Edgar Filing: BRITISH SKY BROADCASTING GROUP PLC

e20vf

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F


o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 30 June 2004


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-13488

British Sky Broadcasting Group plc

(Exact name of Registrant as specified in its charter)

England & Wales

(Jurisdiction of incorporation or organisation)

Grant Way, Isleworth, Middlesex, TW7 5QD, England

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of each		Name of each exchange
Class		on which registered

Ordinary shares (nominal value 50p per share)		New York Stock Exchange ⁽¹⁾
American Depositary Shares, each of which represents four Ordinary shares of British Sky Broadcasting Group plc (nominal value 50p per share)		New York Stock Exchange


(1)	The listing of Registrant’s ordinary shares on the New York Stock Exchange is for technical purposes only and without trading privileges.

Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report.


Ordinary shares (nominal value 50p per share)			1,941,712,786

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

TABLE OF CONTENTS


		Page

FORWARD LOOKING STATEMENTS		3

PART I
ITEM 1:	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4
ITEM 2:	OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3:	KEY INFORMATION	4
ITEM 4:	INFORMATION ON THE COMPANY	11
ITEM 5:	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	46
ITEM 6:	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	74
ITEM 7:	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	96
ITEM 8:	FINANCIAL INFORMATION	97
ITEM 9:	THE OFFER AND LISTING	98
ITEM 10:	ADDITIONAL INFORMATION	99
ITEM 11:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	110
ITEM 12:	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	112

PART II
ITEM 13:	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	112
ITEM 14:	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	112
ITEM 15:	CONTROLS AND PROCEDURES	113
ITEM 16A:	AUDIT COMMITTEE FINANCIAL EXPERT	113
ITEM 16B:	CODE OF ETHICS	113
ITEM 16C:	PRINCIPAL ACCOUNTANT FEES AND SERVICES	113
ITEM 16D:	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	114
ITEM 16E:	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	114

PART III
ITEM 17:	FINANCIAL STATEMENTS	114
ITEM 18:	FINANCIAL STATEMENTS	115
ITEM 19:	EXHIBITS	116
GLOSSARY OF TERMS
Exhibit 4.2
Exhibit 4.3
Exhibit 8
Exhibit 12.1
Exhibit 12.2
Exhibit 13
Exhibit 14

FORWARD LOOKING STATEMENTS

This Annual Report on Form 20-F contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business, and our strategy, plans and objectives. These statements include, without limitation, those that express forecasts, expectations and projections with respect to the potential for growth of free-to-air and pay television, advertising growth, DTH subscriber growth and Multiroom and Sky+ penetration, DTH revenue, profitability and margin growth, cash flow generation, subscriber acquisition costs and marketing expenditure, capital expenditure programmes and proposals for returning capital to shareholders.

These statements (and all other forward-looking statements contained in this Annual Report on Form 20-F) are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied or forecast in the forward-looking statements. These factors include, but are not limited to, the fact that we operate in a highly competitive environment, the effects of government regulation upon our activities, our reliance on technology, which is subject to risk, change and development, our ability to continue to obtain exclusive rights to movies, sports events and other programming content, risks inherent in the implementation of large-scale capital expenditure projects, our ability to continue to communicate and market our services effectively, and the risks associated with our operation of digital television transmission in the United Kingdom (“UK”) and Ireland.

Information on some risks and uncertainties are described in Item 3 “Key Information — Risk Factors” in this Annual Report on Form 20-F. All forward-looking statements in this Annual Report on Form 20-F are based on information known to us on the date hereof. Except as required by law, we undertake no obligation publicly to update or revise any forward-looking statements, whether as a result of new information, future events of otherwise.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable

ITEM 3. KEY INFORMATION

SELECTED FINANCIAL DATA

Set forth below is selected financial data for the Group for each of the years in the five year period ended 30 June 2004 and as at 30 June 2004, 2003, 2002, 2001 and 2000.

The information contained in the following tables should be read in conjunction with Item 5 “Operating and Financial Review and Prospects”, and the Group’s current and historical consolidated financial statements and related notes, as well as other information included elsewhere in this document.

The selected profit and loss account data set forth below for the years ended 30 June 2004, 2003 and 2002, and the balance sheet data at 30 June 2004 and 2003, are derived from audited consolidated financial statements included in this Annual Report on Form 20-F, which have been prepared in accordance with UK GAAP and vary in certain significant respects from US GAAP. A reconciliation of certain amounts from UK GAAP, as well as a description of principal differences between UK GAAP and US GAAP applicable to the Group, is presented in note 28 of the notes to the Consolidated Financial Statements. The selected consolidated profit and loss account data for the years ended 30 June 2001 and 2000, and the balance sheet data at 30 June 2002, 2001 and 2000, are derived from the audited consolidated financial statements appearing in our historical annual reports as filed on Form 20-F with the Securities and Exchange Commission.



		Year ended 30 June

		2004⁽¹⁾			2004			2003⁽²⁾			2002⁽²⁾			2001⁽²⁾			2000⁽²⁾⁽³⁾


		(in millions except per share data)
Profit and Loss Account:
Amounts in accordance with UK GAAP
	DTH subscribers revenues	$	4,822			£2,660			£2,341			£1,929			£1,537			£1,189
	Cable and DTT subscribers revenues⁽⁴⁾		390			215			202			279			299			303
	Advertising revenues		566			312			284			251			271			242
	Interactive revenues		556			307			218			186			93			5
	Other revenues		294			162			141			131			106			108

Group turnover			6,628			3,656			3,186			2,776			2,306			1,847
	Operating expenses, net, before amortisation of goodwill and operating exceptional items		(5,539	)		(3,056	)		(2,822	)		(2,590	)		(2,154	)		(1,762	)
	Amortisation and impairment of intangible fixed assets		(216	)		(119	)		(121	)		(119	)		(44	)		—
	Release of provision against (provision against) ITV Digital programming debtors		—			—			5			(22	)		—			—
	Estimated cost of reorganisation of Sky Interactive		—			—			—			—			(23	)		—
	Estimated cost of transitioning analogue customers to digital service		—			—			—			—			—			(58	)
	Estimated cost of termination of analogue operations		—			—			—			4			—			(41	)
	Estimated cost of Sky In-Home Service Limited reorganisation		—			—			—			—			—			(6	)

Operating expenses, net			(5,755	)		(3,175	)		(2,938	)		(2,727	)		(2,221	)		(1,867	)


Operating profit (loss)			873			481			248			49			85			(20	)
	Share of joint ventures’ and associates’ operating results		(9	)		(5	)		3			(76	)		(256	)		(122	)
	Joint ventures’ and associates’ goodwill amortisation, net*		18			10			—			(1,070	)		(101	)		(14	)
	Profit (loss) on disposal of fixed asset investments		92			51			—			2			—			(1	)
	Share of joint venture’s loss on disposal of fixed asset investments		—			—			—			—			(70	)		(14	)
	Amounts written back to (written off) fixed asset investments, net		44			24			(15	)		(60	)		(39	)		—
	Release of provision against (provision against) loss on disposal of subsidiary		—			—			—			10			(10	)		—
	Interest receivable and similar income		18			10			4			11			18			11
	Interest payable and similar charges		(165	)		(91	)		(118	)		(148	)		(153	)		(103	)
	Exceptional finance credit		—			—			—			—			3			—

Profit (loss) on ordinary activities before taxation			871			480			122			(1,282	)		(523	)		(263	)
	Tax (charge) credit on profit (loss) on ordinary activities		(286	)		(158	)		62			(107	)		(24	)		65

Profit (loss) on ordinary activities after taxation			585			322			184			(1,389	)		(547	)		(198	)
	Equity dividends⁽⁵⁾		(210	)		(116	)		—			—			—			—

Retained profit (loss)			375			206			184			(1,389	)		(547	)		(198	)

Earnings (loss) per share — basic			30.1¢			16.6p			9.6p			(73.6p	)		(29.6p	)		(11.3p	)
Earnings (loss) per share — diluted			30.1¢			16.6p			9.5p			(73.6p	)		(29.6p	)		(11.3p	)
Dividends per share⁽⁵⁾						6.0p			—			—			—			—
Dividends per share⁽⁵⁾						10.8¢			—			—			—			—


*	Included within joint ventures’ goodwill amortisation of £1,070 million for fiscal 2002 is £971 million in respect of an impairment of KirchPayTV GmbH & Co KGaA (“KirchPayTV”) goodwill (see notes 4, 5 and 14 of the Consolidated Financial Statements included within Item 18).


	All results relate to continuing operations.



	Year ended 30 June

	2004⁽¹⁾			2004			2003			2002			2001			2000


	(in millions except per share data)
Amounts in accordance with US GAAP
Total revenues	$	6,408		£	3,535		£	3,082		£	2,707		£	2,296		£	1,911
Amortisation and impairment of intangible fixed assets		—			—			(5	)		(145	)		(58	)		(12	)
Operating profit (loss)		1,209			666			370			(30	)		(176	)		(247	)
Joint ventures’ and associates’ goodwill amortisation and impairment, net		(5	)		(3	)		—			(712	)		(71	)		(10	)
Income (loss) before income tax		1,080			595			260			(940	)		(660	)		(473	)
Net income (loss)		788			434			286			(1,047	)		(625	)		(351	)
Basic earnings (loss) per share		40.6¢			22.4p			14.9p			(55.5p	)		(33.8p	)		(20.1p	)
Diluted earnings (loss) per share		40.4¢			22.3p			14.7p			(55.5p	)		(33.8p	)		(20.1p	)
Basic earnings (loss) per ADS⁽⁶⁾		162.5¢			89.7p			59.7p			(221.9p	)		(135.4p	)		(80.3p	)
Diluted earnings (loss) per ADS⁽⁶⁾		161.8¢			89.3p			58.9p			(221.9p	)		(135.4p	)		(80.3p	)



	As at 30 June

	2004⁽¹⁾			2004			2003⁽²⁾			2002⁽²⁾			2001⁽²⁾			2000⁽²⁾⁽³⁾


	(in millions)
Balance Sheet:
Amounts in accordance with UK GAAP
Total assets	$	4,285		£	2,364		£	1,990		£	2,159		£	3,858		£	3,253
Long-term debt		(1,950	)		(1,076	)		(1,152	)		(1,577	)		(1,768	)		(1,412	)
Net assets (liabilities)		163			90			(152	)		(352	)		1,035			770
Capital stock⁽⁷⁾		4,738			2,614			3,772			3,837			3,901			3,096
Shares in issue (number)		1,942			1,942			1,938			1,893			1,889			1,826



	As at 30 June

	2004⁽¹⁾		2004		2003		2002			2001		2000


	(in millions)
Amounts in accordance with US GAAP
Total assets	$	5,417	£	2,988	£	2,810	£	2,853		£	4,209	£	3,060
Net assets (liabilities)		1,472		812		448		(141	)		850		681



	As at 30 June

	2004		2003		2002		2001		2000


	(in thousands)
Distribution of Sky Channels
DTH subscribers		7,355		6,845		6,101		5,453		4,513
Cable subscribers⁽⁸⁾		3,895		3,871		4,091		3,486		3,735
DTT — UK⁽⁹⁾		3,084		1,510		—		1,105		740

Total UK and Ireland		14,334		12,226		10,192		10,044		8,988


(1)	Solely for convenience, pounds sterling amounts for the year ended 30 June 2004 and as at that date have been translated into US dollars at the noon buying rate of the Federal Reserve Bank of New York on 30 June 2004, which was US$1.8126 per £1.00.

(2)	Under UK GAAP, operating expenses, net, before amortisation of goodwill and operating exceptional items; operating expenses, net; operating profit (loss); profit (loss) on ordinary activities before taxation; profit (loss) on ordinary activities after taxation; basic and diluted earnings (loss) per share; total assets; net assets (liabilities); and capital stock for fiscal 2003, 2002, 2001 and 2000 were restated following the adoption by the Group of Urgent Issues Task Force Abstract 38 “Accounting for ESOP trusts” (“UITF 38”) in fiscal 2004.

(3)	Under UK GAAP, the taxation credit for fiscal 2000 was restated following the adoption by the Group of FRS 19 “Deferred tax” in fiscal 2001. Adoption of FRS 19 resulted in the recalculation of loss per share for fiscal 2000.

(4)	From fiscal 2003, this relates solely to cable subscribers revenues.


(5)	An interim dividend of £53 million, representing 2.75p per share, was paid for the six months ended 31 December 2003 (4.9¢ in US dollars at date of payment on 23 April 2004). A final dividend of £63 million, representing 3.25p per share was proposed for the year ended 30 June 2004 (5.9¢ in US dollars at 18 October 2004). No interim or final dividends were paid or proposed for fiscal 2003, 2002, 2001 or 2000.

(6)	In our Annual Reports filed on Form 20-F for fiscal 2002, 2001 and 2000, the earnings (loss) per ADS was calculated using the weighted average number of ADSs outstanding on the basis of 1 ADS for 6 Ordinary Shares. On 23 December 2002, the ratio was revised to reflect a new ratio of 1 ADS representing 4 Ordinary Shares. Therefore, the current and prior periods earnings (loss) per ADS have been calculated using a weighted average number of ADSs outstanding on the basis of 1 ADS for 4 Ordinary Shares. Earnings (loss) per ADS is not exactly four times earnings (loss) per share due to rounding differences.

(7)	Capital stock includes called-up share capital, share premium, shares to be issued, Employee Share Ownership Plan (“ESOP”) reserve, merger reserve and special reserve. On 10 December 2003, the Company’s share premium account was reduced by £1,120 million (see note 24 of the Consolidated Financial Statements included within Item 18).

(8)	The number of cable subscribers is as reported to us by the cable operators. The cable subscribers disclosure for fiscal 2000 was restated in fiscal 2001 to include subscribers in the Republic of Ireland.

(9)	From fiscal 2003, the DTT subscriber number consists of the Broadcasters’ Audience Research Board’s (“BARB’s”) estimate of the number of homes with access to Freeview (the free DTT offering available in the UK). Up until fiscal 2001, this subscriber number consisted of the number of homes subscribing to ITV Digital’s (previously On Digital’s) DTT pay television service.

Factors which materially affect the comparability of the selected financial data

Accounting changes

During fiscal 2004, UK UITF 38 was adopted. The impact of the adoption of this standard is described in note 1 of the Consolidated Financial Statements included within Item 18.

During fiscal 2004, US EITF 00-21, Revenue Arrangements with Multiple Deliverables, was adopted. The impact of the adoption of this standard is described in note 28 of the Consolidated Financial Statements included within Item 18.

During fiscal 2003, US accounting standard Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, was adopted. The impact of the adoption of this standard is described in note 28 of the Consolidated Financial Statements included within Item 18.

During fiscal 2001, UK accounting standard FRS 19, Deferred Tax, was adopted.

During fiscal 2001, US accounting standard SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was adopted. As of 1 July 2003, we had sufficiently designated a number of interest rate and cross-currency swaps and forward foreign exchange agreements as cash flow hedges of our exposures relating to certain debt and long-term programming contracts payments. For further details see note 28 of the Consolidated Financial Statements included within Item 18.

During fiscal 2000, US accounting standard SAB 101, Revenue Recognition in Financial Statements, was adopted.

Business combinations

During fiscal 2001, we completed the acquisitions of British Interactive Broadcasting Limited (“BiB”) and Sports Internet Group plc (now Sports Internet Group Limited) (“SIG”). The results of these acquisitions were consolidated from the respective dates of acquisition.

On 14 April 2000, we completed the acquisition of a 24% interest in KirchPayTV (subsequently diluted to 22.03%). We gross equity accounted for our share of results of this joint venture from 14 April 2000 until 8 February 2002 under UK GAAP, and until 31 December 2001 under US GAAP. See notes 4, 5, 14 and 28 of the Consolidated Financial Statements included within Item 18 for further information relating to our accounting treatment of our investment in KirchPayTV under UK and US GAAP.

Exchange rates

A significant portion of our liabilities and expenses associated with the cost of programming acquired from US film licensors is denominated in US dollars. For a discussion of the impact of exchange rate movements on our financial condition and results of operations, see Item 11 “Quantitative and Qualitative Disclosures about Market Risk — Currency Exchange Rates”.

Since any dividends we declare are declared in pounds sterling, exchange rate fluctuations will affect the US dollar equivalent of cash dividends receivable by holders of ADSs.

The following table sets forth, for the periods indicated, information concerning the noon buying rates provided by the Federal Reserve Bank of New York for pounds sterling expressed in US dollars per £1.00.


Month	High		Low

April 2004		1.8564		1.7674
May 2004		1.8369		1.7544
June 2004		1.8387		1.8090
July 2004		1.8734		1.8160
August 2004		1.8459		1.7921
September 2004		1.8105		1.7733


Year ended 30 June	Period end		Average⁽¹⁾		High		Low

2000		1.5256		1.5919		1.6724		1.4837
2001		1.4041		1.4509		1.5182		1.3737
2002		1.5347		1.4479		1.5279		1.4000
2003		1.6529		1.5915		1.6840		1.5192
2004		1.8126		1.7491		1.9045		1.5728


(1)	The average rate is calculated by using the average of the noon buying rates on the last day of each month during the relevant year.

On 18 October 2004, the noon buying rate was US$1.8010 per £1.00.

RISK FACTORS

This section describes the significant risk factors affecting our business. These should be read in conjunction with our long-term operating targets, which are set out in Item 5 “Operating and Financial Review and Prospects — Overview and Recent Developments”. These risks could materially adversely affect any or all of our business, financial condition, prospects, liquidity or results of operations. Additional risks and uncertainties of which we are not aware or which we currently believe are immaterial may also adversely affect our business, financial condition, prospects, liquidity or results of operations.

Our business is heavily regulated and changes in regulations, changes in interpretation of existing regulations or failure to obtain required regulatory approvals or licences could adversely affect our ability to operate or compete effectively.

We are subject to regulation primarily in the UK and the European Community. The regimes which affect our business include broadcasting, telecommunications, and competition (anti-trust) laws and regulations. Relevant authorities may introduce additional or new regulations applicable to our business. Our business and business prospects could be adversely affected by the introduction of new laws, policies

or regulations or changes in the interpretation or application of existing laws, policies and regulations. Changes in regulations relating to one or more of licensing requirements, access requirements, programming transmission and spectrum specifications, consumer protection, or other aspects of our business, or that of any of our competitors, could have a material adverse effect on our business and the results of our operations.

As a result of the European Commission’s investigations into the sale of broadcasting rights to Football Association Premier League Limited (“FAPL”) football matches, the FAPL has provisionally agreed with the European Commission, inter alia, that after the 2006/07 FAPL football season, the tendering procedures for television rights will ensure that no single buyer is able to acquire exclusively all of the centrally-marketed live FAPL rights packages (and that these packages will continue to be balanced). The FAPL has also provisionally agreed to examine, jointly with the European Commission, the way in which its tender processes are conducted to ensure that they do not exclude any potential competitors. The European Commission has consulted publicly on the terms of this provisional agreement. The outcome of this consultation has not yet been disclosed. We are not yet able to assess whether these developments will have a material effect on the Group.

The European Commission has opened a sector inquiry regarding the conditions of provision of audio-visual content from sports events to internet and other “new media” companies such as 3G mobile operators. The European Commission has stated that the purpose of its investigation is to gain as clear and wide a view as possible of the availability of audio-visual sports rights in the European Union, so as to ascertain whether access by “new media” operators to such content is not unduly restricted. The Group is co-operating with this investigation. At this stage, the Group is unable to determine whether the investigation or its outcome will have a material effect on the Group.

We cannot assure you that we will succeed in obtaining all requisite approvals and licences in the future for our operations without the imposition of restrictions which may have an adverse consequence to us, nor that compliance issues will not be raised in respect of operations conducted prior to the date of filing of this Annual Report on Form 20-F.

We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.

We face competition from a broad range of companies engaged in communications and entertainment services, including cable television providers, digital and analogue terrestrial television providers, telecommunications providers, home entertainment products companies, companies developing new technologies and other suppliers of news, information, sports and entertainment, as well as other providers of interactive services. Our competitors include organisations which are publicly funded, in whole or in part, and which fulfil a public service broadcasting mandate. Were such mandate to be changed, this could lead to an increase in the strength of competition from these organisations. Although we have continued to develop our services through technological innovation and in licensing, acquiring and producing a broad range of content, we cannot predict with certainty the changes that may occur in the future which may affect the competitiveness of our businesses. In particular, the means of delivering various of our (and/or competing) services may be subject to rapid technological change.

Our ability to compete successfully will depend on our ability to continue to acquire, commission and produce, programming content. The programme content and third party programme services we have licensed from others are subject to fixed term contracts which will expire. We cannot assure you that programme content or third party programme services (whether on a renewal or otherwise) will be available to us on acceptable terms, or at all, and if so available, that such programme content or programme services will be attractive to our customers.

The future demand and speed of take up of our DTH service will depend upon our ability to attractively package our content and offer it to our customers at competitive prices, competitive pressures from competing services, and our ability to create demand for our products and to attract and retain customers

through a wide range of marketing activities. In addition, we operate in a geographic region which has experienced sustained economic growth for a number of years. The effect of a possible slowdown in the rate of economic growth and/or a decline in consumer confidence, on our ability to continue to attract and retain subscribers, is uncertain. We therefore cannot assure you that the marketing activities we undertake will succeed in generating sufficient demand to achieve our operating targets.

We have made, and continue to make, significant investments in the modernisation of our customer relationship management centres and the replacement of our customer relationship management systems.

Throughout the last four fiscal years, we have invested more than £170 million in our customer relationship management centres and systems. This expenditure has been focused principally on replacing the existing customer management and billing systems with new applications and also on improving the existing physical infrastructure of the centres. The implementation of the new systems involves a number of complex activities, including the migration of all existing customer data onto the new applications. As a result, and in common with other projects of this scale, there is a risk that the implementation may not be completed as currently envisaged, either within the proposed timescale or budget, or that the anticipated business benefits may not be fully achieved. In addition, the high level of change inherent in the implementation of new systems absorbs considerable management time and may disrupt normal business operations. The implementation of the new applications has been deferred a number of times since the inception of the project and we currently anticipate the implementation to be completed during fiscal 2005.

Our business is reliant on technology which is subject to the risk of failure, change and development.

We are dependent upon satellites which are subject to significant risks that may prevent or impair proper commercial operations, including defects, destruction or damage, and incorrect orbital placement. If we, or other broadcasters who broadcast channels on our DTH platform, were unable to obtain sufficient satellite transponder capacity in the future, or our contracts with satellite providers were terminated, this would have a material adverse effect on our business and results of operations. Similarly, loss of the transmissions from satellites that are already operational, or failure of our transmission systems or uplinking facilities, could have a material adverse effect on our business and operations.

We are dependent on complex technologies in other parts of our business, including customer relationship management, airtime sales and supply chain management systems. Were any of these technologies to fail, this could have a material adverse effect on our business.

There is a large existing population of digital satellite reception equipment used to receive our services, including set-top boxes and ancillary equipment, in which we have made a significant investment and which is owned by our customers (other than the software in the set-top boxes and smart cards, to which we retain title). Were a significant proportion of this equipment to suffer failure, or were the equipment to be rendered either redundant or obsolete by other technology or other requirement or by the mandatory imposition of incompatible technology, or should we need to or wish to upgrade significantly the existing population of set-top boxes and/or ancillary equipment, this could have a material adverse effect on our business.

We are reliant on encryption technologies to protect against unauthorised access to our services.

Access to our services is protected through a combination of physical and logical access controls, including smart cards. Whilst our encryption technology has so far been resilient to hacking, and we continue to work with our technology supplier to maintain this status, there can be no assurance that it will not be compromised in the future. We are reliant also upon the encryption technologies employed by the cable operators for the protection of access to the services which we wholesale to them.

We undertake significant capital expenditure projects, including technology and property projects.

In August 2004, we announced a capital expenditure programme of approximately £450 million, which is to be incurred over the next four years in support of our growth strategy. This expenditure will be in addition to core capital expenditure, which is expected to remain at around £100 million annually. The capital expenditure programme includes building a new Advanced Technology Centre (see “Technology and Infrastructure — Playout and Uplink Facilities” below), further investment in our customer relationship management centres and systems, increasing contact centre capacity, building new training facilities, refurbishing existing property and building, and/or acquiring, new property and facilities. As is common with capital expenditure projects of this scale, there is a risk that they may not be completed as envisaged, either within the proposed timescale or budget, or that the anticipated business benefits of the projects may not be fully achieved.

We rely on intellectual property and proprietary rights, including in respect of programming content, which may not be adequately protected under current laws.

Our services largely comprise content in which we own, or have licensed, the intellectual property rights, delivered through a variety of media, including broadcast programming, interactive television services, and the internet. We rely on trademark, copyright and other intellectual property laws to establish and protect our rights in this content. However, we cannot assure you that our rights will not be challenged, invalidated or circumvented or that we will successfully renew our rights. Third parties may be able to copy, infringe or otherwise profit from our rights without our authorisation. These unauthorised activities may be more easily facilitated by the internet. In addition, the lack of internet specific legislation relating to trademark and copyright protection creates an additional challenge for us in protecting our rights relating to our on-line businesses and other digital technology rights.

We generate wholesale revenues from a limited number of customers.

Our wholesale customers, to whom we offer the Sky Channels and from whom we derive our cable revenues, comprise principally ntl Group Ltd. (“ntl”) and Telewest Communications plc (“Telewest”).

Economic or market factors, or a change in strategy by ntl or Telewest as it relates to the distribution of our channels, may adversely influence the wholesale revenue we receive from ntl or Telewest, which may negatively affect our business.

We are subject to a number of medium and long-term obligations.

We are party to a number of medium and long-term agreements and other arrangements (including in respect of programming and transmission) which impose financial and other obligations upon us. Were we unable to perform any of our obligations under these agreements and/or arrangements, it could have a material adverse effect on our business.

ITEM 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE GROUP AND BUSINESS OVERVIEW

Introduction

British Sky Broadcasting Group plc and its subsidiaries operate the leading pay television broadcast service in the United Kingdom (“UK”) and the Republic of Ireland (“Ireland”). We acquire programming to broadcast on our own channels and supply certain of those channels to cable operators for them to retransmit to their subscribers in the UK and Ireland. We also retail our channels, together with channels broadcast by third parties, to DTH subscribers and retail certain of our channels (in some cases together with channels broadcast by third parties) to a limited number of DSL subscribers. (References in this Annual Report on Form 20-F to “cable” do not include DSL or DSL customers.) We also make three of our channels available free-to-air via the UK DTT platform, marketed under the brand “Freeview”.

At 30 June 2004, there were approximately 11,250,000 subscribers to our pay television service in the UK and Ireland. Of these, 7,355,000 were DTH subscribers (the remainder being subscribers of the cable operators to whom we supply certain of our channels). According to estimates of the Broadcasters Audience Research Board (“BARB”), as at 30 June 2004, there were 3,084,000 homes in the UK capable of receiving certain of our channels via DTT. Our total revenues in fiscal 2004 were £3,656 million (fiscal 2003: £3,186 million; fiscal 2002: £2,776 million), as set out in the table below.



	Year-ended 30 June

	2004		2003		2002


	(in £ millions)
DTH subscribers		2,660		2,341		1,929
Cable subscribers		215		202		279	⁽¹⁾
Advertising		312		284		251
Interactive		307		218		186
Other		162		141		131

		3,656		3,186		2,776


(1)	Subscription fees from both cable and DTT operators.

We are engaged in television broadcasting services and certain ancillary functions, principally within the UK and Ireland, with activities conducted principally from the UK. Our turnover principally arises from services provided to retail and wholesale customers within the UK, with the exception of £115 million (fiscal 2003: £93 million; fiscal 2002: £62 million) which arises from services provided to retail and wholesale customers in Ireland and £9 million (fiscal 2003: £9 million; fiscal 2002: £8 million) which arises from services provided to the Channel Islands.

As set forth herein, references to fiscal years are to our fiscal years which end on the Sunday nearest to 30 June in each year. We publish our financial statements in British pounds sterling. References herein to “US dollars”, “dollars”, “US$”, “$” and “¢” are to the currency of the United States, references to “Euro” and “€” are to the currency of the European Community, references to “IR£” are to the currency of Ireland prior to its conversion into Euro, and references to “pounds sterling”, “£”, “pence” and “p” are to the currency of the UK. Certain pound sterling amounts stated herein have been translated into US dollars at an assumed rate solely for the convenience of the reader and should not be construed as representations that such US dollar amounts actually represent such pound sterling amounts or that such pound sterling amounts could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise stated herein, US dollar amounts have been translated from the corresponding pound sterling amounts at the noon buying rate for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) on 30 June 2004, which was $1.8126 per £1.00. For information with respect to exchange rates, see Item 3 “Key Information — Exchange Rates”.

Our Consolidated Financial Statements included herein are prepared in accordance with accounting principles generally accepted in the UK. UK GAAP differs in certain significant respects from accounting principles generally accepted in the US. A discussion of the principal differences between UK GAAP and US GAAP is contained in note 28 to the Consolidated Financial Statements included within Item 18.

Certain terms used herein are defined in the glossary which appears at the end of this Annual Report on Form 20-F.

The Company, a public company limited by shares and domiciled in the UK, operates under the laws of England and Wales. It was incorporated in England and Wales on 25 April 1988. Our principal executive offices are located at Grant Way, Isleworth, Middlesex, TW7 5QD, England. Tel: +44(0)870 240 3000. A list of our significant subsidiaries is set out in note 15 to the Consolidated Financial Statements included within Item 18.

Programming

We provide subscribers with a broad range of programming options. Our programming is an important factor in generating and maintaining subscriptions to our channels. With respect to the channels we own and operate, we incur significant expense to acquire the exclusive UK and Ireland pay television rights to films, the exclusive UK and Ireland pay television rights to broadcast certain sports events live and the pay television rights to other general entertainment programming. We are dependent upon the licences which grant us these rights as well as our Television Licensable Content Service licences, telecommunication licences and authorisations. We also produce and commission original entertainment programming and have acquired the rights to market the television services of third parties to DTH subscribers. Currently, we own, operate and distribute 16 Sky Channels via our DTH service (or 26 including multiplex versions of the Sky Channels, but excluding the business channels SkyVenue and the Pub Channel). We also currently retail to our DTH subscribers 104 Sky Distributed Channels (including multiplex versions of certain channels). A “multiplex” of a channel is generally either a time-shifted version of that channel, or a version that has predominantly the same theme or content as the primary channel, but where the content is transmitted at different times. We do not own the Sky Distributed Channels, although we have an equity interest in certain of them. In addition to the Sky Distributed Channels, we currently retail to our DTH subscribers the digital audio services Music Choice and Music Choice Extra, five radio services and the Sky Box Office service (a pay-per-view service offering movies, sporting events and concerts). In September 2001, we ceased broadcasting our residual analogue services.

The current Sky Channels, and their multiplex versions, are as follows:


Sky Channel	Multiplex/ Multiplexes	Channel genre

Sky Movies 1	Sky Movies 3, Sky Movies 5, Sky Movies 7, Sky Movies 9	Movies
Sky Movies 2	Sky Movies 4, Sky Movies 6, Sky Movies 8	Movies
Sky Cinema 1	Sky Cinema 2	Movies
Sky Sports 1		Sports
Sky Sports 2		Sports
Sky Sports 3		Sports
Sky Sports Xtra		Sports
Sky One	Sky Mix	General entertainment
Sky News		News
Sky Sports News		Sports News
Sky Travel	Sky Travel Extra	Travel
Sky Travel Shop		Travel
Flaunt		Music
The Amp		Music
Scuzz		Music
Sky Vegas Live		Interactive entertainment

We retail “packages” of channels to our DTH subscribers. These are combinations of channels at varying prices. Various combinations of the Sky Basic Channels and the Sky Distributed Channels (other than the Premium Sky Distributed Channels) are available as basic tiers of programming, ranging from four to 86 television channels (as well as certain music audio and radio services). These basic packages are collectively called the “Basic Packages”. Our DTH subscribers either subscribe to one of the Basic Packages alone (or together with any one or more Premium Sky Distributed Channels) or, in the case of subscribers to a Sky Premium Channel Package, receive one of the Basic Packages within the cost of the Sky Premium Channel Packages that the subscriber receives. We also offer Sky Box Office to all our DTH subscribers. On the DTH platform, the Sky Premium Channels, the Sky Basic Channels (other than Sky News), Sky Box Office, Music Choice and Music Choice Extra and the Sky Distributed Channels are encrypted in order to limit access to paying subscribers only.

Both ntl and Telewest currently carry versions of all of the Sky Premium Channels, although both offer our movie multiplex channels only to their digital cable subscribers. ntl also carries Sky One and Sky News on its analogue networks and all of the Sky Basic Channels other than Sky Travel Shop and Sky Vegas Live on its digital networks. Telewest carries three of the nine Sky Basic Channels (excluding multiplex versions) on both its analogue and digital networks. Both ntl and Telewest also carry some Sky Box Office events for re-transmission to their cable subscribers, but neither carries the Sky Box Office movies service.

We also broadcast versions of three of our channels, Sky News, Sky Sports News and Sky Travel, unencrypted free-to-air via DTT in the UK as part of the Freeview offering (see “Distribution — DTT Distribution” below).

According to surveys produced by BARB, as of 30 June 2004, an estimated 28% of the estimated 24.7 million television homes in the UK were equipped with digital satellite reception equipment; 13% subscribed to a cable television or SMATV package (single mast antenna television which is primarily for buildings that receive programming by means of a single satellite antenna connected to a head end and which distributes television signals to individual units in the building by cable); and 13% had digital terrestrial television. According to BARB estimates, during the 52 weeks ended 30 June 2004, the Sky Channels accounted for an estimated 27% of viewing of all satellite and cable channels (excluding BBC1, BBC2, ITV1, Channel 4 (and S4C, not Channel 4, in Wales only) and “five” (collectively the “traditionally analogue terrestrial channels”)) in homes that are able to receive those channels in the UK (“Multi-Channel Homes”) (or an overall 11% viewing share of all channels available within Multi-Channel Homes during the same period). The Sky Distributed Channels (as opposed to other unencrypted free-to-air channels available via DTH) accounted for the majority of the balance of viewing of satellite and cable channels in such homes.

For the year ended 30 June 2004, BARB estimates that 42.5% of all viewing in UK homes with digital satellite reception equipment (“digital satellite homes”) was of channels available via the satellite platform other than the traditionally analogue terrestrial channels. BARB estimates that, in the same period, Sky Channels accounted for 30% of multi-channel viewing (i.e. viewing of all channels excluding the traditionally analogue terrestrial channels) in UK digital satellite homes, with an overall 15% viewing share across all channels available (including the traditionally analogue terrestrial channels) within UK digital satellite homes.

In addition to owning the Sky Channels, we hold equity interests in ventures that own 15 (not including time-shifted multiplex versions) of the Sky Distributed Channels (including certain Premium Sky Distributed Channels) which are operated and distributed in the UK, Ireland and the Channel Islands. In addition to the ventures that own the 15 Sky Distributed Channels, we also have a 35.8% equity interest in the UK listed company which operates the audio services Music Choice and Music Choice Extra (which also operate in certain international territories) and a 33.33% equity interest in the venture operating the Sky News Australia Channel, which is based in Australia.

Premium Channels

Sky Premium Channels


	Sky Movies 1 and Sky Movies 2

Sky Movies 1 and Sky Movies 2 operate 24-hours per day, seven days a week and principally show the output of recent release movies, made-for-television movies and certain library movies (in respect of which we are typically granted exclusive UK and Ireland rights to broadcast during the relevant pay television window) by major Hollywood and independent US and European licensors. There are four Sky Movies 1 multiplexes (see “Programming” above) which are provided free to digital subscribers who subscribe to Sky Movies 1, and three Sky Movies 2 multiplexes (see “Programming” above) which are provided free to digital subscribers who subscribe to Sky Movies 2.

As of 30 June 2004, there were approximately 5.1 million UK and Irish DTH and cable subscribers to either Sky Movies 1 or Sky Movies 2 and over 98% of movie subscribers subscribed to both Sky Movies 1 and Sky Movies 2.


	Sky Sports 1, Sky Sports 2 and Sky Sports Xtra

Both Sky Sports 1 and Sky Sports 2 provide, on average, 20 hours or more of sports programming per day, including live coverage of certain popular sports events. As at 30 June 2004, there were approximately 5.5 million UK and Ireland DTH and cable subscribers to either Sky Sports 1 or Sky Sports 2 and over 97% of these sports subscribers subscribed to both Sky Sports 1 and Sky Sports 2.

