the balance sheet in respect of our CRM project was £166 million (30 June 2005: £160 million). 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 period were associated with the CRM systems (half year ended 31 December 2004: 100%). These assets are being depreciated over periods of between three and four years. The majority of CRM-related assets were brought into use in September 2005. The only difference between IFRS and US GAAP relates to the capitalisation of interest costs on funds invested in the construction of major capital assets (see Item 5 “Summary of Differences Between International and United States Generally Accepted Accounting Principles” for further details).

Amortisation of programming inventory

A significant proportion of programming costs relate to the amortisation of television programme rights. Programming costs constituted 51% of operating expenses in the period (half year ended 31 December 2004: 54%). 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 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. 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, they are amortised on a straight-line basis across the season or competition as our estimate of the benefits received from these rights is determined to be most appropriately aligned with a straight-line amortisation profile. Provisions are made for any programme rights which are surplus to our requirements or will not be shown for any other reason. There is no difference in the Group’s treatment of amortisation of programme stock between IFRS and US GAAP.

Deferred tax

We recognise deferred tax assets and liabilities using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used in the computation of taxable profit. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affect neither accounting profit nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is not probable that they will reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that have been enacted or substantially enacted at the balance sheet date.

A deferred tax asset is only recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. 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 temporary 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 to recognise additional deferred tax assets, resulting in a decrease in our effective tax rate and a positive impact on our financial results.

At 31 December 2005, we have recognised a deferred tax asset of £79 million (30 June 2005: £105 million) and have unrecognised deferred tax assets of £330 million (30 June 2005: £330 million) in respect of capital losses related to the Group’s holding of KirchPayTV, £24 million (30 June 2005: £24 million) in respect of capital losses in respect of football clubs and other investments, £14 million (30 June 2005: £14 million) on UK losses in the Group and £64 million (30 June 2005: £64 million) on trading losses in the Group’s German holding companies of KirchPayTV. The Directors consider that at 31 December 2005 there was sufficient evidence to support the recognition of our deferred tax asset on the basis that it was probable that there would be suitable taxable profits against which this asset could be utilised and from which future reversals of underlying timing differences could be deducted.

29

 

The net deferred tax asset recognised under US GAAP has primarily differed in respect of deferred tax on IFRS to US GAAP adjustments and in relation to the recognition of deferred tax assets in respect of employee stock-based compensation expense (see Item 5 “Summary of Differences Between International and United States Generally Accepted Accounting Principles” for further details).

ADOPTION OF NEW ACCOUNTING STANDARDS

Details of new US GAAP accounting standards issued during the period are given in Item 5 “Summary of Differences Between International and United States Generally Accepted Accounting Principles”.

Adoption of IFRS

Following a Regulation issued by the Council of the European Union (“EU”) the Group, along with all European Union listed groups, is required to adopt International Financial Reporting Standards including International Accounting Standards (“IAS”) and Interpretations, as adopted by the EU, together “IFRS”, in the preparation of its consolidated financial statements for periods beginning 1 July 2005. Therefore the consolidated financial statements contained within Item 4 “Interim Financial Statements (IFRS)” have been prepared in accordance with IFRS issued by the International Accounting Standards Board (“IASB”) as adopted by the European Union.

The transition date for the Group’s adoption of IFRS of 1 July 2004 is determined in accordance with IFRS 1 “First-time Adoption of International Financial Reporting Standards”. This transition date complies with the Securities and Exchange Commission’s (“SEC”) decision to provide an exemption from the provision of a second year of comparative financial information for foreign registrants in the first year in which they adopt IFRS. In subsequent years, the Group will produce two years of comparative financial information for SEC reporting purposes.

The adoption of IFRS has led to some changes in the Group’s accounting policies, results, and the presentation of its financial statements, and other disclosures within the Interim Report on Form 6-K, which have previously been in accordance with UK GAAP. The principal effects on the Group’s financial statements are given in note 12 of the interim financial statements included within Item 4 “Interim Financial Statements (IFRS)”.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction

Our treasury function is responsible for raising finance for the Group’s operations, together with associated liquidity management, and the management of foreign exchange, interest rate and credit risks. Treasury operations are conducted within a framework of policies and guidelines authorised and reviewed by both the Audit Committee and the Board, who receive regular updates of treasury activity. Derivative instruments are transacted for risk management purposes only. It is our policy that all hedging is to cover known risks and that no speculative trading in financial instruments is undertaken. Regular and frequent reporting to management is required for all transactions and exposures, and the internal control environment is subject to periodic review, both by our internal audit team and by our Treasury Committee.

