a performance criteria (at grant date) Maximum term 10 years 3.5 or 5.5 years Method of settlement Share distribution Share distribution Expected departures (at grant date) 5% 3 years 30% 5 years 50% Option exercise price calculation Market price over the 3 dealing days preceding grant 20% discount to market price over the 3 dealing days preceding grant 1 The performance condition for the Executive Share Option Scheme requires EPS compound annual growth to exceed compound annual retail price inflation by 4% per annum over a continuous three-year period. This is not a market-based performance condition as defined by IFRS 2.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 91 (ii) Information relating to option valuation techniques The Company uses the Black-Scholes Option Pricing model to determine an appropriate value of the option grants. Where a scheme has been modified, a revaluation is performed at the date of modification. Any increase in fair value is charged to the income statement over the remaining life of the scheme. The estimated fair values and inputs into the option pricing model are as follows: Arrangements The 1998 Approved and Non-Approved Executive Share Option Schemes Home Retail GUS plc Weighted average: Group Fair value ( ) 0.97 2.06 Share price on grant date ( ) 4.17 9.35 Exercise price ( ) 3.88 9.26 Expected volatility 26.6% 29.4% Expected dividend yield 3.0% 3.5% Risk free interest rate 4.8% 4.7% Expected option life to exercise 4 years 4 years Expected volatility for Home Retail Group calculated as an average over the expected life. As no implied or historical volatility exists for Home Retail Group, an average of volatilities has been calculated from comparator companies. Expected volatility for GUS plc calculated as an average over the expected life with an assumption made for volatility in each year of the expected life. Volatility in the first year is assumed to be the same as implied volatility on grant date. Volatility for year 4 and beyond is assumed to remain at the long run (10 year observed) historic volatility. Linear interpolation is assumed for years 2 and 3. (iii) Reconciliation of movement in the number of share options Number of options Weighted average exercise price Outstanding at beginning of year (GUS shares) 12,160,041 6.87 New grants 1,829,272 9.26 Forfeitures (1,044,528) 6.60 Exercised options (4,744,024) 5.71 Expired options (206,099) 6.21 Transferred from GUS on demerger 555,300 6.96 Outstanding at demerger date (GUS shares) 8,549,962 7.77 Rollover adjustment to Home Retail Group shares 14,439,212 3.44 Forfeitures (1,209,606) 2.93 Exercised options (3,271,348) 2.84 Outstanding at end of year (Home Retail Group shares) 9,958,258 3.70 Exercisable at end of year (Home Retail Group shares) 445,921 3.19 Comparatives have been excluded as the movements in the prior year refer to GUS plc shares only and would not directly compare to the movements of the current year. The weighted average share price for share options exercised following demerger was 4.17. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

92 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (iv) Share options outstanding at the end of the year Comparative information for share options at the end of the year has been omitted as it only relates to GUS plc shares providing no meaningful comparison for the current year. Share options at the end of the year had the following exercise prices and remaining contractual lives: As at March 3 2007 Weighted average Weighted average remaining lives Range of exercise prices Number of exercise price Expected Contractual options years years 1.57 3.17 215,829 2.80 0.1 0.5 3.18 3.64 4,027,506 3.57 2.1 8.1 3.65 3.88 5,714,923 3.83 3.1 9.1 (d) Share awards in respect of ordinary shares of the Company (i) Summary of arrangements Existing schemes Co-investment Plan Performance Share Arrangements Matching Shares Plan Nature of arrangement Grant of shares 1 Grant of shares Vesting conditions Service period 4 years 3 3 years Performance Benchmark operating profit Distribution percentage determined of the Group assessed against by ranking total shareholder return specific targets relative to a comparator group. Expected outcome of meeting performance Participants meet target Currently 60% 2 criteria (at grant date) performance Maximum term 6 years 3 years Method of settlement Share distribution Share distribution Expected departures (at grant date) 7% 5%