Since July 2003, Sky Sports Xtra has been available as a premium à la carte service as well as being provided free as an additional channel to DTH subscribers to both Sky Sports 1 and Sky Sports 2. Sky Sports Xtra broadcasts primarily non-UK sports such as the National Football League (“NFL”), international cricket, the Masters Tennis Series, the National Basketball Association (“NBA”), UEFA Champions League football and Spanish League football.

Our programming rights for the Sky Sports channels include exclusive live rights to broadcast, in the UK and Ireland, a number of important football, rugby, cricket, golf and boxing events. In addition, we purchase rights to broadcast a wide range of additional sports programming on both an ad hoc and longer term basis.

In fiscal 2004, the Group successfully bid for all four packages of exclusive live UK television rights to FAPL football, two “near live” packages of delayed UK rights (television and internet respectively) to FAPL football, four of the five packages of live television rights for broadcast in Ireland and two “near live” packages of delayed rights (television and internet respectively) in Ireland from the beginning of the 2004/05 season to the end of the 2006/07 season. See “Government Regulation — Competition (Anti-Trust) Law — European Union Regime — Effect on our Affairs — European Commission Investigation — Football Association Premier League Limited” below for details of the European Commission investigation in relation to the sale of FAPL football broadcast rights.

Sky Bonus Channels


	Sky Cinema 1 and Sky Sports 3

Sky Cinema 1 operates 24-hours per day, seven days a week and primarily features older or classic films. It is available free to DTH and cable subscribers who subscribe to both of our Sky Movies channels. There is one Sky Cinema 24-hour multiplex, Sky Cinema 2.

Sky Sports 3 currently offers, on average, 14 hours of sports programming each day. It is available free to DTH and cable subscribers who subscribe to either Sky Sports 1 or Sky Sports 2.

Premium Sky Distributed Channels


	The Disney Channel

Under an agreement with The Walt Disney Company Limited, we have the exclusive rights to distribute, via DTH in the UK and Ireland, the Disney Channel and three themed multiplexes to the core Disney Channel, as a bonus channel to those of our DTH subscribers receiving both of our Sky Movies channels, and to other DTH subscribers on an à la carte basis.


	Chelsea TV

Chelsea Digital Media Limited (a company in which we own a 20% equity interest), operates a digital subscription pay television channel dedicated to showing certain programming relating to Chelsea Football Club (“Chelsea TV”). We offer Chelsea TV to our DTH subscribers solely on an à la carte basis.


	MUTV

We are party to a joint venture, MUTV Limited, with Manchester United PLC and Granada Media Group Ltd (each party owning a 33.33% equity interest in MUTV Limited) which operates a digital subscription pay television channel (“MUTV”) dedicated to showing certain programming relating to

Manchester United Football Club. We offer MUTV to our DTH subscribers solely on an à la carte basis and also act as agent for the distribution of the channel to cable operators in the UK and Ireland.


	FilmFour

We offer FilmFour, a pay television film channel operated by Channel 4, focusing on original British, independent and cult films, together with its two multiplexes, “FilmFour+1” and “FilmFour Weekly”, to our DTH subscribers solely on an à la carte basis.


	Artsworld

We offer Artsworld, a pay television channel in which we own a 50% equity interest, which broadcasts arts-oriented programming, including classical music, opera and dance, to our DTH subscribers solely on an à la carte basis.


	Music Choice Extra

In addition to Music Choice, which is included in our Basic Packages (see “Basic Channels — Music Choice” below), we offer Music Choice Extra, which consists of 30 digital audio channels, to our DTH subscribers solely on an à la carte basis.

Basic Channels

Sky Basic Channels

Sky One is the general entertainment flagship channel of the Sky Channels. It is targeted primarily at a 16-44 age group audience and includes first-run US entertainment programmes and UK-commissioned factual and drama series and is broadcast on a 24-hour per day basis. According to BARB surveys, during the 52 weeks ended 30 June 2004, Sky One was viewed by approximately 45% of individuals in all UK television homes. In December 2002, we launched Sky One Mix, a multiplex version of Sky One, which has since been rebranded as Sky Mix.

Sky News provides 24-hour national and international news coverage. Sky News is broadcast unencrypted and can be seen by any DTH viewer capable of receiving transmissions from the Astra satellites via which we broadcast our services, and internationally in over 80 countries. Sky News is also distributed by all UK cable operators and by certain cable and satellite operators outside the UK.

Sky Sports News provides 24-hour national and international sports news coverage. It is currently available to our DTH subscribers and to subscribers to ntl’s and Telewest’s digital cable television services.

Sky Travel features travel-related programming and is currently available to DTH subscribers and to subscribers to ntl’s digital cable television services. Sky Travel’s transmission times were expanded in 2004, with the channel now offering a 24-hour schedule. In August 2002, we launched Sky Travel Extra, offering travel programming and the opportunity for DTH viewers to purchase a wide range of holidays via their television set. In February 2003, we launched Sky Travel Shop, a shopping channel allowing DTH viewers to purchase holiday packages via the telephone or the internet.

In April 2003, we launched three interactive music channels, Flaunt, The Amp and Scuzz, which are currently available to our DTH subscribers and to subscribers to ntl’s digital cable television services. In September 2004 we contracted with a third party to provide all day-to-day operational services for these channels going forward, though we still retain ultimate editorial control over the content of the channels.

In March 2004, we launched Sky Vegas Live, an interactive entertainment and gambling channel, which broadcasts daily from 6.00pm to 2.00am and which is currently available to our DTH subscribers.


	Basic Sky Distributed Channels

Our agreements with the owners of the Sky Distributed Channels typically grant us the exclusive right to offer these channels to residential DTH subscribers in the UK and Ireland.

We currently act as an agent for The History Channel, the Biography channel, MUTV, Granada Men & Motors and Granada Plus for the sale of these channels and their multiplexes (where they exist) to cable operators in the UK and Ireland, and have the non-exclusive right to distribute the Disney Channel to cable operators in the UK and Ireland. The owners of the Sky Distributed Channels generally sell their own advertising time on their channels, although we act as an advertising sales agent for certain of these channels (see “Advertising” below).


	Music Choice

We offer Music Choice, a 24-hour digital audio service consisting of ten digital audio channels, to all DTH subscribers. This is included in each of our Basic Packages.

Pay-Per-View

Our Sky Box Office service currently offers our DTH subscribers over 60 screens of television premieres of movies and occasional live sports and other special events on a pay-per-view basis. We have acquired certain exclusive DTH rights from Hollywood and independent distributors, which enable us to show their movies on Sky Box Office. We also offer seven screens of adult movies, between 10.00 pm and 6.00 am, to our DTH subscribers via our “18 Plus Movies” service.

The 2003/04 season was the final season of our exclusive DTH pay-per-view rights agreement for FAPL football matches (for the 2001/02-2003/04 seasons) under which 40 additional live matches (over and above those matches broadcast on our Sky Sports channels) were available on our pay-per-view service, “Premiership Plus”, for either a per-match price or for a one-off “season ticket” price.

Following our purchase of exclusive rights to all of the four live television packages of FAPL football (for the seasons 2004/05-2006/07 inclusive), a total of 50 additional live matches (over and above those matches broadcast on our Sky Sports channels) are available on a pay-per-view basis via our re-branded “PremPlus” service (previously “Premiership Plus”) from the 2004/05 football season, for either a per-match price or for a one-off “season ticket” price. We also wholesale PremPlus to ntl, Telewest, ntl Ireland, Chorus Communications (“Chorus”) and Video Networks Limited (“VNL”), for them to distribute to subscribers to their respective networks.

In addition to our own pay-per-view services, we retail to our DTH subscribers eight third-party adult services on a pay-per-night basis.

Distribution

We distribute our programming services directly to DTH subscribers through the Basic Packages and the Premium Channel Packages. Cable subscribers, by contrast, contract with their local cable operators, which in turn acquire the rights to distribute certain of the Sky Channels from us, which they combine with other channels from third parties and distribute to their subscribers. DTT viewers must have either an integrated digital television set or an appropriate set-top box and will not pay a monthly subscription unless they subscribe to the Top Up TV service (see “Competition — Digital Terrestrial Television — Top Up TV” below).

As at 30 June

2004

2003

2002

(in thousands)

Distribution of Sky Channels

DTH subscribers

7,355

6,845

6,101

Cable subscribers

3,895

3,871

4,091

DTT — UK⁽¹⁾

3,084

1,510

—

Total UK and Ireland

14,334

12,226

10,192


(1)	In fiscal 2003 and fiscal 2004, the number in respect of DTT consists of BARB’s estimate of the number of homes in the UK with access to Freeview services.

DTH Distribution

We launched Sky digital, our digital DTH service, in October 1998 and we terminated our previous analogue service in September 2001. During fiscal 2004, whilst there were 1,200,000 new subscribers to Sky digital, DTH churn in that same period was 690,000 subscribers, resulting in a net 510,000 increase in our DTH subscriber base for the fiscal year. DTH churn in total was 9.7% in fiscal 2004 (fiscal 2003: 9.4%; fiscal 2002: 10.5%). We define DTH churn as the number of DTH subscribers over a given period who terminate their subscription in its entirety, net of former subscribers who reinstate their subscription in that period (where such reinstatement is within a twelve month period of the termination of their original subscription).

As at 30 June 2004, we had a total of 7,355,000 DTH subscribers, with over 52.4% of subscribers taking the Sky World package (the channel package option containing all of the Sky Premium Channels and the largest number of Sky Basic Channels).

The future demand and speed of take up of our DTH service will depend upon its attractiveness, the marketing initiatives adopted both by us and others, and the competitive pressures resulting from the availability of competing services such as analogue and digital terrestrial, and analogue and digital cable, television.

In fiscal 2004, we derived £2,660 million of our revenues from DTH subscription revenues, which are a function of the number of DTH subscribers, the mix of services taken and the rates charged in subscription fees to DTH viewers (fiscal 2003: £2,341 million; fiscal 2002: £1,929 million).

The prices (inclusive of VAT, where applicable) to a residential DTH subscriber in the UK and Ireland of our basic package containing the largest number of basic channels (known as the “Family Pack”), and the range of prices (inclusive of VAT, where applicable) to a DTH subscriber of taking Sky Premium Channels (which varies depending upon the number of Sky Premium Channels taken, which currently can be between one and four, plus multiplexes, bonus channels and free additional channels) since the beginning of fiscal 2002 and currently, are shown in the table below:


			Range of prices
			for Sky Premium
			Channel Packages
			when taken with
	Price of Family Pack		Family Pack
	(per month)		(per month)

UK
As of 1 September 2004		£19.50		£26 - £41
1 January 2004 to 31 August 2004		£19.50		£27 - £40
1 January 2003 to 31 December 2003		£18.50		£27 - £38
1 January 2002 to 31 December 2002		£16		£26 - £37
1 July 2001 to 31 December 2001		£16		£24 - £34
Ireland
As of 1 September 2004		€28.50		€38.50 - €62.50
1 January 2004 to 31 August 2004		€28.50		€40 - €61
1 September 2002 to 31 December 2003		€26.99		€42 - €60
1 September 2001 to 31 August 2002		€27		€37 - €53
1 July 2001 to 31 August 2001		IR£16		IR£24 - IR£36

We also offer a number of our DTH services to commercial DTH subscribers in the UK and Ireland. Our commercial DTH subscribers include offices, retail outlets, hotels, pubs and clubs. Commercial DTH subscribers also include those commercial subscribers that operate a SMATV system (for example in a hotel or office), who are considered as being one commercial DTH subscriber, rather than a number of cable subscribers equal to the number of individual units to which the television signal is distributed.

We offer a range of different contracts to DTH commercial customers. The type of contract which is available to any particular commercial subscriber will depend primarily upon the type of business premises within which they wish to show our services. The channels and packages that are available to a commercial DTH subscriber in the UK and the prices for the channels and packages vary, depending upon the type of commercial contract that is applicable. Under some of the commercial contracts, the prices also vary depending on other factors, including, for pubs and clubs, betting premises or holiday parks, the rateable value of the relevant premises, or, for customers using a SMATV system, the number of rooms or points to which they are distributing the channels that they have chosen to receive.

The majority of our UK DTH commercial customers are subscribers under our pubs and clubs subscription agreement. Under that agreement, the subscription prices range from £55 to £1,980 per month (exclusive of VAT), depending on the package taken and the annual non-domestic rateable value of the subscriber’s premises. In Ireland, prices to pubs and clubs subscribers range from €190 to €474 (exclusive of VAT), depending on the package taken and the licence value of the subscriber (the open market liquor licence for the subscriber’s premises, which is highly dependent on location).

As at 30 June 2004, there were approximately 45,000 subscribers to our commercial DTH services in the UK and Ireland (including approximately 4,300 commercial DTH subscribers operating a SMATV system).

As at 30 June 2004, residential and commercial DTH subscribers represented approximately 65% of the total number of UK and Ireland subscribers to our services (the balance being made up of subscribers to our wholesale customers).

Digital Satellite Reception Equipment


	UK

In order to receive our DTH service, subscribers are required to have a digital satellite system which includes a satellite dish and LNB (low noise block converter), a digital set-top box and a remote control. We have worked with a number of manufacturers and continue to work closely with selected manufacturers to develop digital satellite set-top boxes based upon our specifications. In 1999, we began an initiative to

accelerate the take up of digital satellite by offering free digital satellite systems. During 2002, in order to receive a free digital satellite system, a subscription to our Sky digital service was required. However, from 1 January 2003, we offered free set-top boxes without a requirement to subscribe to one of our services (which was also the case prior to 2002). Recipients of a free set-top box may still be required to pay for installation and are required to enter into a contract which requires them to connect the set-top box to a telephone line, which is fully operational and able to make outbound calls, for a twelve month period. We frequently run promotional offers under which standard installations can be purchased at prices discounted to the standard price.

The services which a non-subscriber taking up the free set-top box offer receives depends upon the number of unencrypted services available on the Astra satellite system and also on whether third party broadcasters of encrypted non-subscription channels utilise the relevant conditional access services to make their channels available to satellite viewers who do not subscribe to pay television.

The retail price for a set-top box to a customer during fiscal 2004 and currently is set out below:


Price (one-off) for set-top box		Price (including VAT, where applicable)
*To subscribers*
From 1 January 2002		Free
*To non-subscribers*
From 1 January 2003		Free

Our charges for standard installation of satellite equipment during fiscal 2004 and currently are set out below (charges for installations which are non-standard vary):


Installation charge (one-off)		Price (including VAT, where applicable)
*To subscribers*
From 5 June 2002	Sky World subscribers	£60
	All other subscribers	£100
From 24 September 2004	Subscribers to all packages costing £19.50 or more per month	Free
	All other subscribers	£60
*To non-subscribers*⁽¹⁾
From 1 January 2003		£120


(1)	See “Distribution — Free-to-view Satellite Proposition” below, for the installation price of our freesat proposition.

We also offer our subscribers the opportunity to purchase up to three extra set-top boxes for use at the same residence as their original set-top box, which enables them to watch different satellite programmes in different rooms at the same time using just one satellite dish (known as “Multiroom”). As well as the cost of the extra set-top box, an installation charge and monthly subscription charge (discounted as against our standard subscription charges) are also payable by the subscriber for each additional set-top box purchased. With each additional subscription the subscriber is able to obtain all the channels included in the package in his or her subscription for the original set-top box on one extra set-top box.

The prices for each additional set-top box (“Multiroom box”) to our subscribers for equipment, installation and subscription during fiscal 2004 and currently are set out below:


Price for each additional Multiroom box		Price (including VAT, where applicable)
*Set-top box price*
Price of set-top box from 8 October 2002		£99⁽¹⁾
*Installation charge*
Installation charge (standard) until 24 June 2004		£50⁽²⁾
Installation charge (standard) from 25 June 2004		£60⁽²⁾
Installation charge (standard) from 24 September 2004		Free⁽¹⁾
*Other installation charges*
Incremental charge for any other installation (standard) at same time until 24 June 2004		£25
Incremental charge for any other installation (standard) at same time from 25 June 2004		Free⁽¹⁾
*Extra monthly subscription*
Extra monthly subscriptions from 8 October 2002 (regardless of subscription package)		£15⁽³⁾
Extra monthly subscriptions from 11 May 2004 (regardless of subscription package)		£10


(1)	When taken with an extra Sky digital subscription.

(2)	During fiscal 2004 we ran various promotional offers under which no charge was made for the installation of a Multiroom box.

(3)	From 1 October 2003, Sky+ subscribers received a £5 discount, reducing the monthly subscription charge to £10.

During fiscal 2004, we have continued to offer Sky+. Sky+ is a set-top box that we have developed which contains two satellite tuners and an integrated personal television recorder allowing an average of 20 hours of programming to be recorded directly on to a hard-disk recording facility contained within the set-top box. This enables DTH subscribers to watch one live satellite programme (or a previously recorded programme) while simultaneously recording another, to pause or rewind live television and to record automatically some series of favourite programmes. From time to time, we update the functionality of Sky+ (and the digital satellite set-top boxes) using software downloads which are broadcast via satellite into the set-top box.

Subscribers pay one-off fees for the Sky+ set-top box and its installation and a monthly subscription fee to use its recording features. However, as of October 2003, if a subscriber subscribes to two or more Sky Premium Channels (excluding bonus channels and the Premium Sky Distributed Channels), no additional monthly subscription fee is charged for Sky+. The prices for Sky+ equipment, installation and subscription during fiscal 2004 and currently are set out below:


Price for Sky+		Price (including VAT, where applicable)
*Set-top box price*
Price of set-top box from 1 March 2003		£249
Price of set-top box from 22 August 2003		£199⁽¹⁾
*Installation charge*
Installation charge for subscribers (standard) until 24 June 2004		£50⁽²⁾
Installation charge for subscribers (standard) from 25 June 2004		£60⁽²⁾
Installation charge for new subscribers only (standard) from 24 September 2004		Free
Installation charge for non-subscribers (standard) from 8 March 2003		£120
*Other installation charges*
Incremental charge for any other installation (standard) at same time until 1 October 2003		£25
Incremental charge for any other installation (standard) at same time from 2 October 2003		£10
Incremental charge for any other installation (standard) at same time from 25 June 2004		Free⁽³⁾
*Monthly subscription*
Monthly subscription for Sky+ functionality⁽⁴⁾		£10


(1)	During fiscal 2004, we frequently ran promotional offers under which the standard price of a Sky+ set-top box was discounted. We are currently running various promotional offers under which the price of a Sky+ set-top box is £99 or £149.

(2)	During fiscal 2004, we ran various promotional offers under which the installation charge for Sky+ was discounted for new subscribers.

(3)	When taken with an extra Sky digital subscription.

(4)	Since 1 October 2003, this monthly subscription fee has not been applicable to any DTH subscriber subscribing to two or more Sky Premium Channels (excluding bonus channels and the Premium Sky Distributed Channels).

In late 2004, we are planning to launch a new, premium version of the Sky+ set-top box, to supplement the existing Sky+ set-top box, which will be available for a one-off price of £399 (plus installation and a monthly subscription for Sky+ functionality). This set-top box has an integrated personal television recorder with four times the storage capacity of the existing Sky+ set-top box, allowing an average of 80 hours of programming to be recorded, as well as having all of the other functionality of the existing Sky+ set-top box.

Both digital satellite reception equipment and subscriptions to our DTH services are offered by us directly and through a variety of retailers. Such retailers generally receive payments from us in connection with the supply of satellite reception equipment under our free digital satellite reception equipment initiative and a commission for the sale of subscriptions to our DTH services. The level of sales of subscriptions varies depending upon the time of the year and the promotions and special offers made available. Installation services are provided to subscribers by some of the smaller retailers. We provide installation and equipment repair services through Sky In-Home Service Limited (“SHS”), one of our subsidiaries. In fiscal 2004, 0.8 million digital satellite reception systems were installed in the UK by or on behalf of SHS (fiscal 2003: 1.0 million; fiscal 2002: 1.3 million).

We have built digital transmission and uplink facilities and have developed (in conjunction with others on a commissioned or licensed basis) a digital conditional access system, customer management systems, an EPG and navigation technology, as well as applications and online return path infrastructure to permit us to offer interactive television services.

Ireland

In Ireland, both satellite equipment and subscriptions to our DTH services are offered directly by us and through a large number of Irish retailers. Such retailers, like their UK counterparts, generally receive payments from us in connection with the supply of digital satellite reception equipment under our free

digital satellite reception equipment initiative and a commission for the sale of subscriptions to our DTH services. Some of the channels offered in Ireland differ from those offered in the UK.

At 30 June 2004, there were approximately 323,000 DTH subscribers to our services in Ireland.

Whilst our digital DTH services have been available in Ireland since December 1998, it was not until September 2000 that we made available the free set-top box offer to DTH subscribers in Ireland. To benefit from this offer, customers in Ireland must subscribe to our services. Since September 2002, a limited range of online interactive services has been provided to our DTH subscribers in Ireland.

Interactive

Our DTH service allows a broadcaster, such as ourselves, to develop and offer its viewers enhanced and interactive services. We offer enhanced broadcast applications behind a number of Sky Channels, including Sky Movies Active (behind our movie channels), Sky Sports Active (behind our sports channels), Sky News Active (behind Sky News) and the interactive betting service available behind the new Sky Vegas Live channel. We, and other broadcasters, are enhancing our channels with interactive services which can be accessed whilst the programming on the channel stays in view. In fiscal 2004, we derived £307 million in interactive revenue (fiscal 2003: £218 million; fiscal 2002: £186 million).

Through our subsidiary Sky Interactive Limited (“Sky Interactive”), we provide an interactive television platform for the development and delivery of interactive services. The platform is also used to deliver the interactive services of third parties. We currently own and operate four stand alone interactive portals on our DTH platform (including the main Sky Active portal) which provide access to a broad range of interactive services including retail, betting, customer services and games. Major product launches on Sky Active during the fiscal year include the United Kingdom National Lottery service and the Friends Reunited service (a service allowing viewers to search a database for old school, university, club and work friends via their television, and send e-mails to individuals within the database).

DTH viewers can access these interactive services by means of either stand alone portals (our Sky Active portal being one of them) or in conjunction with certain broadcast channels. Such interactive services include competitions, voting, messaging services, quizzes, home shopping, holiday bookings, games and betting, some of which relate to the programme content being shown on the relevant channel at the time.

Sky Active (in common with other stand alone interactive portals) is currently offered free of charge to all DTH viewers and each viewer’s telephone line is the return path for these interactive services via a modem in the set-top box. Sky Interactive derives revenues principally from (1) premium rate telephone charges in connection with viewers’ usage of its services (such as pay-per-play games, voting and entries to quizzes); (2) revenue sharing in e-commerce transactions (e.g. retailing or betting) completed on the platform; (3) advertising; and (4) tenancy and technology fees charged to content providers who offer services by means of the platform, including licences of our Wireless Mark-Up Language adapted for television browser technology (see “Emerging Technologies” below) and backend infrastructure to third party broadcasters on the digital DTH platform. In addition, interactive revenues are earned from the set-top box subsidy recovery charges (relating to the Group’s subsidy of the cost to customers of our set-top boxes) which are included within the conditional access, access control charges and EPG charges made to customers on our DTH platform.

We have continued to develop our interactive advertising technology, deploying advertising applications from July 2003 that make use of our browser technology with a view to enabling a wider range of interactive advertising services to be offered. Since our launch of interactive advertising in April 2000, over 500 interactive advertising campaigns have been broadcast by us and others via our DTH platform.

Third party channels (and third party stand alone interactive portals such as PlayJam, YooPlay Games, Teletext Holidays, Directgov and Fancy A Flutter) are increasingly making use of the interactive potential of the digital DTH platform. Third party broadcasters such as the British Broadcasting Corporation (“BBC”), ITV, Channel 4, “five”, Flextech, UK TV, Discovery, MTV, Nickelodeon, QVC, Cartoon Network, TV-X and

the Disney Channel have successfully launched interactive services on our DTH platform, as have eight third party providers of stand alone interactive services (which are separate from those offered in conjunction with any television channel). These services include enhanced television, information services, games, betting, shopping, voting, holiday bookings, ringtone services and quizzes. Third party channels may offer such interactivity in conjunction with Sky Interactive or provide their interactive services independently, including making use of competing interactive infrastructures connected to our DTH platform.

The Group offers a range of betting and gaming services under the “Sky Bet”, “Sky Bet Vegas” and “Sky Vegas” brands. The Sky Bet fixed odds sports betting service is available across multiple platforms, including by means of Sky set-top boxes (including Sky+), by telephone and on the internet. An on-line casino, licensed in Alderney in the Channel Islands, is offered by us on the internet and can be accessed at www.skybetvegas.com. Sky Bet also continues to develop a range of popular fixed odds numbers betting products offered under its UK bookmaker’s permit on our DTH platform, through both Sky Bet Vegas and the new Sky Vegas Live interactive television channel.

Issue of shares — deferred consideration for BiB

Until May 2001, the interactive platform now operated by Sky Interactive was operated through a joint venture, BiB, which was owned 32.5% each by us and by BT Holdings Limited (“BT”), 20% by HSBC Holdings Plc (“HSBC”) and 15% by Matsushita Electric Europe (Headquarters) Limited (“Matsushita”). In May and June 2001, we completed the purchase of the shares in BiB held by the other shareholders through the issue of new BSkyB ordinary shares with a fair market value of £291 million at that time. On 11 November 2002, the Company issued 43.2 million shares with a fair value of £253 million at that time to HSBC, Matsushita and BT in respect of deferred consideration for the acquisition of the remaining 67.5% of BiB in May and June 2001. The Group also agreed with the selling shareholders certain other terms relating to the agreement reached in July 2000 for the acquisition by the Group of the interest of the selling shareholders in BiB. These included the waiver of the selling shareholders’ rights under the earn out provisions in the agreement. These earn out provisions had provided that if the valuation of BiB was £3 billion or more in January or July 2003, further contingent consideration would have been payable to the selling shareholders. Accordingly, these arrangements have now lapsed.

Cable Distribution

United Kingdom

Two major multiple system cable operators, ntl and Telewest, operate almost all of the UK broadband cable systems. Both of these operators provide analogue and digital cable services across the majority of their systems and each accounts for a substantial proportion of our wholesale revenues, which are revenues derived from the supply of Sky Channels to UK and Irish cable platforms. In fiscal 2004, we derived £215 million in subscription fees from cable operators (fiscal 2003: £202 million; fiscal 2002: £279 million (subscription fees from cable and DTT platform operators)). We estimate that, as of 30 June 2004, the subscribers to these cable operators’ networks represented approximately 99% of all cable television subscribers in the UK (measured by reference to total cable subscribers, as reported to us by the cable operators).

Between January 2002 and June 2003, there was a significant fall in the UK cable television subscriber base of 378,000, from a total of 3,644,000 subscribers to 3,266,000 subscribers. The first half of fiscal 2004 saw a period of stabilisation of the UK cable television subscriber base with 16,000 additional subscribers, with modest growth of 39,000 subscribers seen in the second half of the fiscal year (an overall increase in fiscal 2004 of 55,000 subscribers). As at 30 June 2004, there were approximately 3,321,000 UK cable subscribers (including broadband, narrowband and SMATV subscribers) of whom all but a very small proportion take programming from us.

Cable operators pay us a monthly per subscriber fee per channel in respect of their subscribers to the Sky Basic Channels and a monthly per subscriber fee per channel package for the Sky Premium Channels. Since January 2002, the wholesale prices we charge have not included any discount structure. Like the

previous rate cards setting out our wholesale prices, the current rate card allows cable operators to offer their customers any choice or combination of the Sky Premium Channels. The Sky Basic Channels are not included in our current wholesale rate card and we negotiate separate commercial arrangements with each cable operator for the carriage of these channels.

On 15 July 2004, the financial restructuring of the Telewest group of companies (the “Telewest Group”) became effective. The Telewest Group has continued to pay its debts to us as they have fallen due.

Although cable operators do not carry all Sky Channels, both ntl and Telewest carry all of the currently existing Sky Premium Channels on their digital cable networks. Both ntl and Telewest carry certain of the Sky Basic Channels on both their analogue and digital networks, but neither carries the enhanced Sky Channel services, such as Sky News Active and Sky Movies Active. As of November 2003, both cable operators now carry Sky Sports Xtra (also without the enhanced Sky Channel services) as a bonus channel to their customers who subscribe to both Sky Sports 1 and Sky Sports 2, and on an à la carte basis.

Most narrowband cable networks (these are generally smaller cable companies) have a more limited channel capacity than digital satellite or digital cable and do not generally carry all of the Sky Channels.

Ireland

In Ireland, cable subscriber fees for the Sky Premium Channels are charged on a per subscriber per channel package basis. The level of prices charged to cable operators for most Sky Channels is lower than in the UK.

At 30 June 2004, there were approximately 574,000 cable subscribers to our programming in Ireland. We currently have arrangements in place with ntl Ireland and Chorus, the two leading Irish cable operators, for the re-transmission of certain of the Sky Channels to their subscribers. Both ntl Ireland and Chorus have launched, albeit on a limited basis, digital cable services in Ireland.

DTT Distribution

We broadcast versions of three of our channels, Sky News, Sky Sports News and Sky Travel, unencrypted free-to-air via DTT in the UK. The channels broadcast via DTT by us, together with a number of other channels broadcast free-to-air via DTT by other broadcasters, are marketed to consumers under the generic brand “Freeview.” These channels are broadcast on a DTT multiplex for which the licence is held by Crown Castle UK Limited (which owns and operates shared wireless communications and broadcast infrastructure). The BBC also holds a multiplex licence.

DSL Distribution

See “Emerging Technologies” below in relation to our arrangements with Kingston Communications and VNL.

Free-to-view Satellite Proposition

On 21 October 2004, we launched a new freesat proposition, offering purchasers access to over 200 free-to-view television and radio channels (including regional variants) and interactive services, without a monthly subscription fee. Consumers can purchase a package of digital satellite reception equipment, including a digital satellite viewing card and standard installation, for £150. The free-to-view channels on DTH include Sky News, the BBC’s portfolio of digital television and radio services, and digital versions of the five traditionally analogue terrestrial channels. Access to the encrypted signals of ITV1, Channel 4 and “five” is available as a result of the provision of a digital satellite viewing card. There is no obligation for purchasers of this proposition to subscribe to a pay television service; however, the proposition offers an easy upgrade path to a DTH subscription with us for those customers who choose subsequently to add a pay television service to their viewing options.

Seasonality

New subscriptions to our channels have tended to be highest in the second quarter of our fiscal year, the pre-Christmas period. As a result, our marketing costs have tended to be highest in the second quarter of each fiscal year. There is no assurance that these trends will continue in the future.

Advertising

In fiscal 2004, we derived £312 million of our revenues from advertising sales revenue (fiscal 2003: £284 million; fiscal 2002: £251 million).

In the UK, advertising agencies plan campaigns on behalf of their clients and allocate a proportion of each client’s proposed television spend to the divisions of broadcasters that specialise in the sale of television advertising, which are known as sales houses. The principal broadcasters in the UK with sales houses aside from us are ITV, Channel 4, “five”, Flextech (whose sales house is known as Interactive Digital Sales (“IDS”)) and Viacom Brand Solutions (“VBS”).

Advertising agencies do not buy specific spots (defined as 30-second commercials) within particular programmes. Instead, agencies agree to spend a specified “share” of their clients’ advertising budgets with each broadcaster. These shares are, to a large degree, based on the percentage share of impacts that each sales house delivers. In advertising terms, an impact is defined as an individual watching one spot. The amount of advertising spend a broadcaster receives is proportionate to its share of audience viewing and the perceived quality of that audience, judged on the demographic profile and the propensity of the audience to buy or use the product or service.

We sell (or authorise others to sell) advertising for all of the 16 Sky Channels (as well as for their multiplexes) around all programmes that are broadcast on these channels, irrespective of whether the programming was produced in-house or licensed from a third party. We also act as the advertising sales agent for the National Geographic Channel, Adventure One, Hallmark, The History Channel, Biography, MUTV, Chelsea TV, the eight Discovery Channels (Discovery, Home and Leisure, Travel and Adventure, Wings, Sci-Trek, Civilisations, Health and Animal Planet), FX, Artsworld and the seven EMAP channels (Q, Kiss, Magic, Kerrang, Smash Hits, The Box and The Hits) as well as for those channels’ multiplexes (other than The Hits). We sell advertising time across all of our channels, but can sell on a specific channel basis where requested.

According to BARB estimates, across all UK Multi-Channel Homes, our share (for all of the Sky Channels) of commercial audiences (excluding those of the BBC) at 30 June 2004 was 17.0%, a slight decrease from 17.5% at the end of the previous fiscal year (fiscal 2002: 17.3%). Our subscribers’ households tend to be younger and more affluent than the average UK household and tend to over-represent the 16-34 year old, ABC1 (i.e. upmarket) and male demographic profiles sought by many advertisers.

Competition

We are a channel provider, a distributor of television services and, through our subsidiary, Sky Subscribers Services Limited, a DTH platform operator. We therefore compete with a number of communications and entertainment companies to obtain programming, for distribution, for viewers and for advertising sales.

Competition from other Television Channels

The Sky Channels compete with other television channels for the acquisition of programming, for viewers, for distribution and (other than in the case of the BBC) for advertising and sponsorship revenue.

In both the UK and Ireland, the television channels with the largest audience shares are the traditionally analogue terrestrial channels, which are broadcast free-to-air. In the UK, these channels are BBC1, BBC2, ITV1, Channel 4 and “five”, while in Ireland these are RTE1 and Network 2, the Irish language channel

TG4, and the commercial channel TV3. In the UK, as well as being available via analogue terrestrial television, the five traditionally analogue terrestrial channels are also available via DTH, cable, DTT and DSL, and, in the case of DTH and DTT, on a free-to-air basis.

In addition to these channels we compete with both the Sky Distributed Channels and with other television channels broadcast via satellite, cable, DTT and/or via DSL. These other channels may be broadcast by satellite free-to-air (either encrypted or unencrypted) or they may be independently-retailed pay television channels. The free-to-air encrypted and unencrypted channels (which, as at 18 October 2004, amounted to more than 180 digital satellite channels (including radio services)) can be received by anyone with appropriate satellite reception equipment (including the necessary conditional access equipment for the reception of encrypted channels) without payment of a subscription fee. Other than the digital satellite versions of the traditionally analogue terrestrial channels, none of these channels individually has a viewing share in the UK that approaches the combined Sky Channels’ share. However, the popularity of the non-Sky Channels available on our DTH platform can make our DTH offering more attractive to subscribers and potential customers.

As at 18 October 2004, there were 40 encrypted digital satellite pay television channels (excluding pay-per-view) for DTH reception retailed independently of us. Additionally, as at that date, there were 18 such pay-per-view services, all of which are adult channels, except for two Setanta Sport pay-per-view channels and two adult channels that were both pay television and pay-per-view services.

As we and other broadcasters all require some combination of films, sports, general entertainment and/or other programming to attract viewers, in both the UK and Ireland, there have been, and may in the future be, bidding competitions which could increase our programming acquisition costs, or which could mean that certain programming in which we are interested may not be available to us.

Cable Operators

Cable operators compete with us as an alternative service to DTH distribution and carry the majority of the Sky Channels. There are a limited number of areas in the UK and Ireland where it may not be economically feasible to offer cable television services, such as some rural areas. Equally, there are also certain areas in the UK and Ireland, such as conservation areas, where, due to planning and local regulations, DTH satellite equipment may not be installed. Both ntl and Telewest provide analogue and digital cable services in the UK. In September 2004, ntl announced plans to use Local Loop Unbundling (LLU) to provide “triple play” services (broadband internet access, television and telephone) via DSL to customers in areas adjacent to its cable areas. It has ordered 52 exchanges for Q3 2004, which it has stated will enable it to reach a further 2 million homes beyond areas in which its cable networks are currently available. ntl Ireland and Chorus offer both analogue and digital cable and multipoint microwave distribution system (“MMDS”) television services in Ireland (albeit on a much smaller scale than in the UK). According to the Office of Communications (“Ofcom”), cable networks currently cover approximately 50% of UK homes, whilst, according to the Commission for Communications Regulation (“Comreg”) (the telecommunications regulator in Ireland), cable and MMDS services cover nearly 75% of Irish homes. Approximately 13% of UK homes currently subscribe to a cable television service, whilst 39% of Irish homes currently subscribe to cable and MMDS television services.

Cable distribution of the Sky Channels represents a source of additional operating income for us. A reduction in, or the loss of, such operating income may negatively affect our business.

