BUSINESS PROGRESS
We continued to implement our strategy of growth through business transformation. Your Board has given its backing to targeted acquisitions that will help us confirm our status as a leading player in the global networked IT services market. In the 2006 financial year, we acquired Atlanet in Italy (as part of a major deal with Fiat), Cara Group in Ireland and Total Network Solutions in the UK. And in the UK, we now have almost eight million broadband lines over which we are able to offer customers exciting, next-generation voice and entertainment services. New wave revenue grew by 38% to £6.3 billion, and accounted for around one-third of our total business.

REGULATION
We believe that a fair and flexible regulatory regime is vital for our industry, for ensuring that we can meet customers’ growing needs and for encouraging investment. We were pleased that, following its strategic review of telecommunications, Ofcom accepted the set of legally-binding Undertakings that BT proposed in order to transform the regulatory landscape in the UK. We believe that the impact of these Undertakings will be to focus regulation where it remains necessary at the same time as stimulating de-regulation wherever possible.

PENSIONS
BT stands fully behind its pension promise to pensioners and members of the BT Pension Scheme (BTPS). The scheme is well-managed and its assets have grown very significantly in recent years, from £23 billion at the end of 2002 to more than £35 billion currently. The accounting deficit has almost halved in the last year alone. With the Trustees of the BTPS, we are continuing discussions on the triennial funding valuation of the scheme. In particular, we aim to review recent pensions legislation and guidelines, and examine the implications and extent of the Crown Guarantee given on privatisation in 1984. The Crown Guarantee, which applies to liabilities assumed by BT in 1984 and only in the event of insolvency, is an extra layer of security for BT pensioners.

THE BOARD
There were a number of changes to your Board during the year. I would like to welcome Matti Alahuhta and Phil Hodkinson as non-executive directors. Matti has been President of Kone Corporation since January 2005 and was previously at Nokia; Phil is Group Finance Director of HBOS. Both bring a wide range of commercial and senior management experience to your company. I would also like to thank Lou Hughes who stepped down as a non-executive director on 31 March 2006 for his excellent contribution over more than six years. I’m pleased that his experience is not lost to us: he has joined our Americas Advisory Board.

OUR WIDER RESPONSIBILITIES
Our aim as a communications company is to operate in a socially responsible and sustainable way and to ensure that we help everyone benefit from improved communications and enhanced connectivity. I’m very proud of the fact that, for the fifth year in a row, BT was the highest placed telecommunications company in the Dow Jones Sustainability Index.
     Climate change has been moving inexorably up the social and corporate agendas for a number of years now. Although telecommunications technology is environmentally friendly, BT is one of the largest companies in the UK and one of the largest consumers of electricity. Our operations inevitably have an impact on the environment and we take the job of managing that impact seriously. We are now, for example, meeting almost all our UK electricity needs from environmentally friendly sources, including wind generation, solar, wave and hydroelectric schemes.

LOOKING FORWARD
I am very grateful to our shareholders and our customers for their continued loyalty and the confidence that they have shown in BT’s programme of transformation. I’d like to thank our employees for making that programme happen.
     Your company is well set for continued success in the years ahead. Our performance underpins our confidence that we can continue to grow revenue, EBITDA¹, earnings per share and dividends over the coming year, and accelerate the strategic transformation of the business.

NOTICE OF MEETING
To give as many shareholders as possible the opportunity to attend the AGM, we hold the meeting in a different city in the UK each year. We also broadcast my speech and the presentation by our Chief Executive, Ben Verwaayen, live over the internet (see Notice of meeting).
     The directors proposed for re-election this year are Sir Anthony Greener, Maarten van den Bergh and Clay Brendish who are independent non-executive directors. I am pleased to confirm to shareholders that, following formal performance evaluation, we continue to regard Sir Anthony, Maarten and Clay as effective non-executive directors. They make a valuable contribution to the Board and have demonstrated a high level of commitment to the role. Matti Alahuhta and Phil Hodkinson, who joined the Board during the year, are also retiring automatically and are proposed for election. The Board recommend Matti and Phil for election.
     Even if you are not able to come to the meeting in person, your vote is still important. I would urge you, regardless of the number of shares you own, to vote.
     You may vote by completing and returning the enclosed Proxy Card. Alternatively, you may cast your vote online or by telephone or fax.
     If you intend coming to this year’s meeting, please either return the enclosed AGM Intention to Attend card or indicate your intention to attend over the internet or by phone.
     I look forward to seeing you at the Barbican.