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 93 New share award schemes Long-term Re-investment investment Share Performance plan plan incentive share plan matching shares matching shares plan Nature of arrangement Grant of shares Grant of shares 1 Grant of shares 1 Grant of shares Vesting conditions Service period 3 years A 3-part scheme 3 years 3 years running over 3, 4 and 5 years Performance n/a a) Time vesting n/a n/a b) Total shareholder return c) Return on c) invested capital Expected outcome of n/a Participants meet n/a n/a meeting performance criteria target (at grant date) performance except for total shareholder return, currently 51% 2 Maximum term 3 years 3, 4 and 5 years 5 years 5 years Method of settlement Share distribution Share distribution Share distribution Share distribution Expected departures 10% 0% 10% 30% (at grant date) (ii) 1 The Matching Shares are a nil consideration option and have been classified as an award of shares because the nature of the award is the same. 2 The performance share plan and re-investment plan - The total shareholder return performance condition is considered a market-based performance condition under IFRS 2. Both schemes have been valued using a Monte Carlo simulation with historic volatilities and correlations measured over the three year period preceding valuation. The performance share plan valuation was performed during the time when the scheme was operated as a GUS scheme. The re-investment plan has a fair value award of 51% of the share price at the date of grant. 3 The grant date for the co-investment plan is the start of the financial year in which performance is assessed. This may be up to one year before the quantity of shares award is determined. The underlying value of the award is known at grant date, subject to the outcome of the performance condition. The value of awarded shares reflects the performance outcome at the date of issue to participants. Information relating to share grant valuation techniques The value of the awards is determined as the observed market closing rate on the date awarded grants are issued to participants. For the co-investment plan, this occurs after the first year of performance is assessed. The performance share plan s and the re-investment plan s market-based performance condition is included in the fair value measurement on grant date and is not revised for actual performance. Under the share awards, the participants have an entitlement to dividend distributions from issue date until point of vesting. The observed market rate on the day of valuation is considered inclusive of future dividend distributions. There were 8,879,440 ordinary share awards granted during 2007 with a weighted average fair value of 3.57. HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

94 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 31. OPERATING LEASES Future aggregate minimum lease payments under non-cancellable operating leases, for leases expiring in the time frame indicated is as follows: Less than one year Between one and five years More than five years 2007 2006 m m (334.1) (317.6) (1,263.5) (1,199.6) (2,608.0) (2,526.2) Total operating leases (4,205.6) (4,043.4) Home Retail Group leases various retail stores, offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses, contingent rentals and renewal rights. 32. COMMITMENTS Capital expenditure for which contracts have been placed: 2007 2006 m m Property, plant and equipment Intangible assets (58.2) (47.6) (0.6) (0.9) Total commitments (58.8) (48.5) 33. CONTINGENT LIABILITIES There are a number of contingent liabilities that arise in the normal course of business, which if realised, are not expected to result in a material liability to the Group.

Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 95 34. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Cash generated from operations 2007 2006 m m Profit before tax 296.9 272.4 Adjustments for: Share of post-tax (profits)/losses of joint ventures and associates (0.7) 4.2 Net financing costs 9.0 44.7 Operating profit 305.2 321.3 Loss on sale of property, plant and equipment 0.9 1.0 Loss on sale of subsidiary 1.1 Depreciation and amortisation 146.4 134.9 Impairment losses 4.1 12.8 (Increase)/decrease in inventories (23.4) 7.6 (Increase)/decrease in receivables (42.7) 0.3 Increase/(decrease) in payables 193.3 (30.9) Movement in working capital 127.2 (23.0) (Decrease)/increase in provisions (6.3) 1.0 Movement in retirement benefits 10.0 (90.2) Share based payment expense 15.9 9.6 Cash generated from operations 604.5 367.4 (b) Reconciliation of net increase in cash and cash equivalents to movement in net debt 2007 2006 m m Net debt at 1 April (178.0) (103.9) Effect of foreign exchange rate changes (3.0) Net increase in cash and cash equivalents 156.8 110.0 Decrease/(increase) in debt 84.4 (184.1) Net debt at the end of the financial year 60.2 (178.0) (c) Major non-cash transactions Home Retail Group did not enter into any new finance lease arrangements during the period (2006: nil). 35. RELATED PARTIES The ultimate parent company of the Group is Home Retail Group plc. The principle subsidiary and associate undertakings at 3 March 2007 are shown in Note 37. Transactions between the Home Retail Group plc and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Transactions carried out with related parties in the normal course of business are summarised below: Joint Venture During 2007 the Group lent 8.1m to a joint venture, Home Retail Group Personal Finance Limited. This loan is outstanding as at 3 March 2007. Key management personnel Remuneration of key management personnel is disclosed in Note 9. During the year, there were no material transactions or balances between the Group and its key management personnel or members of their close families. Argos pension plans Transactions between the Group and the Argos pension plans are disclosed in Note 25. GUS plc Group companies GUS plc and other GUS related companies were related parties until the demerger which came into effect on 10 October 2006. Since this date, certain services have been provided in accordance with the demerger agreement. Transactions and balances prior to this date are set out below: HOME RETAIL GROUP Annual Report 07 > Notes to the Financial Statements