Digital Terrestrial Television

Freeview

Take-up of Freeview services has grown quickly since its launch in October 2002. According to BARB estimates, as at 30 June 2004, there were 3,084,000 homes in the UK with access to Freeview services.

It is likely that as a result of the availability of free-to-air television channels via DTT, beyond the five traditionally analogue terrestrial channels, some consumers will choose to take such free-to-air DTT

services in preference to a pay service, just as some customers may remain satisfied with analogue free-to-air.

There is currently no DTT service in Ireland. In 2001, the Irish Government sought to introduce a commercial DTT service with a free-to-air component in Ireland, but in the absence of any viable bids to operate the network, the proposal was withdrawn in 2002. In 2004, the Irish Government commenced a re-evaluation of the options for the roll-out of a DTT network in Ireland. As part of this process, it has announced its intention to establish a trial DTT service involving the transmission network owned and operated by RTE (the Irish state broadcaster) in the Dublin area. No such trial service has yet been launched.

Top Up TV

Top Up TV (which launched on 31 March 2004) offers a pay television service via DTT. Top Up TV comprises five DTT channels, on which programming from ten digital television channels is broadcast (for example, programming from one digital television channel is broadcast on one of Top Up TV’s DTT channels between 6 am and midday, whilst programming from a different digital television channel is broadcast on the same DTT channel during other hours of the day). A subscription to the service costs £7.99 per month. A subscription to programming from an adult digital television channel, which is broadcast on one of Top Up TV’s DTT channels late at night, costs £9.99 per month.

The service can be received only by households with a DTT set-top box (or an integrated digital television set) which has conditional access technology within it, or with a Conditional Access Module (“CAM”) plugged into a set-top box (or integrated digital television set) which has a Common Interface Socket. Most DTT set-top boxes (and integrated digital television sets) that have been sold to date do not include such technology, although Common Interface Sockets are now a mandatory feature on all integrated digital television sets.

Free-to-view Satellite Proposition

The introduction by us in October 2004 of our freesat proposition (see “Distribution — Free-to-view Satellite Proposition” above) has provided an alternative multichannel television service to households, which might elect to take up such service instead of our pay-television offerings.

New Technologies (Competition)

New technologies, such as third generation cellular telephone networks (3G) and DSL networks, provide additional means by which video content can be delivered to viewers. The development of 3G services in the UK and Ireland, however, is at a relatively early stage, for example, in relation to the roll-out of, and numbers of subscribers to, such services. 3G services are not yet available for non-business subscribers in Ireland. DSL services have grown significantly in the UK in the recent past, both in terms of the number of providers, and the number of users. According to Ofcom, as at June 2004, there were approximately 2.8 million subscribers to DSL services in the UK. However, only a very limited number of these subscribers currently use these services for digital television, the great majority using these services for broadband internet access only. According to Ofcom, as at 30 June 2004, approximately 9,000 television homes in the UK were viewing television via a DSL platform.

Competition in Programming

The operators of such networks compete with us for the acquisition of programming rights. For example, in 2003, Vodafone UK and the mobile communications company “3” secured the mobile rights to show near live clips of FAPL football for the three seasons beginning with the 2004/05 season, for which we also bid.

Competition in Distribution

The operators of such networks also compete with us as an alternative service to DTH distribution. For example, VNL uses DSL technology to provide broadcast and video-on-demand television services in the London area. Currently, none of the Sky Channels are sold by us to such third party DSL operators on a wholesale basis for distribution by them on their networks (although we wholesale the PremPlus service to VNL (see “Programming — Pay-Per-View” above)). We do however, retail certain of our channels directly to homes connected to Kingston Communications’ and VNL’s DSL networks, having contracted for a network access service with each platform operator (see “Emerging Technologies” below). In addition, we provide content, such as news and sports clips, for inclusion in the broadband internet services offered by the operators of certain of such networks.

Digital Switchover

The UK Government has stated that it intends to switch off the transmission of analogue terrestrial television in the UK and that this is likely to be completed by 2012. We understand that the process will take approximately four years to complete and could begin in some areas as early as 2007. On switching off analogue transmission, the power of the DTT signal will be increased and the coverage of the existing DTT network will rise from approximately 73% to approximately 93% or more (depending on how many of the 1,154 terrestrial transmitters are converted to digital). Ofcom is currently consulting on proposed licence conditions for Channels 3, 4 and 5 that would require those channels to achieve the same DTT coverage as is currently achieved in analogue. The DTT transmitter network may, therefore, be extended so that DTT coverage matches the existing analogue core coverage of 98.5%. Switching off analogue terrestrial transmission will, in any event, enable DTT to be made available to households who cannot currently receive it.

Following analogue terrestrial transmission being switched off, all households wishing to continue to receive television services will need to convert to digital television. Current options for digital television reception are DTT, digital satellite via our DTH service (either as a subscriber, or as a non-subscriber) and, in some areas, cable or DSL. There may be other options for digital television available in the future. The extent to which households may choose another platform in preference to digital satellite (which is already generally available to them) is difficult to predict.

Home Videos and DVDs

Home video sales and rentals (including DVDs) have historically been strong in the UK. In addition to offering consumers an alternative source of programming to terrestrial, cable and satellite television, the video window (which includes DVDs) for new films generally starts before both the pay television window and the pay-per-view television window. The video window typically commences approximately ninety days following a film’s UK cinema release. Currently, the pay-per-view television window generally commences six months later. We have, to date, been able to develop a significant customer base for our pay-per-view services and movie channels, notwithstanding competition from the home video industry and increased competition from DVDs.

Advertising

Our primary competitors for television advertising sales are ITV plc (formed by the merger of Granada plc (“Granada”) and Carlton Communications plc (“Carlton”), which completed in February 2004) which sells advertising on ITV1 and ITV2 (as well as some smaller channels), Channel 4 (which also sells advertising for E4), “five”, IDS (which sells advertising on behalf of UKTV and the Flextech channels Living, Bravo, Trouble and Challenge), and VBS (which sells advertising on behalf of Viacom, MTV and Nickelodeon). In October 2003, the Secretary of State for Trade and Industry confirmed that the proposed merger between Carlton and Granada could proceed if certain undertakings could be agreed between Granada, Carlton and the Office of Fair Trading. Undertakings were agreed on 14 November 2003 and a mechanism known as CRR (Contract Rights Renewal) remedy was introduced to protect media buyers and

advertisers from the increased market power enjoyed by the merged ITV plc. CRR allows media buyers and advertisers that contract directly with ITV to renew the terms of their existing 2003 share deals without change. In addition, in respect of agreements that include a share commitment, the advertisers/ media buyers are able to reduce the share committed to ITV commensurate with any decline in ITV’s share of impacts (relative to its share in 2002). It is generally believed by us and other independent broadcasters that ITV’s share of impacts will decline in the future.

Based upon the latest BARB survey estimates, ITV1 and Channel 4 were available to approximately 24.5 and 24.4 million television homes, respectively, in the UK (both digital and analogue), with approximately 87% of the estimated 24.7 million television homes in the UK receiving an acceptable “five” terrestrial analogue signal. In addition, according to BARB survey estimates, as at June 2004, approximately 12.9 million UK homes have access to satellite, cable, or digital terrestrial television. Both ITV1 and Channel 4 have a significantly greater overall UK television viewing share than any individual Sky Channel. As a result of the ability of ITV1 and Channel 4 to reach almost all UK television homes, these channels are able to generate greater advertising revenues than we do. We also compete with the Sky Distributed Channels and all other commercial channels for television advertising sales.

Within UK Multi-Channel Homes, however, the Sky Channels in aggregate attract viewing levels which are comparable to some of the traditionally analogue terrestrial channels. This suggests to us that, as the number of Multi-Channel Homes increases, our competitive position with respect to advertising revenues may improve. Additional growth from the free-to-view offerings, Freeview and our freesat proposition, should also improve the revenue share of the Sky Channels which are available as part of these offerings. The Sky Channels jointly have an overall viewing share (within Multi-Channel Homes) significantly greater than each of Channel 4 and “five” in those homes, although the Sky Channels’ combined viewing share is still less than that of ITV1 in these homes. Based upon BARB surveys for the 52 weeks ended 30 June 2004, the viewing shares in UK Multi-Channel Homes of the traditionally analogue terrestrial channels and the combined Sky Channels were, respectively, BBC1 19.3%, BBC2 7.0%, ITV1 19.2%, Channel 4 7.2%, “five” 4.9%, and the Sky Channels 11.3% (of which Sky One accounted for 27% of the Sky Channels’ viewing share (and had an individual viewing share of 3.0%)). The remaining 31.1% of viewing in UK Multi-Channel Homes was of other (non-Sky) satellite, cable and DTT channels.

Technology and Infrastructure

We control access to encrypted DTH channels through the use of a conditional access system, VideoGuard (see “Encryption of Digital Services” below). Apart from the smart card (a credit card size plastic card containing a chip that provides conditional access functionality) and the software in the set-top box, to which we retain title, we do not own the satellite reception equipment in DTH subscribers’ homes (this equipment is owned by viewers, whether or not they are subscribers). All costs associated with the acquisition of subscribers, including the cost of satellite reception equipment, are charged immediately to the profit and loss account and are therefore not included within capital expenditure.

Underpinning the EPG in the set-top box is an operating system which we license from OpenTV, Inc. (“OpenTV”). The OpenTV operating system provides a virtual machine interface which enables applications to be authored once, yet still be capable of running on all our different types of DTH set-top boxes once the application is downloaded to the set-top boxes. This simplifies the development of applications for the set-top box and ensures universal availability of services to all DTH set-top boxes. The operating system in each set-top box is fully licensed in perpetuity upon payment of a per set-top box royalty by the set-top box manufacturer to OpenTV.

The deployed set-top boxes contain finite memory resources that are used by the operating system and other software components such as the conditional access system, EPG, and interactive applications. We have, to date, been able to carry out software downloads from time to time to reconfigure the memory utilisation in these set-top boxes in order to accommodate additional and increasingly complex services. We cannot be certain that this course of action will always be available to us.

Encryption of Digital Services

VideoGuard is a conditional access technology which can be used to encrypt and decrypt digital television and audio services. We use it to control DTH viewers’ access to encrypted satellite non-subscription channels and encrypted digital pay and pay-per-view television and audio channels broadcast on digital satellite for reception in the UK and/or Ireland.

We use the VideoGuard technology and distribute smart cards in the UK and Ireland under an agreement with NDS Limited which expires in 2010, but is renewable, at our option, for a further three years. NDS supplies smart cards and undertakes ongoing security development and other support services in return for the payment of fees by us.

In conjunction with NDS, we maintain a policy of refining and updating the VideoGuard technology in order to protect against unauthorised DTH reception of our services. We believe that there are no pirate devices capable of unauthorised decryption of our services extant at this time. We will take appropriate measures to counter any unauthorised reception, including implementing effective over-the-air countermeasures and seeking available legal remedies, both civil and criminal, reasonably available to us. We also periodically replace smart cards in circulation with smart cards containing progressively more sophisticated technology. Such replacement has the effect of rendering useless smart cards then in circulation, whether genuine or counterfeit. The first periodic replacement of digital smart cards since our digital launch in October 1998 was successfully completed in November 2003.

We are actively working with cable companies in the UK to investigate the use of any cable piracy devices. We believe that we have suffered a loss of wholesale cable revenue as a result of the availability of cable piracy devices (in relation to both analogue and digital cable services). We are unable to quantify this loss, including whether or not such loss is material. We have not (to date) invoiced any cable company in respect of such lost cable revenues and therefore, such lost revenues have not been recognised within our Consolidated Financial Statements.

In the case of delivery of our channels to cable operators, they generally receive our signal via secure landlines. In some cases, we also provide delivery to cable operators via satellite. To enable reception of the satellite signal, a smart card is located at the site of the cable operator’s feed into its cable transmission system, permitting decryption of the signal, which the operator in turn distributes to those of its subscribers who are authorised and equipped to receive the service.

Encryption of Channels Retailed by Third Parties

Any potential DTH broadcaster wishing to operate and independently retail an encrypted television service within the UK and Ireland needs either to acquire an alternative encryption and conditional access technology from someone other than us, and build its own decoder base capable of receiving transmissions encrypted using that technology, or, in respect of digital services, to contract with us for conditional access services in respect of access to the installed VideoGuard decoder base.

In addition to providing broadcast conditional access services, both for our own DTH offerings and those of third parties, we provide digital access control services for interactive services produced by us and others, including using a telephone return path to carry out transactions between suppliers and viewers. These broadcast conditional access and access control services are regulated by Ofcom. See “Government Regulation — Broadcasting and Telecommunications Regulation — European Union — Electronic Communications Directives”.

Satellites

We lease the majority of the satellite transponders that we use for digital transmissions for reception by both DTH viewers and cable operators from SES ASTRA (“SES”), the operator of the Astra satellites. SES is 100% owned by SES GLOBAL, a Luxembourg company in which the Luxembourg State and GE Capital hold interests of 11.58% and 24.58%, respectively, with the balance held by other international financial institutions, communications groups, institutional and private investors and Luxembourg public institutions.

We also lease four transponders via a sub-lease from BT on the Eurobird satellite, which is owned and operated by Eutelsat.

For the transmission of our DTH service, we have 28 transponders leased from SES on SES satellites Astra 2A, 2B and 2D. All but four of our digital transponder leases (on SES satellites) are for a period of ten years with varying end dates between 2008 and 2011. Three of the remaining four leases expire in 2007, and the fourth in 2005. The extension of the lease which expires in 2005 is currently being negotiated. We also have rights to extend certain of the initial lease periods.

We use some of the transponders that we have leased for the Sky Channels. Some transponder capacity (and in some cases all of the capacity on a particular transponder) is sub-leased to third parties for the transmission of other channels or services, including certain of the Sky Distributed Channels.

The term of the digital leases on the Eurobird satellite expires in October 2013.

We have been designated a “non pre-emptible customer” under each of our transponder leases. This means that, in the event of satellite or transponder malfunction, our use of these transponders cannot be suspended or terminated by SES or Eutelsat in favour of another broadcaster which has pre-emption rights over capacity in preference to some other customers. In addition, in the event of satellite or transponder malfunction, we have arrangements in place with SES pursuant to which back-up capacity may be available for some of our transponders based on an agreed satellite back-up plan.

We have also put in place disaster recovery plans in the event that we experience any significant disruption of our transponder capacity. To date, we have not experienced any such significant disruption. However, the operation of both the Astra and Eutelsat satellites is outside our control and a disruption of transmissions could have a material adverse effect on our business, depending on the number of transponders affected and its duration.

Our transponder leases with SES provide that our rights are subject to termination by SES in the event that SES’s franchise is withdrawn by the Luxembourg government.

Capital Expenditure Programme

In August 2004, we announced a capital expenditure programme of approximately £450 million which is to be incurred over the next four years and which is to support our growth strategy. This expenditure will be in addition to core capital expenditure, which is expected to remain at around £100 million annually. The peak of this expenditure is expected in fiscal 2005. The capital expenditure programme includes building a new Advanced Technology Centre, further investment in our customer relationship management centres and systems, increasing contact centre capacity, building and/or acquiring new training facilities, refurbishing existing property and building, and/or acquiring, new property and facilities. We expect to finance the programme from operating cash flows.

Capital expenditure on our customer relationship management centres and systems and on our Advanced Technology Centre is described in further detail below. The remaining expenditures are required in order to service future subscriber growth more effectively. We are planning to build a new training centre for our customer-facing staff to ensure that our customer service standards remain at the forefront of the industry. Additionally, we intend on investing in a property programme to ensure that our Osterley (Isleworth) campus is fully scalable with our long term growth plans. At 30 June 2004, the costs incurred in relation to the increased contact centre capacity and training facilities, the refurbishment of existing property and the building, and/or acquiring of, new property and facilities were not material.

As is common with capital expenditure projects of this scale, there are risks that they may not be implemented as envisaged; or that they may not be completed either within the proposed timescale or budget; or that the anticipated business benefits of the projects may not be fully achieved.

The Customer Relationship Management Centres and Sky In-Home Service Limited

Our customer relationship management centres are based in Scotland. The centres’ functions include the handling of orders from subscribers, the establishing and maintaining of customer accounts, invoicing and revenue collection, telemarketing and customer service. These functions permit the centres to play a key role in both customer acquisition and customer retention. We provide customer management services for the Sky Channels, the Sky Distributed Channels, and, through one of our subsidiaries, for two third party channels, North American Sports Network and Setanta Sports. Through a subsidiary, we also deliver customer services for both our own, and certain third party, interactive television services, BSkyB telephony services, our video-streaming services, and the personal video recorder TiVo.

The customer relationship management centres also provide the distribution of ordered customer installations into Sky In-Home Service Limited which then provides a nationwide installation service of digital satellite reception equipment directly into customer homes. Sky In-Home Service Limited also provides an aftercare service to the DTH subscriber base in relation to digital satellite reception equipment which is both in, and out of, warranty.

During the course of the last four fiscal years, we have invested more than £170 million in our customer relationship management centres. This expenditure has been focused principally on completely replacing the centres’ existing customer management and billing systems with new, state-of-the-art applications and also on improving the existing physical infrastructure of the centres. The replacement of the customer management and billing systems will also involve the migration of all existing customer data onto the new applications. This project is ongoing and in accordance with other projects of this size and complexity, there is a risk that the implementation may not be completed as currently envisaged, either within the proposed timescale or budget, or that the anticipated business benefits may not be fully achieved. In addition, the high level of change inherent in the implementation of the new systems absorbs considerable management time and may disrupt normal business operations. The implementation of the new applications has been deferred several times since the inception of the project and we currently anticipate implementation to be completed during fiscal 2005.

See Item 8 “Financial Information — Consolidated Statements and Other Financial Information — Legal Proceedings” for details of a claim by us against Electronic Data Systems Corporation and Electronic Data Systems Limited in respect of the systems integration, software development and business implementation services provided to the Group as part of the Group’s investment in customer relationship management software and infrastructure.

Playout and Uplink Facilities

Our uplinking facility, located in Chilworth, England, provides primary uplinking capacity for our digital services to the Astra 2A, 2B and 2D satellites as well as Eutelsat’s Eurobird 1 satellite.

The majority of our television channels are played out from one of the buildings on our main site at Osterley. The Isleworth-sourced channels are fed to the uplink site at Chilworth using a fibre link, which is backed up by a diversely routed secondary link in case of any malfunction in the primary fibre route. In the event of failure of our primary playout site, we have alternative facilities available, though at the present time, the restoration of services would not be immediate. However, we have almost completed the construction of an Advanced Technology Centre which will provide a complete back-up playout facility, and which we currently anticipate will go live during fiscal 2005. Expenditure on the facility to 30 June 2004 was £15 million, which was funded out of internally generated cash flows.

For those third parties to whom we sub-lease transponder capacity, we have agreements in place to provide uplinking facilities as well.

In the fiscal year to 30 June 2003, we completed the investment of approximately £4 million in our second uplink facility at Fair Oak, England. This facility provides a back-up uplinking capacity for our digital services to the Astra 2A, 2B and 2D satellites as well as Eutelsat’s Eurobird 1 satellite.

Emerging Technologies

In the UK, consumer broadband DSL access remains focused on the provision of internet access with typical speeds of approximately 0.5 Megabits per second (Mbit/s) (which is not fast enough to support quality video services). Two operators have developed DSL networks with the capacity to deliver digital television services to homes: Kingston Communications in Kingston-upon-Hull and VNL in parts of London. We use both these networks to retail television services to connected homes (having contracted for a network access service with the relevant DSL platform operator).

In Kingston-upon-Hull, we have, since 1 November 2002, retailed certain of the Sky Channels and a number of channels owned by third parties to subscribers via Kingston Communications’ DSL network (as at 30 June 2004, approximately 4,000 subscribers).

We began offering subscriptions to certain of the Sky Channels to households connected to VNL’s platform in August 2004. VNL distributes pay-television and broadband access services via a DSL platform that it has established in Greater London (as at 31 March 2004 approximately 3,300 subscribers), marketed under the brand “Homechoice”. Although the service has existed for several years, VNL undertook a refinancing in 2003 and has extensively revised its service as a consequence. The latest version of the service was launched commercially in May 2004 and offers access to a range of broadcast channels and video-on-demand content, including movies packaged together with broadband internet access. VNL intends, subject to raising the necessary financing, to extend its DSL platform throughout the UK. We have entered into an agreement with VNL which gives us access to VNL’s platform to enable us to retail the Sky Premium Channels to customers who already subscribe to VNL’s services. In addition, VNL provides us with certain customer management, billing and sales agency services in respect of our subscribers receiving the Sky Premium Channels via VNL’s platform. In return for these services, we pay VNL a fixed monthly fee per subscriber who subscribes to a Sky Premium Channel on the VNL platform.

We are currently also evaluating other possible means of distributing our services other than by DTH, cable, DSL and DTT, such as by Digital Audio Broadcasting (DAB), the internet, General Packet Radio Service (GPRS) and 3G.

We have developed an internet-compatible microbrowser application to work with current digital satellite set-top boxes which deploys an enhanced Wireless Mark-Up Language (“WTVML”). Whilst not enabling access to the World Wide Web, the nature of the microbrowser makes it suitable for the vast majority of e-television and e-business applications on a digital television platform. As WTVML is based on internet standards which are familiar to web developers, content can be authored more easily than if the platform’s existing OpenTV Application Programming Interfaces were to be used. Working with the browser also facilitates greater interoperability between different television devices and the internet.

WTVML has recently been published as a European Telecommunications Standards Institute (“ETSI”) standard, making it available for deployment on other devices and platforms. We anticipate that we will launch a new commercial model for e-business services on our DTH platform in fiscal 2005, which we anticipate will have the effect of stimulating the conversion of many web services into WTVML-based services.

We have also developed technology allowing WTVML services to be transcoded into formats suitable for other networks. This will allow us to manage the deployment and distribution of interactive e-business services to other small footprint devices, including mobile phones and other television networks.

Sky also participates actively in the Digital Video Broadcasting (“DVB”) standardisation group and is helping to drive an activity called “The Portable Content Format” which hopes to build on the above interoperability principles, and create market growth in television-based interactive services by delivering interoperability on a large scale.

We are currently developing a High Definition Television (“HDTV”) offering. HDTV delivers a superior picture compared to standard definition television. It is also the preferred format for a growing number of television productions in various genres including sports, drama, entertainment and music. We expect to

launch a premium HDTV service during calendar 2006 with a set of dedicated high definition channels and access to selected events produced in high definition format. In order to receive these services, subscribers will need a new set-top box, which is currently in development. We will also need to obtain additional satellite capacity to broadcast the high definition channels, and will need to invest in the necessary broadcasting infrastructure.

Minority Equity Investments

In March 2004, we disposed of our 20% interest in QVC (UK), operator of QVC — The Shopping Channel for £49 million.

In July 2003, we sold our 9.9% equity interest in Chelsea Village plc, the parent company of Chelsea Football Club, for £6 million. In October 2003, we sold our 9.9% equity interest in Manchester United PLC, with whom (together with Granada Media Group Limited) we hold an interest in the MUTV Limited joint venture, for £62 million. Leeds United PLC, the parent company of Leeds United football club, in which we hold a 9.1% stake, went into administration in March 2004.

In April 2000, we acquired a minority equity interest in KirchPayTV. KirchPayTV became insolvent in fiscal 2002 (see notes 4, 5 and 14 of the Consolidated Financial Statements included within Item 18).

New Markets

We examine and discuss with third parties, from time to time, acquisition possibilities and joint ventures in media-related areas in the UK, continental Europe and elsewhere.

GOVERNMENT REGULATION

We are subject to regulation primarily in the UK and the European Union. The regimes which affect our business include broadcasting, telecommunications and competition (anti-trust) laws and regulation.

BROADCASTING AND TELECOMMUNICATIONS REGULATION

United Kingdom

Communications Act 2003

The Communications Act 2003 (the “Communications Act”) introduced reforms of the broadcasting and telecommunications regulatory regimes in the UK. It established a new framework under the jurisdiction of a new single unified regulator, Ofcom, which replaced the five previous regulatory bodies responsible for these sectors, including the Office of Telecommunications (“Oftel”) and the Independent Television Commission (“ITC”).

The Communications Act enables Ofcom to introduce a new system for the management of spectrum designed both to ensure efficient use of spectrum and to protect the quality of spectrum. This new system may include a system of recognised spectrum access (“RSA”) which would afford protection from interference to satellite downlinks and would include a voluntary charging mechanism for spectrum used for satellite downlinks. This system is yet to be implemented, and is likely to be subject to public consultation by Ofcom in the last quarter of calendar 2004. Ofcom also intends to introduce progressively a system of spectrum trading, beginning in the last quarter of calendar 2004. This is not intended to embrace spectrum used for satellite downlinks until a system of RSA is implemented.

Ofcom review of public service broadcasting

Ofcom is currently undertaking, under the Communications Act, a review of public service broadcasting. In September 2004, Ofcom published its second report on this review in which it considered the position of public service broadcasting after digital switchover. In the report, Ofcom makes a number of proposals, one of which is the creation of a “Public Service Publisher” (PSP), a newly publicly-funded

service, which Ofcom considers would ensure a continued plurality in the provision of public service broadcasting.

Ofcom considers that the PSP would require up to £300 million funding a year. It contemplates three possible sources of funding for the PSP: general taxation, an enhanced television licence fee, or a tax on the turnover of UK licensed broadcasters. It is therefore possible, if the Government and Parliament were to accept the PSP proposition and fund it under the broadcaster tax model, that the Group would be required to contribute to such funding.

Our Television Services Licences

The broadcasting services provided by us are currently regulated by Ofcom as Television Licensable Content Services (“TLCS”) and Digital Television Programme Services (“DPS”) pursuant to the Broadcasting Act 1990, as amended and supplemented by the Broadcasting Act 1996 (together, the “Broadcasting Acts”) and the Communications Act.

We and our broadcasting joint ventures each currently hold a TLCS licence for each of our respective channels and for a number of other broadcasting services, including our EPG on digital satellite. A TLCS licence permits the operation of a cable or satellite service but does not confer on a TLCS licensee the right to use any specified satellite, transponder or frequency to deliver the service. TLCS licences are granted for an indefinite duration (for so long as the licence remains in force) and new licences are issued by Ofcom if certain minimum objective criteria are met. We have also been issued a DPS licence, which is required for the distribution of our channels via DTT.

Ofcom Powers

In common with all television licences issued by Ofcom, our licences impose on us an obligation to comply with the Codes and Directions issued by Ofcom from time to time. The Codes include requirements as to impartiality and accuracy of news programming, requirements as to taste and decency and the portrayal of sex and violence, and restrictions on the quantity and content of advertisements. These requirements were inherited by Ofcom which took over the responsibility from the ITC (and other legacy regulators) for the enforcement of these Codes. In July 2004, Ofcom published a consultation document on a proposed new Broadcasting Code, to replace six Codes inherited from the ITC and other legacy regulators (the Broadcasting Standards Commission (BSC) Code on Fairness and Privacy, the BSC Code on Standards, the ITC Programme Code, the ITC Code of Programme Sponsorship, the Radio Authority (“RA”) News and Current Affairs Code and Programme Code, and the sponsorship rules contained in the RA Advertising and Sponsorship Code). The consultation period ended on 5 October 2004, though we do not know when the Codes will be finalised.

Ofcom may revoke a licence in order to enforce the restrictions contained in the Broadcasting Acts (as amended by the Communications Act) on the ownership of media companies, or in the event that the characteristics of the licensee change so that it would not be granted a new licence. In addition, the amended Broadcasting Acts prohibit “disqualified persons” from holding certain licences. Disqualified persons include any bodies whose objects are wholly or mainly of a political nature and advertising agencies. Religious bodies are prohibited from holding certain licences but can seek Ofcom’s prior approval to hold other types of licences (including a TLCS or DPS licence).

Media Ownership

The UK’s rules in respect of media ownership, which are contained in the Broadcasting Acts and the Communications Act, currently preclude us (for as long as the Group is ultimately owned as to over 20% by News Corporation or another member of the same group) from acquiring more than a 20% interest in any Channel 3 licence (which covers the 15 regional ITV1 licences and GMTV). Certain restrictions also apply to the ownership of local radio businesses by persons that own local newspapers in the same area (or to persons who are connected to such persons). There are also certain restrictions on the ownership of

multiple radio multiplex licences. The Communications Act has also introduced a “plurality” test for media mergers (see “UK Competition Law Regime — Enterprise Act 2002 — Additional Measures” below).

Digital Terrestrial Television

The Broadcasting Act 1996 established a framework for DTT broadcasting in the UK. Certain “multiplex” frequencies are currently used to transmit public service and other channels. In August 2002, the ITC confirmed its conditional decision to award three multiplex licences to the BBC and Crown Castle UK Limited for an initial twelve year term. As part of an agreement with Crown Castle UK Limited, we agreed to supply initially versions of three channels, namely Sky News, Sky Sports News and Sky Travel, unencrypted free-to-air via the DTT platform marketed under the brand “Freeview” (see “History and Development of the Group and Business Overview — Distribution — DTT Distribution” above).

Listed Events — Limits on Exclusive Distribution Rights

The Broadcasting Act 1996 (as amended by the Communications Act) provides that no UK broadcaster may undertake the exclusive live broadcast of certain sporting or other events of national interest designated by the Secretary of State from time to time (“listed events”), whether on a free-to-air or subscription basis, without the previous consent of Ofcom. The effect of these rules is that many leading sports events cannot be shown exclusively live on pay television in the UK. On 12 August 2004, Ofcom published a consultation on a draft Code on listed events which largely seeks to formalise the listed events regime as then applied.

A list of designated events in Ireland has also been defined, under the Irish Broadcasting (Major Events Television Coverage) Act 1999 (Designation of Major Events) Order 2003. The effect of these rules is that many leading sports events cannot be shown exclusively live on pay television in Ireland.

Our Telecommunications Licences

We operated under a number of class licences under the Telecommunications Act 1984 in relation to the technical side of our transmissions until 25 July 2003, when these class licences were revoked by the Communications Act and replaced with authorisations or continuation notices. The most important of these relate to conditional access, EPGs and access control services for digital transmissions. These are discussed further in the context of the UK’s implementation of European Union legislation (see “European Union — Electronic Communications Directives” below).

European Union

The Television Without Frontiers Directive

The EC Television Without Frontiers Directive 1989 (“TWF Directive”), as revised in 1997, sets forth basic principles for the regulation of broadcasting activity in the European Union. The UK has adopted a variety of measures to give effect to the requirements of the TWF Directive. The European Commission is responsible for monitoring compliance and has authority to initiate infringement proceedings against Member States which fail to implement the TWF Directive properly. The European Commission is reviewing the provisions of the TWF Directive through a work programme, in consultation with interested parties.

Programme and Independent Productions Quotas

The TWF Directive requires Member States to ensure “where practicable and by appropriate means” that (a) broadcasters reserve a majority proportion of their transmission time for European works, and (b) broadcasters reserve at least 10% of their transmission time or, at the discretion of the Member State, at least 10% of their programming budget for European works created by producers who are independent of broadcasters (in relation to (b) an adequate proportion of such works should be produced within the five years preceding their transmission). The term “where practicable and by appropriate means” is not defined in the TWF Directive and is left for the interpretation of each Member State. In applying these requirements,

broadcast time covering news, games, advertisements, sports events, teletext and teleshopping services are excluded.

A condition requiring licensees to comply with these requirements of the TWF Directive, where practicable, and having regard to any guidance issued by Ofcom for the purpose of giving effect to the relevant provisions of the TWF Directive, was introduced by Ofcom into all Broadcasting Act licences (including TLCS and DPS licences) in December 2003. Prior to December 2003, the ITC and the Department for Culture, Media & Sport monitored broadcasters’ quota data but compliance with these requirements was not a condition of Broadcasting Act licences. Ofcom has yet to issue any guidance on the relevant provisions of the TWF Directive, although in October 2004 it published draft guidance for consultation. The deadline for comments on this consultation is 9 December 2004. Ofcom is therefore unlikely to publish substantive guidance on its interpretation of the terms of the TWF Directive until 2005.

A number of our channels currently meet the relevant quota requirements for both European works and European independent productions. Some of our channels only meet one of the relevant quotas and some do not meet either quota. For those channels that do not currently reserve the required proportion of relevant transmission time to European works or to European independent productions, it may not be practicable to do so, in which case those channels would still comply with the condition in their Broadcasting Act licences.

The draft guidance set out in Ofcom’s consultation document would, if adopted, require television broadcasters who consider that it would not be practicable to meet one or more of the quota requirements, to explain why to Ofcom, which will advise whether any remedial measures are necessary. If Ofcom does not accept that it is not practicable for a broadcaster to meet the relevant quota requirements, possible consequences may include Ofcom issuing a direction under the Broadcasting Act licence requiring compliance with the licence condition and a fine for contravention of the licence condition. Ofcom also has the ultimate power to revoke a broadcaster’s Broadcasting Act licence where it is found to be in breach of its licence (if no other remedies are considered appropriate). Ofcom’s approach to enforcement of the licence conditions is not yet known and is not addressed in the draft guidance published for consultation.

Electronic Communications Directives

The EC Electronic Communications Directives, which comprise the Access Directive, Authorisation Directive, Framework Directive and Universal Services Directive, (together the “EC Directives”) came into force in April 2002. They established a framework for the regulation of electronic communications networks and services and associated facilities within the European Union. Their provisions were implemented in the UK by the Communications Act in July 2003 and are regulated in the UK by Ofcom.

The EC Directives, notably the Framework and Access Directives, apply to us in relation to the regulation of conditional access services, access control services, EPGs and standards for the transmission of television signals. The EC Directives have not, however, materially changed these regulatory regimes.

Conditional Access Services and Technology

The regulation of conditional access for digital television services is carried out in the UK under the Communications Act, the principal requirements of which are:


	•	that the provision of conditional access services to other broadcasters should be on fair, reasonable and non-discriminatory terms;

	•	that providers of conditional access services should co-operate with cable operators regarding transcontrol (the process of changing a conditional access system) at cable head-ends; and

	•	that, where conditional access technology is licensed to manufacturers of digital decoders, such licences should be on fair, reasonable and non-discriminatory terms.

These requirements have been applied as conditions imposed under the Communications Act on our subsidiary Sky Subscribers Services Limited (“SSSL”), which has been identified as a provider of conditional access services.

In May 2002, Oftel published a statement of policy regarding the pricing of conditional access services and in October 2002 published revised guidelines on the pricing of conditional access services. These guidelines continue to be applied by Ofcom. Ofcom is likely to consult on possible revisions to these guidelines towards the end of calendar 2004.

Access Control Services

The provision of access control services (which include services, other than conditional access and EPG services, that control access to digital television services) is also regulated. Our subsidiary, SSSL, is currently designated a regulated supplier in respect of its activities in providing access control services to third parties on our DTH platform and it is, among other things, subject to the obligation to provide such access control services on fair, reasonable and non-discriminatory terms and not to favour related companies. This designation, set out in a continuation notice issued by Oftel under the Communications Act in July 2003, will remain in place for as long as SSSL is considered to have significant market power. In November 2003, Oftel commenced a review under the Communications Act to determine whether any provider of access control services has (or, in the case of SSSL, continues to have) significant market power. The deadline for comments on the consultation document was in January 2004. Ofcom has yet to publish its conclusions to this consultation; in the meantime, SSSL continues to be subject to the regulatory regime under this continuation notice.

Regulation of Electronic Programme Guides

In addition to being required to hold a TLCS license in relation to our EPG, the provision of EPG services is also regulated. We are required to provide these services to other broadcasters on fair, reasonable and non-discriminatory terms and not to favour related companies. These requirements have been applied under a continuation notice issued by Oftel in July 2003. Ofcom has consulted on replacing this continuation notice with authorisation conditions under the Communications Act, the deadline for comments on the consultation document having been in March 2004. Ofcom has yet to replace this continuation notice following this consultation and therefore the continuation notice still applies. The Communication Act does not, however, envisage that the basis of regulation of EPGs will change.

We are also required to offer listings on our EPG in accordance with Ofcom’s Statement on Code on Electronic Programme Guides (July 2004) (“EPG Code”), which applies to all providers of EPG’s licensed under the Broadcasting Acts. This requires us to give public service channels (which currently comprise all BBC television channels, ITV1, Channel 4, “five”, and S4C Digital and the digital public teletext service) such degree of prominence as Ofcom considers appropriate. Ofcom’s EPG Code provides guidance as to its interpretation of this requirement. We are also obliged by Ofcom’s EPG Code, inter alia, to provide EPG services on fair, reasonable and non-discriminatory terms; not to give undue prominence to connected channels; to maintain and publish an objective policy for allocating listings; and not to require exclusivity on an EPG for any service.

