Priority Telecom Reports Q1

SCHIPHOL-RIJK, The Netherlands -- Highlights Q1 2005

Gina van der Werf, acting Chairman of the Board of Management of Priority Telecom was quoted:“We have made further progress in migrating our product portfolio to a more comprehensiveportfolio of advanced telecommunications solutions. The transition partly mitigates the risksassociated with the declining revenue potential in traditional transport layer services such asleased lines. Our current solutions portfolio allow us to offer all our services on-net and off-net,over varying access technologies enabling growth in geographic areas where we currently do nothave infrastructure in place. This strategy has proven to be successful. Our market position forVoIP and other voice based solutions has improved.”

Operational Review

During the first quarter of 2005, Priority Telecom further established itself as one of the leadingVoIP solution providers in Europe. The Company increased its indirect VoIP connections to over57,000, from 37,000 per year end 2004. The complete range of VoIP solutions is available in allcore markets. As an example, the Company signed its first VoIP customer contract with a largecable operator in Austria. In Norway, a major switch and network capacity upgrade was initiatedin order to accommodate the significant growth in VoIP traffic running on its network.

For its Corporate Office Solutions, Network Solutions and Customer Contact Solutions portfolios,Priority Telecom contracted several large high profile clients such as UMC St Radboud /Universiteit Nijmegen and Dumeco in the Netherlands and Krone Hit Radio in Austria.To enable customers to benefit from attractive call charges between their own fixed and mobilenumbers, the Company signed an agreement with Orange in the Netherlands to jointly offer fixedmobileservices to the Dutch business market.

Priority Telecom not only developed new services, but also improved the range of servicesavailable in different product categories. A number of flexible ISDN services were launched withavailability on different access technologies including our own DSL infrastructure in theNetherlands.

Financial Review

Danny de Vries, member of the Board of Management commented on the financial results: “Wehave been able to increase our top line revenue by continuing to invest in new growth areas. Thislevel of investment is possible because our existing fibre based business is generating a positivecash flow. Our overall return on assets and profitability will continue to improve as we leverageour existing infrastructure, skills and back office systems.”As per January 1, 2005, Priority Telecom migrated from Dutch GAAP to International FinancialReporting Standard (‘IFRS’). The presented figures in this press release are in accordance withthe accounting principles under IFRS. The migration impact is fully disclosed under a separateIFRS paragraph in this press release.

Revenue increased to EUR 25.4 million in the first quarter of 2005, an increase of EUR 1.3million compared to the same quarter last year (Q1 2004: EUR 24.1 million). On a recurring basis,revenue increased by EUR 2.3 million or 10% as the first quarter of 2004 included a one-offrevenue of EUR 0.9 million associated with providing professional and migration services tonl.tree. Due to the launch of a range of advanced VoIP, Customer Contact and voice operatorsolutions, Priority Telecom was able to realise revenue growth, despite churn and price erosion inthe leased line, data network and Internet access service markets. These new solutionscontributed strongly to the revenue growth in the first quarter of 2005.

As expected the gross margin decreased to 56.5% of revenue in the first quarter of 2005 (Q12004: 67.2%) due to a shift in the revenue mix towards lower margin voice services. The grossmargin has gradually decreased over the past year and, if adjusted for one-off effects3, it wouldhave been 65.8% in the first quarter of 2004 and 59.8% in the fourth quarter of 2004,respectively.

Continued cost control enabled the Company to reduce the operational expenses to EUR 10.7million in the first quarter of 2005 (Q1 2004: EUR 12.6 million). The majority of savings resultedfrom the implementation of a shared service centre in the Netherlands, stringent cost controls andimproved operating efficiencies.The reduction in operational expenses was partially offset by the increase in direct cost, resultingin an increase of EBITDA of EUR 0.1 million, from EUR 3.6 million in the first quarter of 2004 toEUR 3.7 million in the first quarter of 2005. On a recurring basis, the comparative EBITDA for thefirst quarter of 2004 would have been EUR 2.6 million as adjusted for the one-off revenue of EUR0.9 million, leading to a year over year improvement of 39%.

The net result improved to a loss of EUR 3.4 million in the first quarter of 2005, an increase ofEUR 5.3 million from a loss of EUR 8.7 million in the same quarter of 2004. The improvement ismainly caused by a lower depreciation charge of EUR 7.1 million in the first quarter of 2005 (Q12004: EUR 12.0 million).

Capital expenditures amounted to EUR 4.8 million in the first quarter of 2005 (Q1 2004: EUR3.8 million). The Company further invested in VoIP and DSL infrastructure. These investmentsexpand the investments already made last year, enabling Priority Telecom to offer its solutionsbased service portfolio on a much larger scale.

The fiber based business generated a positive operating cash flow (i.e. EBITDA minus CAPEX)of nearly EUR 1 million. The negative operating cash flow of approximately EUR 2 million for thenew business lines is a result of start-up investments. Total operating cash flow (i.e. EBITDAminus CAPEX) was still slightly negative with EUR 1.1 million.Cash and cash equivalents decreased to EUR 18.5 million during the first quarter of 2005 (Q12004: EUR 29.8 million). The main uses of cash during the previous year were associated withinvestments in new business lines and repayment of vendor loans.Long-term liabilities was reduced by EUR 11.2 million from EUR 26.4 million in the first quarterof 2004 to EUR 15.2 million in the same quarter of 2005. The decrease in long-term liabilities ismainly a result of a settlement with regards to certain assets in the fourth quarter of 2004, whichwas offset through a reduction in the UGC group company deferred financing facility. The outstanding amount under this facility is currently EUR 11.8 million. Repayments of vendor loansalso contributed towards the reduction in long-term liabilities.

Other Events

On March 29, 2005 Priority Telecom held an Extraordinary Shareholders Meeting in whichRichard de Lange, Mike Moriarty and Paul Ward were appointed to the Supervisory Board ofPriority Telecom. The Supervisory Board currently consists of Michael Fries (chairman), CharlesBracken, Anton Tuijten, Annemarie Jorritsma-Lebbink, Richard de Lange, Mike Moriarty and PaulWard.

Outlook 2005

Priority Telecom continues with its transition from being a traditional transport layer servicesprovider to being a network and voice solutions provider. We are confident that our solutionsbasedrevenue will continue to grow during the year, especially in the voice area. The Companyis currently on track to meet its target of improving revenue and profitability on an annualisedbasis in 2005.

Priority Telecom N.V.