30

Our principal market risks are exposures to changes in interest rates and currency exchange rates, which arise both from our sources of finance and from our operations. Following evaluation of those positions, we selectively enter into derivative financial instruments to manage these exposures. The principal instruments currently used are interest rate swaps and options on interest rate swaps (“swaptions”) to hedge interest rate risks, forward exchange contracts, currency options (collars) and similar financial instruments to hedge transactional currency exposures, and cross-currency swaps to hedge exposures on long-term foreign currency debt.

Interest rate management

We have financial exposures to both UK and US interest rates, arising primarily from long-term bonds. We manage our exposures by borrowing at fixed rates of interest and by using interest rate swap and swaption agreements to adjust the balance between fixed and floating rate debt. All of our US dollar-denominated debt has been swapped to pounds sterling, using cross-currency swap arrangements, which, in addition to the translation of the principal amount of the debt to pounds sterling, also provide for the exchange, at regular intervals, of fixed-rate amounts of dollars for fixed-rate amounts of pounds sterling. All of our debt exposure is denominated in pounds sterling after cross-currency swaps are taken into account; at 31 December 2005, the split of our aggregate net borrowings into their core currencies was US dollar 75% and pounds sterling 25% (30 June 2005: US dollar 91% and pounds sterling 9%). We also enter into pounds sterling interest rate swap and swaption arrangements, which provide for the exchange, at specified intervals, of the difference between fixed rates and variable rates, calculated by reference to an agreed notional pounds sterling amount. Certain of the swaption agreements can be cancelled prior to the maturity of the bonds to which they apply. The counterparties have a minimum long-term rating of “A” or equivalent with Moody’s and Standard & Poor’s.

Our hedging policy requires that between 50% and 80% of our borrowings are held at fixed rates after taking account of interest rate swap and swaption agreements. At 31 December 2005, 76% of our borrowings were at fixed rates after taking account of interest rate swaps and swaption agreements (30 June 2005: 72%). The fair value of interest rate swap and swaption agreements and cross-currency swaps held, as of 31 December 2005, was £83 million against our favour, compared to £103 million against our favour at 30 June 2005.

At 31 December 2005, we had outstanding cross currency swap, interest rate swap and swaption agreements with net notional principal amounts totalling £1,596 million, compared to £1,018 million at 30 June 2005. This movement reflects derivative financial instruments entered into in relation to bonds issued during the period, partly offset by the expiry of certain existing swap agreements.

In November 2004, we entered into a £1 billion RCF. This facility was used to cancel an existing £600 million RCF and is available for general corporate purposes. At 31 December 2005, the £1 billion facility was undrawn (30 June 2005: undrawn). The £1 billion facility has a maturity date of July 2010, and interest accrues at a margin of between 0.45% and 0.55% per annum above LIBOR, dependent on our leverage ratio of net debt to EBITDA (as defined in the loan agreement). The current applicable margin is 0.45% (30 June 2005 0.45%), which is based on a net debt to EBITDA ratio of 1.00:1 or below. Should this ratio increase above 1.00:1 and up to 2.00:1, the margin would increase to 0.50%, and above 2.00:1, the margin increases to 0.55%. The ratio of net debt to EBITDA at 31 December 2005 was 0.46:1, indicating a margin of 0.45% (30 June 2005 ratio of 0.5:1, indicating a margin of 0.45%).

To ensure continuity of funding, our policy is to ensure that available funding matures over a period of years. At 31 December 2005, 34% of our available funding was due to mature in more than five years (30 June 2005: 49%).

At 31 December 2005, a one percentage point movement in interest rates, from 1 January 2006, would result in a £5 million movement in our annual net interest expense (31 December 2004: £4 million) generated by interest receivable and payable on our bank accounts, RCF and interest rate swap and swaption agreements.

At 31 December 2005, our annual interest charge would be unaffected by any change to our credit rating in either direction (half year ended 31 December 2004: nil).

Currency exchange rates

Our revenues are substantially denominated in pounds sterling, although some of our revenues are denominated in euros. Our primary euro exposure arises as a result of revenues generated from our subscribers in Ireland, being approximately 4% of total revenue in the period (half year ended 31 December 2004: 3%). These euro-denominated revenues are offset to a certain extent by euro-denominated costs, relating mainly to certain transponder rentals, the net position being a euro surplus.