Transmission Standards

The use of standards for the transmission of television signals are also governed by the EC Directives (notably the Access and Universal Services Directives) which required Member States to impose transmission standards on broadcasters of television services. These requirements on technical standards have been implemented in the UK by The Advanced Television Services Regulations 2003 and are administered by Ofcom.

Interoperability

Under the terms of the Framework Directive, the European Commission published its review of progress towards facilitating access for content providers to multiple platforms in July 2004. The European Commission found that there was no case for mandating the use of technical standards for the delivery of interactive services at present, but that Member States should continue to promote open and interoperable standards for interactive digital television. The European Commission will review whether there is sufficient progress again in 2005.

Ireland

We are currently not regulated by the Irish national communications regulatory authority, the Commission for Communications Regulation (“ComReg”), as the services offered by us fall under the jurisdiction of Ofcom in the UK. All of the EC Directives were also implemented in Ireland on 25 July 2003. During the consultations concerning the implementation of the EC Directives in Ireland, ComReg indicated that it would be seeking to regulate our Irish operations. However, in June 2003, ComReg clarified that it would not, for the time being, seek to regulate the provision of access to broadcasting networks or the delivery of content services to end users in Ireland under the EC Directives.

Working Time Directive

The Working Time Directive aims at protecting workers from health and safety problems which may arise from working long hours. It confers rights on workers in relation to the number of hours they can be required to work, rest periods, breaks and annual leave. In particular, it lays down provisions for a maximum 48 hour working week, averaged over a 17 week period. Employees are able to opt-out of this 48 hour limit at the time of signing their contract of employment and work longer hours, giving employers greater flexibility in organising work patterns.

The European Commission has published proposals to amend the provisions for opting out which would result in an employee not being able to opt-out for the first 13 weeks of employment. Additionally an employee could not work for more than 65 hours in any week and tighter provisions for compensatory rest (for those who work long hours) are proposed.

These proposals, if adopted, could reduce our flexibility in deploying employees and may result in additional employment costs.

COMPETITION (ANTI-TRUST) LAW

We are subject to the European competition law regime (administered by the European Commission and by the competition authorities and civil courts in each Member State) and to individual national regimes in the countries in which we operate, of which the principal country is the UK. We are also subject to specific competition regulation by Ofcom under powers contained in the Communications Act.

UK Competition Law Regime

The Competition Act 1998

On 1 March 2000, the Competition Act 1998 (“Competition Act”) came into force in the UK. It aligns UK domestic competition law with European law, in particular Articles 81 and 82 of the EC Treaty.

Anti-Competitive Agreements

The Chapter I prohibition of the Competition Act prohibits agreements which have the object or effect of preventing, restricting or distorting competition in the UK. An agreement will only infringe the Chapter I prohibition if it is likely to have an appreciable effect on competition.

Agreements which fall within the scope of the Chapter I prohibition will not be prohibited where their beneficial effects in improving production or distribution or promoting technical or economic progress

outweigh their restrictive effects, provided that consumers receive a fair share of the benefit, that competition will not be substantially eliminated and that no unnecessary restrictions are accepted by the parties.

Abuse of a Dominant Position

The Chapter II prohibition of the Competition Act prohibits abusive behaviour by dominant firms.

Infringement of Chapter I or Chapter II may result in significant consequences including fines, voidness or unenforceability of all or part of infringing agreements, prohibition of infringing conduct and potential liability to affected third parties (notably for damages).

Effect on Our Affairs

In January 2000, the Office of Fair Trading (“OFT”) announced that it was to conduct a competition review of BSkyB’s position in pay television (in the UK). In December 2000, the OFT announced that this review had led it to open an investigation under the Competition Act into BSkyB’s activities, in particular the wholesale supply of our premium channels to third party distributors in the UK. In December 2002, following the submission by BSkyB of written and oral representations, the OFT announced that BSkyB had not been found in breach of the Competition Act. Both ntl and the liquidator of ITV Digital requested, under the Competition Act, the OFT to vary or withdraw its decision concerning BSkyB. On 29 July 2003, the OFT announced that it had rejected both applications. The period in which both ntl and the liquidator of ITV Digital had the right to appeal this decision of the OFT to the Competition Appeal Tribunal expired in October 2003, without any appeal having been made.

In November 2001, the arrangements relating to the “At The Races” joint venture (made between Arena Leisure plc, the Group, Channel Four Television Corporation and The Racecourse Association Limited (“RCA”)) were notified to the OFT seeking either a clearance or exemption under Chapter I of the Competition Act. In April 2004, the OFT issued its decision in which it found that the Chapter I prohibition of the Competition Act had been infringed to the extent that the notified arrangements entailed the collective sale by the 49 racecourses of certain of their media rights to At The Races. The OFT did not impose a penalty on the notifying parties. Both the RCA and the British Horseracing Board have appealed the OFT’s decision to the Competition Appeal Tribunal which has yet to issue its judgement.

Enterprise Act 2002

Market Investigations

The market investigation provisions of the Enterprise Act 2002 (“Enterprise Act”) provide that the OFT may make a market investigation reference to the Competition Commission (“CC”) where it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts, or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK. Ofcom has market investigation powers, concurrent with the OFT, in relation to the communications sector.

The OFT (or, in relation to the communications sector, Ofcom) may make a market investigation reference to the CC for a detailed inquiry, although it may accept undertakings instead of making a reference. The CC may decide that action is required if it finds that there is an adverse effect on competition in a market under investigation. Ultimately, the CC has extensive powers to impose remedial action including the divestment of parts of a business and the prohibition on the performance of agreements.

Any decision by the OFT, the CC or Ofcom relating to market investigations can be appealed to the Competition Appeal Tribunal (on a judicial review basis).

Additional Measures

The Enterprise Act has reformed UK competition law in a number of other ways:


	•	a criminal cartel offence has been created, applying to those participating in arrangements involving price fixing, market sharing, bid rigging or limitations of production. This criminal offence operates alongside the existing civil regime under the Competition Act. Investigations are carried out by the OFT and the Serious Fraud Office. The maximum penalty for infringement (for those individuals found to have committed the offence) is up to five years’ imprisonment or a fine, or both; and

	•	provisions enabling company directors to be disqualified for involvement in (or failure to take steps to prevent) a breach of UK or European competition law have been introduced.

The Communications Act has amended the Enterprise Act merger control provisions to introduce a “plurality” test for mergers between broadcasters (or involving broadcasters and newspaper enterprises). Under the plurality test, the Secretary of State is able to intervene in, and take decisions concerning, mergers involving broadcasters, on the basis of both a competition-based test and the additional plurality test. The Government issued guidance in May 2004 stating, however, that its policy is to consider intervention only where the media ownership rules have been removed by the Communications Act, save in exceptional circumstances (which would be where the Secretary of State considers that the merger would give rise to serious public interest concerns).

Effect on our Affairs

Our operations are subject to both the Enterprise Act and the Communications Act. To date, there have been no market investigation references made to the CC which concern the communications sector. The Secretary of State has yet to invoke the media plurality intervention powers in relation to a media merger.

Ofcom Competition Jurisdiction

Broadcasting Act 1990

In addition to its concurrent powers under the Competition Act, Ofcom has a duty to promote competition in relevant markets and to ensure fair and effective competition in the provision of television services and those connected with them.

There have been no rulings by Ofcom or the ITC that have had a material adverse effect on our business during fiscal 2004.

Irish Competition Law Regime

Our operations in Ireland are subject to the Irish competition law regime which regulates anti-competitive agreements, abuses of dominant positions, and mergers.

European Union Regime

Anti-Competitive Agreements

Article 81(1) of the EC Treaty renders unlawful agreements and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the Common Market (that is, the Member States of the European Union collectively). An agreement may infringe Article 81 only if it is likely to have an appreciable effect on competition. Article 81(2) makes offending provisions (and, in some cases, the entire agreement) void. Article 81(3) provides an exception to the provisions of Articles 81(1) and 81(2) for agreements whose beneficial effects in improving production or distribution or promoting technical or economic progress outweigh their restrictive effects, provided that consumers receive a fair share of the benefit, that

competition will not be substantially eliminated and that no unnecessary restrictions are accepted by the parties.

Abuse of a Dominant Position

Article 82 of the EC Treaty prohibits abuse by one or more enterprises of a dominant market position in the Common Market or a substantial part of it, insofar as the abuse may affect trade between Member States.

Mergers

The European Commission regulates mergers, full function joint ventures (i.e. ones which perform on a lasting basis all the functions of an autonomous economic entity) and the acquisition of holdings which confer decisive influence over an enterprise and which meet certain turnover thresholds specified in the EC Merger Regulation. Such transactions cannot be carried out without prior approval from the European Commission. Where the European Commission has jurisdiction under the EC Merger Regulation, national authorities do not normally have jurisdiction.

Effect On Our Affairs

European Commission Investigation — Football Association Premier League Limited

The European Commission has undertaken investigations into a number of agreements, decisions or practices leading to the acquisition of broadcast rights to football events within the European Economic Area (“EEA”), including the sale of exclusive broadcast rights to football matches by the FAPL.

In August and October 2003, the FAPL announced that the Group had been awarded (subject to contract) all four packages of live UK rights to FAPL football and two “near live” packages of delayed UK rights (television and internet respectively) to FAPL football, four of the five packages of live television rights in Ireland and two “near live” packages of delayed rights (television and internet respectively) in Ireland from the beginning of the 2004/05 season to the end of the 2006/07 season.

On 16 December 2003, the European Commission announced that it had reached provisional agreements with the FAPL and with the Group in respect of its investigations into the FAPL’s joint selling of the broadcasting rights to FAPL football matches for seasons 2004/05 to 2006/07 and the proposed award of all four packages of live rights in the UK to the Group.

The FAPL provisionally agreed, among other things, that after the 2006/07 FAPL season, the tendering procedures for television rights will ensure that no single buyer is able to acquire exclusively all of the centrally-marketed live FAPL rights packages (and that these packages will continue to be balanced); it also provisionally agreed to examine, jointly with the European Commission, the way in which its tender processes are conducted, to ensure that they do not exclude potential competitors. The Group provisionally agreed, among other things, to offer to sub-license rights to broadcast a set of up to eight live FAPL matches per season (for the three seasons commencing 2004/05) to another broadcaster.

Following consultation with third parties and further dialogue with the Group, the European Commission and the Group agreed certain modifications to the provisional agreement announced on 16 December 2003. On the basis of the performance by the Group of certain commitments given by the Group to the European Commission (concerning the future retailing and wholesaling of the Group’s channels featuring live FAPL coverage and the offer of a sub-licence of rights mentioned above), the European Commission has confirmed in a “comfort letter” that it has fully and finally settled its investigations in connection with the Group’s bids for all rights in relation to FAPL matches throughout the 2004/05 to 2006/07 FAPL seasons and any resulting agreements between the Group and the FAPL.

In accordance with its commitments to the European Commission, the Group conducted a tender process for a proposed sub-licence of rights to broadcast six or eight live FAPL matches per season. On 12 May 2004, the Group announced that it had concluded the tender process and that none of the bids

received had attained the reserve price per match which had previously been agreed with the European Commission. The Group will not, therefore, sub-license those rights.

The European Commission has published a notice inviting third party comments on its intention to adopt a decision under Regulation (EC) 1/2003 making the commitments offered by the FAPL legally enforceable and subsequently to close its file in relation to the FAPL’s joint selling of the media rights to FAPL matches on an exclusive basis. The deadline for comments was 14 July 2004. The outcome of this consultation has not yet been disclosed and the European Commission has not yet adopted any decision.

European Commission Investigation — Movie Contracts

The European Commission continues to investigate the terms on which movies produced by major US movie studios are supplied to distributors, including pay television operators, throughout the European Union. The European Commission has not yet issued a Statement of Objections (the document in which it sets out the grounds on which it considers the EU competition rules to have been breached) to the studios. The Group understands this has been delayed due to some procedural issues being raised by a number of the studios.

It has also been reported in the UK press (September 2004) that the European Commission is holding settlement negotiations with a number of the studios, with a view to the studios committing to remove certain offending terms from their output agreements with pay television operators. The European Commission has not, however, made any statement on these negotiations.

The Group is co-operating with this investigation. At this stage, the Group is unable to determine whether this investigation or its outcome will have a material effect on the Group.

European Commission Sector Inquiry — “New Media” Sports Rights

The Group is co-operating with this investigation. At this stage, the Group is unable to determine whether the investigation or its outcome will have a material effect on the Group.

PROPERTY, PLANT AND EQUIPMENT

Our headquarters are located at leasehold and freehold premises in Osterley, England.

The principal properties of the Group are as follows:

Current

annual

rent

Approximate

licence

square foot

Location

Tenure

Use

Term

fee

area

2, 5, 6 and 7 Grant Way

Freehold

Offices, studios and

n/a

155,504

and Cromwell Centre,

storage

Centaurs Business Park, Osterley,

Isleworth, England

Athena Court, Centaurs Business

Leasehold

Offices

Lease expires

£990,000

52,583

Park, Osterley, Isleworth, England

23 June 2008

1 Grant Way,

Freehold

Offices and studio

n/a

55,000

Centaurs Business Park, Osterley, Isleworth, England

3a/3b Grant Way,

Freehold

Offices, storage and

n/a

30,676

Centaurs Business Park, Osterley,

workshop

Isleworth, England

4 Grant Way,

Freehold

Offices and technology

n/a

40,718

Centaurs Business Park, Osterley, Isleworth, England

New Horizons Court,

Leasehold

Offices

Lease expires

£546,147

26,095

Courtyard Units 1-7

25 June 2007

The Courtyard, Brentford, England

New Horizons Court,

Leasehold

Offices

Lease expires

£2,509,255

139,399

Units 1-4, Brentford, England

25 December 2011

West Cross House,

Leasehold

Offices

Lease expires

£1,349,296

88,400

Brentford, England

26 March 2019

West Cross 7

Leasehold

Offices

Lease expires

£125,944

12,110

Centaurs Business Park, Osterley,

20 May 2014

Isleworth, England

Breaks 21 May 2007,
21 May 2008 and 21 May 2009

206 Harlequin Avenue,

Freehold

Offices

n/a

5,000

Brentford, England

The Chilworth Research Centre,

Leasehold

Satellite uplink

Lease expires

£1

18,850

Southampton, England

25 February 2087

Knowle Lane, Fair Oak,

Freehold

Satellite uplink

n/a

43,087

Eastleigh, England

123 Buckingham Palace Rd,

Leasehold

Offices

Lease expires

£1,834,300

36,500

London, England

31 March 2017 with an option to terminate at 24 March 2012

Marcopolo House and Arches,

Leasehold

Sub-let

Lease expires

£2,406,847

85,509

Queenstown Road, London

24 December 2013

Welby House

Leasehold

Offices

Lease expires

£311,250

8,138

96 Wilton Road, London

15 January 2015

1, 2, 4 and 5 Macintosh Road,

Freehold

Contact centres

n/a

128,000

Kirkton Campus, Livingston, Scotland

Carnegie Campus,

Leasehold

Contact centre

Lease expires

£500,000

75,431

Dunfermline, Scotland

29 September 2020

Current

annual

rent

Approximate

licence

square foot

Location

Tenure

Use

Term

fee

area

New Logic House,

Leasehold

Offices

Lease expires

222,000

13,900

Kirkton South, Livingston,

03 October 2017

Scotland

Logic House,

Leasehold

Offices

Lease expires

221,584

13,849

Kirkton South, Livingston,

03 October 2017

Scotland

Citygate Dunfermline,

Leasehold

Offices

Lease expires

294,081

9,650

Scotland

03 October 2017

See “History and Development of the Group and Business Overview — Technology and Infrastructure — Capital Expenditure Programme” above in relation to our proposed capital expenditure on property.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

INTRODUCTION

The following discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements, including the related notes, included within Item 18. The financial statements have been prepared in accordance with UK GAAP, which differs in significant respects from US GAAP. Note 28 to our consolidated financial statements provides a description of the significant differences between UK GAAP and US GAAP as they relate to our business, and provides a reconciliation from UK GAAP to US GAAP. Details of our critical accounting policies are provided in the “Critical Accounting Policies” section below.

OVERVIEW AND RECENT DEVELOPMENTS

Sky has delivered another year of strong financial results, producing our second full year of positive earnings since the launch of Sky digital in October 1998. Total revenue for fiscal 2004 was £3,656 million, an increase of 15% over fiscal 2003. Total operating expenses before goodwill and exceptional items increased by 8% to £3,056 million, generating an operating profit margin before goodwill and exceptional items of 16%, up from 11% in fiscal 2003. Total operating expenses after goodwill and exceptional items increased by 8% to £3,175 million. Goodwill and exceptional items are discussed separately below. The cash flows associated with growth in revenues and profitability have enabled us to reduce net debt by £676 million in the year to £429 million. We also resumed dividend payments, which commenced with an interim dividend payment on 23 April 2004 of £53 million (2.75 pence per share) and has been followed with a proposed final dividend to be paid on 19 November 2004 of £63 million (3.25 pence per share).

At 30 June 2004, the total number of DTH digital subscribers in the UK and Ireland was 7,355,000, representing a net increase of 510,000 subscribers on the prior year. We have announced that our longer term target for DTH digital subscribers in the UK and Ireland is 10,000,000 in 2010. The mix of packages taken by subscribers continues to be weighted towards premium packages, with 52.4% of all DTH subscribers taking the top tier Sky World package at the end of the fiscal year, a decline of one percentage point from 53.4% at 30 June 2003. DTH churn for the year was 9.7%.

The total number of households in the UK and Ireland receiving one or more Sky Channels increased to 14,334,000 at 30 June 2004. This was driven by DTH growth, a small increase in the number of households subscribing to a television service via cable, and an increase in the number of households receiving the Freeview, free-to-air digital terrestrial channels, as free-to-air-only homes continued to replace analogue with digital reception equipment.

monthly subscription fee. For further details see Item 4 “Information on the Company — History and Development of the Group and Business Overview — Distribution — Free-to-view Satellite Proposition”.

The number of Sky+ households continued to grow during the year, increasing by 292,000 to 397,000. 22% of new Sky+ subscribers in the last quarter of fiscal 2004 were new subscribers. This has contributed to the uptake of the Multiroom product, with the number of households taking two or more set-top boxes increasing from 165,000 to 293,000 in the year. We have also announced our long-term target is to achieve 30% Multiroom and 25% Sky+ penetration of DTH subscribers in 2010.

Multi-channel television’s combined share of total television audience in the UK continues to grow, increasing by 9% over the previous year to 26% in the last quarter of fiscal 2004, according to viewing figures from BARB. In the last quarter of fiscal 2004, the viewing share of Sky Channels across all UK television homes remained above 6%.

Sky Sports had an 11% increase in viewing share across UK television homes over the prior year. The 2004/05 football season, which started in August 2004, will be the most televised on Sky Sports, with viewers offered over 450 live matches. With the commencement in August 2004 of the new FAPL broadcast contracts, Sky Sports is showing 88 live games in the 2004/05 season, up from 66, and an additional 50 live games, up from 40, are being offered on a pay-per-view basis. A new interactive service is offering one FAPL match per week in full on a delayed basis plus extended highlights of every FAPL match played that day.

Sky was awarded the contract in March 2004 to supply a news service to the terrestrial channel “five”, and Sky News launched a dedicated news service for Ireland on 10 May 2004.

As a result of upgrades during the year, our debt has moved to investment grade. On 8 December 2003, Standard & Poor’s increased the Group’s credit rating to BBB- and, on 9 December 2003, Moody’s Investor Service increased the Group’s credit rating to Baa3, with the outlook on both ratings being ‘stable’.

In August 2004, we announced a capital expenditure programme of approximately £450 million which is to be incurred over the next four years and which is to support our growth strategy (see Item 4 “Information on the Company — History and Development of the Group and Business Overview — Technology and Infrastructure — Capital Expenditure Programme”).

We are currently in discussions with our lending banks to replace our £600 million revolving credit facility (“RCF”) with a new RCF, maturing on 30 July 2010.

OPERATING RESULTS

Revenues

Our principal revenues result from DTH subscribers, cable subscribers, the sale of advertising on our wholly-owned channels, and the provision of interactive services.

Our DTH subscription revenues are a function of the number of subscribers, the mix of services taken and the rates charged. Revenues from the provision of pay-per-view services, which include Sky Box Office, are included within DTH or cable subscriber revenues as appropriate.

Our cable subscription revenues (also referred to as wholesale revenues), which are revenues derived from the supply of Sky Channels to cable platforms, are a function of the number of subscribers on cable operators’ platforms, the mix of services taken by those subscribers and the rates charged to those cable operators. We are currently a leading supplier of premium pay television programming to cable operators in the UK and Ireland for re-transmission to cable subscribers, although cable operators do not carry all Sky Channels.

Our advertising revenues are a function of the number of commercial impacts, defined as individuals watching one thirty-second commercial on a Sky Channel, together with the quality of impacts delivered, and overall advertising market conditions.

Interactive revenues include income from betting, on-line advertising, e-mail services, e-commerce, telephony income from the use of interactive services (e.g. voting), text services, and set-top box subsidy recovery earned through conditional access and access control charges made to customers on the Sky digital platform.

Other revenues principally comprise revenues from the installation of digital satellite reception equipment, Sky+ and Multiroom set-top boxes sales revenues, Sky Talk (our telephony service) revenues, sales of set-top boxes, service call revenues, warranty revenues, customer management service fees, conditional access fees and access control fees.

Operating expenses

Our principal operating expenses result from programming, transmission and related functions, marketing, subscriber management, administration and betting costs.

Programming represents our largest single component of costs. Programming costs include payment for: (i) licences of television rights from certain US and European film licensors; (ii) the rights to televise certain sporting events; (iii) other programming acquired from third party licensors; (iv) the production and commissioning of original programming; and (v) the rights to retail the Sky Distributed Channels and the Music Choice and Music Choice Extra audio services to DTH subscribers.

Under our pay television agreements with the US major movie studios, we generally pay a US dollar denominated licence fee per movie calculated on a per movie subscriber basis, subject to a minimum guarantee, which was exceeded some time ago. We currently manage our US dollar/ pound sterling exchange risk primarily by the purchase of forward foreign exchange agreements for up to 18 months ahead (see Item 11 “Quantitative and Qualitative Disclosures about Market Risk — Currency Exchange Rates”). Offering multiplexed versions of our movie channels on the digital DTH platform and on digital cable incurs no additional variable rights fees.

Under the DTH distribution agreements for the Sky Distributed Channels, we generally pay a monthly fee per subscriber for each channel, the fee in some cases being subject to periodic increases, or we pay no such fee at all. Under a number of our distribution agreements we guarantee payment against percentages of the total number of subscribers to our basic packages. Our costs for carriage of the Sky Distributed Channels will (where a monthly per subscriber fee is payable) continue to be dependent on changes in the subscriber base, contractual rates and/or the number of channels distributed.

Transmission and related functions costs, including other technical costs, are primarily dependent upon the number and annual rental cost of the satellite transponders which we use. The most significant components of transmission and related costs are transponder rental costs relating to the SES Astra satellites and Eutelsat Eurobird satellite and costs associated with our transmission, uplink and telemetry facilities.

Marketing costs include commissions payable to retailers and other agents for the sale of subscriptions; promotional and related advertising costs; and the costs of our own direct marketing to our DTH subscribers. In addition, marketing costs include the cost of providing free or subsidised digital satellite reception equipment to new customers and the installation cost in excess of the relevant amount actually received from the customer. A significant part of marketing expenditure is subject to the discretion of management.

Subscriber management costs include customer relationship management (“CRM”) costs, supply chain costs, and associated depreciation. CRM costs are those associated with managing the existing subscriber base, including subscriber handling and DTH subscriber bad debt costs. Supply chain costs relate to systems and infrastructure and the installation costs of satellite reception equipment and installation costs of new products purchased by subscribers such as Sky+ and Multiroom set-top boxes, including smart card costs. CRM costs and supply chain costs are largely dependent on DTH subscriber levels. Subscriber management costs exclude both the cost of free or subsidised digital satellite reception

equipment and the installation cost to us in excess of the amount actually received from the customer for such installation, as these costs are included within marketing costs.

Administration costs include channel management, facilities and other operational overhead and central costs. Amortisation of goodwill arising on the acquisitions of BiB and SIG is included within administrative costs. The goodwill arising on these acquisitions is being amortised over seven years from the respective dates of acquisition, on a straight-line basis.

Betting costs mainly comprise the cost of payouts for winning bets placed through our wholly-owned bookmaker, Hestview Limited, which operates telephone, internet and interactive betting services under the brand name “Sky Bet”.

2004 FISCAL YEAR COMPARED TO 2003 FISCAL YEAR

Our results for fiscal 2003 have been restated, following the adoption of UITF 38 in fiscal 2004. This has resulted in a restatement of operating expenses, net, operating profit, profit on ordinary activities before taxation, profit on ordinary activities after taxation, and basic and diluted earnings per share.

Revenues

The Group’s revenues can be analysed as follows:



	Revenues


	2004				2003

	£m		%		£m		%
DTH subscribers		2,660		73		2,341		74
Cable subscribers		215		6		202		6
Advertising		312		9		284		9
Interactive		307		8		218		7
Other		162		4		141		4

		3,656		100		3,186		100


	*DTH subscriber revenues*

DTH subscriber revenues increased to £2,660 million in fiscal 2004 compared to £2,341 million in fiscal 2003. The improvement of 14% in fiscal 2004 was driven by a 10% increase in the average number of DTH subscribers, and a 3% increase in average DTH subscription revenue per subscriber, to £356 at 30 June 2004 from £344 at 30 June 2003.

The total number of UK and Ireland DTH subscribers increased by 510,000 in fiscal 2004. One factor contributing to this increase was the low level of DTH churn. DTH churn for the year was 9.7% (2003: 9.4%).

The increase in average DTH subscription revenue per subscriber reflected the change in our UK retail prices along with increased subscription revenues from products such as Sky+ and Multiroom set-top boxes.


	*Cable subscriber revenues*

Cable subscriber revenues increased by 6% to £215 million in fiscal 2004 compared to £202 million in fiscal 2003. This increase was attributable to the receipt of £6 million of audit monies from ntl and increases in the average revenue per subscriber resulting from changes to wholesale pricing from January 2004 (for further details see Item 4 “Information on the Company — History and Development of the Group and Business Overview — Distribution — Cable Distribution”).

At 30 June 2004, there were 3,895,000 (2003: 3,871,000) UK and Ireland cable subscribers to our programming.

In fiscal 2004, we charged UK cable operators between £10.35 and £20.30 (2003: £9.97 and £19.10) per subscriber for packages of Sky Premium Channels, dependent upon the number of Sky Premium Channels to which the cable customer subscribed. The percentage of cable subscribers who subscribed to Sky Premium Channels is far lower than that for DTH subscribers. As a result, on average, cable subscribers (including Irish cable operators’ subscribers) accounted for 35% of total subscribers (2003: 38%), although cable subscription revenues accounted for only 7% (2003: 8%) of total subscription revenues.

ntl and Telewest, who represented in excess of 99% of the UK broadcast cable industry (2003: 99%) (measured by reference to total cable subscribers, as reported to us by the cable operators), accounted for 99% of our cable subscriber revenues in fiscal 2004 (2003: 99%).

For further details on our major cable customers, ntl and Telewest, see Item 4 “Information on the Company — History and Development of the Group and Business Overview — Distribution — Cable Distribution”.


	*Advertising revenues*

Advertising revenues increased by 10% to £312 million in fiscal 2004 from £284 million in fiscal 2003. This increase reflects the growth in total UK advertising revenue, growth in Sky’s viewing share, the growth in agency commissions earned on the sale of advertising on behalf of those channels that have appointed Sky Sales to represent their airtime sales during the year, and the growth of airtime sales in Ireland.

Our share of television advertising revenues has increased in recent years as viewing levels to our channels have increased (in part due to the growth in subscribers to our channels) and as we have added other third party channels to our sales portfolio. Our share of total UK advertising revenue increased by 6% in the current year. The other main determinant of advertising revenue levels is overall television advertising revenue growth.


	*Interactive revenues*

Total interactive revenues, including both Sky Active and betting revenues, increased by 41% to £307 million in fiscal 2004 from £218 million in fiscal 2003.

Sky Active revenues increased by 15% to £116 million in fiscal 2004 from £101 million in fiscal 2003. This was due to a combination of increases in retail revenues through SkyBuy (the Group’s retail operation), interactive television gaming, third party betting, revenues from interactive advertising, premium rate telephony revenues and platform access fees paid by third party broadcasters and interactive service providers.

Sky Bet revenue increased by 63% to £191 million in fiscal 2004 from £117 million in fiscal 2003, primarily due to the 85% increase in fiscal 2004 in the total number of bets placed across all platforms from fiscal 2003.


	*Other revenues*

Other revenues increased by 15% to £162 million in fiscal 2004 from £141 million in fiscal 2003, due to the sale of a greater volume of Sky+ and Multiroom set-top boxes as well as increased Sky+ and Multiroom set-top boxes installation revenues.

Operating expenses, net

The Group’s operating expenses, net, can be analysed as follows:



	Operating expenses, net


	2004				2003

	£m		%		£m		%
Programming		1,711		54		1,604		54
Transmission and related functions		146		4		143		5
Marketing		396		12		400		14
Subscriber management		371		12		324		11
Administration		376		12		359		12
Betting		175		6		108		4

		3,175		100		2,938		100


	*Programming*

Programming costs increased by 7% to £1,711 million in fiscal 2004 from £1,604 million in fiscal 2003. Programming costs are stated net of amounts receivable from the disposal to third parties of programming rights not acquired for use by the Group of £11 million (2003: £12 million).

Sky Sports channels’ programming costs increased by 11% to £803 million in fiscal 2004 from £723 million in fiscal 2003. This increase was driven by contractual increases in rights costs and the addition of UEFA Champions League football from the 2003/04 season.

Sky Movies channels’ programming costs decreased by 1% to £393 million in fiscal 2004 from £397 million in fiscal 2003, reflecting continued weakness of the US dollar and therefore a favourable movement in the average rate at which the Group was able to purchase dollars compared to fiscal 2003. These savings were partially offset by increased subscriber volumes and pricing increases in certain studio contracts.

Third party channel costs, which include our costs in relation to the distribution agreements for the Sky Distributed Channels and Premium Sky Distributed Channels, increased by 3% to £360 million in fiscal 2004 from £351 million in fiscal 2003. This increase was due to the 10% increase in the average number of DTH subscribers and new channels added to the platform, partially offset by savings resulting from contractual renegotiations as we renewed carriage deals with MTV, Nickelodeon, Paramount, Music Choice, E4, Film Four and Eurosport.

Entertainment programming costs increased by 26% to £118 million in fiscal 2004 from £94 million in fiscal 2003, mainly due to the regular review of programme stock balances during the year, which resulted in the acceleration of certain amortisation charges totalling £28 million, in accordance with the Group’s policy in respect of programme stock accounting.

News programming costs decreased by 5% to £37 million in fiscal 2004 from £39 million in fiscal 2003, due to the cost of covering the war in Iraq in the prior year.


	*Transmission and related functions*

Transmission and related functions costs (net of amounts receivable for the provision of spare transponder capacity to third party broadcasters of £28 million in fiscal 2004 (2003: £26 million)) increased by 2% to £146 million in fiscal 2004 from £143 million in fiscal 2003.


	*Marketing*

Marketing costs decreased by 1% to £396 million in fiscal 2004 from £400 million in fiscal 2003. This decrease was driven by a £22 million reduction in acquisition marketing costs to £256 million, due to lower set-top box unit prices and fewer installations. Retention marketing also decreased by £2 million from fiscal

2003 to £32 million. These decreases were partly offset by increased above-the-line expenditure, up £10 million from fiscal 2003 to £49 million, and other marketing costs up £10 million to £59 million, as a result of the Sky+ and programming campaigns which ran this year.

Marketing costs continued to be significant, partly as a result of the continued free digital satellite reception equipment offer to new customers. The impact in fiscal 2004 of these costs was £191 million (2003: £217 million).


	*Subscriber management*

Subscriber management costs increased by 15% to £371 million in fiscal 2004 from £324 million in fiscal 2003. Supply chain costs, including the cost of goods sold in respect of Sky+ and Multiroom set-top boxes, increased by 24% to £173 million in fiscal 2004 from £140 million in fiscal 2003, reflecting the growth in Sky+ customers during the year. Also included within supply chain costs is the cost of stock for SkyBuy, the Group’s retail operation, which increased by £12 million in the year to £18 million. CRM costs increased by £9 million to £157 million in fiscal 2004 from £148 million in fiscal 2003, due to the growing subscriber base. However, CRM cost per subscriber has declined by 3% as the associated costs are offset by continued efficiencies achieved in the contact centres. Depreciation costs increased by £5 million to £41 million in fiscal 2004 from £36 million in fiscal 2003, due to increased depreciation in respect of CRM assets developed and capitalised over the past three years.


	*Administration*

Administration costs, including goodwill amortisation and operating exceptional items, increased by 5% to £376 million in fiscal 2004 from £359 million in fiscal 2003. This is mainly a result of increased technology and facilities costs, costs resulting from increased compliance obligations, and the release in fiscal 2003 of a £5 million provision against ITV Digital programming debtors. These increases were partly offset by a decrease in goodwill amortisation from £121 million to £119 million. This decrease is explained below in the “Goodwill” section.


	*Betting*

Betting costs increased by 62% to £175 million in fiscal 2004 from £108 million in fiscal 2003, directly as a result of the growth in betting revenues. Betting gross margin (including duty and levy) increased to 9% in fiscal 2004 from 8% in fiscal 2003.

Operating profit and operating margin

Operating profit after goodwill amortisation and exceptional items increased by £233 million to £481 million in fiscal 2004 from £248 million in fiscal 2003. This increase was driven by the increase in revenues, as detailed above, partly offset by the increase in operating expenses, primarily due to the increase in programming costs and betting costs as detailed above.

Operating margin (calculated as total revenues less all operating expenses before goodwill amortisation and exceptional items) for fiscal 2004 was 16%, up from 11% in fiscal 2003, largely as a result of total revenues increasing at a faster rate than programming costs.

Goodwill

Goodwill amortisation, which is included in administration costs, above operating profit, decreased by 2% to £119 million in fiscal 2004 from £121 million in fiscal 2003. This comprises the amortisation of goodwill for the £272 million and £543 million goodwill arising on the acquisitions of SIG and BiB respectively, over seven years from the date of acquisition on a straight-line basis. The reduction in amortisation of £2 million was due to the £5 million provision made in fiscal 2003 against goodwill which originally arose on the acquisition of Opta Index Limited (“Opta”) (a sports media and information company, a subsidiary of SIG, which provided statistics on the sports industry), partly offset by the

£3 million provision made in the current year against the goodwill that arose on the acquisition of Planetfootball.com Limited (a company which provides website services to the sports industry).

Non-operating exceptional items

2004

Profit on disposal of fixed asset investments

On 7 October 2003, the Group disposed of its listed investment in Manchester United plc, realising a profit on disposal of £2 million.

On 1 March 2004, the Group sold its 20% shareholding in QVC (UK), operator of QVC — The Shopping Channel, for £49 million in cash, realising a profit on disposal of £49 million.

Amounts written off fixed asset investments, net

In accordance with the accounting treatment required by UK GAAP, the £33 million provision held against our investment in Manchester United plc was released during fiscal 2004, following the sale of our shareholding as described above. In fiscal 2004, we made a further provision against our remaining minority equity investments in football clubs, leading to a non-cash exceptional charge of £9 million. The provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred.

2003

Amounts written off fixed asset investments, net

At 31 December 2002, we made a further provision against our minority equity investments in football clubs, leading to a non-cash exceptional charge of £21 million. This provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred. At 30 June 2003, we reduced our provision against our investment in Chelsea Village plc by £3 million, following the agreement to sell our minority interest in July 2003.

At 31 December 2002, we reduced our deferred revenue balance by £5 million relating to minority investments in new media companies, and reduced both our investment and provision against our investment by £5 million accordingly. This was a result of the new media companies no longer requiring the services for which the deferred balance was being held.

At 31 December 2002, we made a provision against our investment in OpenTV, leading to a non-cash exceptional charge of £3 million, bringing the carrying value of our investment in OpenTV to nil. Between 12 February 2003 and 24 March 2003, we disposed of our entire investment in OpenTV shares, leading to a nil profit or loss on disposal.

