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Report of the directors

The directors submit their report and the audited financial statements of the company, BT Group plc, and the group, which includes its subsidiary undertakings, for the 2004 financial year.

BT Group plc is the listed holding company for the BT group of companies and was formed when
the mmO2 business (comprising what had been British Telecommunications plcís mobile activities in the UK, the Netherlands, Germany and the Republic of Ireland) was demerged on 19 November 2001.
     The Operating and financial review, the discussion on Corporate governance, the Report on directorsí remuneration and Risk Factors form part of this report. The audited financial statements are also presented.

Principal activity
The groupís principal activity is the supply of communications services and equipment. In the 2004 financial year, approximately 93% of group turnover arose from operations in the UK.

The names and biographical details of the directors of the company are available from the Board of directors and Operating Committee section. All served throughout the financial year.
     In accordance with the articles of association, Sir Christopher Bland retires by rotation at the forthcoming annual general meeting and will be proposed for re-election. Andy Green, Ian Livingston and John Nelson also retire by rotation and will be proposed for re-election. Details of these directorsí contracts of appointment are included in the Report on directorsí remuneration and the discussion on Corporate governance.

Substantial shareholdings
At 19 May 2004, the company had received notifications from Legal & General Investment Management Limited, Barclays PLC and Brandes Investment Partners LLC, under Part VI of the Companies Act 1985, in respect of holdings of 289,727,496 shares, 347,436,030 shares and 347,201,310 shares respectively, representing holdings of 3.37%, 4.04% and 4.04% of the companyís issued ordinary share capital.

Interest of management in certain transactions
During and at the end of the 2004 financial year, none of the companyís directors was materially interested in any material transaction in relation to the groupís business and none is materially interested in any presently proposed material transactions.

Policy on the payment of suppliers
BTís policy is to use its purchasing power fairly and to pay promptly and as agreed.
     BT has a variety of payment terms with its suppliers. The terms for payments for purchases under major contracts are settled when agreeing the other terms negotiated with the individual suppliers. It is BTís policy to make payments for other purchases within 30 working days of the invoice date, provided that the relevant invoice is presented to the company in a timely fashion and is complete. BTís payment terms are printed on the companyís standard purchase order forms or, where appropriate, specified in individual contracts agreed with the supplier. The ratio, expressed in days, between the amounts invoiced to the company by its suppliers in the 2004 financial year and the amounts owed to its trade creditors at the end of the year was 35 calendar days.

Political donations
The companyís continuing policy is not to make political donations in the everyday sense of those words. This is explained in the Corporate governance section. However, during the 2004 financial year British Telecommunications plc made the following payments to cover the cost of hosting briefing meetings about the companyís activities with MPs and MEPs: Labour Party £8,882; Conservative Party £8,366; Liberal Democrat Party £5,942; Scottish National Party £2,500.

A resolution to reappoint PricewaterhouseCoopers LLP as auditors of the company and authorise the directors to settle their remuneration will be proposed at the AGM.

Authority to purchase shares
The authority given at last yearís AGM of the company held on 16 July 2003 for the company to purchase in the market 867 million of its shares, representing 10% of the issued share capital, expires on 15 October 2004. Shareholders will be asked to give a similar authority at the AGM.
     During the 2004 financial year, 81 million shares of 5 pence each were purchased under this authority (1% of the share capital) for a total consideration of £144 million, at an average price of £1.77 per share. The shares were purchased in an on-market programme of buying back the companyís shares, initiated in November 2003, as part of the companyís shareholder distribution strategy. 36 million shares were cancelled and 44 million shares have been retained as treasury shares. At 14 May 2004, 0.2 million treasury shares had been transferred to meet the companyís obligations under its employee share plans.

AGM resolutions
The resolutions to be proposed at the AGM to be held on 14 July 2004, together with explanatory notes, appear in the separate Notice of Annual General Meeting sent to all shareholders.

By order of the Board  
Larry Stone
19 May 2004
Registered office: 81 Newgate Street, London EC1A 7AJ
Registered in England and Wales No. 4190816


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