38 million euros were exchanged for US dollars on currency spot markets during the period (half year ended 31 December 2004: nil) and 30 million euros were exchanged for pounds sterling during the period (half year ended 31 December 2004: nil). At 31 December 2005, 74 million euros (£51 million) has been retained by the Group, in part to cover obligations under foreign exchange contracts for the purchase of Swiss francs.

A significant proportion of operating costs are denominated in US dollars. In the period, 11% of operating costs (£173 million) were denominated in US dollars (half year ended 31 December 2004: 13% (£200 million)). These costs relate mainly to our long-term programming contracts with US suppliers.

During the period, we managed our US dollar/pound sterling exchange risk exposure on US programming contracts by the purchase of forward foreign exchange contracts, currency options (collars) and similar financial instruments for up to five years ahead. All US dollar-denominated forward exchange contracts, currency options (collars) and similar financial instruments entered into by us are in respect of firm commitments only and those instruments maturing over the 12 months following 31 December 2005 represent approximately 80% (30 June 2005: 80%) of US dollar-denominated costs falling due in that period. At 31 December 2005, we had outstanding commitments to purchase, in aggregate, US$693 million (30 June 2005: US$670 million) at average rates of US$1.80 to £1.00 (30 June 2005: US$1.79 to £1.00). In addition, at 31 December 2005, currency options (collars) were held relating to the purchase of a total of US$340 million (30 June 2005: US$114 million).

We purchased the programming rights to certain UEFA Champions League football matches until the end of the 2005/06 season. Payments in respect of these rights are made pursuant to the contract in Swiss francs, which means that we are exposed to the Swiss franc/pound sterling exchange rate. In line with our policy of limiting foreign exchange transactions to fixed price instruments, 100% of this exposure (CHF 100 million) was hedged during the period via the use of forward contracts for the exchange of euros and pounds sterling for Swiss francs.

It is our policy that all anticipated foreign currency exposures are substantially hedged in advance of the fiscal year in which the exposure occurs. The impact on our annual profit of a 10% movement in pounds sterling, from 1 January 2006, against all currencies in which we have significant transactions is estimated to be a £5 million movement (half year ended 31 December 2004: £3 million movement) to the income statement, with a strengthening of pounds sterling resulting in a decrease in profits.

The accounting policies in respect of market risk sensitive instruments are disclosed in note 1 of Item 4 “Interim Financial Statements (IFRS)”. The differences between IFRS and US GAAP in respect of market risk sensitive instruments are described in Item 5 “Summary of Differences Between International and United States Generally Accepted Accounting Principles”.

ITEM 4: INTERIM FINANCIAL STATEMENTS (IFRS)

Consolidated Income Statement for the half year ended 31 December 2005

				2005/06				2004/05
				Half year				Half year
				£m				£m
		Notes		(unaudited)				(unaudited)
Revenue		2			2,016				1,855
Operating expenses		3			(1,602	)			(1,499	)
Operating profit					414				356
Share of results of joint ventures and associates					7				8
Investment income					20				15
Finance costs					(51	)			(45	)
Profit on disposal of joint venture					—				9
Profit before tax					390				343
Taxation		4			(116	)			(98	)
Profit for the period					274				245
Earnings per share from profit for the period
Basic and diluted (in pence)		5			14.9p				12.7p

All profit for the period is attributable to equity holders of the parent.

All results relate to continuing operations.

The accompanying notes are an integral part of this consolidated income statement.

Consolidated Statement of Recognised Income and Expense for the half year ended 31 December 2005

		2005/06				2004/05
		Half year				Half year
		£m				£m
		(unaudited)				(unaudited)
Profit for the period			274				245
Unrealised gains (losses) arising during the period
Cash flow hedges			19				(78	)
Tax on cash flow hedges			(6	)			23
			13				(55	)
Reclassified and reported in profit for the period
(Gains) losses on cash flow hedges			(18	)			54
Tax on cash flow hedges			6				(16	)
			(12	)			38
Net gains (losses) not recognised in the Income Statement			1				(17	)
Total recognised income for the period			275				228

All recognised income for the period is attributable to equity holders of the parent.