96 Notes to the Financial Statements continued For the short period 1 April 2006 to 3 March 2007 (a) Trading transactions and balances arising in the normal course of business The following purchases and balances have arisen from transactions between the Group and GUS plc and related companies. Purchases from GUS related companies 2007 2006 m m Purchases from related parties GUS plc and related companies purchase of services (5.6) (11.0) charge in respect of corporate head office costs borne by GUS plc (7.0) Total (12.6) (11.0) (b) The net balances with GUS plc related companies were: 31 March 2006 m Related party receivables GUS plc and related companies 960.8 Related party payables GUS plc and related companies (1,046.4) Total net balances (85.6) 36. POST BALANCE SHEET EVENT There are no material post balance sheet events. 37. PRINCIPAL SUBSIDIARY AND ASSOCIATED UNDERTAKINGS Country of Percentage of Description incorporation ordinary shares held Home Retail Group Home Retail Group (UK) Limited* Group holding company UK 100 Argos Limited General merchandise retailing UK 100 Argos Distributors (Ireland) Limited General merchandise retailing Republic of Ireland 100 Homebase Limited Home enhancement retailing UK 100 Homebase House and Garden Centre Limited Home enhancement retailing Republic of Ireland 100 Hampden Group Limited Home enhancement retailing UK 100 Home Retail Group Card Services Limited Financial services UK 100 ARG Personal Loans Limited Financial services UK 100 Home Retail Group Insurance Services Limited Financial services UK 100 Home Retail Group (Hong Kong) Limited Product sourcing for the Hong Kong 100 Home Retail Group companies Details of interests in joint ventures and associated undertakings are given within Note 18. * Held directly by the parent entity

Independent Auditors Report to the members of Home Retail Group plc - Parent 97 We have audited the Parent Company Financial Statements of Home Retail Group plc for the period ended 3 March 2007 which comprise the Company Balance Sheet and the related notes. These Parent Company Financial Statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors Remuneration Report that is described as having been audited. We have reported separately on the Group Financial Statements of Home Retail Group plc for the period ended 3 March 2007. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Annual Report, the Directors Remuneration Report and the Parent Company Financial Statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Parent Company Financial Statements give a true and fair view and whether the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors Report is consistent with the Parent Company Financial Statements. The information given in the Directors Report includes that specific information presented in the Business Review that is cross referred from the Business Review section of the Directors Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited Parent Company Financial Statements. The other information comprises only the Chairman s Statement, the Business Review, the Board of Directors, the Directors Report, the Corporate Governance Statement and the unaudited part of the Directors Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Parent Company Financial Statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Parent Company Financial Statements, and of whether the accounting policies are appropriate to the Company s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited. Opinion In our opinion: the Parent Company Financial Statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company s affairs as at 3 March 2007; the Parent Company Financial Statements and the part of the Directors Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors Report is consistent with the Parent Company Financial Statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 2 May 2007 HOME RETAIL GROUP Annual Report 07 > Independent Auditors Report to the members of Home Retail Group plc - Parent

