X-PHONICS plc

Chairman's Statement

For the six months ended 31 March 2008 

I am pleased to announce the results of our trading activities for the

6 months ended 31 March 2008.

Financial Report

Revenue for the period was £53,628 (6 months to 31 March 2007:

£12,362). This is a result of a number of our artists starting to generate sales following the release of albums and from other activities.

Cost of sales continues to represent all the costs associated with

developing the bands and artists including recording and promotion and are accounted for as they are incurred. Costs are matched with revenues only once the revenues are certain. Cost of sales for the period was £58,609 (6 months to March 2007: £99,926) a reduction of 41% over the same period last year. Costs associated with projects continue to be tightly controlled with decisions made on further investment in artists and projects being made when the Directors believe there is a reasonable prospect of revenues being generated in the future.

Administrative expenses for the period were £212,163 (6 months to March

2007: £209,567).

The Group has therefore made a loss on ordinary activities before taxation of

£217,177 (6 months to 31 March 2007: £293,126) an improvement of 26%.

At the end of the period the Group held cash balances of £21,869 (31

March 2007: £339,642) and had trade and other receivables of £105,095 (31

March 2007: £87,655). It also had trade and other payables of £167,679 (31 March 2007: £108,790). Following the period end the Group secured loans of £50,000. These loans, which are unsecured, and the fact that costs had been reduced significantly throughout the period provides sufficient short term working capital for the Groups immediate needs. 

Trading Update

Record Label Activities

As reported in previous statements the Group believes it is well placed with regard to its share of future revenues generated by the Attic Lights, a band who are contracted to the Group and licensed to Universal Island in a five album deal worth potentially £1,500,000 in advances over the contract period.

Any measure of success to date is determined by how well the Attic Lights and the singles that have been released so far are received and by the effort provided by Universal Island in promoting the band.

To date three singles have been released as part of the build up with the fourth Single "Bring You Down" scheduled for release on July 7th. The Attic Lights have been played on Radio 2, XFM and on various regional radio stations. A lot of regional promotions have been arranged and the band have attended the "Choices for Life" events in Glasgow, Edinburgh, Aberdeen and Inverness, organised by Scottish Schools where they played in front of audiences of tens of thousands. They have also started to play and perform in London and have recorded live sessions for a number of regional radio stations.

In addition they have performed an acoustic set at the TBA Awards with The Feeling and The Sugababes which should result in at least one of the band's songs being played on Channel 4. Of particular note is the fact that The Fratellis, another of Universal Islands bands, have agreed to record a mix of "Wendy" which will be the final single prior to the release of the album. This is expected to produce a great deal of publicity for the band. 

With "Bring You Down" being released in July, having already having been added to the Virgin radio playlist and with Universal Island commissioning a large budget video to accompany it, the build up towards the final single release, "Wendy" and the album's release in September is progressing very well. 

Recording of the first album for the singer songwriter, Maeve O'Boyle is now complete. The album is in the process of being mixed for "surround sound" as we expect to make the album available through Linn Records who are part of the top end Hi-Fi equipment manufacturer. Linn have an international customer base to whom they market artists and material contracted by Linn Records. Securing this distribution channel represents a particular coup and we expect to be able to extend the relationship and make others of the Group's artists available through Linn Records.

The Poems first UK album was released in February with good reviews in the music press. They are supporting sales of the album by touring with a new line up and we hope to be able to extend the Linn relationship to The Poems shortly. As a consequence we expect to see growing revenues from sales of The Poems album, "Sound of Young America".

Emma Curran was mentioned in my last statement as a new artist to the Group. Since March Emma has been recording her debut album which is nearing completion. There is a growing level of interest with, as an example, The Daily Record approaching Emma to run a feature to coincide with a major article on Gary Lightbody of Snow Patrol who spotted Emma initially. This increased profile and the imminent finishing of the album makes it an ideal time to approach larger labels with a proposed licensing deal.

Keith Jack, the runner-up in "Any Dream Will Do", has also completed recording his album for the Group. With this and the fact that Keith's profile has continued to grow with articles in the national press; features in BBC's, "I'll do Anything"; and most importantly performing to over 250,000 people as the Narrator on the Joseph tour, we are seeing a high level of interest from some large high street retailers who understand Keith's appeal and see an opportunity to promote his album through their stores.

As we continue to develop these artists we are also making good progress with others that are less traditional.

The Zimmers have been mentioned in previous statements and continue to be recognised across the world. Following the initial success of the Zimmer's first single, "My Generation", and on the back of the extensive world-wide PR coverage that has been achieved, an album has been recorded which is expected to be released during the latter part of the summer. Promotion of the album will be key to its success. Recently, The Zimmers have been a regular part of the BBC television programme "The One Show" who ran a competition to find three new members for the band. We are also in the latter stages of negotiating a promotional visit to China with the Chinese Cultural Secretary in London so that the Zimmers can join a three day event in Shanghai where they will perform as part of China's Aging China Celebration. This should generate another flurry of international interest which will be harnessed in support of the release of the album.

Another new project with similar potential for promotion is "The Decadence". The Decadence is Gary Hart who's story as a soldier serving in Iraq has created a lot of interest in his music and support for his story from Soldier Magazine, British Forces Broadcasting (TV and Radio) and regional press in Surrey and South Wales, his home town and where he now resides. Taking all these sources of PR and in addition the fact that there are approaching one million people in the military including their families, there is a potentially healthy market for an album. The Decadence first single is planned for release at the end of July with the support of the Ministry of Defence, The Army, Navy and Air-force.

Music Publishing

Revenues continue to be earned from the Group's share of royalties of its writers including Robert Hodgens (for The Poems and Texas) and Kevin Tait (Urbnri). With the Poems Album now released and with improved distribution along with the forthcoming release of Texas's Greatest Hits through a national newspaper, we should see an increase in royalties in this area. Likewise, with Urbnri's latest single play listed on a lot of radio stations, this increased profile will produce a stronger royalty stream in time.

The Group has just concluded negotiations with EMI Publishing to administer our publishing catalogue. EMI Publishing has the resource and expertise to do so cost effectively but at the same time would have a vested interest in looking for opportunities that increase the level of royalty that the Group might enjoy. As an indication of the opportunities that could be realised, EMI are confident in their ability to identify and secure synchronisations deals for a number of our artists.

Outlook  

The Group now has a number of artists, writers and recorded material that should generate revenues in the near term. It has also established a number of relationships and partnerships through which the materials can be distributed and with a degree of confidence that is supported by the level of press and other coverage that is being seen on a daily basis. 

Through its recorded material, its contracts and relationships with its artists and writers the Group has created value which must now be capitalised upon through the continued marketing effort, establishment of strong distribution channels and a growth in sales. 

Robin Davies

Chairman

27 June 2008