In March 2003, we disposed of our investment in Streetsonline for total consideration of £1 million, which had been held at a cost of £6 million less provision of £6 million. These amounts were written back upon disposal of our investment in Streetsonline, leading to an exceptional credit of £1 million.

Joint ventures and associates

Our share of the net operating results from joint ventures and associates before goodwill decreased to a £5 million net loss in fiscal 2004 from a £3 million net profit in fiscal 2003. This reflects a write down of £11 million by At The Races in respect of capitalised infrastructure costs and media rights prepayments, partly offset by an improvement of £3 million due to the improved performance of certain programming joint ventures, including National Geographic Channel and Music Choice Europe. We continue to invest in programming joint ventures managed by our wholly-owned subsidiary, Sky Ventures Limited.

Joint ventures’ and associates’ goodwill amortisation, net

On 30 April 2004, Sky and Arena Leisure plc acquired Channel 4’s shares and loan notes in At The Races, increasing the Group’s shareholding to 50% (subsequently reduced to 47.5%, following the issue of shares by At The Races in October 2004). At the same time, the shareholder loans were capitalised, giving rise to negative goodwill of £11 million, which was immediately released to the profit and loss account. The remaining joint ventures’ goodwill amortised during the year of £1 million relates to goodwill that arose from the purchase of a 50% stake in Artsworld in December 2003.

Net interest payable

Interest payable and similar charges, net of interest receivable and similar income, decreased by 29% to £81 million in fiscal 2004 from £114 million in fiscal 2003. This decrease was a result of a reduction in average gross debt to £1,102 million for fiscal 2004 from £1,461 million for fiscal 2003 as well as an increase in interest receivable due to higher levels of cash held. Our average cash and liquid resources balance for fiscal 2004 was £300 million, compared to £113 million for fiscal 2003.

Taxation

The total net tax charge for fiscal 2004 of £158 million includes a current tax charge of £127 million and a deferred tax charge of £34 million, offset by a £3 million net adjustment in respect of prior years. Excluding the effect of goodwill, joint ventures and exceptional items, this results in an underlying effective tax rate on ordinary activities of 30%. A reconciliation of the Group’s current tax charge to the UK statutory rate is given in note 9 of the Consolidated Financial Statements included within Item 18.

The corporation tax liability for the period was £124 million. After utilising all the Group’s remaining Advanced Corporation Tax, this was reduced to £70 million. At 30 June 2004, £35 million had been paid, with the balance of £35 million due for payment by 31 December 2004.

The total net tax credit of £62 million for fiscal 2003 included a current pre-exceptional tax charge of £85 million and a deferred tax credit of £2 million (which was included within the total £28 million non-exceptional deferred tax credit) due to the Group generating profits chargeable to corporation tax in this fiscal year. Excluding the effect of goodwill, joint ventures and exceptional items, this resulted in an underlying effective tax rate on ordinary activities of 31%, slightly higher than the UK statutory rate due to a number of standard disallowable items.

As a result of the significant investment made in digital, and the resultant losses incurred, the Group has accumulated significant tax losses within different Group companies. Under the UK Accounting Standard FRS 19, a deferred tax asset in respect of these tax losses may only be recognised in the Group’s balance sheet at the point when it is “more likely than not” that there will be sufficient future taxable profits to offset the tax losses thereby being capitalised.

As the Group’s and individual entities’ profitability has continued to rise, it was increasingly possible to satisfy the requirements of FRS 19. During the six months ended 31 December 2002, the Group recognised a £40 million deferred tax asset, principally as a result of the forecast future profitability of one of the Group’s trading subsidiaries.

Subsequently, following a review of the forecast utilisation of tax losses within the Group, and as a consequence of a planned reorganisation of certain assets within the Group, the Directors were able to conclude that the required FRS 19 conditions had been satisfied in respect of other tax losses in the Group, permitting the Group to recognise a further deferred tax asset of £123 million, which was treated as an exceptional tax credit due to its size. This brought the total deferred tax asset recognised within fiscal 2003 to £151 million, net of utilisation and an adjustment arising from the prior period. A deferred tax asset of £450 million (2003: £450 million) has not been recognised in respect of potential capital losses related to the Group’s holding of KirchPayTV on the basis that these timing differences are not more likely than not to reverse. The Group has no further significant unrecognised UK losses, and therefore over the long-term, the Group’s ongoing UK tax charge in the profit and loss account is expected to be approximately 31%.

After the £85 million current pre-exceptional tax charge for fiscal 2003, the £151 million deferred tax credit, the tax charge on exceptional items of £2 million and our share of joint ventures’ tax charge of £2 million, the net tax credit for fiscal 2003 was £62 million.

Profit after taxation

Profit after taxation for fiscal 2004 was £322 million compared with £184 million in fiscal 2003, mainly as a result of an increase in operating profit of £233 million, a non-operating net exceptional credit of £75 million relating to fixed asset investments (2003: charge of £15 million), a decrease in net interest payable of £33 million, a loss of £5 million being our share of the results of joint ventures (2003: profit of £3 million), a net credit of £10 million (2003: nil) in respect of joint ventures and associates’ goodwill amortisation and a £158 million tax charge in the current period (2003: credit of £62 million).

Equity dividends

An interim dividend of £53 million (2.75 pence per share) in respect of the period ended 31 December 2003 (period ended 31 December 2002: nil) was paid to shareholders on 23 April 2004. In August 2004, the Directors proposed to pay shareholders a final dividend of £63 million (3.25 pence per share) in respect of the period ended 30 June 2004 (period ended 30 June 2003: nil), payable on 19 November 2004 to shareholders on the register on 29 October 2004, subject to approval of shareholders at the Annual General Meeting on 12 November 2004.

Earnings per share

Basic earnings per share increased by 7.0p to 16.6p in fiscal 2004 from 9.6p in fiscal 2003, due principally to the movement in profit after taxation described above. Similarly, diluted earnings per share increased by 7.1p to 16.6p in fiscal 2004 from 9.5p in fiscal 2003.

2003 FISCAL YEAR COMPARED TO 2002 FISCAL YEAR

Our results for fiscal 2003 and fiscal 2002 have been restated, following the adoption of UITF 38 in fiscal 2004. This has resulted in a restatement of operating expenses, net, operating profit, profit on ordinary activities before taxation, profit on ordinary activities after taxation, and basic and diluted earnings per share.

Revenues

The Group’s revenues can be analysed as follows:



	Revenues


	2003				2002

	£m		%		£m		%
DTH subscribers		2,341		74		1,929		69
Cable and DTT subscribers⁽¹⁾		202		6		279		10
Advertising		284		9		251		9
Interactive		218		7		186		7
Other		141		4		131		5

		3,186		100		2,776		100


(1)	DTT subscriber revenues were nil in fiscal 2003.


	*DTH subscriber revenues*

DTH subscriber revenues increased to £2,341 million in fiscal 2003 from £1,929 million in fiscal 2002. The improvement of 21% in fiscal 2003 was driven by a 14% increase in the average number of DTH

subscribers, in addition to a 7% increase in average DTH subscription revenue per subscriber, to £344 at 30 June 2003 from £323 at 30 June 2002.

The total number of UK and Ireland DTH subscribers increased by 744,000 in fiscal 2003. One factor contributing to this increase was a reduction in DTH churn. DTH churn for the year was 9.4% (2002: 10.5% excluding the effect of analogue churn up to 27 September 2001 and the effect of the termination of the analogue service on 27 September 2001).

The increase in average DTH subscription revenue per subscriber reflected the change in our UK retail prices which was effective from 1 January 2003, along with increased subscription revenues from products such as Sky+ and the Multiroom set-top boxes.


	*Cable and DTT subscriber revenues*

Cable and DTT subscriber revenues decreased by 28% to £202 million in fiscal 2003 from £279 million in fiscal 2002. This was mainly due to a £52 million decrease in DTT subscription revenues to nil following the termination of operations by ITV Digital in April 2002. Cable subscription revenues continue to be an important source of revenue, although revenues decreased by 11% to £202 million from £228 million in fiscal 2002. This decrease was a result of both the loss of subscribers by our two major customers, ntl and Telewest, and the lower penetration of Sky Premium Channels amongst remaining cable subscribers. ntl and Telewest, who represented in excess of 99% of the UK broadcast cable industry (measured by reference to total cable subscribers), accounted for 99% of our cable subscriber revenues in fiscal 2003.

At 30 June 2003, 3,871,000 (2002: 4,091,000) UK and Ireland cable subscribers received our programming.

In fiscal 2003, we charged UK cable operators between £9.97 and £19.10 per subscriber for packages of Sky Premium Channels, dependent upon the number of Sky Premium Channels to which the cable customer subscribed. The percentage of cable subscribers who subscribed to Sky Premium Channels in the year was far lower than that for DTH subscribers. As a result, on average, cable subscribers (including Irish cable operators’ subscribers) accounted for 38% of total subscribers (2002: 40% including DTT subscribers), although cable subscription revenues accounted for only 8% (2002: 13% including DTT subscription revenues) of total subscription revenues.


	*Advertising revenues*

Advertising revenues increased by 13% to £284 million in fiscal 2003 from £251 million in fiscal 2002. This increase reflected the growth in total UK advertising revenue, growth in Sky’s viewing share, the growth in agency commissions earned on the sale of advertising on behalf of those channels that have appointed Sky Sales to represent their airtime sales during the year, and the growth of airtime sales in Ireland.

Our share of television advertising revenues had increased in recent years as viewing levels to our channels increased (in part due to the growth in subscribers to our channels) and as we increased the levels of sales of advertising on third party channels. Our share of total UK advertising revenue increased by 17% in fiscal 2003. The other main determinant of advertising revenue levels was overall television advertising revenue growth.


	*Interactive revenues*

Total interactive revenues, including both Sky Active and betting revenues, increased by 17% to £218 million from £186 million in fiscal 2002.

Sky Active revenues continued to grow in fiscal 2003, and increased by 11% to £101 million in fiscal 2003 from £91 million in fiscal 2002. This increase was driven by growth in interactive advertising, retail services, increased usage of games and revenues from third party channels using interactive applications.

Sky Bet revenue increased by 23% to £117 million in fiscal 2003 from £95 million in fiscal 2002. The increase in betting revenue was driven by a threefold increase over fiscal 2002 in the total volume of bets placed to over 15 million, of which 12 million were interactive television bets.


	*Other revenues*

Other revenues increased by 8% to £141 million in fiscal 2003 from £131 million in fiscal 2002, primarily due to new product revenue (from Sky+ and Multiroom set-top boxes), increased service call revenues due to a larger subscriber base and increased extended warranty revenues.

Operating expenses, net

The Group’s operating expenses, net, can be analysed as follows:



	Operating expenses, net


	2003				2002

	£m		%		£m		%
Programming		1,604		54		1,439		53
Transmission and related functions		143		5		143		5
Marketing		400		14		417		15
Subscriber management		324		11		291		11
Administration		359		12		349		13
Betting		108		4		88		3

		2,938		100		2,727		100


	*Programming*

Programming costs increased by 11% to £1,604 million in fiscal 2003 from £1,439 million in fiscal 2002. Programming costs are stated net of amounts receivable from the disposal of programming rights not acquired for use by the Group of £12 million (2002: £15 million).

Sports channels’ programming costs increased by 9% to £723 million in fiscal 2003 from £663 million in fiscal 2002. This increase was primarily due to contractual increases in rights costs and the costs of non-annual events such as the Ryder Cup and the Cricket World Cup. Contractual increases were partly offset by savings achieved by decisions made by the Group not to renew agreements to broadcast UEFA Cup football, Scottish Premier League football and Six Nations Rugby.

Movie channels’ programming costs increased by 10% to £397 million in fiscal 2003 from £360 million in fiscal 2002, mainly due to the increase in the average number of movie subscribers, around a 30% increase in the number of output titles qualifying as “Megahits” compared to fiscal 2002, and contractual increases. “Megahits” are normally defined by reference to US theatrical release revenue. This increase was offset by savings resulting from the weakness of the US dollar in fiscal 2003.

Third party channel costs increased by 18% to £351 million in fiscal 2003 from £297 million in fiscal 2002. This increase was primarily due to the impact of a greater number of subscribers, new channels, and contracted per subscriber fee increases. These increases were partly offset by savings generated by the renewal, on improved terms, of contracts with a number of channel suppliers. In all cases, savings of at least 15% on the pence per subscriber cost of channel carriage were achieved.

Entertainment programming costs increased by 11% to £94 million in fiscal 2003 from £85 million in fiscal 2002, due to the scheduling of newly acquired programming and the launch of four new Sky Channels during the year (Sky One Mix (which has since been rebranded as Sky Mix), Flaunt, The Amp and Scuzz).

News programming costs increased by 15% to £39 million in fiscal 2003 from £34 million in fiscal 2002, due to the cost of covering the war in Iraq.


	*Transmission and related functions*

Transmission and related functions costs after exceptional items (net of amounts receivable for the provision of spare transponder capacity to third party broadcasters of £26 million in fiscal 2003 (2002: £24 million)) remained constant at £143 million in fiscal 2003. This was as a result of the £4 million release of the analogue termination provision in fiscal 2002, as discussed below, that reduced the expense that year, offset by a reduction of fiscal 2003 costs, mainly due to reductions in technical operations costs through transponder cost efficiency savings.

At 30 June 2002, £4 million of the £41 million provision originally made in fiscal 2000, relating to the cost of early termination of the analogue service on 27 September 2001, had not been utilised and was therefore released to the profit and loss account as an exceptional operating credit.


	*Marketing*

Marketing costs decreased by 4% to £400 million in fiscal 2003 from £417 million in fiscal 2002, mainly due to reduced hardware costs, an increase in install revenues and a greater proportion of direct customer acquisitions.

Marketing costs continued to be significant, partly as a result of the continued free digital satellite reception equipment offer to new customers. The impact in fiscal 2003 of these costs was £217 million (2002: £261 million).


	*Subscriber management*

Subscriber management costs increased by 11% to £324 million in fiscal 2003 from £291 million in fiscal 2002. Supply chain costs increased by 20% to £140 million in fiscal 2003 from £117 million in fiscal 2002, as a result of the associated hardware costs of new products and costs associated with the smartcard swap-out as part of on-going anti-piracy measures. CRM costs per subscriber decreased by 15% from fiscal 2002, leading to an overall reduction in CRM costs of 3% over fiscal 2002 to £148 million from £153 million, as a result of contact centre efficiencies and lower call volumes leading to a lower head count in the contact centre. Depreciation costs increased by £15 million to £36 million in fiscal 2003 from £21 million in fiscal 2002, due to increased depreciation in respect of CRM assets developed and capitalised.


	*Administration*

Administration costs, including goodwill amortisation and operating exceptional items, increased by 3% to £359 million in fiscal 2003 from £349 million in fiscal 2002. This was a result of an increase in goodwill amortisation to £121 million in fiscal 2003 from £119 million in fiscal 2002 (see “Goodwill” section below), a provision against ITV Digital programming debtors of £22 million made in fiscal 2002, £5 million of which was released in fiscal 2003, and an increase in fiscal 2003 costs, mainly due to increases in insurance and disaster recovery planning costs.

On 27 March 2002, ITV Digital, a 50:50 joint venture between Carlton and Granada, which provided pay television programme services via the UK DTT platform, was placed into administration. As of 27 March 2002, we had balances owing to us and unprovided for, in respect of programming licensed to ITV Digital, of £22 million. On 30 April 2002, the joint administrators of ITV Digital announced the closure of ITV Digital’s pay television service on the platform and their intention to close the administration. Accordingly, in fiscal 2002, we made an exceptional operating provision against the whole of this balance. During fiscal 2003, we received £5 million from ITV Digital’s administrators and released £5 million of the operating exceptional provision accordingly. This operating exceptional credit was included within administration costs.


	*Betting*

Betting costs increased to £108 million from £88 million in fiscal 2002 directly as a result of the growth in betting revenues. Betting gross margin (including duty and levy) remained constant at 8% in fiscal 2003, compared to fiscal 2002.

Operating profit and operating margin

Operating profit after goodwill amortisation and exceptional items increased by £199 million to £248 million in fiscal 2003 from £49 million in fiscal 2002. This increase was driven by the increase in revenues, as detailed above. This increase in revenues was partly offset by the increase in operating expenses, primarily due to the increase in programming costs.

Operating margin for fiscal 2003 was 11%, up from 7% in fiscal 2002. The most significant contributors to this increase were programming costs, marketing costs, and transmission and related functions costs, as detailed above.

Goodwill

Goodwill amortisation and impairment increased by £2 million to £121 million in fiscal 2003 from £119 million in fiscal 2002. This comprised the amortisation of goodwill for the £272 million and £543 million of goodwill arising, respectively, on the acquisitions of SIG and BiB, over seven years from the date of acquisition on a straight-line basis. In addition, we made a provision of £5 million, included within amortisation, against goodwill which originally arose on the acquisition of Opta. This provision was made as a result of our announcement in December 2002 that we would close Opta and the carrying value of this goodwill was reduced to nil. In September 2003, an agreement to sell certain assets and lease other assets of Opta for nominal consideration was reached.

Non-operating exceptional items (except taxation)


	*2003*

A description of the non-operating exceptional items for fiscal 2003 is included in the “2004 fiscal year compared to 2003 fiscal year — Non-operating exceptional items” section above.


	*2002*

Amounts written off fixed asset investments

At 31 December 2001, £60 million was provided against our minority investments in football clubs. This provision was made due to the continued decline over the previous months in the market value of these investments, leading us to believe that a permanent diminution in value had occurred.

Release of provision for loss on disposal of subsidiary

On 16 October 2001, we jointly announced with Ladbrokes, the betting and gaming division of Hilton Group plc, that we had agreed not to pursue a proposed joint venture to offer a fixed-odds betting service on Sky Sports channels and other media. As a result, the provision for loss on disposal of subsidiary of £10 million, taken in fiscal 2001, was written back in fiscal 2002 as a non-cash exceptional credit, below operating profit. We continue to operate and develop interactive TV betting services through our wholly-owned bookmaker, Sky Bet (formerly known as Surrey Sports).

Profit on sale of fixed asset investments

During fiscal 2002, we disposed of our unlisted minority investment in Static 2358 Limited, realising a profit on disposal of £2 million.

Joint ventures

Our share of the operating results from joint ventures improved to a £3 million net profit in fiscal 2003 from a £76 million net loss in fiscal 2002. This was due to the non-recognition of KirchPayTV losses from 8 February 2002, down to nil in fiscal 2003 from £70 million in fiscal 2002. The remaining improvement of £9 million was due to the improved performance of certain programming joint ventures, including Nickelodeon, The History Channel, Paramount and National Geographic Channel.


	*Joint ventures’ goodwill amortisation, net*

As at 31 December 2001, the carrying value of our investment in our KirchPayTV joint venture was written down to nil, following an exceptional charge to joint ventures’ goodwill amortisation of £985 million. Joint ventures’ goodwill amortisation also included goodwill amortisation of £99 million for the prior year. To match our share of KirchPayTV’s losses for the period from 1 January 2002 to 8 February 2002, we released an amount of £14 million from the impairment provision made at 31 December 2001.

Our investment in KirchPayTV was treated as a joint venture until 8 February 2002, by which date we considered that we were no longer able to exercise significant influence over KirchPayTV. Accordingly, on 8 February 2002, the investment was transferred within fixed asset investments to “Other investments” at a net book value of nil. On 1 August 2002, formal insolvency proceedings were opened for KirchPayTV, from which we did not expect to receive any funds. On 13 May 2002, we exercised a put option to transfer our interest in KirchPayTV to Taurus Holding GmbH & Co KG, a company which became the subject of formal insolvency proceedings on 13 September 2002. We do not expect to receive a significant amount, if any, from the exercise of our put option.

Net interest payable

Interest payable and similar charges, net of interest receivable and similar income, decreased by 17% to £114 million in fiscal 2003 from £137 million in fiscal 2002. This was primarily a result of a reduction in average gross debt to £1,461 million for fiscal 2003 from £1,854 million for fiscal 2002, and a decrease in our share of joint ventures’ interest payable, due to inclusion in the prior period of our share of KirchPayTV’s interest payable. This was partly offset by decreased interest receivable due to lower levels of cash held. Our average cash balance for fiscal 2003 was £113 million compared to £203 million for fiscal 2002.

Taxation

The total net tax credit for fiscal 2003 of £62 million included a current pre-exceptional tax charge of £85 million and a deferred tax credit of £2 million (which is included within the total £28 million non-exceptional deferred tax credit) due to the Group generating profits chargeable to corporation tax in this fiscal year. Excluding the effect of goodwill, joint ventures and exceptional items, this resulted in an underlying effective tax rate on ordinary activities of 31%, slightly higher than the UK statutory rate due to a number of standard disallowable items.

As a result of the significant investment made in digital, and the resultant losses incurred, the Group had accumulated significant tax losses within different Group companies. As the Group’s and individual entities’ profitability has continued to rise it has become increasingly possible to satisfy the requirements of FRS 19. During the six months ended 31 December 2002, the Group recognised a £40 million deferred tax asset, principally as a result of the forecast future profitability of one of the Group’s trading subsidiaries.

recognition, the Group has no further significant unrecognised UK losses, and therefore over the long-term, the Group’s ongoing UK tax charge in the profit and loss account is expected to be around 31%.

In fiscal 2002, the tax charge of £107 million mainly comprised an exceptional write-off of a deferred tax asset arising on losses, following the impairment charge made in respect of KirchPayTV goodwill, of £83 million; utilisation of the existing deferred tax asset of £28 million; an exceptional tax charge on the release of the remaining analogue termination provision of £1 million; and our share of our joint ventures’ tax charges of £1 million. This was partly offset by an exceptional tax credit arising on the provision made against unprovided for ITV Digital debtors of £6 million. There was no current tax charge in fiscal 2002.

Following the impairment charge made in respect of our investment in KirchPayTV at 31 December 2001, there was insufficient evidence to support the recognition of a deferred tax asset arising on losses incurred by certain UK companies. Accordingly, the deferred tax asset of £95 million was written off in full as at 31 December 2001. Subsequent to this date, £12 million of this amount was written back due to the utilisation of tax losses.

Profit after taxation

In fiscal 2003, the profit for the financial year was £184 million compared to a loss of £1,389 million in fiscal 2002, mainly as a result of the impairment of KirchPayTV goodwill by £971 million in fiscal 2002, a tax credit of £62 million in fiscal 2003 compared to a tax charge of £107 million in fiscal 2002 and an increase in operating profit after goodwill and exceptional items of £199 million. Furthermore, we ceased to account for our share of KirchPayTV’s losses after 8 February 2002 (2002: loss of £70 million), and, following the impairment charge against KirchPayTV goodwill in fiscal 2002, there was no amortisation charge for KirchPayTV goodwill in fiscal 2003 (2002: charge of £99 million).

The impairment charge relating to KirchPayTV goodwill followed an impairment review of the carrying value of the investment in KirchPayTV, which resulted in a carrying value of nil. The tax credit of £62 million is mainly due to the recognition of a deferred tax credit of £163 million relating to deferred tax assets not previously recognised. The increase in operating profit is the result of revenues increasing by £410 million, partly offset by an increase in operating expenses of £211 million.

Earnings (loss) per share

Basic earnings per share increased by 83.2p to earnings per share of 9.6p in fiscal 2003 from a loss per share of 73.6p in fiscal 2002, primarily due to the movement in profit after taxation described above. Similarly, diluted earnings per share increased to diluted earnings per share of 9.5p in fiscal 2003 from a diluted loss per share of 73.6p in fiscal 2002.

2004 BALANCE SHEET COMPARED TO 2003 BALANCE SHEET

The Group’s balance sheet at 30 June 2003 has been restated, following the adoption of UITF 38 in fiscal 2004. This has resulted in a restatement of fixed asset investments, creditors falling due within one year, current assets, total assets less liabilities and reserves.

Intangible assets decreased by £119 million to £417 million at 30 June 2004 from £536 million at 30 June 2003, due to amortisation of goodwill. Intangible assets comprise the goodwill that arose on the acquisitions of BiB, SIG and WAPTV Limited.

Tangible fixed assets increased in the year by £30 million to £376 million at 30 June 2004 from £346 million, due to £133 million of additions, including investment in our customer relationship management centres and systems and in new premises, offset by depreciation of £102 million and a

disposal of £1 million. Assets in the course of construction increased by £72 million in the year to £101 million from £29 million, due to the investment in customer relationship management systems.

Fixed asset investments decreased by £42 million to £2 million at 30 June 2004 from £44 million, due to the sale of the Group’s investments in Manchester United plc and Chelsea Village plc and a further provision against the Group’s minority investments in football clubs of £9 million.

Equity shareholders’ funds (deficit)

On 10 December 2003, the High Court approved a reduction in the Company’s share premium account of £1,120 million, as approved by the Company’s shareholders at the Annual General Meeting held on 14 November 2003. The reduction had the effect of eliminating the Company’s deficit on its profit and loss account as at 30 September 2003 of £1,106 million, and creating a non-distributable special reserve of £14 million, which represents the excess of the share premium reduction over the deficit. The Company’s balance sheet and profit and loss account are not presented within this Annual Report on Form 20-F.

A new ESOP reserve has been created following the adoption of UITF 38, when a prior year adjustment was required as at 30 June 2003 to reclassify £35 million from fixed asset investments to the new ESOP reserve. During the year, the ESOP reserve has decreased by £5 million, due to the exercise of £27 million executive share options, partly offset by the purchase of £22 million of additional ESOP shares.

FOREIGN EXCHANGE

For details of the impact of foreign currency fluctuations on our results of operations, see Item 11 “Quantitative and Qualitative Disclosures about Market Risk — Currency exchange rates”.

CONTINGENT LIABILITIES

The Group has contingent liabilities by virtue of its investments in unlimited companies, or partnerships, which include Nickelodeon UK, The History Channel (UK), Paramount UK, and National Geographic Channel UK. The Directors do not expect any material loss to arise from the above contingent liabilities.

LIQUIDITY AND CAPITAL RESOURCES

Our long-term funding, which comes primarily from US dollar and sterling-denominated public bond debt, was raised in 1996 and 1999. We launched Sky digital, our digital DTH service, in October 1998 and we terminated our analogue service in September 2001. As a result, the height of our funding requirements was in fiscal 2001, when our year-end net debt reached £1,547 million. As at 30 June 2004, net debt has been reduced to £429 million. The public bond debt is repayable in 2006 and 2009 and we currently believe that our financial position at those dates will enable us to meet our repayment requirements. For details of our facilities and long-term funding see note 20 of the Consolidated Financial Statements included within Item 18. For details of our treasury policy and use of financial instruments see note 21 of the Consolidated Financial Statements included within Item 18.

Our principal source of liquidity is our operating cash flow, combined with access to a £600 million (2003: aggregate of £800 million) RCF. We are currently in discussions with our lending banks to replace our £600 million RCF with a new RCF, maturing on 30 July 2010. Our operating cash inflow for the current year was £882 million (2003: £664 million) (see “Cash flows” below). We expect to continue to generate significant operating cash inflow in fiscal 2005 (for further details, see “Trends and other information” and “Tabular disclosure of contractual obligations” below), subject to the factors detailed below. As at 30 June 2004, our RCF was not drawn.

Our liquidity and working capital may be affected by a material decrease in cash flow from operations due to factors, among others, such as infringement of intellectual property and proprietary rights, increased

competition, failure to obtain required regulatory approvals, long-term obligations, loss of wholesale revenues and failure of technology (see Item 3 “Key Information — Risk Factors”).

Cash flows

During fiscal 2004, there was an operating cash inflow of £882 million, compared with an operating cash inflow of £664 million in fiscal 2003. The operating cash inflow was driven primarily by improved operating results and cash generated from the movement in working capital totalling £182 million, due to the timing of payments to third party channels and movie studios, the timing of DTH revenue collection and the unwinding of programming prepayments.

During the year, net interest payments were £82 million, compared to £125 million in fiscal 2003. This reduction in payments was due to the reduction in net debt in the current year. We expect that these payments will continue to decline in the short-term as the level of our net debt reduces.

During the year, tax payments were £58 million, compared to £18 million in fiscal 2003. This increase in payments was due to the increased profitability of the Group in the current year. We expect that these payments will continue to increase as the Group becomes increasingly profitable.

During the year, capital expenditure was £132 million, compared with £98 million in fiscal 2003. A significant part of this expenditure related to investment in customer-facing technology based in Scotland, the CRM project, and construction of the Advanced Technology Centre. We intend to invest approximately £450 million on capital expenditure over the four years to 30 June 2008, in order to support the long-term growth of the Group. This is in addition to ongoing core maintenance capital expenditure which is expected to remain at about £100 million per annum over the same period. The additional expenditure includes building a new Advanced Technology Centre, further investment in our customer relationship management centres and systems, increasing contact centre capacity, building and/or acquiring new training facilities, refurbishing existing property and building, and/or acquiring, new property and facilities.

During the year, non-recurring receipts from the sales of fixed asset investments of £116 million, compared to £1 million in fiscal 2003, comprised proceeds from the sale of our shareholding in Manchester United plc of £62 million, proceeds from the sale of our shareholding in Chelsea Village plc of £6 million, and proceeds from the sale of our shareholding in QVC (UK) of £49 million.

During the year, we made equity dividend payments of £53 million, compared to nil in fiscal 2003. We expect that future year payments will increase in line with the Board’s expected dividend policy described in the “Trends and other information” section below.

During the year, the Group also received proceeds of £20 million from the issue of shares, made payments to acquire ESOP shares of £22 million and had other net inflows of £5 million, which resulted in a decrease in net debt of £676 million to £429 million.

Major non-cash transactions


	*2004*

Share premium reduction

WAPTV

On 30 September 2003, the Company issued 338,755 (2003: 169,375) Ordinary Shares to satisfy the remaining contingent consideration in respect of the acquisition of the remaining 5% in WAPTV Limited which occurred in May 2001.


	*2003*

Issue of shares — deferred consideration for BiB

On 11 November 2002, the Company issued 43.2 million shares with a fair value of £253 million to HSBC, Matsushita and BT in respect of deferred consideration for the acquisition of the remaining 67.5% of BiB in May and June 2001.


	*2002*

Impairment of investment in KirchPayTV

Effective 31 December 2001, the Group wrote down the carrying value of its investment in KirchPayTV to nil. The write-down resulted in a non-cash exceptional charge to the profit and loss account of £985 million. Subsequently, an amount of £14 million was released from the provision matching our share of losses from the period from 1 January 2002 to 8 February 2002.

Tabular disclosure of contractual obligations

A summary of our contractual obligations and commercial commitments at 30 June 2004 is shown below:



			Payments due by period

			Less than		Between		Between		More than
	Total		1 year		1-3 years		3-5 years		5 years

	£m		£m		£m		£m		£m
Obligation or commitment
Purchase obligations:
— Television programme rights		2,489		830		1,279		303		77
— Set-top boxes and related equipment		70		70		—		—		—
— Third party payments		41		13		23		5		—
— Capital expenditure		17		17		—		—		—
— Other		61		33		28		—		—
Long-term debt		1,069		—		189		367		513
Operating lease obligations		447		87		161		108		91
Capital lease obligations		7		—		—		1		6

Total cash obligations		4,201		1,050		1,680		784		687

For the avoidance of doubt, this table does not include commitments relating to employee or interest costs.

Purchase obligations — Television programme rights

At 30 June 2004, we had minimum television programming commitments of £2,489 million (2003: £1,618 million), of which £766 million (2003: £692 million) related to commitments payable in US dollars for periods of up to nine years (2003: ten years), £87 million (2003: £136 million) related to commitments payable in Swiss francs for periods of up to two years (2003: three years), and £6 million (2003: nil) related to commitments payable in Euros for periods of up to two years. An additional £265 million (US$483 million) of commitments (2003: £213 million (US$351 million)) would also be payable in US dollars, assuming that movie subscriber numbers remained unchanged from current levels. The pounds

sterling television programme rights commitments include similar price escalation clauses that would result in additional commitments of £3 million (2003: nil) if subscriber numbers were to remain at 30 June 2004 levels.

At 30 June 2004, the US dollar commitments have been translated at the year end rate of US$1.8219: £1 (2003: US$1.6497: £1), except for US$340 million (2003: US$566 million) covered by forward rate contracts where the average forward rate of US$1.6227: £1 (2003: US$1.4925: £1) has been used. The Swiss francs commitments have been translated at the year end rate of CHF2.2743: £1 (2003: CHF2.2288: £1), except for CHF90 million (2003: CHF99 million) covered by forward rate contracts where the average forward rate of CHF2.2899: £1 and CHF1.5099: Euro1 (2003: CHF2.0834: £1 and CHF1.4844: Euro1) has been used. The Euro commitments have been translated at the year end rate of Euro1.5020: £1.

Of the total increase in our minimum television programming commitments of £871 million compared to 30 June 2003, £784 million is due to the award, in August and October 2003, of contracts with the FAPL in respect of UK broadcast, UK near-live, internet and Ireland rights for the 2004/05 season to the 2006/07 season. Additionally, in fiscal 2004, some of our existing movie contracts were extended, resulting in an increase in commitments of £335 million. These increases were partly offset by the decreased average period remaining on the majority of our other existing programming commitments.

Purchase obligations — Set-top boxes and related equipment

At 30 June 2004, we had made commitments to manufacturers, in relation to the supply of set-top boxes and related equipment, of up to a maximum of £70 million (2003: £106 million). The decrease compared to the prior period is due to certain contracts being in the process of being renegotiated. Commitments relating to ongoing contracts are higher due to increased volumes, including Multiroom and Sky+ set-top boxes, offset by a reduction in the price charged per box by suppliers.

Purchase obligations — Third party payments

At 30 June 2004, we had minimum third party payment commitments in respect of distribution agreements for the Sky Distributed Channels of £41 million (2003: £46 million). An additional £844 million (2003: £799 million) of commitments is also payable for periods of up to five years (2003: six years), assuming that the number of DTH subscribers remained unchanged from current levels.

Purchase obligations — Capital expenditure

At 30 June 2004, we had capital expenditure commitments totalling £17 million (2003: £3 million), mainly relating to the building of the Advanced Technology Centre.

Long-term debt

Further information concerning long-term debt is given in note 20 of the Consolidated Financial Statements included within Item 18.

Operating lease obligations

At 30 June 2004, our operating lease obligations totalled £447 million (2003: £495 million), the majority of which related to property and transponder leases.

Capital lease obligations

At 30 June 2004, our obligations under capital leases were £7 million (2003: £8 million). This represents amounts drawn in connection with the CRM Centre in Dunfermline, Scotland. The CRM Centre leases bear interest of 8.5% and expire in September 2020.

Trends and other information

The significant trends which have a material effect on our financial performance are outlined below.

The rate of growth in DTH subscriber numbers slowed in fiscal 2004, with a 7% increase compared with 12% increases in fiscal 2003 and 2002. We expect DTH subscriber numbers to continue to increase in fiscal 2005, albeit at a slower rate of growth than in fiscal 2004, nonetheless followed by increased rates of growth in the years thereafter as a result of the implementation of our current marketing strategy, consistent with achieving our target of 8,000,000 DTH subscribers by December 2005; thereafter we expect increased rates of growth to remain consistent with achieving our longer term target of 10,000,000 DTH subscribers in 2010. Sky+ and Multiroom subscribers increased substantially during fiscal 2004, with growth rates of 279% and 77% respectively. We expect the trend of Sky+ and Multiroom subscriber growth to continue, consistent with achieving our targets of 30% Multiroom and 25% Sky+ penetration of DTH subscribers in 2010. The rate at which our subscribers take Sky Premium Channels (calculated as the ratio of the total number of Sky Premium Channels subscribed to (other than Sky Sports Xtra) compared to the total number of subscribers) has gradually declined in fiscal years 2003 and 2004, and is currently expected to continue to decline marginally, although average DTH subscription revenue per subscriber grew in fiscal 2004, and we expect another increase to take place during the second quarter of fiscal 2005 as a result of the changes in UK and Ireland retail pricing, which began to take effect from September 2004.

Operating margin has grown from 6.7% in fiscal 2002 to 16.4% in fiscal 2004. We currently expect operating margin to increase in fiscal 2005 and 2006, albeit at a slower rate of growth than in fiscal 2004, due to the expenditure required in accordance with our longer term strategy to improve subscriber and revenue growth; however, we currently expect the rate of growth of operating margin to increase from fiscal 2007 onwards.