98 Parent Company Balance Sheet At 3 March 2007 3 March 2007 Notes m Fixed assets Investments in subsidiary 5 2,895.6 Current assets Debtors amounts falling due within one year 6 179.4 Current liabilities Creditors amounts falling due within one year 7 (209.7) Net current liabilities (30.3) Total assets less current liabilities 2,865.3 Net assets 2,865.3 Capital and reserves Called up share capital 8 87.7 Profit and loss account 9 2,777.6 Equity shareholders funds 2,865.3 The Financial Statements on page 98 to 102 were approved by the Board of Directors on 2 May 2007 and were signed on its behalf by: Terry Duddy, chief executive Richard Ashton, finance director

Notes to the Parent Company Financial Statements For the short period 30 June 2006 to 3 March 2007 99 1. GENERAL INFORMATION The Company was incorporated and registered in England and Wales on 30 June 2006 under the Companies Act as a public limited Company by shares with the name Hackplimco (no. 116) plc and with registered number 586353. The Company changed its name to ARG Holdings (UK) plc pursuant to a special resolution passed on 13 July 2006 and then changed its name to Home Retail Group plc pursuant to a special resolution on 11 September 2006. The registered office of the Company is Avebury, 489 499 Avebury Boulevard, Milton Keynes, MK9 2NW. 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Basis of accounting These separate financial statements of Home Retail Group ( the Company ) are presented as required by the Companies Act 1985 ( the Act ), and were approved by the Board on 2 May 2007. They have been prepared on a going concern basis and under the historical cost convention, and in accordance with the Companies Act 1985 and applicable UK Generally Accepted Accounting Principles (UK GAAP). The Company is the ultimate parent entity of Home Retail Group ( the Group ). The Company s Financial Statements are included in Home Retail Group plc s Consolidated Financial Statements for the short-period ended 3 March 2007. As permitted by section 230 of the Act, the Company has not presented its own profit and loss account. The Company has also taken advantage of the exemption from preparing a cash flow statement under the terms of FRS 1 (Revised 1996) Cash Flow Statements. The Company is also exempt under the terms of FRS 8 Related Party Disclosures from disclosing transactions with other members of the Home Retail Group. The Company has applied the provisions for merger relief under section 131 of the Act, as a consequence no share premium was recorded in respect of the shares issued. The investment in Home Retail Group (UK) Ltd has also been recorded at the nominal value of shares issued under the provision of section 133 of the Act (provision supplementing section 131 of the Act). Changes in accounting standards At the balance sheet date FRS 28 Corresponding Amounts and FRS 29 Financial Instruments: Disclosures were in issue but not yet effective. These standards will be fully considered in due course. Financial instruments The Company classifies its financial instruments in the following categories: financial assets at fair value through profit or loss, loans and receivables. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at initial recognition and re-evaluates this position at every reporting date. The Company uses interest rate swaps to manage its interest rate exposure against borrowings from subsidiary undertakings. Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss are so designated by management on initial recognition. Derivatives are so designated unless they are designated as hedges. Items in this category are classified as current assets or current liabilities if they are expected to be realised within 12 months of the balance sheet date. Investments Investments are included in the balance sheet at their cost of acquisition. Where appropriate, a provision is made for any impairment in their value. Deferred tax Deferred taxation has been recognised as a liability or asset if transactions have occurred at the balance sheet date that give rise to an obligation to pay more tax in the future, or a right to pay less tax in the future. An asset is not recognised to the extent that the transfer of economic benefits in the future is uncertain. Deferred taxation assets and liabilities have not been discounted. Dividend distribution Final dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the financial statements, until they have been approved by the shareholders at the Annual General Meeting. Interim dividends are recognised when paid. 3. PROFIT AND LOSS ACCOUNT DISCLOSURES The Company s profit on ordinary activities was 1.7m. Details of the remuneration of Directors are given in the auditable part of the Directors Remuneration Report and related matters on pages 52 to 56, and were paid by another Group Company. There were no non-audit services. HOME RETAIL GROUP Annual Report 07 > Parent Company Balance Sheet