Consolidated Balance Sheet as at 31 December 2005

				31 December				30 June
				2005				2005
				£m				£m
		Notes		(unaudited)				(unaudited)
Non-current assets
Goodwill					417				417
Intangible assets					221				202
Property, plant and equipment					349				335
Investments in joint ventures and associates					29				23
Available for sale investments					52				2
Derivative financial assets					13				9
Deferred tax assets					79				105
					1,160				1,093
Current assets
Inventories					568				321
Trade and other receivables					389				331
Derivative financial assets					29				14
Short-term deposits					764				194
Cash and cash equivalents					889				503
					2,639				1,363
Total assets					3,799				2,456
Current liabilities
Borrowings					174				—
Trade and other payables					1,376				1,031
Derivative financial liabilities					26				6
Current tax liabilities					116				100
Provisions					6				13
					1,698				1,150
Non-current liabilities
Borrowings					1,854				982
Other payables					23				25
Derivative financial liabilities					80				112
					1,957				1,119
Total liabilities					3,655				2,269
Shareholders’ equity		7			144				187
Total liabilities and shareholders’ equity					3,799				2,456

The accompanying notes are an integral part of this consolidated balance sheet.

Consolidated Cash Flow Statement for the half year ended 31 December 2005

				2005/06				2004/05
				Half year				Half year
				£m				£m
		Notes		(unaudited)				(unaudited)
Cash flows from operating activities
Cash generated from operations		8a			514				407
Interest received					16				17
Taxation paid					(76	)			(28	)
Net cash from operating activities					454				396
Cash flows from investing activities
Funding to joint ventures and associates					(2	)			(4	)
Repayments of funding from joint ventures and associates					1				6
Dividends received from joint ventures and associates					3				7
Proceeds from the sale of a joint venture					—				14
Purchase of property, plant and equipment					(58	)			(60	)
Purchase of intangible assets					(36	)			(63	)
Purchase of available-for-sale investments					(51	)			—
(Increase) decrease in short-term deposits					(570	)			71
Net cash used in investing activities					(713	)			(29	)
Cash flows from financing activities
Proceeds from issue of guaranteed notes		8b			1,014				—
Proceeds from disposal of shares in Employee Share Ownership Plan (“ESOP”)					7				2
Share buy-back					(240	)			(128	)
Interest paid					(44	)			(49	)
Dividends paid to shareholders					(92	)			(63	)
Net cash from (used in) financing activities					645				(238	)
Net increase in cash and cash equivalents					386				129
Cash and cash equivalents at beginning of the period					503				513
Cash and cash equivalents at end of the period					889				642

The accompanying notes are an integral part of this consolidated cash flow statement.

Notes to the interim accounts

1

Accounting policies

British Sky Broadcasting Group plc (the “Company”) is a limited liability company incorporated in England and Wales, and domiciled in the United Kingdom. The consolidated financial statements of the Company for the half year ended 31 December 2005 comprise the Company and its subsidiaries (together referred to as the “Group”) and its interests in associates and jointly-controlled entities.

a)

Statement of compliance

The Group has a date of transition to International Financial Reporting Standards (“IFRS”) of 1 July 2004 (the “IFRS Transition Date”). The following IFRSs have been adopted from the IFRS Transition Date, which is earlier than required under the IFRS transitional provisions: International Accounting Standard (“IAS”) 32 “Financial Instruments: Disclosure and Presentation”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”.

b)

Basis of preparation

The interim accounts for the half year ended 31 December 2005, which were approved by the Board of Directors on 31 January 2006, have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’. The Group will adopt IFRS for the first time in its financial statements for the year ended 30 June 2006, which will include comparative financial statements for the year ended 30 June 2005. IFRS 1 “First Time Adoption of International Financial Reporting Standards” (“IFRS 1”) requires that an entity develop accounting policies based on the standards and related interpretations effective at the reporting date of its first annual IFRS financial statements. IFRS 1 also requires that those policies be applied as of the IFRS Transition Date and throughout all periods presented in the first IFRS financial statements. The accompanying interim financial statements have been prepared in accordance with those International Accounting Standards Board (“IASB”) standards and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations issued and effective, or issued and early-adopted, at 31 December 2005. The IASB standards and IFRIC interpretations that will be applicable at 30 June 2006, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing this interim financial information. As a result, the accounting policies used to prepare these financial statements are subject to change up to the reporting date of the Group’s first IFRS financial statements.

The Group maintains a 52 or 53 week fiscal year ending on the Sunday nearest to 30 June in each year. In fiscal year 2006, this date will be 2 July 2006, this being a 52 week year (Fiscal Year 2005: 3 July 2005, 53 week year). This interim report is prepared to 1 January 2006, being the first 26 weeks of the 52 week year (Fiscal Year 2005: 26 weeks of the 53 week year). For convenience purposes, the Group continues to date its interim report as of 31 December 2005.