During the year ended 30 June 2004, the number of cable subscribers receiving Sky Channels in the UK and Ireland increased by 24,000 to 3,895,000 following a reduction of 220,000 subscribers during fiscal 2003. We expect cable subscriber numbers to increase marginally in the foreseeable future in accordance with current expectations as to the timing of analogue terrestrial switch off and further expansion in UK pay television. We expect that the rate at which cable subscribers take Sky Premium Channels will increase in fiscal 2005 and 2006, stabilising thereafter. We currently have agreements with ntl and Telewest for the supply of certain Sky Basic Channels until 2006 (see Item 4 “Information on the Company — History and Development of the Group and Business Overview — Programming”). We are also in the process of negotiating new agreements for the supply of premium channels which, if agreed, are expected to result in increased sales of our premium movie and sports channels.

In fiscal 2004, UK television advertising revenue grew by 4%. We currently anticipate marginally higher growth in fiscal 2005, and marginally lower growth in fiscal 2006, returning to fiscal 2004 growth levels in the years thereafter. We expect that our share of UK television advertising revenue will increase year on year as we benefit from a greater number of subscribers leading to growth in Sky’s commercial impacts, although this is likely to be partly offset by a fall in the share of viewing of Sky Channels as the total number of channels available to multi-channel viewers increases. This increase in impacts will enable us to attract a greater proportion of total UK television advertising expenditure and will continue to have a positive impact on advertising revenues.

Interactive revenues have seen growth during fiscal 2002, 2003 and 2004 and are expected to continue to grow in the next few years as the range of interactive services available on the digital satellite platform develops further. The core growth areas are expected to be interactive betting via television (which reflects anticipated liberalisation of the United Kingdom gambling laws (see “Critical Accounting Policies — Goodwill” below)), interactive advertising, gaming and telephony income from the use of enhanced television services (e.g. voting).

Programming costs increased at slower rates than our revenues in fiscal 2003 and 2004. We will continue to seek to reduce the per subscriber cost of sports and movies programming and the per subscriber cost in relation to the Sky Distributed Channels, as and when the contracts for these are

renewed. However, we do expect minor fluctuations depending upon the timing of individual programming agreements. Our entertainment programming costs per subscriber are currently expected to increase in fiscal 2005, after which they are expected to stabilise. We expect that total programming costs will continue to increase at a slower rate than our revenues.

Transmission and related function costs have remained stable in fiscal 2002, 2003 and 2004, resulting in year-on-year decreases in costs per subscriber. We expect these costs to increase in fiscal 2005 due to increased transponder capacity costs, depreciation costs resulting from our investment in the Advanced Technology Centre, and increased staff costs, as part of our business continuity programme. Transmission and related function costs per subscriber are expected to stabilise after fiscal 2005.

Marketing costs as a percentage of revenues fell consistently in fiscal 2002, 2003 and 2004. We expect this trend to reverse in fiscal 2005. This includes above-the-line marketing expenditure, a component of total marketing costs amounting to £49 million in fiscal 2004, which is expected to increase by 40% to 50%, to address our strategy of investing in future subscriber growth. We currently expect marketing costs as a percentage of revenues to stabilise in fiscal 2006 and to start falling again from fiscal 2007 onwards. Also included within marketing costs are the costs of providing free digital satellite reception equipment and the installation costs in excess of the relevant amount actually received from customers. It remains our current intention to continue the practice of providing free digital satellite reception equipment and subsidising installation to new subscribers.

We expect that subscriber management costs will continue to increase in fiscal 2005 due to a greater proportion of Sky+ installations, which carry higher hardware costs than the standard installations, partly offset by a reduction in the cost of standard set-top boxes. We expect that CRM costs will continue to increase due to the incremental costs of migrating to a new CRM system. However, we expect that CRM costs per subscriber will begin to stabilise after fiscal 2006 as the benefits of the new system are realised, with efficiency savings in the cost per subscriber being offset by higher depreciation charges from fiscal 2006 as a result of the new CRM systems being operational. Additionally, we expect to invest in increasing the capacity of our contact centres and to build a new training centre to keep customer services standards at the forefront of the industry, which will result in increased depreciation charges in the medium term.

Administration costs, before goodwill amortisation, increased during fiscal 2003 and 2004, and are expected to continue increasing in the foreseeable future due to the growth in our overall business. However, the rate of growth is expected to peak in fiscal 2006, with lower rates of growth in the following years. This is mainly a result of the depreciation charge relating to investment at the main site in Osterley, for which a significant part of the expenditure on buildings and refurbishments will be incurred in fiscal 2005.

The trends described above reflect our current expectations based on UK GAAP. International Financial Reporting Standards, which we are required to adopt in the preparation of our consolidated financial statements from 1 July 2005 (see “Adoption of New Accounting Standards — Adoption of International Financial Reporting Standards (“IFRS”)” below), may impact the magnitude and/or the direction of these trends.

The Board is currently considering the appropriate financial strategy and capital structure for the next phase of the Group’s growth. This financial strategy will be consistent with the Group’s desire to maintain an investment grade credit rating and retain financial flexibility going forward. The financial strategy is also expected to include returns to shareholders in addition to the ordinary dividend that was resumed in the 2004 fiscal year.

The Board expects to adopt a progressive dividend policy and intends that the ordinary dividend in fiscal 2005 will grow broadly in line with Group earnings. The Board is considering additional mechanisms to allow further distributions to shareholders in due course. As a first step, the Board intends to propose resolutions at the Annual General Meeting in November 2004 to renew the annual authority to buy back up to 5% of the issued ordinary share capital of the Company. If approved, the Group expects to utilise a

proportion of the share repurchase authority during the remainder of fiscal 2005, subject to market conditions.

The Board also intends to put in place a Scheme of Arrangement that will enable additional returns of cash to shareholders by way of special dividends or share buy-backs in the future and expects to put proposals to shareholders in due course.

Dividends are paid between Group companies out of profits available for distribution subject to, inter alia, the provisions of our Articles of Association and the Companies Act 1985 (as amended). There are restrictions over the distribution of any profits which are not generated from external cash receipts as defined in Technical Release 7/03, issued by the Institute of Chartered Accountants in England and Wales. The interim dividend of the Company of £53 million announced in February 2004, relating to the period ended 31 December 2003, and the final dividend of £63 million proposed in August 2004, relating to the year ended 30 June 2004, were resolved or proposed to be paid out of profits available for distribution generated from external cash receipts.

We currently believe that our existing external financing, together with internally generated cash inflows, will continue to be sufficient sources of liquidity to fund our current operations, including our contractual obligations and commercial commitments described above, our approved capital expenditure requirements and any dividends proposed.

OFF-BALANCE SHEET ARRANGEMENTS

At 30 June 2004, the Company did not have any undisclosed off-balance sheet arrangements that require disclosure as defined by Securities and Exchange Commission Release No. 33-8182.

RESEARCH AND DEVELOPMENT

The Group did not incur significant research and development expenditure in fiscal 2004, 2003 or 2002.

US GAAP RECONCILIATION

Net profit after tax under UK GAAP in fiscal 2004 was £322 million (2003: £184 million; 2002: loss of £1,389 million). Under US GAAP, net profit after tax was £434 million (2003: £286 million; 2002: loss of £1,047 million). Net assets under UK GAAP at 30 June 2004 were £90 million (2003: net liabilities of £152 million). Under US GAAP, net assets were £812 million (2003: £448 million).

The principal differences between US GAAP and UK GAAP, as they relate to the Group, arise from the methods of accounting for goodwill, employee stock-based compensation, derivatives, fixed asset investments, deferred taxation and proposed equity dividends. For a further explanation of the differences between US GAAP and UK GAAP, see note 28 of the Consolidated Financial Statements included within Item 18.

CRITICAL ACCOUNTING POLICIES

The application of UK GAAP often requires our judgement when we formulate our accounting policies and when presenting a true and fair view of our financial position and results in our consolidated financial statements. Often, judgement is required in respect of items where the choice of specific policy to be followed can materially affect our reported results or net asset position, in particular through estimating the lives of recoverability of particular assets, or in the timing of when a transaction is recognised. A summary of our significant accounting policies is discussed in the accompanying notes to the consolidated financial statements, and our critical accounting policies are discussed below.

We do not believe that we have any critical accounting policies which are specific to US GAAP, as any US GAAP accounting policies that we have deemed to be critical are also critical under UK GAAP.

We consider that our accounting policies in respect of the following are critical:

Goodwill

Where the cost of acquisition exceeds the fair value attributable to the net assets acquired, the difference is treated as purchased goodwill and capitalised on our balance sheet in the year of acquisition. Determining the fair value of assets acquired and liabilities assumed requires our judgement and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives, among other items. Purchased goodwill arising on acquisitions from 1 July 1998 is capitalised. Prior to 1 July 1998, goodwill arising on acquisitions was eliminated against reserves. As permitted by Financial Reporting Standard No. 10, “Goodwill and Intangible Assets” (“FRS 10”), this goodwill has not been restated on our balance sheet. As at 30 June 2004, the total value of goodwill written off directly to reserves was £524 million (2003: £524 million) principally relating to the merger of Sky Television and British Satellite Broadcasting in 1990.

Where capitalised goodwill is regarded as having a limited useful economic life, FRS 10 provides that the cost is amortised on a straight-line basis over that life, of up to 20 years. All goodwill currently held on our balance sheet is being amortised over periods of up to seven years on a straight-line basis. Goodwill is reviewed for impairment if events or circumstances indicate that the carrying value may not be recoverable. Any amortisation or impairment write-down is charged to the profit and loss account.

At 30 June 2004, the carrying value of goodwill amounted to £417 million (2003: £536 million) and represented 18% (2003: 26%) of our total assets. As a result, the choice of amortisation period is critical to our results. Applying the lives referred to in the previous paragraph has resulted in this year’s charge for amortisation amounting to £116 million (2003: £116 million; 2002: £217 million, including £99 million of KirchPayTV goodwill amortisation).

Goodwill impairment reviews are also an area requiring our judgement, requiring assessment as to whether the carrying value of goodwill can be supported by the net present value of future cash flows derived from assets using cash flow projections, and discounting using an appropriate rate. We completed two significant acquisitions in fiscal 2001. These were the acquisitions of the 67.5% of BiB not previously owned by us and 100% of SIG (a company that we acquired in July 2000, which owns a bookmaker which operates telephone and interactive betting services under the brand name “Sky Bet”). In accordance with Financial Reporting Standard No. 11, “Impairment of Fixed Assets and Goodwill”, impairment reviews were performed on the carrying values of BiB and SIG goodwill balances at the end of the first full financial year after acquisition, at 30 June 2002, which did not indicate impairment. Consistent with our strategy, the business plans on which these reviews were based reflect significant projected increases in betting and other interactive revenues over the subsequent five years and the carrying value of the goodwill is therefore heavily dependent on the forecast performance of, and projections for, these businesses. The forecasts and projections used for SIG’s impairment reviews are dependent, at least in part, on the anticipated liberalisation of the United Kingdom’s gambling laws in accordance with the stated policy of the current UK Government and in particular upon the legalisation of onshore remote gambling and clarification of the position in relation to offshore remote gambling. Substantial parts of a draft Gambling Bill providing for such liberalisation were published in late 2003/early 2004 and were subject to pre-legislative scrutiny by a joint parliamentary committee. The Government’s responses in June and September 2004 to such scrutiny were broadly positive and a revised Gambling Bill was introduced in the House of Commons on 18 October 2004 and published the following day. The Government has announced that the Bill will be subject to a carry-over motion to the next session of Parliament and therefore we envisage that this would see the Bill becoming law in mid-2005, however, there can be no guarantee that it will be passed in the current form, within that timetable or at all, or that forecast performance will be delivered.

The treatment of goodwill under US GAAP differs significantly from that under UK GAAP. Under US GAAP, goodwill is not amortised over its useful life; instead, it is tested for impairment on an annual basis and whenever indicators of impairment arise. As is the case under UK GAAP, goodwill impairment reviews are an area requiring our judgement, requiring assessment as to whether the carrying value of goodwill can be supported by the net present value of future cash flows derived from assets using cash

flow projections, and discounting using an appropriate rate (see note 28 of the Consolidated Financial Statements included within Item 18 for further details).

Revenues and bad debt provisions

The main source of our revenue is revenue from subscribers. Revenues from the provision of DTH subscription services are charged to contract customers on a monthly basis. Revenues are invoiced and recorded as part of a periodic billing cycle, and are recognised as the services are provided. Pay-per-view revenue is recognised when the event, movie or football match is viewed. Cable revenue is recognised as the services are provided to the cable companies and is based on the number of subscribers taking the Sky Channels, as reported to us by the cable companies, and the applicable wholesale prices. The overriding principle followed is to recognise revenues in line with the provision of service, and accordingly, this leaves little scope for subjectivity. In fiscal 2004, subscription revenues from DTH subscribers and cable companies comprised 79% of total turnover (2003: 80%; 2002: 80% (including revenues from DTT subscribers)).

Management judgement is required in evaluating customer debts to determine if they will be collected. This evaluation requires estimates to be made, and a provision is made for those amounts which we determine are unlikely to be recovered. Currently, our provision is partly based upon the historical trends in the percentage of total subscriber debts which are not recovered. As DTH subscriber revenues are billed in advance and corrective action is taken early within the billing cycle, bad debts are a relatively low percentage of sales. Additionally, more detailed reviews are carried out in respect of more significant balances, which include cable subscriber revenues, whereby specific provisions are made where deemed appropriate.

The remaining 21% of turnover (2003: 20%; 2002: 20%) is comprised of advertising, interactive and other revenues. Recognition of these revenues takes place once the advertising is broadcast, or when the relevant goods or services have been delivered or provided. Betting revenues, which are included in interactive revenues, represent amounts receivable in respect of bets placed on events which occur in the year and net customer losses in the year in respect of the on-line casino operations.

Under UK GAAP, betting costs from internet casino betting are offset against betting revenues within “turnover”, and costs from all other betting are shown within “operating expenses, net”. Our treatment under US GAAP of costs from betting, aside from internet casino betting, differs from that under UK GAAP (see note 28 of the Consolidated Financial Statements included within Item 18 for further details).

In prior years, there have been differences between UK GAAP and US GAAP with respect to revenue recognition for installation fees, set-top boxes and related equipment revenues received by us (net of any discount given) when a set-top box was installed and a subscriber was connected to the Sky digital service. Under UK GAAP, these revenues are recognised on the successful completion of the installation of the set-top box, together with any associated costs such as set-top box costs, smartcard costs and installation costs. The treatment of installation fees under US GAAP has changed in the current year due to the implementation of EITF 00-21, “Revenue Arrangements with Multiple Deliverables”; see note 28 of the Consolidated Financial Statements included within Item 18 for further details.

Tangible fixed assets

Tangible fixed assets represented 16% of our total assets (2003: 17%). Tangible fixed assets are stated at cost, net of accumulated depreciation and any provision for impairment. Our depreciation policy in respect of tangible fixed assets is disclosed in note 1 of the Consolidated Financial Statements included within Item 18. We estimate the useful life of these assets based on their periods of expected use and this estimation is judgemental. We review the period of expected use on a regular basis. We begin amortisation of these assets when they become available for use. Tangible fixed asset impairment reviews are also an area requiring our judgement in determining whether the carrying value of our tangible fixed assets can be supported by the net present value of future cash flows derived from the tangible fixed asset using cash flow projections, and discounting using an appropriate rate. We perform impairment reviews if events or

circumstances indicate that the carrying value of tangible fixed assets may not be recoverable. There have been no material impairments in the current year.

Financial Reporting Standard No. 15, “Tangible Fixed Assets”, specifies criteria for the recognition of tangible fixed assets, including a detailed definition of costs that are capitalised in relation to self-constructed assets. As at 30 June 2004, £152 million (2003: £121 million) of costs associated with our CRM project were capitalised on the balance sheet, some of which relate to assets which continue to be under construction. Capitalised costs include technology hardware and software assets, site preparation and development costs, and associated consultancy expenditures. All of the CRM project costs capitalised during the year are associated with the CRM systems (2003: approximately 90%). These costs are being depreciated over three years for software and four years for hardware. The only difference between UK GAAP and US GAAP relates to the capitalisation of interest costs on funds invested in the construction of major capital assets (see note 28 of the Consolidated Financial Statements included within Item 18 for further details).

Amortisation of programme stock

A significant proportion of programming costs relates to the amortisation of television programme rights. Programming costs constituted 54% of operating expenses in the period (2003: 55%; 2002: 53%). Our investments in television programme rights are amortised over the planned number of showings according to the type of programme right, with the exception of movie rights and certain sports rights, which are discussed below. The amortisation methods used are based on programme genre, for example, general entertainment programmes, and have been based on the repeatability and value to us of showing the programme. This basis is regularly reviewed. The principle followed is to match the benefit received from the showing of the programme to the cost of the programme rights. Acquired movie rights are amortised on a straight-line basis over the period of the transmission rights, although where acquired movie rights provide for a second availability window, 10% of the cost is allocated to that window. Our own in-house movie productions are amortised in line with anticipated revenue over a maximum of five years. Where contracts for sports rights provide for multiple seasons or competitions, the amortisation of each contract is based on anticipated revenue. Provisions are made for any programme rights which are surplus to our requirements or will not be shown for any other reason. During fiscal 2004, a review of programme stock balances resulted in the acceleration of certain amortisation charges totalling £28 million. There is no difference in the Group’s treatment of amortisation of programme stock between UK GAAP and US GAAP.

Deferred tax

We recognise deferred tax assets and liabilities in respect of timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at the balance sheet date. Deferred tax liabilities existing at the balance sheet date are provided for in full at expected future tax rates. Deferred tax assets are recognised when, on the basis of all available evidence, it is regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted.

We regularly review our deferred tax assets for recoverability and the expected reversals of existing timing differences. If our ability to generate sufficient future taxable income changes, or if there is a material change in the actual tax rates or time period within which the underlying timing differences become taxable or deductible, we could be required either to write down our deferred tax assets further, resulting in an increase in our effective tax rate and an adverse impact on our financial results, or recognise additional deferred tax assets, resulting in a decrease in our effective tax rate and a positive impact on our financial results.

Included within the total deferred tax asset recognised at 30 June 2004 is £118 million (2003: £146 million), relating to carried forward tax losses. Following a review of the forecast utilisation of tax losses within the Group, and as a consequence of the reorganisation of certain assets within the Group,

the Directors consider that at 30 June 2004 there was sufficient evidence to support the recognition of this deferred tax asset on the basis that it was more likely than not that there would be suitable taxable profits against which this asset could be utilised.

Included within the total deferred tax asset recognised at 30 June 2004, is £21 million (2003: £28 million) of accelerated capital allowances (“ACAs”) and £12 million (2003: £16 million) of short-term timing differences (“STTDs”), which relate to accruals for share-based remuneration, interest capitalised and transponder prepayments. Following a review of the ACAs and the STTDs, the Directors consider that at 30 June 2004 there was sufficient evidence to support the recognition of these deferred tax assets, on the basis that it was more likely than not that there would be suitable taxable profits against which these assets could be utilised and that the ACAs and STTDs are expected to fully reverse.

The treatment of deferred tax under US GAAP differs from that under UK GAAP (see note 28 of the Consolidated Financial Statements included within Item 18 for further details).

Exceptional items

Operating exceptional items are those that, in management’s judgement, are items that arise from events or transactions that fall within the ordinary activities of the Group but which individually or, if of a similar type, in aggregate, need to be disclosed separately because of their size or incidence if the financial statements are to properly reflect the results for the period. These items are included in the line of the profit and loss account to which they relate, but are disclosed in a separate column to provide the reader with a better understanding of the ongoing performance of the business.

The determination of which items should be separately disclosed as operating exceptional items requires a degree of judgement based on the materiality and nature of the items.

Exceptional items which must be described as non-operating exceptional items are defined by UK GAAP, although management judgement is required in determining whether any such items are material enough individually, or if of a similar type, in aggregate, to warrant separate disclosure. These items are included below operating profit in the profit and loss account, within the same separate column as the operating exceptional items.

The treatment of exceptional items under US GAAP differs from that under UK GAAP (see note 28 of the Consolidated Financial Statements included within Item 18 for further details).

ADOPTION OF NEW ACCOUNTING STANDARDS

In fiscal 2004, the following UK GAAP accounting standard came into force and was adopted by us:

UITF abstract 38 — Accounting for ESOP trusts

This abstract requires that the Company’s shares held by the Group’s ESOP, which were previously held within fixed asset investments, be presented as a deduction from shareholders’ funds. In addition, the charge to the profit and loss account in relation to awards under the Long-Term Incentive Plan (“LTIP”), the Key Contributor Plan (“KCP”) and the Equity Bonus Plan (“EBP”), which was previously based on the cost of shares held by the ESOP, is now based on the difference between the market price on the date of grant and the exercise price. The adoption of UITF 38 has been treated as a prior year adjustment with comparative figures being restated accordingly. See note 1 of the Consolidated Financial Statements included within Item 18 for further details.

No new UK GAAP accounting standards were adopted during fiscal 2003 or fiscal 2002.

Details of new US GAAP accounting standards issued during the year are given in note 28 of the Consolidated Financial Statements included within Item 18.

Adoption of International Financial Reporting Standards (“IFRS”)

Following a Regulation issued by the Council of the European Union, the Group, along with all European Union listed groups, is required to adopt IFRS in the preparation of its consolidated financial statements from 1 July 2005. The adoption of these standards will lead to significant changes in the Group’s accounting policies, results, presentation of its financial statements, and other disclosures within the Annual Report on Form 20-F, which are currently in accordance with UK GAAP.

In 2003, the Group established an IFRS transition steering committee, comprising the Chief Financial Officer, senior finance management and an independent adviser. The Committee is responsible for monitoring the progress of a dedicated transition working group, for decision-making, and for reporting to the Audit Committee in relation to the transition. The working group is undertaking an extensive analysis of the impact of IFRS across the Group, with the objective of ensuring full compliance with IFRS by 1 July 2005. Implementation plans are in progress to modify procedures, systems and controls as necessary. Training of the Group’s finance function in IFRS commenced in 2004, and the Group has been active in responding to public consultation documents issued by bodies including the International Accounting Standards Board (“IASB”), the Accounting Standards Board and the Securities and Exchange Commission on issues relating to the mandatory transition of European listed groups to IFRS.

Several uncertainties remain which affect the Group’s ability to assess the impact of IFRS, including whether the IASB and other related bodies will issue new or revised standards which will either be mandatory for the Group’s 30 June 2006 financial statements, or which the Group could adopt early voluntarily. However, based on the Group’s initial assessment, the key changes to the Group’s accounting policies as a result of the adoption of IFRS are expected to be in the following areas:


	*Intangible assets*

IAS 38 “Intangible assets” provides more detailed guidance on intangible assets than UK GAAP, which may result in the reclassification of certain costs into intangible assets, including software development costs which are currently included within tangible fixed assets within the Group’s balance sheet.


	*Financial instruments and hedge accounting*

The Group uses cross-currency and interest rate swaps and swaptions, and forward purchases of US dollars and Swiss francs to hedge its foreign currency and interest rate exposures. Under UK GAAP, these financial instruments are not recognised on the balance sheet, however, under IFRS, the Group will be required to recognise its derivative financial instruments on the balance sheet at fair value, with changes in fair value being recognised in the profit and loss account. Where hedge accounting is achieved under IAS 39 “Financial Instruments — Recognition and Measurement” (“IAS 39”), the profit and loss impact of the changes in fair value may be postponed and matched to the profit and loss impact of the underlying hedged exposure. The Group does not see a requirement to change its current hedging policy as a result of the new requirements for achieving hedge accounting under IAS 39 and expects to be able to achieve hedge accounting for the majority of its financial instruments.


	*Share-based payments*

Under current UK GAAP, the Group recognises a charge in the profit and loss account for its LTIP, EBP and KCP schemes based on the difference between the exercise price of the award and the price of a BSkyB share on the date of grant (the “intrinsic value”). Under IFRS 2 “Share-based Payment”, the Group will be required to recognise a charge in the profit and loss account for all share options and awards based on the fair value of the awards as calculated at the grant date using an option-pricing model. This will introduce an additional cost for the Group, as Executive Scheme options, which have an intrinsic value of nil, and Sharesave scheme options, which are specifically exempt from the scope of current UK GAAP accounting, will have a fair value attached to them, and hence an associated profit and loss account charge under IFRS.


	*Goodwill*

Under UK GAAP, the Group amortises goodwill on a straight-line basis over periods of up to 20 years. Under IFRS 3 “Business Combinations”, goodwill will no longer be amortised and will instead be subject to annual impairment testing. This will remove the cost of goodwill amortisation from the Group’s profit and loss account, although impairment losses, if identified, would be recorded in the profit and loss account.

This list should not be taken as a comprehensive or complete indication of the impacts that the adoption of IFRS may have on the Group’s financial statements, but is indicative of the major adjustments to its financial reporting that the Group has identified to date.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

Our Directors are as follows:


Name	Age		Position with the Company

Chase Carey		50	*Director
Jeremy Darroch		42	Director (Chief Financial Officer)⁽ⁱ⁾
David DeVoe		57	*Director
David Evans		64	**Director
Nicholas Ferguson		56	**Director⁽ⁱⁱ⁾
Andy Higginson		47	**Director⁽ⁱⁱⁱ⁾
Allan Leighton		51	**Director (Audit Committee Chairman)
James Murdoch		31	Director (Chief Executive Officer)^(iv)
Rupert Murdoch		73	*Chairman
Jacques Nasser		56	**Director (Remuneration Committee Chairman)
Gail Rebuck		52	**Director
Lord Rothschild		68	**Director (Deputy Chairman & Senior Independent Non-Executive Director)^(v)
Arthur Siskind		66	*Director
Lord St John of Fawsley		75	*Director
Lord Wilson of Dinton		62	**Director (Corporate Governance & Nominations Committee Chairman)


*	Non-Executive

**	Independent Non-Executive

(i)	Jeremy Darroch was appointed as Chief Financial Officer (“CFO”) of the Company with effect from 16 August 2004, following Martin Stewart’s resignation from the Board of the Company on 4 August 2004.

(ii)	Nicholas Ferguson was appointed as a Director of the Company on 15 June 2004.

(iii)	Andy Higginson was appointed as a Director of the Company on 1 September 2004.

(iv)	James Murdoch was appointed as Chief Executive Officer (“CEO”) of the Company on 4 November 2003.

(v)	Lord Rothschild was appointed a Director of the Company on 17 November 2003.

Our senior executives (“Senior Executives”) who are not members of the Board of Directors are as follows:


Name	Age		Position with the Company

Dawn Airey		43	Managing Director, Sky Networks
James Conyers		40	Head of Legal and Business Affairs
Beryl Cook		43	Director for People and Organisational Development
Mike Darcey		39	Director of Strategy
Julian Eccles		46	Director of Corporate Communications and Corporate Affairs
Jon Florsheim		44	Managing Director, Sales, Marketing and Interactive
Richard Freudenstein		39	Chief Operating Officer
David Gormley		41	Company Secretary
Nick Milligan		43	Managing Director, Sky Media
Simon Post		39	Group IT and Strategy Director
Michael Rhodes		40	Head of Regulatory Affairs
Vic Wakeling		61	Managing Director, Sky Sports
Alun Webber		38	Group Director of Engineering and Platform Technology

None of the Senior Executives listed above, who are not members of the Board of Directors, holds more than 1% of the issued share capital in the Company.

Further information with respect to the Directors and Senior Executives is set forth below.

Board of Directors

Chase Carey was appointed as a Director of the Company on 13 February 2003. Mr Carey has been a Non-Executive Director of The News Corporation Limited (“News Corporation”) since 2002 and was an Executive Director from 1996 until 2002. Mr Carey has been named President and CEO of The Direct TV Group, Inc (“DIRECTV”) and serves on the Boards of Gateway, Inc. and Colgate University. Mr Carey previously served as Co-Chief Operating Officer of News Corporation and as a Director and Co-Chief Operating Officer of Fox Entertainment Group (“FEG”). Mr Carey has also held the positions of Chairman and CEO of Fox Television, Director of Star Group Limited (“STAR”), Director of NDS Group plc (“NDS”) and Director of Gemstar-TV Guide International, Inc (“Gemstar”).

Jeremy Darroch joined the Company as CFO, replacing Martin Stewart with effect from 16 August 2004. Mr Darroch joined Dixons Group plc (“Dixons”) in January 2000 as Retail Finance Director, rising to the position of Group Finance Director in February 2002. Prior to Dixons, Mr Darroch spent twelve years at Procter & Gamble in a variety of roles in the UK and Europe, latterly as European Finance Director for their healthcare businesses.

David DeVoe was appointed as a Director of the Company on 15 December 1994. Mr DeVoe has been an Executive Director of News Corporation since October 1990, Senior Executive Vice President of News Corporation since January 1996, CFO and Finance Director of News Corporation since October 1990 and Deputy Finance Director from May 1985 to September 1990, Director of News America International (“NAI”) since January 1991, and a Director of STAR since July 1993. Mr DeVoe has also been a Director of FEG since 1991 and a Senior Executive Vice President and CFO since August 1998. Mr DeVoe has been a Director of NDS since 1996 and a Director of Gemstar since June 2001.

David Evans was appointed as a Director of the Company on 21 September 2001. Mr Evans is President and CEO of Crown Media Holdings, Inc (“Crown”). Mr Evans was previously President and CEO of Crown’s predecessor, Hallmark Entertainment Networks, from 1 March 1999. Prior to that, Mr Evans was President and CEO of Tele-Communications International, Inc. (“TINTA”) from January 1998. Mr Evans joined TINTA in September 1997 as its President and Chief Operating Officer, overseeing the day-to-day operations of the Company. Prior to joining TINTA, from July 1996, Mr Evans was Executive

Vice President of News Corporation and President and CEO of Sky Entertainment Services Latin America, LLC.

Nicholas Ferguson was appointed as a Director of the Company on 15 June 2004. Mr Ferguson is CEO of SVG Capital, a publicly-quoted private equity group, and Chairman of SVG Advisers Limited and was formerly Chairman of Schroder Ventures. He is also Chairman of the Courtauld Institute of Art.

Andy Higginson was appointed as a Director of the Company on 1 September 2004. Mr Higginson is Finance and Strategy Director of Tesco plc (“Tesco”). Mr Higginson was appointed to the Board of Tesco in 1997, having previously been the Group Finance Director of the Burton Group PLC. Mr Higginson is a member of the 100 Group of Finance Directors, Chairman of Tesco Personal Finance and a Non-Executive Director of C&J Clark Limited.

Allan Leighton was appointed as a Director of the Company on 15 October 1999. Mr Leighton joined ASDA Stores Limited as Group Marketing Director in March 1992. In September 1996 he was appointed Chief Executive and in November 1999 he was appointed President and CEO of Wal-Mart Europe. Mr Leighton resigned all of these positions in September 2000. Mr Leighton is Non-Executive Chairman of BHS Limited, Lastminute.com plc, Royal Mail Group plc and Health Club Investments Group Limited (parent of Cannons Group Limited). Mr Leighton is a Non-Executive Director of Dyson Limited, George Weston Limited and Selfridges & Co Limited.

James Murdoch was appointed as a Director of the Company on 13 February 2003 and CEO with effect from 4 November 2003. Until Mr Murdoch’s appointment as CEO, he was Chairman and CEO of STAR from May 2000. With effect from 4 November 2003, Mr Murdoch resigned as Executive Vice President of News Corporation and as a member of News Corporation’s Board of Directors and Executive Committee and from the Board of NDS. Mr Murdoch serves on the Board of YankeeNets and the Board of Trustees of the Harvard Lampoon. Mr Murdoch attended Harvard University. James Murdoch is the son of Rupert Murdoch.

Rupert Murdoch was appointed as a Director of the Company in November 1990, when he founded British Sky Broadcasting, and was appointed Chairman in June 1999. Mr Murdoch has been a Managing Director and Chief Executive of News Corporation since 1979 and Chairman since 1991. Mr Murdoch has also served as a Director of FEG and its predecessor companies since 1985, Chairman since 1992 and CEO since 1995. In addition, Mr Murdoch has been a Director of STAR since 1993, Gemstar since 2001, and DIRECTV since 2003. Rupert Murdoch is the father of James Murdoch.

Jacques Nasser was appointed as a Director of the Company on 8 November 2002. Mr Nasser is a Senior Partner of One Equity Partners. In addition, Mr Nasser is Chairman of Polaroid Corporation, and he serves on the Board of Directors of Quintiles Transnational Corporation, Brambles Industries and the International Advisory Board of Allianz A.G. Mr Nasser served as a Member of the Board of Directors, and as President and CEO of Ford Motor Company from 1998 to 2001. Mr Nasser has received an honorary Doctorate of Technology and graduated in Business from the Royal Institute of Melbourne. Because of Mr Nasser’s significant contributions to the wellbeing of humanity to the country of Lebanon, he has received the Order of the Cedar. In recognition of Mr Nasser’s work for Australian industry, as an adviser to government, and for education in the area of technology, he has been awarded an Order of Australia and a Centenary Medal.

Gail Rebuck was appointed as a Director of the Company on 8 November 2002. Ms Rebuck is Chairman and Chief Executive of The Random House Group Limited, the UK’s largest trade publishing company. In 1982, Ms Rebuck became a founder Director of Century Publishing (“Century”). Century merged with Hutchinson in 1985 and in 1989 Century Hutchinson was acquired by Random House Inc. In 1991, Ms Rebuck was appointed Chairman and Chief Executive of The Random House Group Limited. Ms Rebuck was a Trustee of the Institute for Public Policy Research from 1993 to 2003 and was for three years a member of the Government’s Creative Industries Task Force. Ms Rebuck is on the Board of The Work Foundation, a member of the Court of the University of Sussex, on the Advisory Board of the Cambridge

Judge Institute, and the Council of the Royal College of Art. Ms Rebuck was awarded a Commander of the British Empire in the 2000 New Year’s Honours List.

Lord Rothschild was appointed as a Director, Deputy Chairman and Senior Independent Non-Executive Director of the Company on 17 November 2003. Lord Rothschild is Chairman of RIT Capital Partners Inc and Five Arrows Limited, and co-founded Global Asset Management, which is now part of UBS, and J Rothschild Assurance, which is now part of St James’ Place Capital. From university Lord Rothschild joined the family bank, N.M. Rothschild & Sons, and subsequently ran the corporate finance department and became Chairman of the executive committee, before leaving N.M. Rothschild & Sons in 1980 to develop Rothschild Investment Trust and his interests in the financial sector. Lord Rothschild attended Oxford University and, in addition to his career in the world of finance, he has been involved in philanthropy and public service.

Arthur Siskind was appointed as a Director of the Company on 19 November 1991. Mr Siskind has been a Senior Executive Vice President of News Corporation since January 1996 and an Executive Director and Group General Counsel of News Corporation since 1991. Mr Siskind was an Executive Vice President of News Corporation from February 1991 until January 1996. Mr Siskind has been a Director of NAI since 1991, a Director of STAR since 1993, a Director of NDS since 1996 and Senior Executive Vice President, General Counsel and a Director of FEG since August 1998. Mr Siskind has been a member of the Bar of the State of New York since 1962.

Lord St John of Fawsley was appointed as a Director of the Company on 20 November 1991. Lord St John was a Director of the N.M. Rothschild Trust from 1990 to 1998. Lord St John is Chairman of the Royal Fine Art Commission Trust and was Chairman of the Royal Fine Art Commission from 1985 to 2000. Lord St John is a member of the Privy Council and holds the Order of Merit of the Italian Republic. Lord St John has held the offices of Minister of State for Education, Minister of State for the Arts, Leader of the House of Commons and Chancellor of the Duchy of Lancaster. Lord St John has also been Master of Emmanuel College, Cambridge. Lord St John is a regular commentator on television and radio.

Lord Wilson of Dinton was appointed as a Director of the Company on 13 February 2003. He has been a Non-Executive Director of Xansa plc since April 2003. Lord Wilson entered the Civil Service as an assistant principal in the Board of Trade in 1966. Lord Wilson subsequently served in a number of departments, including twelve years in the Department of Energy, where his responsibilities included nuclear power policy, the privatisation of Britoil, personnel and finance. Lord Wilson headed the Economic Secretariat in the Cabinet Office under Mrs Thatcher from 1987 to 1990 and, after two years in the Treasury, was appointed Permanent Secretary of the Department of the Environment in 1992. Lord Wilson became Permanent Under Secretary of the Home Office in 1994 and Secretary of the Cabinet and Head of the Home Civil Service in January 1998. Since his retirement in September 2002, Lord Wilson has been Master of Emmanuel College, Cambridge. Lord Wilson was made a peer in November 2002.