100 Notes to the Parent Company Financial Statements continued For the short period 30 June 2006 to 3 March 2007 4. DIVIDENDS 2007 2007 2006 2006 pence m pence m Amounts recognised as distributions to equity holders Interim 4.0 34.6 Ordinary dividends on equity shares 4.0 34.6 Proposed final divided for the short period to 3 March 2007 9.0 78.3 The proposed final dividend was approved by the Board of Directors on 24 April 2007 and is subject to approval of the shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability at 3 March 2007 in accordance with FRS 21 Events after the balance sheet date. It will be paid on 25 July 2007 to shareholders who are on the register of members on 23 May 2007. Home Retail Group (UK) Ltd is a 100% owned subsidiary incorporated within the UK and is a Group holding company. 5. INVESTMENTS IN GROUP SUBSIDIARIES 2007 m Cost: Acquisition of Home Retail Group (UK) Ltd 2,895.6 At 3 March 2007 2,895.6 Under section 425 of the Companies Act 1985 scheme of arrangements (the demerger of Home Retail Group and Experian Group from GUS plc) the Company issued shares to the public shareholders of Experian Group Ltd in return for the receipt of the shares in Home Retail Group (UK) Ltd. Home Retail Group (UK) Ltd is a 100% owned subsidiary incorporated within the UK and is a Group holding company. 6. DEBTORS 2007 m Amounts owed by Group companies 179.4 179.4 The amounts owed by subsidiary undertakings are repayable on demand. 7. CREDITORS AMOUNTS FALLING DUE IN ONE YEAR Amounts owed to Group companies Taxation Other financial liabilities 2007 m (208.5) (0.7) (0.5) (209.7) The amounts owed to subsidiary undertakings represents an unsecured loan taken out on 10 October 2006 with Stanhope Finance Limited, a Group Company. The loan is due to be repaid in June 2007. Interest is fixed and charged at 4.91%. The other financial liability represents the market value of an interest rate swap novated from GUS plc at nil consideration. The benefit of this swap will unwind between the date of novation and June 2007.

Notes to the Parent Company Financial Statements continued 101 For the short period 30 June 2006 to 3 March 2007 8. CALLED UP SHARE CAPITAL 2007 2007 30 June 2006 30 June 2006 Number of shares m Number of shares m Authorised: Ordinary share capital at 10p each 2,000,500,000 200.1 2,000,000,000 200.0 Preference share capital of 25,000 each 2 0.1 200.1 200.1 2007 Allotted, called-up and fully paid: m Ordinary shares: At 30 June 2006 Issue of new share capital 877,444,999 at 330p each 2,895.6 Reduction in nominal value of shares from 330p to 10p (2,807.9) At 3 March 2007 87.7 On incorporation, the Company s authorised share capital was 1,000,050,000 divided into 1,000,000,000 ordinary shares of 1 each and two redeemable preference shares of 25,000 each. Of such shares, two ordinary shares were taken by the subscribers to the memorandum of association, and were paid up in full in cash. The preference shares were allotted for cash and were paid up as to 30% (by virtue of the holder giving an understanding to pay up each share to such amount pursuant to section 738(2) of the Act). On 26 February 2007 these shares were redeemed and pursuant to Article 8.2.5 of the Articles, the nominal amount of such redeemable preference shares comprised in the authorised share capital was subdivided and converted into ordinary shares of 10p each. On 11 September 2006 at an Extraordinary General Meeting, the existing ordinary shares of 1 each were subdivided into 100 ordinary shares of 1p each, subsequently a further 460 ordinary shares of 1p each were issued in aggregate and fully subscribed for equivalent in cash by the subscribers to the memorandum of association. The authorised share capital of the Company was increased to 6,600,050,000 by the creation of 560,000,000,000 ordinary shares of 1p each. Finally, all the issued and ordinary shares of 1p each were consolidated into ordinary shares of 330p each. On 10 October 2006, the Company issued 877,444,999 ordinary shares of 330p to the public shareholders of Experian Group Ltd in return for the receipt of shares in Home Retail Group (UK) Ltd and to satisfy the obligations of Experian Group Ltd to it s public shareholders pursuant to the reduction of capital of Experian Group Ltd, under the scheme of arrangement. As Home Retail Group plc was not a subsidiary of Experian Group Ltd, section 131 of the Act applied to the transaction and no recognition of share premium was necessary. On 12 October 2006, the nominal amount of the issued ordinary shares was reduced from 330p to 10p by way of a court approved capital reduction scheme in accordance with section 135 of the Act. HOME RETAIL GROUP Annual Report 07 > Notes to the Parent Company Financial Statements

