Net cash inflow from operating activities of £5,389 million in the 2004 financial year compares with £6,023 million in the 2003 financial year and £5,257 million in the 2002 financial year. Net cash inflow from continuing operating activities amounted to £5,023 million in the 2002 financial year. Special and deficiency contributions to the main pension fund, described below, of £742 million in the 2004 financial year, £329 million in the 2003 financial year and

£600 million in the 2002 financial year were paid, consequently reducing the net cash inflow by these amounts. The pension payments in the 2004 financial year include early payment of £380 million deficiency contributions to the BT Pension Scheme, which represents most of the deficiency contributions for the 2005 and 2006 financial years.
     The net cash outflow for returns on investments and servicing of finance amounted to £527 million, £1,506 million and £1,695 million in the 2004, 2003 and 2002 financial years, respectively. The reduction in the 2004 financial year outflow of £979 million reflects the receipt of £420 million of funds on restructuring some of the group’s swap portfolio. There will be offsetting higher interest payments in future years as a result of restructuring the swaps. The 2003 financial year included the payment of a £293 million premium on closing out £2.6 billion of fixed interest rate swaps, following receipt of the Cegetel sale proceeds.
     Tax paid in the 2004 financial year totalled £317 million compared with £434 million in the 2003 financial year and £562 million paid in the 2002 financial year. The lower tax paid in the 2004 and 2003 financial years reflects the lower current tax charge and the level of payments made on account.
     The net cash outflow of £2,477 million for capital expenditure and financial investment in the 2004 financial year included £2,684 million of capital expenditure on property, plant and equipment, offset by £208 million received on the sale of fixed assets. In the 2003 financial year the net cash outflow of £2,381 million for capital expenditure and financial investment included £2,580 million of capital expenditure on plant and equipment, offset by £200 million received on the sale of fixed assets. In the 2002 financial year the net cash outflow of £1,354 million for capital expenditure and financial investment included £4,069 million of capital expenditure on plant and equipment, offset by £2,752 million received on the sale of fixed assets. These proceeds included £2,380 million from the property sale and leaseback transaction completed in December 2001, described above.
     The net cash outflow from acquisitions less disposals in the 2004 financial year totalled £60 million. The principal cash outflow for acquisitions was due to the purchase of a controlling interest in BT Expedite Limited (formerly NSB Retail plc) and Transcomm plc. In the 2003 financial year the net cash inflow from disposals less acquisitions totalled £2,842 million. Cash proceeds from disposals amounted to £2,919 million and principally comprised £2,603 million from the sale of the investment in Cegetel. In the 2002 financial year the net cash inflow from disposals less acquisitions totalled £5,785 million. Cash proceeds from disposals amounted to £6,916 million and principally comprised £3,075 million from the sale of the investment in Japan Telecom and J-Phone, £1,838 million from the sale of the Yell directories business and £1,084 million from the sale of our investment in Airtel. The principal cash outflow for acquisitions was the completion of the purchase of a minority interest in Esat Digifone in April 2001 for £869 million.
     Equity dividends paid in the 2004 financial year totalled £645 million whilst those paid in the 2003 financial year totalled £367 million. There were no equity dividends paid in the 2002 financial year as explained above.
     The resulting cash inflow for the 2004 financial year, before management of liquid resources and financing, of £1,366 million was mainly applied in repaying long-term borrowings and short-term investments with total borrowings of £3,627 million being repaid. In addition, the group issued new loans of £1,326 million. The new loans included a US$172 million 0.75% exchangeable bond due in 2008, exchangeable into ordinary shares of LG Telecom, BT’s Korean based associate and a sale and leaseback of circuit switches which had no effect on net debt but increased gross debt and cash by around £1 billion. The cash inflow for the 2003 financial year of £4,183 million was applied in repaying short-term borrowings and investing in short-term investments, with total borrowings of £2,535 million being repaid. The cash inflow for the 2002 financial year of £7,433 million was also applied in repaying short-term borrowings and investing in short-term investments. This was in part due to the success of the company’s rights issue which closed in June 2001. 1,976 million new shares were issued for a total consideration of £5,876 million, net of expenses. As part of the demerger arrangements, £440 million was received from mmO₂, additionally mmO₂ assumed £60 million of the group’s external net debt.
     The cash inflow for the 2004 financial year resulted in net debt reducing by a further £1,148 million to £8,425 million having reduced by £4,128 million to £9,573 million in the 2003 financial year. In the 2002 financial year the cash inflow resulted in net debt reducing to £13,701 million at 31 March 2002.
     During the 2004 financial year, as noted earlier, the group restructured some of its swaps portfolio to mitigate credit risk to certain counterparties. As a result, the group terminated £7 billion of cross-currency interest rate swaps and replaced these with new swaps which had the same economic hedging effect. This resulted in the group paying £445 million in reducing gross debt and receiving £420 million of interest receipts. The interest receipts have been included within deferred income on the balance sheet and will be amortised to the profit and loss account over the term of the underlying hedged debt.
     During the 2004 financial year the group commenced a share buyback programme, repurchasing 81 million shares during the year for consideration of £144 million. The buyback programme will be funded from cash generated over and above that required to meet our net debt target of around £7 billion in the 2007 financial year, after paying dividends and taking into account acquisitions or disposals.

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