Alternate Directors

A Director may appoint any other Director or any other person to act as his Alternate. An Alternate Director shall be entitled to receive notice of and attend meetings of the Directors and Committees of Directors of which his appointer is a member and not able to attend. The Alternate Director shall be entitled to vote at such meetings and generally perform all the functions of his appointer as a Director in his absence.

On the resignation of the appointer for any reason the Alternate Director shall cease to be an Alternate Director. The appointer may also remove his Alternate Director by notice to the Company Secretary signed by the appointer making or revoking the appointment. An Alternate Director shall not be entitled to fees for his service as an Alternate Director.

Rupert Murdoch, David DeVoe, Arthur Siskind and Chase Carey have appointed each of the others to act as their Alternate Director and, in addition, each has appointed Leslie Hinton to act as his Alternate Director.

David Evans has appointed Allan Leighton as his Alternate Director.

Senior Executives

Our Senior Executives who are not members of the Board of Directors or Alternate Directors are as follows:

Dawn Airey joined us in January 2003 as Managing Director of Sky Networks. She is responsible for all wholly-owned Sky Channels (with the exception of Sky Sports) and is also responsible for Sky Media (airtime sales).

James Conyers joined us in April 1993 as Assistant Solicitor. During 1998 he was appointed as our Deputy Head of Legal and Business Affairs and in January 2004 he was appointed as our Head of Legal and Business Affairs.

Beryl Cook joined us in April 2004 as our Director for People and Organisational Development.

Mike Darcey joined us in February 1998 as our Head of Strategic Planning and has served as our Director of Strategy since July 2002.

Julian Eccles joined us in March 2000 as our Director of Communications and Corporate Affairs.

Jon Florsheim joined us in April 1994 as Marketing Director, Direct to Home and in October 1998, he was appointed Director of Distribution and Marketing. In August 2000, Mr Florsheim was appointed as Managing Director, Sales, Marketing and Interactive.

Richard Freudenstein joined us in October 1999 as General Manager and was appointed as Chief Operating Officer in October 2000.

David Gormley joined us in March 1995 as Assistant Company Secretary and was appointed as Group Company Secretary in November 1997.

Nick Milligan joined us in June 2004 as Managing Director of Sky Media.

Simon Post joined us in April 2002 as Group IT and Strategy Director and is responsible for Sky’s IT platform and technical strategy. He will be leaving the Company in January 2005. The Company’s management is taking appropriate action to ensure that this will not adversely affect the implementation of the new customer relationship management systems.

Michael Rhodes joined us in February 1998 as our Head of Regulatory Affairs.

Vic Wakeling joined us in 1991 as Head of Football, taking over as Head of Sport in January 1994. In August 1998, he was appointed Managing Director of Sky Sports.

Alun Webber joined us in 1995 and was part of the core team which launched Sky Digital, and established the Sky Interactive venture. In April 2002, he was appointed Group Director of Engineering and Platform Technology.

Except as set forth above, there is no arrangement or understanding between any of the above listed persons and any other person pursuant to which he or she was elected as a Director or executive officer.

EMPLOYEES

The average monthly number of full time equivalent persons (including temporary employees) employed by us during the previous three fiscal years was as follows:


	2004		2003		2002

Programming		1,295		1,106		1,131
Transmission and related functions		1,394		1,383		1,274
Marketing		209		199		193
Subscriber management		5,418		5,381		5,432
Administration		1,051		954		965
Betting		133		109		88

		9,500		9,132		9,083

There were approximately 385 temporary staff included within the average number of full time equivalent people employed by the Group during the 2004 fiscal year.

CORPORATE GOVERNANCE

In November 2003, the Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (“NYSE”) new corporate governance listing standards. The Company, as a foreign issuer with American Depositary Shares listed on the NYSE, is obliged to disclose any significant ways in which its corporate governance practices differ from these standards. However, the Company must comply fully with the provisions of the listing standards which relate to the composition, responsibilities and operation of audit committees. These provisions incorporate the rules concerning audit committees implemented by the SEC under the US Sarbanes-Oxley Act of 2002.

The Company has reviewed the NYSE’s new listing standards and believes that its corporate governance practices are generally consistent with the standards, with the following exception. The standards state that companies must have a nominating/corporate governance committee composed entirely of independent directors. The Company’s Corporate Governance & Nominations Committee is made up of a majority of Independent Non-Executive Directors.

In July 2003, the United Kingdom’s Financial Services Authority issued the revised code on Corporate Governance (the “Combined Code”). The Combined Code applies to companies listed on the London Stock Exchange for reporting years beginning on or after 1 November 2003, and therefore in relation to the Company from the financial year ending 30 June 2005. Accordingly, this report explains the Company’s compliance during the financial year ending 30 June 2004 with the provisions set out in Section 1 of the Combined Code on Corporate Governance issued by the Hampel Committee in June 1998 (the “Hampel Code”) and the changes made as a result of the Board’s corporate governance review announced on 15 June 2004.

The Company is committed to high standards of corporate governance and, except as noted below, has complied throughout the year with the best practice provisions of the Hampel Code.

THE BOARD

The Board currently comprises fifteen Directors, made up of the CEO and CFO (the “Executive Directors”) and thirteen Non-Executive Directors, nine of whom were determined to be independent under the provisions of the Hampel Code and the NYSE’s new corporate governance listing standards (“NYSE’s rules”) and eight under the provisions of the Combined Code. The Non-Executive Directors of the Company bring a wide range of experience and expertise to the Company’s affairs, and they carry significant weight in the Board’s decisions.

The roles of the Chairman and CEO are separate and have been since the Company obtained its listing in 1994. Lord St John of Fawsley held the position of Senior Independent Non-Executive Director of the Company until 17 November 2003, when he was replaced in this position by Lord Rothschild.

BOARD PRACTICES

The Board is scheduled to meet at least six times a year to review appropriate strategic, operational and financial matters as required. A schedule of matters reserved for the full Board’s approval is in place, which includes, inter alia, the approval of annual and interim results, dividend policy, and significant transactions, agreements or arrangements between the Group and related parties, including members of The News Corporation Limited group (“News Corporation group”).

The Board has also delegated specific responsibilities to Board Committees, notably the Audit, Remuneration and Corporate Governance & Nominations Committees, as set out below. Directors receive Board and Committee papers several days in advance of Board and Committee meetings and also have access to the advice and services of the Company Secretary. In addition, the Board members have access to external professional advice at the Company’s expense. Non-Executive Directors serve for an initial term of three years, subject to election by shareholders following appointment, subsequent re-election by shareholders, and Companies Act provisions relating to the removal of directors. In addition, reappointment for a further term is not automatic, but may be mutually agreed. All of the Directors are required to retire and offer themselves for re-election at least once in every three years.

A committee of senior management generally meets on a weekly basis to allow prompt decision making and discussion of relevant business issues. It is chaired by the CEO and comprises the CFO and other Senior Executives from within the Group.

Board Committees

Remuneration Committee

The Remuneration Committee, on behalf of the Board, is responsible for reviewing and recommending to the Board the key terms of employment (including without limitation the remuneration package (in all its forms)), and any changes thereto and any termination, settlement or compromise package or similar, of any Executive Director or any Senior Executive employed by the Group who reports directly to the CEO. The Remuneration Committee has clearly defined terms of reference, meets at least twice a year, and takes advice from the CEO and independent consultants as appropriate in carrying out its work. The Remuneration Committee currently comprises three Independent Non-Executive Directors. Rupert Murdoch and David DeVoe have a standing invitation to attend meetings of the Remuneration Committee as observers in a non-voting capacity.

The Board noted that, for the majority of the 2004 fiscal year, the composition of the Remuneration Committee did not comply with the Hampel Code, which states that all members of the Remuneration Committee must be Independent Non-Executive Directors. The Board considered that David DeVoe and Rupert Murdoch, along with the other members of the Remuneration Committee, provided a valuable contribution to the Remuneration Committee. Rupert Murdoch did not participate in any Remuneration Committee discussions concerning the negotiation of James Murdoch’s service agreement with the Company. On 15 June 2004, Rupert Murdoch and David DeVoe resigned as members of the Remuneration Committee and Nicholas Ferguson was appointed as a member. The members of the Remuneration Committee are Jacques Nasser (Chairman), David Evans and Nicholas Ferguson, all of whom are Independent Non-Executive Directors, in compliance with the Combined Code.

Audit Committee

The Audit Committee, which consists exclusively of Non-Executive Directors, has clearly defined terms of reference as laid out by the Board. Philip Bowman, who had been Chairman of the Audit Committee since March 1995, resigned as a Director and consequently as a member of the Audit Committee on

14 November 2003. Following Philip Bowman’s resignation, the composition of the Audit Committee did not comply with the provisions of the Hampel Code, which states that there must be a majority of Independent Non-Executive Directors on the Audit Committee. On Philip Bowman’s resignation, the Board started a process to recruit a further Independent Non-Executive Director with sufficient financial experience to replace Philip Bowman. Andy Higginson joined the Board on 1 September 2004, and became a member of the Audit Committee, as of that date. On 15 June 2004, David DeVoe and Arthur Siskind resigned from the Audit Committee. The members of the Audit Committee are currently Allan Leighton (Chairman), Gail Rebuck and Andy Higginson. The composition of the Audit Committee now complies with the Combined Code, which requires there to be a minimum of three Directors on the Audit Committee, the majority of whom have to be independent. David DeVoe and Arthur Siskind have a standing invitation to attend meetings of the Audit Committee as observers in a non-voting capacity.

The Audit Committee meets at least five times a year. Its duties include making recommendations to the Board in relation to the appointment, reappointment and removal of the external auditors, and discussing with the external auditors the nature, scope and fees for the external auditors’ work. The Audit Committee reviews, and recommends to the Board the approval of or any amendment to, the quarterly, half year and annual financial statements of the Group, and also reviews the Company’s Annual Report on Form 20-F prior to its filing, the Group’s significant accounting principles, systems of internal control, treasury policies and the audit plans and findings of the Group’s internal audit function. The Audit Committee also monitors the Group’s whistleblowing policy and is responsible for approving all services including non-audit services provided by Deloitte & Touche LLP. The Audit Committee has the power to seek external advice as and when required.

News UK Nominees Limited, a subsidiary of News Corporation, is a major shareholder in the Group, holding over 35.3% of the issued share capital. The Audit Committee receives, on a quarterly basis, a schedule of all transactions between companies within the News Corporation group and the Group and any other related party transactions, showing cumulatively all transactions which have been entered into during the year, and which exceed £100,000 in value.

Furthermore, Audit Committee approval is required for the entering into by the Group of a commitment or arrangement (or any series of related commitments or arrangements) with News Corporation or any of its subsidiaries, or any other related party which involves or could reasonably involve the payment or receipt by the Group of amounts equal to or in excess of £10 million, but not exceeding £25 million in aggregate value. Any transaction in excess of £25 million in aggregate value must be submitted to the Audit Committee and, if approved by the Audit Committee, it must also be submitted to the Board for approval.

Corporate Governance & Nominations Committee

On 15 June 2004, the Nominations Committee was merged with the Corporate Governance Committee to become the Corporate Governance & Nominations Committee. The Committee is chaired by Lord Wilson of Dinton and its other members are Lord Rothschild and Arthur Siskind. Lord St John of Fawsley stepped down from the Committee on 15 June 2004 and John Thornton resigned from the then Nominations Committee following his resignation as a Director of the Company on 11 May 2004.

During the fiscal year, the following processes were followed by the Corporate Governance & Nominations Committee in its nomination of Directors to the Board.

On 23 September 2003, the Company announced that Tony Ball, then CEO of the Group, would not be renewing his service agreement on its expiry on 31 May 2004. The Nominations Committee, then chaired by Lord St John of Fawsley, was tasked by the Board to find a suitable replacement for Tony Ball. Gail Rebuck and Allan Leighton were asked to assist the Nominations Committee in this process. An Executive Search Consultant, Spencer Stuart, was retained by the Nominations Committee to aid in the search process. An extensive list of candidates was put together by Spencer Stuart, which was then reduced to a shortlist, all of whom were interviewed by all members of the Board involved in the process. This resulted in the Nominations Committee unanimously recommending to the Board the appointment of James Murdoch as CEO.

During this period, the Nominations Committee met with various shareholders and shareholder bodies to advise them on the selection process. As a result of the comments received from those shareholders, the Nominations Committee considered it appropriate to nominate a further senior figure to the Board and recommended the appointment of Lord Rothschild, who was nominated to the Board and appointed as Deputy Chairman and Senior Independent Non-Executive Director on 17 November 2003.

During the fiscal year, the Nominations Committee also commenced searches to find replacements for Philip Bowman and John Thornton, who resigned during the course of the year. Spencer Stuart were again asked to assist in the process and a number of candidates were identified. The Nominations Committee was assisted in this search by Allan Leighton, Gail Rebuck, Lord Wilson of Dinton, Lord Rothschild and Arthur Siskind. The Nominations Committee was mindful of appointing a Director with relevant financial experience who could also be appointed as a member of the Audit Committee and a further Independent Non-Executive Director. As a result, the Nominations Committee identified and unanimously recommended to the Board the appointment of Andy Higginson and Nicholas Ferguson as additional Independent Non-Executive Directors.

Corporate Governance Review

On 14 November 2003, the Company announced that it had formed an ad-hoc Committee of the Board (the “Corporate Governance Committee”) to review all of the relevant codes and statutory obligations and to identify any appropriate changes to make to the processes of the Board and the composition of its Committees. The Corporate Governance Committee members comprised Lord Wilson of Dinton as Chairman, Lord Rothschild and Arthur Siskind.

The Corporate Governance Committee’s approach was to undertake an analysis of the Combined Code, as well as the relevant SEC and NYSE rules applicable to the Company, and to identify where the Company’s own structure and practices varied from them. The Corporate Governance Committee sought to bring the Company’s structure and practices into line with all the rules with which the Company will be bound to comply, including the provisions of the Combined Code.

The Corporate Governance Committee recommended to the Board the adoption of all of the Combined Code’s provisions. In the case of code provision A.7.2, which requires that directors who have been serving on a Board for more than nine years should retire and stand for re-election at each Annual General Meeting, the Corporate Governance Committee recommended that this provision should apply only from expiry of the current term of office that each Director is serving as approved by shareholders in general meeting.

The Corporate Governance Committee also recommended that the composition of the Board’s Committees should comply with the relevant provisions of the Combined Code and recommended changes to the composition of the Audit and Remuneration Committees as discussed above in the “Remuneration Committee” and “Audit Committee” sections. Furthermore, it recommended that the Corporate Governance Committee should be merged with the Nominations Committee to form the Corporate Governance & Nominations Committee. These changes ensure that going forward, the composition of the Audit, Remuneration and Corporate Governance & Nominations Committees comply with the provisions of the Combined Code.

The Corporate Governance Committee recommended that David DeVoe and Arthur Siskind should have a standing invitation to attend meetings of the Audit Committee and that Rupert Murdoch and David DeVoe should have a standing invitation to attend meetings of the Remuneration Committee. In both of these instances, their attendance at these meetings shall be as observers only and in a non-voting capacity.

Under the Combined Code, the criteria to determine whether or not a Director is independent have changed from those under the Hampel Code. In light of the new criteria, the Board has determined that Lord St John of Fawsley, whilst independent under the Hampel Code and NYSE’s rules, will not be independent under the Combined Code.

COMPENSATION

The Executive Directors and Senior Executives’ total direct compensation consists of salary, annual bonus, long-term incentives, pensions and other benefits. This reward structure is regularly reviewed by the Remuneration Committee (the “Committee”) to ensure that it is achieving the Group’s objectives. The remuneration package is significantly weighted towards variable performance-related incentive arrangements. The policy ensures that a significant proportion of the remuneration of the Executive Directors and Senior Executives is aligned with our performance, generating a strong alignment of management’s interests with those of shareholders.

Salary

The salary for each Executive Director and Senior Executive is determined by the Committee taking account of the recommendation of the CEO (other than in respect of his own salary), and information provided from external sources relative to the industry sectors in which the Group operates.

Annual bonus

Executive Directors and Senior Executives participate in a bonus scheme under which awards are made to participants at the discretion of the Committee. The level of award is dependent on both personal performance during the relevant financial year and the performance of the Group through the achievement of commercial and strategic objectives. Previously, an element of the annual bonuses paid to Executive Directors and some Senior Executives was guaranteed. Under the revised bonus scheme arrangements guaranteed bonuses are being phased out.

LTIP

The Company operates an LTIP for Executive Directors and Senior Executives, under which awards may be made to any employee or full-time Director of the Group at the discretion of the Committee. An award under the existing LTIP comprises a performance-based share award, which may be in a variety of forms, including grants of shares, nil-priced options or market-value options with a cash bonus, all of which have the same value to the participant. Awards are not transferable or pensionable and are made over a number of shares in the Company, determined by the Committee.

The awards vest, in full or in part, dependent on the satisfaction of specified performance targets. Measurements of the extent to which performance targets have been met are reviewed by the Committee at the date of vesting of each award, taking account of independent advice as necessary.

As a result of the ongoing review of the Group’s remuneration policy, the Committee has agreed that future awards made under the LTIP will be subject to performance measurement over a period of three years, and will take the form of nil-priced options.

During the year, awards under the plan were made to Tony Ball and Martin Stewart. Further information on these awards can be found in this Item (see “Agreements with departing Executive Directors”). James Murdoch was awarded 450,000 shares under the plan on 11 August 2004 and Jeremy Darroch was awarded 250,000 shares under the plan on 16 August 2004. The performance conditions attaching to these share awards comprise 30% of the award being based on a comparison of the Company’s relative total shareholder return (“TSR”) performance against the FTSE 100 and 70% against internal financial measures, comprising growth in earnings per share, free cash flow and DTH subscribers.

Where awards are made in the form of market-value options with a cash bonus, if the market price of a share at the date of vesting is below the exercise price, awards in this form have been treated as having lapsed and participants have been eligible to receive shares for no consideration, equal to the value of their vested award.

2003 Awards

Awards under the 2003 LTIP were granted in the form of nil-priced options. Performance measures for the 2003 LTIP focus on rewarding performance which results in maximised returns to shareholders. For the awards made in 2003, the Committee determined that the performance targets should be based on a comparison of the Company’s relative TSR performance against both the FTSE 100 and the international media and telecommunications sector. The awards only vest in full for outstanding performance against both of these comparator groups. TSR was selected as the target as it was considered to be a clear indicator of the value created for shareholders, and was a widely accepted measure of performance. Unlike awards granted in previous years, these awards will vest in full after three years.

The selected comparator companies from the international media and telecommunications sector (“the Media Comparator Group”) were as follows: Carlton Communications; EMAP; Granada; MediaSet; ntl; RTL; SMG; Telewest Communications; Viacom; Vivendi Universal; and Walt Disney. As a result of the merger between Carlton Communications and Granada, these two companies were removed from the comparator group and replaced by the merged company, itv plc.

The table below sets out the proportion of the awards, in percentage terms, that vests according to performance against the Media Comparator Group and the FTSE 100.



	The Company’s TSR performance
	against the FTSE 100

The Company’s TSR			Median		Upper		Upper
performance against the	Below		to upper		quartile		decile
Media Comparator Group	median		quartile		or above		or above

1st highest TSR		70%		80%		100%		100%
2nd highest TSR		60%		70%		95%		100%
3rd highest TSR		50%		65%		80%		90%
4th highest TSR		45%		55%		65%		75%
5th highest TSR		40%		50%		60%		70%
6th highest TSR		30%		40%		50%		60%
7th highest TSR or lower		—		—		—		—

The awards granted to Tony Ball lapsed on 31 May 2004, on the expiry of his service agreement with the Company. The awards granted to Martin Stewart were released by Martin Stewart on 31 July 2004, and replaced by a pro-rata payment. Further details relating to these awards can be found in this Item (see “Agreements with departing Executive Directors”).

2002 Awards

Awards under the 2002 LTIP took the form of market value options with a cash bonus equal to the lower of the exercise price and the share price at the date of exercise, with the exception of shares awarded as part of an agreement to meet the employer’s National Insurance obligations, which did not attract a cash bonus.

Performance measures for the 2002 LTIP focused on rewarding performance which results in maximised returns to shareholders. For the awards made in 2002, the Committee determined that the performance targets should be based on a comparison of the Company’s relative TSR performance against both the FTSE 100 and the Media Comparator Group. The awards only vest in full for outstanding performance against both of these comparator groups. TSR was selected as the target as it was considered to be a clear indicator of the value created for shareholders, and was a widely accepted measure of performance.

The table below sets out the proportion of the awards, in percentage terms, that vest according to performance against the Media Comparator Group and the FTSE 100.



	The Company’s TSR performance
	against the FTSE 100

The Company’s TSR			Median		Upper		Upper
performance against the	Below		to upper		quartile		decile
Media Comparator Group	median		quartile		or above		or above

1st highest TSR		70%		80%		100%		100%
2nd highest TSR		60%		70%		95%		100%
3rd highest TSR		50%		65%		80%		90%
4th highest TSR		45%		55%		65%		75%
5th highest TSR		40%		50%		60%		70%
6th highest TSR		30%		40%		50%		60%
7th highest TSR or lower		5%		5%		5%		5%

The awards granted to Tony Ball lapsed on 31 May 2004, on the expiry of his service agreement with the Company. Further details relating to this award can be found in this Item (see “Agreements with departing Executive Directors”).

The Company was placed seventh against the Media Comparator Group and was below median against the FTSE 100, and therefore 5% of the award vested to Martin Stewart, representing 5,964 shares. Shares that did not vest, have rolled over and will vest subject to satisfaction of the performance conditions at 31 July 2005.

50% of the award granted to Martin Stewart that was due to vest on 31 July 2005 was released by Martin Stewart on 31 July 2004 and was replaced by a pro-rata payment. Further details relating to this award can be found in this Item (see “Agreements with departing Executive Directors”).

2001 Awards

Awards under the 2001 LTIP took the form of market value options with a cash bonus equal to the lower of the exercise price and the share price at the date of exercise with the exception of shares awarded as part of an agreement to meet the employer’s National Insurance obligations, which do not attract a cash bonus. Performance measures for the 2001 award focused on a mix of relative TSR measures and key commercial targets. 50% of the award granted in November 2001 vested in full on 30 June 2003 as to 400,000 shares to Tony Ball and 200,000 shares to Martin Stewart. The additional options which were granted in respect of the National Insurance enhancement, 54,000 to Tony Ball and 27,000 to Martin Stewart, lapsed, as the market price on the day of exercise was below the exercise price. This was as a result of the Company being placed second against the International Media and Telecommunications Comparator Group (“the Media & Telecoms Comparator Group”) in terms of TSR for the period November 2001 to June 2003, and for the achievement of the commercial targets at 30 June 2003.

The table below sets out the proportion of the awards that was available to vest according to performance against the Media and Telecoms Comparator Group which comprises: Carlton Communications; Granada; MediaSet; ntl; RTL; SMG; Telewest Communications; and Vivendi Universal.


	Maximum percentage of award
Company position against the	that may vest if commercial
Media & Telecoms Comparator Group	measures targets are met in full

1st or 2nd out of 9		100%
3rd or 4th out of 9		95%
5th or 6th out of 9		75%
7th or lower out of 9 (Core Award)		60%

This level of vesting was only achievable if the Company also met the stretching commercial targets in full, which are set out below. 75% of the remaining award granted in November 2001 vested on 30 June

2004, as to 150,000 shares to Martin Stewart. This was as a result of being placed fifth against the Media & Telecoms Comparator Group in terms of TSR for the period November 2001 to June 2004, and for the achievement of the commercial measures at 30 June 2004, as set out below. The unvested portion of the award lapsed on 30 June 2004.

2001 LTIP performance conditions

Performance

Percentage

Target

achieved

Total DTH Homes

7,350,000 or more

7,355,000

100%

DTH Churn Rate

9.4% or less

9.7%

97%

Operating Margin

16% or more

16.4%

103%

Operating Cash Flow Margin

21.0% or more

24.1%

115%

Normalised EPS

17.1p or more

18.3p

107%

ARPU

£379 or more

£380

100%

On 12 August 2003 Tony Ball and Martin Stewart exercised their rights under these awards. Further details relating to these awards can be found in the outstanding awards table below.

Other broadly similar arrangements are operated for certain members of senior management not participating in the LTIP, under the terms of the KCP. Shares used to satisfy KCP awards are acquired by the ESOP in the market.

Details of outstanding awards under the LTIP are shown below:



	Number of shares under award																Market
																	price
	At			Granted			Exercised			Lapsed		At					at date				Date from
	30 June			during the			during the			during the		30 June			Exercise		of		Date of		which		Expiry
Executive Director	2003			year			year			year		2004			price		exercise		award		exercisable		date

Tony Ball		454,000			—			400,000	^(v)		54,000		—		£	10.04	£	7.105		03.11.00		n/a		n/a
		454,000			—			400,000	^(v)		54,000		—		£	10.04	£	7.105		03.11.00		n/a		n/a
		454,000			—			400,000	^(v)		54,000		—		£	8.30	£	7.105		21.11.01		n/a		n/a
		454,000	⁽ⁱ⁾		—			—			454,000		—		£	8.30		—		21.11.01		n/a		n/a
		227,110	⁽ⁱ⁾		—			—			227,110		—		£	5.55		—		02.08.02		n/a		n/a
		227,110	⁽ⁱ⁾		—			—			227,110		—		£	5.55		—		02.08.02		n/a		n/a
		11,466	⁽ⁱ⁾		—			—			11,466		—		£	5.60		—		13.08.02		n/a		n/a
		11,466	⁽ⁱ⁾		—			—			11,466		—		£	5.60		—		13.08.02		n/a		n/a
		—			400,000	⁽ⁱ⁾		—			400,000		—			n/a		—		13.08.03		n/a		n/a

Martin Stewart		227,000			—			200,000	^(v)		27,000		—		£	10.04	£	7.105		03.11.00		n/a		n/a
		227,000			—			200,000	^(v)		27,000		—		£	10.04	£	7.105		03.11.00		n/a		n/a
		227,000			—			200,000	^(v)		27,000		—		£	8.30	£	7.105		21.11.01		n/a		n/a
		227,000			—			—			77,000		150,000	⁽ⁱⁱⁱ⁾	£	8.30		—		21.11.01		30.06.04		21.11.11
		113,555	^(iv)		—			—			—		113,555		£	5.55		—		02.08.02		31.07.04		31.07.12
		113,555	⁽ⁱⁱ⁾		—			—			—		113,555		£	5.55		—		02.08.02		n/a		n/a
		5,733	^(iv)		—			—			—		5,733		£	5.60		—		13.08.02		31.07.04		31.07.12
		5,733	⁽ⁱⁱ⁾		—			—			—		5,733		£	5.60		—		13.08.02		n/a		n/a
		—			220,000	⁽ⁱⁱ⁾		—			—		220,000			n/a		—		13.08.03		n/a		n/a

Notes:


(i)	These awards all lapsed on 31 May 2004 following the expiry of Tony Ball’s service agreement with the Company. Further details relating to this award can be found in this Item (see “Agreements with departing Executive Directors”).

(ii)	These awards were released on 31 July 2004. Further details relating to this award can be found in this Item (see “Agreements with departing Executive Directors”).

(iii)	These awards vested during the 2004 fiscal year.


(iv)	5,964 of these awards vested on 31 July 2004. At that date, 95% of this award did not vest and will be rolled over and tested at 31 July 2005.

(v)	The aggregate amount received by the Directors under the LTIP was £12,789,000 (2003: nil).

EBP

In August 2002, the Company introduced an EBP for Executive Directors and Senior Executives. This plan rewards performance against key commercial measures over the financial year, with stretching targets derived from the Group’s business plan.

Awards under the plan are made in the form of a contingent right to acquire the Company’s shares, for nil consideration, which are acquired in the market and are subject to performance achieved in the financial year of award.

2003 Awards

At 30 June 2004, the commercial measures for the awards made in August 2003 were achieved at a vesting level of 80%, based on the achievement of commercial targets at 30 June 2004, as set out in the table below.

2003 EBP performance conditions


			Performance		Percentage
	Target		achieved		achieved

Total DTH Homes		7,350,000 or more		7,355,000		100	%
DTH Churn Rate		9.4% or less		9.7%		97	%
Operating Margin		16% or more		16.4%		103	%
Operating Cashflow Margin		21.0% or more		24.1%		115	%
Normalised EPS		17.1p or more		18.3p		107	%
ARPU		£379 or more		£380		100	%

The awards granted to Tony Ball lapsed on 31 May 2004 on the expiry of his service agreement with the Company. The awards granted to Martin Stewart, which vested as to 44,000 shares at 30 June 2004, were released by him on 31 July 2004 and he will receive a payment equivalent to a proportion of the shares released. Further details relating to these awards can be found in this Item (see “Agreements with departing Executive Directors”).

The delivery of the shares to Senior Executives has been deferred until 31 July 2006.

2002 Awards

At 30 June 2003, the commercial measures for the awards granted in August 2002 were achieved in full. The delivery of the shares to the Executive Directors and Senior Executives are deferred in equal amounts to 31 July 2004 and 31 July 2005. The commercial targets, together with the actual results, at 30 June 2003, are set out in the table below.

2002 EBP performance conditions


			Performance		Percentage
	Target		achieved		achieved

Total DTH Homes		6,723,000 or more		6,845,000		102	%
DTH Churn Rate		10.5% or less		9.4%		112	%
Gross Margin		49.4% or more		49.7%		101	%
Operating Cashflow Margin		14.1% or more		20.8%		150	%
PBT (pre-exceptional items)*		£59.1m or more		£138m		234	%
ARPU		£362 or more		£366		101	%


*	Before prior-year restatement for adoption of Urgent Issues Task Force abstract 38 “Accounting for ESOP trusts”.

The awards granted to Tony Ball lapsed on 31 May 2004 on the expiry of his service agreement with the Company. The awards granted to Martin Stewart, which vested on 31 July 2004, will be delivered to him in full. The awards that are due to vest on 31 July 2005 were released by Martin Stewart on 31 July 2004 and he will receive a payment equivalent to a proportion of the awards. Further details relating to these awards can be found in this Item (see “Agreements with departing Executive Directors”).

Details of outstanding awards under the EBP are shown below:

Number of shares under award

Market

Granted

price

during

Exercised

Lapsed

at date

Date from

30 June

the

during the

30 June

Exercise

which

Expiry

Executive Director

2003

year

2004

price

exercise

exercisable

date

Tony Ball

52,000

⁽ⁱ⁾

—

52,000

—

n/a

52,000

⁽ⁱ⁾

—

52,000

—

n/a

—

100,000

⁽ⁱ⁾

—

100,000

—

n/a

Martin Stewart

26,000

—

26,000

n/a

31.07.04

n/a

26,000

⁽ⁱⁱ⁾

—

26,000

n/a

—

55,000

⁽ⁱⁱ⁾

—

55,000

n/a

Notes:


(i)	These awards lapsed on 31 May 2004 following the expiry of Tony Ball’s service contract with the Company (see “Agreements with departing Executive Directors”).

(ii)	These awards were released on 31 July 2004. Further details relating to these awards can be found in this Item (see “Agreements with departing Executive Directors”).

Additional Executive Bonus Scheme

The Company has operated an Additional Executive Bonus Scheme in which beneficiaries who participate have the right to receive the growth in value on a number of notional shares. No awards have been made under this scheme since 1999 when awards were made to Tony Ball on his commencement of employment as CEO.

The rights awarded to Tony Ball vested on 12 August 2002, and were subsequently exercised by Tony Ball on 12 August 2003. Further details can be found in this Item (see “Executive bonuses”).

This scheme expires on 23 November 2004 and will not be renewed.

Share option schemes

The Company operates Inland Revenue Approved and Unapproved Executive Share Option Schemes (“Executive Schemes”) and a Sharesave Scheme.

Executive Schemes

With the exception of ad hoc awards made to certain individuals on hiring, grants under the Executive Schemes have been made, and continue to be made, on an annual basis.

Executive Directors and Senior Executives who participate in the LTIP and EBP do not participate in the Executive Schemes annual options award. No options were granted to any of the Executive Directors or Senior Executives under the Executive Schemes during the year.

The Company follows a policy of granting options to employees whose base salaries are £50,000 or above (“eligible employees”) linked to salary. These are then subject to approval by the department heads who may recommend that the individual receives an additional allocation for exceptional performance. There is no limit on the number of share options that may be granted to an individual (other than for the purposes of granting Inland Revenue approved options), however, any proposal to make a one-off grant of

share options over four times an individual’s salary would require the prior approval of the Committee (irrespective of the employee’s level of salary). No such grant has been made to date.

The performance conditions for option awards granted before August 2002 were based on key strategic measures for the Group, including subscriber growth measures and profit before tax.

Awards granted since August 2002 have been based on EPS targets. The use of EPS as a performance measure for the awards aligns the interests of employees with shareholders. Growth in EPS will have to exceed RPI plus 3% per annum in order for awards to vest.

Measurements of the extent to which performance targets have been met are reviewed by the Committee at the date of vesting of each award, taking account of independent advice as necessary.

In August 1999, options over 600,000 shares were granted to Tony Ball which were deemed to vest on 12 August 2002. These were exercised on 12 August 2003, see the outstanding awards table below.

In June 2002, options over 600,000 shares were granted to Tony Ball at an exercise price of £7.35 as part of the arrangements agreed on the renewal of his service agreement with the Company. Following the agreement reached with Tony Ball, on the expiry of his contract these Executive options will remain capable of exercise to the fullest extent applicable under the rules of the Executive Share Option Scheme and can be exercised at any time up until 12 February 2007. If they have not been exercised by this date they will lapse.

Following approval by shareholders at the 2000 AGM, options granted after November 2000 may be exercised over a phased period of years, provided that, in normal circumstances, no part of an option will be capable of exercise earlier than one year from the date of grant. Awards made since August 2002 become capable of vesting over a period of four years, with one third of the award capable of vesting annually in each of years two, three and four, subject to the achievement of the performance target. Awards that do not vest in years two or three remain capable of vesting in the following years, subject to the achievement of performance targets.

In accordance with an agreement with the Inland Revenue, the Group can, with the consent of the employee, pass on to the employee the cost of employer’s National Insurance Contributions on the exercise of share options granted to UK employees under the Unapproved Executive Share Option Scheme. Where the Company has decided to do this in the past, additional options have been granted under the Unapproved Executive Share Option Scheme to ensure that the employees, as far as possible, are no worse off than if the National Insurance cost was not passed to them.

The Executive Schemes expire on 23 November 2004, and a resolution will be placed before shareholders at the 2004 AGM to renew the scheme for a further ten years.

Details of outstanding awards under the Executive Schemes are shown below:

Number of options

Market

price

Granted

Exercised

Lapsed

at date

Date from

30 June

during the

30 June

Exercise

which

Expiry

Executive Director

2003

year

2004

price

exercise

exercisable

date

Tony Ball

5,145

⁽ⁱ⁾

—

5,145

—

£5.83

£7.105

n/a

594,855

⁽ⁱ⁾

—

594,855

—

£5.83

£7.105

n/a

600,000

⁽ⁱⁱ⁾

—

600,000

£7.35

n/a

31.05.04

12.02.07

Notes:


(i)	On 12 August 2003 the Executive Options were exercised and subsequently sold. The gain made on the exercise of the shares was £765,000.

(ii)	The Company has agreed that these options will remain capable of exercise to the fullest extent applicable under the rules of the Executive Scheme.

Millennium Award

In addition to the awards set out above, in December 2000 the Company made an award over 500 shares to all employees who had not been granted options or awards under the LTIP or the Executive Schemes in the 2001 fiscal year. This award was made under the Approved Executive Share Option Scheme and became exercisable in December 2003. There were no performance conditions attached to this award.

Sharesave Scheme

The Sharesave Scheme is open to all employees, including Executive Directors. Options are normally exercisable after either three, five or seven years from the date of grant. The price at which options are offered is not less than 80% of the middle-market price on the dealing day immediately preceding the date of invitation. It is the policy of the Group to make an invitation to employees to participate in the scheme following the announcement of the end of year results. Jeremy Darroch was granted an option on 1 October 2004 over 4,281 shares at an exercise price of 386p per share under the terms of the Sharesave Scheme. This option becomes exercisable on 1 February 2010 and will lapse on 1 August 2010.

This scheme expires on 23 November 2004, and a resolution will be placed before shareholders at the 2004 AGM to renew the scheme for a further ten years.