102 Notes to the Parent Company Financial Statements continued For the short period 30 June 2006 to 3 March 2007 9. RESERVES Treasury Profit and ESOP and loss shares account Total m m m Profit for the financial period 1.7 1.7 Reduction in nominal value of shares 2,807.8 2,807.8 Net movement in own shares (6.1) (6.1) Equity dividends paid during the period (34.6) (34.6) Movement in share based compensation reserve 8.8 8.8 At 3 March 2007 (6.1) 2,783.7 2,777.6 Net movement in own shares represents shares purchased for the purpose of satisfying obligations arising from Home Retail Group plc share-based compensation schemes. Shares in Home Retail Group are held in the following Trusts which have been established since demerger: Home Retail Group Employee Share Ownership Trust ( ESOT ) The ESOT provides for the issue of shares to Group employees under share option and share grant schemes (with the exception of the Share Incentive Plan). At 3 March 2007, the ESOT held 7,449,855 shares with a market value of 31.3m. The shares in the Trust are held in the balance sheet of the Group at nil value. The shares were acquired as part of the demerger from GUS at no cost. Dividends on these shares are waived. Home Retail Group Share Incentive Scheme Trust The Home Retail Group Share Incentive Scheme Trust provides for the issue of shares to Group employees under the Share Incentive Plan. At 3 March 2007, the Trust held 1,477,105 shares with a market value of 6.2m. These shares were purchased during the year at a cost of 6.1m. 10. COMMITMENTS On 12 July 2006, Argos Limited, a subsidiary of the Company, entered into a five-year multi-currency revolving loan facility of 700m with a syndicated group of banks. On 27 October 2006 the Company acceded to this facility as a borrower and a guarantor. As at the balance sheet date there were no drawings made under this facility. As part of the demerger, all the rights, obligations and liabilities relating to Cliffrange plc were transferred into the Home Retail Group. The Company replaced GUS plc as guarantor of the loans between Stanhope Finance Limited and Homebase Group Limited ( 150m) and Home Retail Group Card Services Limited ( 100m). These companies are all members of the Home Retail Group. There are no capital or operating lease commitments.

Group Two Year Summary 103 52-week pro forma to 52-week pro forma to 3 March 2007 4 March 2006 Income Statement m m Argos 4,164.0 3,858.8 Homebase 1,594.2 1,559.0 Financial Services 93.2 92.5 Sales 5,851.4 5,510.3 Argos 325.0 297.0 Homebase 53.4 51.4 Financial Services 5.0 6.1 Central Activities (24.0) (22.7) Benchmark operating profit 359.4 331.8 Benchmark PBT 376.7 337.1 Statistics Argos Like-for-like change in sales 2.4% (1.4%) New space contribution to sales change 5.5% 7.5% Total sales change 7.9% 6.1% Number of stores at period end 680 655 Of which Argos Extra stocked-in 238 189 Homebase Like-for-like change in sales (1.4%) (3.1%) New space contribution to sales change 3.6% 3.1% Total sales change 2.2% 0.0% Number of stores at period end 310 297 Of which contain a mezzanine floor 165 144 Financial Services Store card gross receivables m 448 378 3 March 2007 31 March 2006 Balance Sheet m m Invested capital 3,011.8 3,107.2 Retirement benefit assets 9.3 25.5 Net tax liabilities (2.6) (4.8) Pro forma net cash/(debt) 60.2 (200.0) Pro forma net assets 3,078.7 2,927.9 Net GUS group balances 22.0 Reported net assets 3,078.7 2,949.9 52-week pro forma to 52-week pro forma to Earnings and Dividends 3 March 2007 4 March 2006 Basic benchmark EPS 29.3p 25.6p Dividends per share (iinterim paid and final proposed) 13.0p n/a Dividend cover 2.25x n/a The change in both the year-end and the Group's capital structure on demerger result in statutory reported results that are noncomparable. To assist with analysis and comparison, certain pro forma information has therefore been provided to eliminate the distortions of these two impacts on the performance of Home Retail Group. HOME RETAIL GROUP Annual Report 07 > Group Two Year Summary

Group Two Year Summary 103 52-week pro forma to 52-week pro forma to 3 March 2007 4 March 2006 Income Statement m m Argos 4,164.0 3,858.8 Homebase 1,594.2 1,559.0 Financial Services 93.2 92.5 Sales 5,851.4 5,510.3 Argos 325.0 297.0 Homebase 53.4 51.4 Financial Services 5.0 6.1 Central Activities (24.0) (22.7) Benchmark operating profit 359.4 331.8 Benchmark PBT 376.7 337.1 Statistics Argos Like-for-like change in sales 2.4% (1.4%) New space contribution to sales change 5.5% 7.5% Total sales change 7.9% 6.1% Number of stores at period end 680 655 Of which Argos Extra stocked-in 238 189 Homebase Like-for-like change in sales (1.4%) (3.1%) New space contribution to sales change 3.6% 3.1% Total sales change 2.2% 0.0% Number of stores at period end 310 297 Of which contain a mezzanine floor 165 144 Financial Services Store card gross receivables m 448 378 3 March 2007 31 March 2006 Balance Sheet m m Invested capital 3,011.8 3,107.2 Retirement benefit assets 9.3 25.5 Net tax liabilities (2.6) (4.8) Pro forma net cash/(debt) 60.2 (200.0) Pro forma net assets 3,078.7 2,927.9 Net GUS group balances 22.0 Reported net assets 3,078.7 2,949.9 52-week pro forma to 52-week pro forma to Earnings and Dividends 3 March 2007 4 March 2006 Basic benchmark EPS 29.3p 25.6p Dividends per share (iinterim paid and final proposed) 13.0p n/a Dividend cover 2.25x n/a The change in both the year-end and the Group's capital structure on demerger result in statutory reported results that are noncomparable. To assist with analysis and comparison, certain pro forma information has therefore been provided to eliminate the distortions of these two impacts on the performance of Home Retail Group. HOME RETAIL GROUP Annual Report 07 > Group Two Year Summary

104 Shareholder Information Ordinary shareholders There were 41,243 holders of ordinary shares at 3 March 2007 and their holdings can be analysed as follows: Percentage Number of Number of of total number ordinary shares Percentage of shareholders of shareholders 000 ordinary shares Over 1,000,000 157 0.38 670,447,914 76.41 100,001 1,000,000 386 0.94 129,673,635 14.78 10,001 100,000 969 2.35 28,868,787 3.29 5,001 10,000 1,341 3.25 9,080,946 1.04 2,000 5,000 5,339 12.94 16,169,677 1.84 1 2,000 33,051 80.14 23,204,042 2.64 41,243 100.00 877,445,001 100.00 Shareholders are further analysed as follows: Percentage Number of Number of of total number ordinary shares Percentage of shareholders of shareholders 000 ordinary shares Corporate 7,284 17.66 825,301,500 94.06 Individuals 33,959 82.34 52,143,501 5.94 41,243 100.00 877,445,001 100.00 Employee shareholdings under the Group s share schemes are held in trust and are not therefore reflected in the number of individual shareholders. The Company shall disclose the total number of voting rights and capital of each class of shares which it issues at the end of each month where there has been a change. Registrar Enquiries concerning holdings of the Company s shares and notification of the holder s change of address should be referred to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA (telephone: 0845 603 9903). A text phone facility for those with hearing difficulties is available by telephoning 0870 600 3950. Electronic communications Shareholders can arrange to receive future Home Retail Group reports and communications electronically, receive notifications of communications by email and submit voting instructions online at shareholder meetings by registering at www.shareview.co.uk. This service is provided by Lloyds TSB Registrars and gives access to a comprehensive range of shareholder information, including dividend payment details. Home Retail Group website A full range of investor relations information on Home Retail Group is available at www.homeretailgroup.com. This includes webcasts of results presentations given to analysts and investors together with the slides accompanying those presentations. Dividend reinvestment plan The Home Retail Group dividend reinvestment plan ( DRIP ) enables shareholders to use their cash dividends to purchase Home Retail Group shares. Shareholders who wish to participate in the DRIP for the first time, in respect of the final dividend to be paid on 25 July 2007, should return a completed and signed DRIP mandate form to be received by the Registrar, by no later than 4 July 2007. For further details please contact Lloyds TSB Registrars, The Causeway, West Sussex, BN99 6DA (telephone: 0870 241 3018). Share price information The latest Home Retail Group share price is available on the Home Retail Group website (www.homeretailgroup.com) and also on the Financial Times Cityline Service (telephone: 0906 843 2740 calls charged at 60p per minute). Share dealing facility Existing or potential investors can buy or sell Home Retail Group shares using the Internet or postal dealing service provided by Lloyds TSB Registrars by logging onto www.shareview.co.uk or by calling 0870 850 0852 between 8.30am and 4.30pm weekdays. Financial calendar and Annual General Meeting arrangements Final dividend ex-dividend date 23 May 2007 Final dividend record date 25 May 2007 First quarter trading update 14 June 2007 Annual General Meeting 3 July 2007 Final dividend to be paid 25 July 2007 The Annual General Meeting will be held at the London Marriott Hotel, Grosvenor Square, London W1K 6JP and begins at 11.30am on Tuesday 3 July 2007. Registered office Home Retail Group plc, Avebury, 489-499 Avebury Boulevard, Milton Keynes MK9 2NW. Registered in London No. 5863533.