Pensions

The Group provides pensions to eligible employees through the BSkyB Pension Plan (“Pension Plan”), which is a defined contribution plan. Employees may contribute up to 4% of basic salary into the Pension Plan each year and the Group matches this with a contribution of up to a maximum of 8% of basic salary. Contributions into the approved plan are subject to Inland Revenue limits. The Group does not currently operate a Supplementary Pension Scheme in excess of the Inland Revenue earnings cap.

For those executives whose Pension Plan contributions are restricted due to Inland Revenue limits, employee contributions are reduced and, where employer contributions need to be restricted, a cash supplement is paid to the individual equal to the shortfall in the 8% employer contribution rate.

The amounts received by the Executive Directors during the 2004 fiscal year under pension arrangements are detailed below.

Tony Ball received a payment of £22,918 (2003: a one-off payment of £113,883 and a further payment of £10,421) in relation to the shortfall in his pension arrangements. Employer contributions of £33,443 (2003: £31,863) were paid into the Pension Plan.

Martin Stewart received a payment of £10,511 (2003: £4,213) in relation to the shortfall in his pension arrangements. Employer contributions of £25,171 (2003: £27,473) were paid into the Pension Plan.

James Murdoch received a payment of £3,854 (2003: nil) in relation to the shortfall in his pension arrangements. Employer contributions of £6,092 (2003: nil) were paid into the Pension Plan.

Other benefits

Executive Directors are entitled to a company car, life assurance equal to four times base salary and medical insurance. In addition, they may be eligible for a resettlement and housing allowance for a specified period.

Service agreements

Policy

The Committee has introduced a policy that Executive Directors’ service agreements will contain a maximum notice period of one year. This policy has now been fully implemented. The Committee will also consider, where appropriate to do so, reducing remuneration to a departing director. However, the

Committee will consider such issues on a case by case basis and will consider the terms of employment that a departing director is engaged upon. A large proportion of each Executive Director’s total direct remuneration is linked to performance and therefore will not be payable to the extent that the relevant targets are not met.

James Murdoch

James Murdoch has a service agreement with the Company which was deemed to commence on 27 November 2003 and shall continue unless, or until, terminated by either party giving to the other not less than 12 months’ notice in writing. James Murdoch’s remuneration consists of a base salary of £750,000 per annum. James Murdoch will be paid a bonus amount depending upon the performance criteria adopted by the Committee for each financial year during the continuance of his service agreement with the Company, including earnings growth, subscriber growth, magnitude of free cash flow and such other criteria which may be agreed with James Murdoch. The amount paid under this clause in respect of the financial year ending 30 June 2005 will be £1 million, if the performance targets for the year are met, up to a maximum of £1.5 million, where performance targets have been exceeded, and such appropriate lesser amount if, and to the extent, such targets are not met. The amount of bonus capable of being earned by James Murdoch in each subsequent financial year shall not be less than that capable of being earned in the financial year ending 30 June 2005, and shall similarly be calibrated against the budget adopted by the Company following the annual planning process. For the year ended 30 June 2004, James Murdoch was awarded a discretionary bonus of £850,000 which reflected, among other matters, the fact that James Murdoch had not been employed by the Company as Chief Executive Officer throughout the whole of the fiscal year.

James Murdoch is also entitled to other benefits, namely pension benefits, a company car, life assurance equal to four times base salary and medical insurance. He is also entitled to participate in the LTIP and was awarded 450,000 ordinary shares on 11 August 2004 at a nil cost per ordinary share. This award will vest in full in August 2007 provided that certain performance criteria are satisfied. Subject to the achievement of the performance conditions and prior to any other event which would otherwise lead to a vesting of the shares under this award, the Company may elect instead to pay in cash an amount equal to the then market value of such shares and upon such payment the right to the vesting of such shares shall lapse. He also receives a relocation allowance (“Expense Allowance”) of £200,000 per annum up until 27 November 2006. This Expense Allowance covers all the expenses he incurs in respect of temporary accommodation following his move to the UK, all expenses in relocating to the UK including any fees incurred in connection with obtaining any visa or work permit required by James Murdoch or his family, cost of rental and maintenance for home telephones and faxes, all professional fees incurred in connection with obtaining appropriate tax advice, costs in respect of non-business related international flights by James Murdoch and his family, and all school or education fees in respect of his children.

James Murdoch has a non-compete clause in his service agreement specifying that he shall not be able to work for any business or prospective business carried on within the United Kingdom, which wholly or partially competes with the Group’s businesses at the date of termination of his agreement. Such restriction will be for a period of six months.

On termination of the agreement, James Murdoch will be entitled to one year’s salary, pension and life assurance benefits from the date of termination, plus his expense allowance equal to the value received over the previous twelve months, except that the expense allowance would be reduced to the extent that it would have ceased to be payable in the following twelve months. James Murdoch will also be entitled to a pro-rata bonus up to the date of termination.

Jeremy Darroch

Jeremy Darroch joined the Company on 16 August 2004 as the new CFO. Jeremy Darroch has a service agreement with the Company which was deemed to commence on 16 August 2004 and shall continue unless, or until, terminated by either party giving to the other not less than twelve months’ notice

in writing. Jeremy Darroch’s remuneration consists of a base salary of £500,000 per annum and an annual discretionary bonus to be agreed by the Committee. He is also entitled to other benefits, namely pension benefits, a company car, life assurance equal to four times base salary and medical insurance. He also participates in the LTIP and was awarded 250,000 ordinary shares on 16 August 2004 at a nil cost per ordinary share.

Jeremy Darroch has a non-compete clause in his service agreement specifying that he shall not be able to work for any business or prospective business carried on within the United Kingdom, which wholly or partially competes with the Group’s businesses at the date of termination of his agreement. Such restriction will be for a period of twelve months.

On termination of the agreement, Jeremy Darroch will be entitled to one year’s salary, pension and life assurance benefits from the date of termination and a pro-rata bonus up to the date of termination.

Agreements with departing Executive Directors

Tony Ball

Tony Ball resigned as CEO and as a member of the Board on 4 November 2003, and his employment with the Company ended on the expiry of his service agreement on 31 May 2004. Details of the payments made to him are set out below. Details of the remuneration paid to him throughout the year ended 30 June 2004 are set out in this Item (see “Directors’ emoluments”).

Payment on expiry of service agreement

On 23 September 2003, the Company announced that Tony Ball would not be renewing his service agreement with the Company on expiry. As part of an agreement reached with Tony Ball, the amounts detailed below were paid to him.

Tony Ball received £10,746,064 on 31 May 2004 in return for agreeing with the Company a two-year non-compete restriction from 1 June 2004 in respect of free and pay television services in the UK, and until after the next renegotiation of rights in respect of services to or on behalf of the FAPL, and in return for waiving all of his unvested entitlements under the LTIP and EBP. Tony Ball also agreed to waive the contractual entitlement within his service agreement of a payment of one year of salary, bonus and benefits that would have been paid had his agreement not been extended on expiry on 31 May 2004. The Company has agreed that the Executive share options granted to Tony Ball will remain capable of exercise following the expiry of his service agreement to the fullest extent applicable under the rules of the Executive Share Option Scheme. As part of the agreement, Tony Ball also received certain assets with a value of £70,500, which included a car and audio visual equipment.

Martin Stewart

Martin Stewart had a service agreement with the Company, which was deemed to commence on 1 December 1998, unless, or until, terminated by either party, giving to the other not less than 12 months’ notice in writing. Martin Stewart’s remuneration consisted of a base salary of £500,000 per annum and an annual discretionary bonus to be agreed by the Committee. He was also entitled to other benefits, namely pension benefits, a company car, life assurance equal to four times base salary and medical insurance. He also participated in the LTIP and EBP.

Martin Stewart resigned as CFO and as a member of the Board on 4 August 2004. The Company has agreed with Martin Stewart that he will serve his one year notice period from 1 August 2004 to 31 July 2005.

During the notice period, the non-compete terms of the agreement prevent Martin Stewart from taking up another position at a competing company, but do not stop him seeking employment elsewhere, with non-competing companies. Components of the package paid to Martin Stewart during this period are essentially the same as he would have received during normal employment except that:


	a)	His annual bonus will be paid out at the 2003 level, as a substitute for a ‘normal’ annual bonus, and it will be paid in two equal instalments on 31 January 2005 and 31 July 2005.

	b)	He also received a sum to compensate him for the loss of the LTIP and EBP awards due to vest in 2005 and 2006. This was paid on 31 August 2004. The total payment was based on the average closing price of a BSkyB share for the period 1 January 2004 to 31 July 2004. The payment was pro-rated as if his employment with the Company had ended on 31 July 2004, equal to 730/1096 of the LTIP and EBP award vesting in July 2005 and 365/1096 of the LTIP and EBP award vesting in August 2006. The balance of the 2002 LTIP award that did not vest at 31 July 2004 will be carried over and measured at 31 July 2005. The average share price over this period was £6.7638, consequently Martin Stewart received a payment of £1,273,982 in respect of these awards.

	c)	During the notice period, Martin Stewart will continue to participate in the Company’s pension scheme and will receive his company car and certain computer equipment.


	Value of pay
	during garden
	leave period

	£000
Salary and bonus		1,000
Compensatory cash award (in lieu of outstanding shares)		1,274
Pensions		40
Benefits		50

		2,364

Non-Executive Directors

The basic fees payable to the Non-Executive Directors, set by the Board, were £38,600 each for the financial year ending 30 June 2004. It is intended that in future these will be increased on an annual basis by 5% or RPI, whichever is the greater, unless the Board determines otherwise. The Non-Executive Directors are paid an additional £5,000 per annum each, for membership of each of the Audit Committee, the Remuneration Committee and the Corporate Governance & Nominations Committee. The Chairmen of the Board, the Audit Committee, the Remuneration Committee and the Corporate Governance & Nominations Committee each receive an additional £5,000 per annum. Each Non-Executive Director is engaged by the Company for an initial term of three years. Reappointment for a further term is not automatic, but may be mutually agreed.

Directors’ emoluments

The emoluments of the Directors for the years ended 30 June 2004, 2003 and 2002 are shown below:


											Total		Total		Total
							Total				emoluments		emoluments		emoluments
							emoluments				including		including		including
	Salary		Bonus				before				pensions		pensions		pensions
	and fees		scheme		Benefits		pensions		Pensions		2004		2003		2002

	£		£		£		£		£		£		£		£
Executive
James Murdoch^(i)(viii)		456,284		850,000		164,348		1,470,632		9,946		1,480,578		13,946		—
Martin Stewart⁽ⁱⁱ⁾		500,000		500,000		24,244		1,024,244		35,682		1,059,926		956,436		713,517
Tony Ball⁽ⁱⁱⁱ⁾		717,676		12,284,064		126,644		13,128,384		56,361		13,184,745		2,459,737		2,049,343
Non-Executive
Rupert Murdoch		48,375		—		—		48,375		—		48,375		17,741		—
Chase Carey		38,600		—		—		38,600		—		38,600		13,946		—
David Devoe		48,151		—		—		48,151		—		48,151		17,741		—
David Evans		43,600		—		—		43,600		—		43,600		39,994		27,057
Nicholas Ferguson^(iv)		2,012		—		—		2,012		—		2,012		—		—
Allan Leighton		46,747		—		—		46,747		—		46,747		41,750		39,698
Jacques Nasser		43,792		—		—		43,792		—		43,792		26,923		—
Gail Rebuck		43,600		—		—		43,600		—		43,600		25,596		—
Lord Rothschild^(v)		29,744		—		—		29,744		—		29,744		—		—
Arthur Siskind		46,010		—		—		46,010		—		46,010		15,843		—
Lord St John of Fawsley		47,035		—		—		47,035		—		47,035		40,673		35,000
Lord Wilson of Dinton		44,894		—		—		44,894		—		44,894		13,946		—
Philip Bowman^(vi)		18,069		—		—		18,069		—		18,069		46,750		45,000
John Thornton^(vii)		46,110		—		—		46,110		—		46,110		53,744		49,522
Total emoluments		2,220,699		13,634,064		315,236		16,169,999		101,989		16,271,988		3,784,766		2,959,137

Gains on exercise of LTIPs, EBP and executive share options are disclosed in this Item (see “LTIP”, “EBP” and “Executive Schemes” sections above).

Notes:


(i)	James Murdoch was appointed CEO on 4 November 2003.

(ii)	Martin Stewart resigned as a Director of the Company on 4 August 2004.

(iii)	Tony Ball resigned as a Director of the Company on 4 November 2003.

(iv)	Nicholas Ferguson was appointed a Director of the Company on 15 June 2004.


(v)	Lord Rothschild was appointed a Director of the Company on 17 November 2003.


(vi)	Philip Bowman resigned as a Director of the Company on 14 November 2003.

(vii)	John Thornton resigned as a Director of the Company on 11 May 2004.

(viii)	James Murdoch’s salary and fees for fiscal year 2004 include £13,015, received for his services as a Non-Executive Director.

Executive bonuses

The amounts received by the Executive Directors under bonus schemes for the year ended 30 June 2004 are shown below:


	Payment on		Additional		Senior
	expiry of		Executive		Management
Executive Director	contract		Bonus Scheme		Bonus Scheme		Total

	£		£		£		£
James Murdoch		n/a		—		850,000		850,000
Martin Stewart		n/a		—		500,000		500,000
Tony Ball		10,746,064		288,000		1,250,000		12,284,064

Additional Executive Bonus Scheme

Tony Ball had rights over 600,000 notional shares which were exercised on 12 August 2003. The notional shares had an exercise price of £5.35 but the gain on exercise was limited to a maximum of 48 pence per notional share, or £288,000 in aggregate.

During the year ended 30 June 2004 no shares (notional or actual) have been granted under this scheme.

Senior Management Bonus Scheme

The amounts shown above are those which have been approved by the Committee for the year ended 30 June 2004.

Martin Stewart elected that, in the event of any discretionary bonus being made to him at the Company’s discretion, it should be in the form of a contribution to a funded, unapproved retirement benefit scheme.

Share interests

The interests of the Directors in the Ordinary Share capital of the Company during the year were:

18 October

30 June

Name of Director

2004

2003

Lord St John of Fawsley

4,000

2,000

2,000

Lord Rothschild

100,000

—

Lord Wilson of Dinton

486

486

David Evans

*16,000

*8,000

—

Nicholas Ferguson

10,000

—

n/a

Martin Stewart

n/a

—

2,096


*	Held in the form of 4,000 ADSs, one ADS is equivalent to four ordinary shares.

Lord Rothschild is also deemed to be interested in 2 million ordinary shares registered in the name of Bank of New York Nominees, as a result of being a director of RIT Capital Partners plc; and of 15,250 ordinary shares as a result of being a trustee of a Charitable Foundation of which Lord Rothschild is not a beneficiary and of 3,500 ordinary shares which belong to a family trust of which Lord Rothschild is not a beneficiary but acts as a trustee.

Except as disclosed in this Item, no other Director held any interest in the share capital, including options, of the Company, or of any subsidiary of the Company, during the year. All interests at the date shown are beneficial and, except as disclosed in this Item, there have been no other changes between 1 July 2004 and 18 October 2004.

At 18 October 2004, the ESOP was interested in 4,235,090 Ordinary Shares in which the Directors who are employees are deemed to have an interest.

29.86% of the Ordinary Shares of News Corporation are owned by either (i) Telegraph Investment Co. Pty. Ltd., (ii) Cruden Investments Pty. Limited, a private Australian investment company owned by Rupert Murdoch, members of his family and various corporations and trusts, the beneficiaries of which include Rupert Murdoch, members of his family, including James Murdoch, and certain charities, and (iii) corporations which are controlled by trustees of settlements and trusts set up for the benefit of the Murdoch family, certain charities and other persons. News UK Nominees Limited, a significant shareholder in the Group, is a subsidiary of News Corporation. The News Corporation group has significant transactions with the Group as set out in note 27 of the Consolidated Financial Statements included within Item 18.

News Corporation has proposed to its shareholders a reorganisation transaction that would change the place of incorporation of News Corporation to the United States. In connection with this reorganisation,

News Corporation would acquire from Murdoch family interests certain companies holding approximately 58% of Queensland Press Pty Ltd not already owned by News Corporation. This transaction is subject to shareholder and court approval and, if approved, is expected to be completed in November 2004. As a result of the proposed transaction, the Murdoch family interests will own approximately 29.47% of the voting shares of News Corporation, which is slightly less than the 29.86% of the voting shares of News Corporation that the Murdoch family interests currently control.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Our sole outstanding class of voting securities is ordinary shares, nominal value 50p each.

PRINCIPAL SHAREHOLDERS

The following table sets forth, as of 18 October 2004, the amount and percentage of ordinary shares owned by each shareholder, including our directors and officers as a group, known to us to own more than 3% (directly and indirectly) of our ordinary shares.


	Amount	Percent
Identity of Person or Group	Owned	of Class

News UK Nominees Limited⁽¹⁾	686,021,700		35.33%
One Virginia Street London E98 1XY
Franklin Resources, Inc. and its affiliates	98,030,827		5.05%
One Franklin Parkway San Mateo CA 94403-1906
Janus Capital Management LLC	79,154,541		4.08%
151 Detroit St. Denver CO 80206


(1)	On 23 April 2002, Sky Global Operations, Inc. (“SGO”) transferred its entire shareholding in us to BSkyB Holdco, Inc., its wholly-owned subsidiary. On 30 June 2004, BSkyB Holdco, Inc. transferred its entire shareholding in us to News UK Nominees Limited, a wholly-owned subsidiary of The News Corporation Limited which remains interested in the shares.

There has been no significant change in the percentage ownership held by any major shareholders during the past three years, except for the following:

On 11 August 2004, Janus Capital Management LLC (“Janus”) notified us that it had a 3.01% interest in our shares. On 11 October 2004 Janus further notified us that its interest in our shares had increased to 4.08%.

On 9 August 2004, Franklin Resources, Inc. notified us that it had a 3.58% interest in our shares. On 12 August 2004, Franklin Resources, Inc. further notified us that its interest in our shares had increased to 4.08%. On 15 September 2004, Franklin Resources, Inc. further notified us that its interest in our shares had increased to 5.05%.

On 16 February 2004, FMR Corp. notified us that it had a 3.01% interest in our shares. On 28 June 2004, FMR Corp. notified us that it no longer had a notifiable interest in our shares.

In July 1999, Vivendi S.A. merged with Pathé and acquired its then 12.68% direct stake and 11.80% indirect stake in us, through BSB Holdings Limited. Between 22 December 2000, and 3 October 2001, shares of the combined stake were sold, leaving the direct stake, then registered to Vivendi Universal S.A., at 11.22% and indirect stake at 10.78%. On 6 October 2001, 21.20% of the combined stake was

transferred to Deutsche Bank AG in an equity swap. Deutsche Bank AG announced it ceased to be interested in the shares on 21 May 2002. The remaining 14,884,888 shares registered to Vivendi were sold directly onto the market by the end of March 2002 and Vivendi thereby ceased to have an interest in us.

Major shareholders have the same voting rights as all other shareholders.

On 18 October 2004, 4,031,023 ADSs were held of record by 14 holders in the US and 27,466 ordinary shares were held of record by 58 US persons.

RELATED PARTY TRANSACTIONS

For details of transactions with related parties, see note 27 of the Consolidated Financial Statements included within Item 18. The Audit Committee reviews all related party transactions with a cumulative value of £100,000 and above.

ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Financial statements

The financial statements filed as part of this Annual Report filed on Form 20-F are included on pages F-1 to F-90.

Legal proceedings

In August 2004, the Group commenced proceedings in the High Court of England and Wales for a material amount against Electronic Data Systems Corporation and Electronic Data Systems Limited for damages arising out of deceit, negligent misrepresentation and breach of contract in respect of the systems integration, software development and business implementation services provided to the Group as part of the Group’s investment in CRM software and infrastructure. The amount that will be recovered by the Group will not be finally determined until resolution of the claim.

Additionally, certain regulatory proceedings which could have material consequences for us are described within Item 4 “Information on the Company”.

Dividend distributions

In order to facilitate the investment in organic growth following the launch of the Sky digital service, and to maintain gearing at efficient levels, the Board announced on 5 May 1999 that it had decided to suspend dividend payments to shareholders.

Dividend payments were resumed during fiscal 2004, when the Company paid an interim dividend of 2.75 pence per share to shareholders on 23 April 2004. The Board has also proposed a final dividend for the year ended 30 June 2004 of 3.25 pence per share, payable on 19 November 2004 to shareholders on the register on 29 October 2004, subject to approval of shareholders at the Annual General Meeting in November 2004. The Board expects to adopt a progressive dividend policy and intends that the total ordinary dividend in fiscal 2005 will grow broadly in line with Group earnings.

SIGNIFICANT CHANGES

Other than those events described in other Items in this Annual Report on Form 20-F, including as set out in note 30 of the Consolidated Financial Statements included within Item 18, there have not been any significant changes to our financial condition or results of operations since 30 June 2004. We are currently in discussions with our lending banks to replace our £600 million RCF with a new RCF, maturing on 30 July 2010.

ITEM 9. THE OFFER AND LISTING

LISTING DETAILS AND MARKETS

Our ordinary shares are admitted to the Official List of the London Stock Exchange and our ADSs are listed on the New York Stock Exchange. The principal trading market for our ordinary shares is the London Stock Exchange. The Bank of New York is the depositary of the American Depositary Receipts, which evidence the ADSs.

The following tables set forth for the periods indicated the highest and lowest middle market quotations for the ordinary shares as derived from the Daily Official List of the London Stock Exchange and the highest and lowest sales prices of the ADSs as reported on the New York Stock Exchange composite tape.



	Shares				ADSs⁽ⁱ⁾


	(Pence)				($)

	High		Low		High		Low

Fiscal year ended 30 June
2000		2,158		550 1/2		133 1/3		34 3/4
2001		1,320		642		80 2/3		37 7/100
2002		936		544		53		32 1/100
2003		706		458		47 3/25		28 53/100
2004		776		584 1/2		59 6/25		40 13/50

Shares

ADSs⁽ⁱ⁾

(Pence)

($)

High

Low

High

Low

Fiscal year ended 30 June

2003

First Quarter

650

488

30 3/20

Second Quarter

674 1/2

458

28 35/100

Third Quarter

671

550

44 13/100

36 3/10

Fourth Quarter

706

624

47 3/25

39 22/225

2004

First Quarter

724

614 1/2

47 6/25

40 13/50

Second Quarter

709

614

51 1/4

41 9/100

Third Quarter

776

678 1/2

59 6/25

50 3/5

Fourth Quarter

696 1/2

584 1/2

51 3/10

43 33/100

2005

First Quarter

625

465 1/2

46 33/100

33 39/50

Shares

ADSs⁽ⁱ⁾

(Pence)

($)

High

Low

High

Low

Month ended

30 April 2004

696 1/2

661

51 3/10

47 59/100

31 May 2004

667 1/2

606 1/2

48 13/25

43 33/100

30 June 2004

633 1/2

584 1/2

46 13/20

43 33/100

31 July 2004

625

603 1/2

46 33/100

44 49/100

31 August 2004

604

465 1/2

44 87/100

33 39/50

30 September 2004

521 1/2

478

37 79/100

34 59/100


(i)	Each ADS represents four ordinary shares (up until 23 December 2002, each ADS represented six ordinary shares). Prior year ADS figures in the above tables have been restated to reflect this change in ratio.


ITEM 10.	ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

The Memorandum of Association of the Company provides that the Company’s principal object is to carry on the business of direct broadcasting by satellite and to carry out the other objects more particularly set out in Clause 4 of the Memorandum of Association of the Company.

The Memorandum and Articles of Association of the Company are registered at Companies House, Crown Way, Maindy, Cardiff, CF14 3UZ, Wales under company number 2247735.

The current Articles of Association (“Articles”) of the Company, contain, inter alia, provisions to the following effect:

Directors’ material interests

Subject to the Companies Act 1985 (and any statutory amendment, modification or re-enactment of it for the time being in force (the “Act”)), and provided the Director has disclosed to the other Directors the nature and extent of his material interest, a Director may be party to or in any way interested in any arrangement or transaction with the Company or in which the Company is in any way interested and he may hold and be remunerated in respect of any office or place of profit of the Company or any other company in which the Company is in any way interested and he (or any firm of which he is a member) may act in a professional capacity for the Company or any such other body and be remunerated therefore and in any such case as aforesaid (save as otherwise agreed by him) he may retain for his own absolute use and benefit all profits and advantages accruing to him thereunder or in consequence thereof.

Save as otherwise provided in the Articles, a Director shall be prohibited from voting at a meeting of the Directors on material matters in which he has directly or indirectly a material interest (other than an interest in shares, debentures or other securities of, or otherwise in or through the Company). A Director shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote. Subject to the provisions of the Act and every other statute for the time being in force concerning companies and affecting the Company (the “Statutes”), a Director shall be entitled to vote (and be counted in the quorum) in respect of any resolution at a meeting of the Directors concerning any of the following matters:


	(i)	the giving of any guarantee, security or indemnity to him in respect of money lent to, or obligations incurred by him at the request of, or for the benefit of, the Company or any of its subsidiaries;

	(ii)	the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security;

	(iii)	any proposal concerning an offer of any shares or debentures or other securities of or by the Company for subscription, purchase or exchange in which offer he is, or is to be, interested as a participant in the underwriting or sub-underwriting thereof;

	(iv)	any proposal concerning a superannuation fund or retirement benefits scheme which has been approved by, or is subject to, and conditional upon approval by the Board of the Inland Revenue for taxation purposes;

	(v)	any arrangement for the benefit of employees of the Company or any of its subsidiaries including but not limited to, an employees share scheme which has been approved by, or is subject to and conditional upon approval by, the Board of the Inland Revenue for taxation purposes and which does not accord to any Directors any privilege not accorded to the employees to whom the arrangement relates; and

	(vi)	any proposal concerning the purchase or maintenance of insurance for the benefit of Directors or persons who include Directors.

The Articles also specifically provide that a Director is to be treated as interested in a matter the subject of a resolution if it relates to a transaction or arrangement with a person or body corporate of or in which he is an officer, employee, shareholder, consultant, advisor, representative or otherwise interested. Any question as to the right of a Director to vote, including whether he has a material interest in a material matter the subject of a resolution, may be decided by a resolution of the majority of those Directors who do not have a like interest to the Director or Directors in question.

The quorum for meetings of the Directors is currently three Directors.

Directors’ compensation

The ordinary remuneration of the Non-Executive Directors shall not in aggregate exceed £750,000 per annum or such higher amount as may from time to time be determined by ordinary resolution of the Company. Such remuneration shall be divisible among the Directors as they may agree or, failing agreement, equally, except that any Directors who shall hold office for part only of the period in respect of which such remuneration is payable shall be entitled only to rank in such division for a proportion of remuneration related to the period during which he has held office.

Under the current Articles, the Directors may also be paid all expenses properly incurred by them in attending meetings of the Directors or any committee of the Directors or general meetings of the Company or otherwise in connection with the discharge of their duties as Directors. Any Director who holds any executive office or who serves on any committee of the Directors, or who otherwise performs services which in the opinion of the Directors are outside the scope of the ordinary duties of a Director, may be paid such extra remuneration by way of bonus, commission or otherwise, as the Directors may determine.

The Directors have the power to provide benefits whether by payment of gratuities, pensions or otherwise to (or to any person in respect of) any Directors or ex-Directors and for the purpose of providing any such benefits, to contribute to any scheme or fund or to pay premiums. The Directors may purchase and maintain insurance for, or for the benefit of, any persons who are or were Directors, officers, employees of the Company or an associated company or who are or were trustees of any pension fund in which employees of the Company or any such other associated company are interested.

The Directors may, from time to time, appoint one or more of their number to any executive office on such terms and for such periods as they may (subject to the provisions of the Statutes) determine.

Borrowing powers

The Directors shall restrict the borrowings of the Company and exercise all powers of control exercisable by the Company in relation to its subsidiary undertakings so as to secure (as regards subsidiary undertakings so far as by such exercise they can secure) that the aggregate principal amount outstanding of all money borrowed by the Group (excluding amounts borrowed by any member of the Group from any other member of the Group), shall not at any time, save with the previous sanction of an ordinary resolution of the Company, exceed an amount equal to the higher of (i) £1.5 billion and (ii) an amount equal to four times the aggregate turnover of the Group as shown in the then latest audited consolidated profit and loss accounts of the Group.

No age disqualification for Directors

No person shall be disqualified from being appointed or re-appointed as a Director and no Director shall be requested to vacate that office by reason of his attaining the age of seventy or any other age.

No share qualification for Directors

Directors shall not be required to hold any shares in the Company by way of qualification. A Director who is not a member shall nevertheless be entitled to attend and speak at any general meeting.

100

Dividends

Subject to the Act, the Company may by ordinary resolution declare dividends to be paid to members of the Company according to their rights, but no such dividend shall exceed the amount recommended by the Directors. If, in the opinion of the Directors, the profits of the Company available for distribution justify such payments, the Directors may, from time to time, pay interim dividends on the shares of such amounts and on such dates and in respect of such periods as they think fit. The profits of the Company available for distribution and resolved to be distributed shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion of the period in respect of which the dividend is paid.

No dividend shall be paid otherwise than out of profits available for distribution under the provisions of the Statutes.

Any dividend unclaimed after a period of twelve years from the date of declaration of such dividend shall be forfeited and shall revert to the Company.

Directors’ appointment and removal

The Directors and the Company (by Ordinary Resolution) may appoint a person who is willing to act as a Director, either to fill a vacancy or as an additional Director. A Director appointed by the Directors shall retire at the next Annual General Meeting and will put himself forward to be elected by the shareholders.

At each Annual General Meeting, there shall retire from office by rotation:


	(i)	all Directors of the Company who are subject to retirement by rotation who held office at the time of the two preceding Annual General Meetings and who did not retire by rotation at either of them; and

	(ii)	such additional number of Directors as shall, when aggregated with the number of Directors retiring under paragraph (a) above, equal either one third of the number of Directors, in circumstances where the number of Directors is three or a multiple of three, or in all other circumstances, the whole number which is nearest to but does not exceed one-third of the number of Directors (the “Relevant Proportion”) provided that:


	(a)	the provisions of this paragraph (i) shall only apply if the number of Directors retiring under paragraph (i) above is less than the Relevant Proportion; and

	(b)	subject to the provisions of the Act and to the following provisions of these Articles, the Directors to retire under this paragraph (ii) shall be those who have been longest in office since their last appointment or reappointment, but as between persons who became or were last reappointed Directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot.

Winding-up

If the Company commences liquidation, the liquidator may, with the sanction of an extraordinary resolution of the Company and any other sanction required by the Act and the Insolvency Act 1986:


	(i)	divide among the members in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and, for that purpose, set such values as he deems fair upon any property to be divided and determine how the division shall be carried out between the members; and

	(ii)	vest the whole or any part of the assets in trustees upon such trusts for the benefit of members as the liquidator shall think fit,

but no member shall be compelled to accept any share or other assets upon which there is any liability.

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Redemption

None of the shares of the Company has been issued on the basis that it may be redeemed or is liable to be redeemed at the option of the shareholders or the Company. The Company is therefore under no obligation to create a sinking fund or redemption reserve. However, subject to the provisions of the Statutes, the Company may purchase any of its own shares (including any redeemable shares).

Further capital calls

The Directors may only make calls upon the members in respect of amounts unpaid on the shares (whether in respect of nominal value or premium).

Variation of rights

Subject to the Act, the rights attached to any class of shares may (unless otherwise provided by the terms of the issue of shares of that class) be varied with the consent in writing of the holders of three-quarters in nominal value of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the shares of the class (but not otherwise) and may be so varied either whilst the Company is a going concern or during, or in contemplation of, a winding-up. At every such separate general meeting the necessary quorum shall be at least two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class (but so that at any adjourned meeting any holder of shares of the class present in person or by proxy shall be a quorum).

General meetings

The Directors may call general meetings whenever and at whatever time and location they so determine. At a general meeting called to pass a special resolution at least 21 clear days’ notice must be given, and all other extraordinary general meetings shall be called by at least 14 clear days’ notice. Two persons entitled to vote upon the business to be transacted shall be a quorum.

Subject to any terms as to voting upon which any shares may be issued and to the provisions of the Articles, every member present in person shall have one vote on a show of hands and on a poll every member present in person or by proxy shall have one vote for each share of which he is the holder. No member shall be entitled to vote in respect of any share held by him if any call or other sum payable by him to the Company remains unpaid.

If a member or any person appearing to be interested in shares has been duly served with a notice under Section 212 of the Act and is in default for the prescribed period in supplying to the Company information thereby required, unless the Directors otherwise determine, the member shall not be entitled to vote at any general or class meeting of the Company in respect of the shares in relation to which the default occurred.

Limitations on non-resident or foreign shareholders

English law and the Memorandum and Articles of Association of the Company treat those persons who hold shares and are neither UK residents nor nationals in the same way as UK residents or nationals. They are free to own, vote on and transfer any shares they hold.

Transfer of shares

Any member may transfer all or any of his shares by instrument of transfer in the usual common form or in any other form which the Directors may approve. The instrument of transfer of a share shall be signed by or on behalf of the transferor and, except in the case of fully-paid shares, by or on behalf of the transferee.

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Where any class of shares is for the time being a participating security, title to shares of that class which are recorded as being held in uncertificated form, may be transferred by the relevant system concerned. The Directors may in their absolute discretion and without giving any reason refuse to register any transfer of shares (not being fully paid shares). The Directors may also refuse to register a transfer of shares unless the instrument of transfer:


	(i)	is lodged at the transfer office accompanied by the relevant share certificate(s);

	(ii)	is in respect of only one class of share; and

	(iii)	is in favour of not more than four persons jointly.

The Directors of the Company may refuse to register the transfer of a share in uncertificated form to a person who is to hold it thereafter in certificated form in any case where the Company is entitled to refuse (or is excepted from the requirements) under the Uncertificated Securities Regulations 2001 to register the transfer; and they may refuse to register any such transfer in favour of more than four transferees. The Directors may refuse to register any transfer if it is their opinion that such transfer would or might (i) prejudice the Group’s right to hold, be awarded or granted or have renewed or extended, any licence granted under the Broadcasting Acts, or (ii) give rise to or cause a variation to be made to, or a revocation or determination of, any such licence by Ofcom.

If the Directors determine following registration of a transfer of shares:


	(i)	and following consultation with Ofcom that, inter alia, by reason of the interest of a person in any shares of the Company transferred, Ofcom may vary, revoke, determine or refuse to award, grant, renew or extend a licence granted under the Broadcasting Acts; or

	(ii)	that any person has an interest in the shares of the Company which, inter alia, makes the Company a disqualified person under the Broadcasting Acts or which contravenes, or would cause a contravention of, any of the restrictions set out in Parts III, IV or V of Schedule 2 to the Broadcasting Act 1990 or any order, direction or notice made pursuant to the Broadcasting Acts or such other restrictions as may be applied by Ofcom from time to time to disqualify certain persons or bodies from having interests in such a licence or to restrict the accumulation of interests in relevant services as defined in Schedule 2 to the Broadcasting Act 1990;

the Directors shall be entitled to serve written notice (a “Disposal Notice”) on the relevant transferee in respect of the shares transferred stating that they have so determined, specifying their grounds in general terms and calling for the disposal of such transferred shares as are specified in the Disposal Notice within 21 days of the date of such notice or such longer period as the Directors may consider reasonable and which they may extend. If the Disposal Notice is not complied with to the satisfaction of the Directors, they shall, so far as they are able, dispose of the relevant shares for the best price reasonably obtainable in all the circumstances. In addition, a member who has been served with a Disposal Notice shall not, with effect from the expiration of such period as the Directors shall specify in such notice (not being longer than 30 days from the date of service of the notice), be entitled to receive notice of, or to attend or vote at, any general meeting of the Company by reason of his holding the shares specified in the Disposal Notice.

Untraced shareholders

The Company shall be entitled to sell, at the best price reasonably obtainable, the shares of a member or the shares to which a person is entitled by transmission if, during a period of twelve years, no cheque for amounts payable in respect of the share has been cashed and no communication has been received by the Company from the member or the person entitled by transmission and at least three dividends have been paid in relation to such shares during those twelve years and no such dividend has been claimed and, within a further period of three months from the date of advertisements giving notice of its intention to sell such shares placed after the expiry of the period of twelve years, the Company has not received any communication from the member or the person entitled by transmission and notice has been given by the Company to the London Stock Exchange of its intention to make such sale. The Company shall be

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obligated to account to the former member or person entitled by transmission for the net proceeds of the sale of such shares but no trust shall be created in respect of the debt and no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds.

Alteration of share capital