Detailed Index 105 Statement of Directors Responsibilities 57 Independent Auditors Report to the members of Home Retail Group plc 58 Consolidated Income Statement 59 Consolidated Statement of Recognised Income and Expense 60 Consolidated Balance Sheet 61 Consolidated Cash Flow Statement 62 Analysis of Net Debt 63 Notes to the Financial Statements 64-96 1. GENERAL INFORMATION 64 2. BASIS OF PREPARATION 64 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES 66 4. FOREIGN CURRENCY 70 5. SEGMENTAL INFORMATION 71 6. ANALYSIS OF REVENUE BY CATEGORY 73 7. ACQUISITIONS 73 8. NET OPERATING EXPENSES 73 9. EMPLOYEE BENEFIT COSTS AND EMPLOYEE NUMBERS 74 10. EXCEPTIONAL ITEMS 75 11. NET FINANCING COSTS 75 12. TAXATION 76 13. DIVIDENDS 77 14. BASIC AND DILUTED EARNINGS PER SHARE (EPS) 77 15. GOODWILL 78 16. INTANGIBLE ASSETS 78 17. PROPERTY, PLANT AND EQUIPMENT 79 18. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES 80 19. INVENTORIES 80 20. TRADE AND OTHER RECEIVABLES 80 21. CASH AND CASH EQUIVALENTS 81 22. TRADE AND OTHER PAYABLES 81 23. LOANS AND BORROWINGS 81 24. PROVISIONS 82 25. POST EMPLOYMENT BENEFITS 82 26. OTHER FINANCIAL ASSETS AND LIABILITIES 86 27. DEFERRED TAX 87 28. SHARE CAPITAL 88 29. RECONCILIATION OF MOVEMENTS IN EQUITY 89 30. SHARE-BASED PAYMENT ARRANGEMENTS 90 31. OPERATING LEASES 94 32. COMMITMENTS 94 33. CONTINGENT LIABILITIES 94 34. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 95 35. RELATED PARTIES 95 36. POST BALANCE SHEET EVENT 96 37. PRINCIPAL SUBSIDIARY AND ASSOCIATED UNDERTAKINGS 96 Independent Auditors Report to the members of Home Retail Group plc 97 Parent Company Balance Sheet 98 Notes to the Parent Company Financial Statements 99-102 Group Two Year Summary 103 Shareholder Information 104 HOME RETAIL GROUP Annual Report 07 > Detailed Index

Design and production by Accrue

Home Retail Group plc Avebury 489-499 Avebury Boulevard Milton Keynes MK9 2NW Tel: 0845 603 6677 www.homeretailgroup.com