The unaudited interim accounts for the half year ended 31 December 2005 do not constitute statutory accounts as defined in Section 240 of the Companies Act 1985.

The financial statements have been prepared on a historical cost basis, except for the remeasurement to fair value of financial instruments as described in the accounting policies below.

The accounts have been prepared on a going concern basis.

c)

Basis of consolidation

	i.		Subsidiaries
			Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are included in the financial statements of the Company from the date control commences until the date that control ceases.
			Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
	ii.		Associates and joint ventures
			Associates are entities where the Group has significant influence, but not control or joint control, over the financial and operating policies of the entity. Joint ventures are those entities which are jointly controlled by the Group under a contractual agreement.
			The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates and joint ventures using the equity method, from the date that significant influence or joint control commences to the date that it ceases, based on the present ownership interests and excluding the possible exercise of potential voting rights, less any impairment losses (see note k). When the Group’s interest in an associate or joint venture has been reduced to nil because the Group’s share of losses exceeds its interest in the associate or joint venture, the Group only provides for additional losses to the extent that it has incurred legal or constructive obligations to fund such losses, or made payments on behalf of an associate or joint venture. Where the disposal of an investment in associates and joint ventures is considered highly probable, the investment ceases to be equity accounted and, instead, is classified as held for sale and stated at the lower of carrying amount and fair value less costs to sell.

d)

Foreign currency translation

The Group’s presentational currency is pounds sterling. Trading activities denominated in foreign currencies are recorded in sterling at the actual exchange rates as of the date of the transaction. Monetary assets, liabilities and commitments denominated in foreign currencies at the period end are reported at the rates of exchange at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at the date of the initial transaction. Gains and losses on retranslation of assets and liabilities are included net in the profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised directly in equity.

e)

Derivative financial instruments and hedging activities

The Group uses a number of derivatives to hedge its exposures to fluctuations in interest and foreign exchange rates.

Derivatives are held at fair value from the date that a derivative contract is entered into. Certain derivatives held by the Group relating to highly probable forecast transactions (the “hedged items”) that meet qualifying criteria under IAS 39 are designated as cash flow hedges, and are subject to hedge accounting. Other derivatives held by the Group do not meet the qualifying criteria for recognition as cash flow hedges, despite this being their economic purpose. Changes in the fair values of these derivatives are recognised immediately in the income statement. The Group does not hold or issue derivatives for speculative purposes.

Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The fair value of derivative financial instruments is estimated with reference to the contracted value and the appropriate market value prevailing at each balance sheet date.

Derivatives that qualify for cash flow hedge accounting

Changes in the fair values of derivatives that are designated as cash flow hedges are initially recognised in the hedging reserve. In the circumstances where only the intrinsic value of a derivative is designated as a cash flow hedge, only the intrinsic value of the derivative is initially recognised in the hedging reserve, with all other movements being recognised in the income statement. Amounts accumulated in the hedging reserve are subsequently recognised in the income statement in the periods when the related hedged items are recognised in the income statement.

When a hedging instrument expires, is terminated or is exercised, or if a hedge no longer meets the qualifying criteria for hedge accounting, any cumulative gain or loss existing in the hedging reserve at that time remains in the hedging reserve and is recognised when the forecast transaction is ultimately recognised in the income statement, provided that the underlying transaction is still expected to occur. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in the hedging reserve is immediately recognised in the income statement and all future changes in the fair value of the hedging instruments are immediately recognised in the income statement.

The ongoing effectiveness of the Group’s cash flow hedges is assessed using the dollar-offset approach, with the expected cash flows for hedging instruments being compared to the expected cash flows of the hedged items. This assessment is used to demonstrate that each hedge relationship has been highly effective in the period and is expected to continue to be highly effective in future periods. The measurement of hedge ineffectiveness for the Group’s cash flow hedges is calculated using the hypothetical derivative method, with the fair values of the hedging instruments being compared to those of the hypothetical derivative that would result in the designated item achieving perfect hedge effectiveness. The excess of the cumulative change in the fair value of the actual hedging instrument compared to that of the hypothetical derivative is deemed to be hedge ineffectiveness, which is recognised in the income statement.

Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement. Embedded derivatives are carried on the balance sheet at fair value from the inception of the host contract. Changes in fair value are recognised within the income statement during the period in which they arise.

f)

Goodwill and Intangible assets

	i.		Goodwill
			Business combinations that have occurred since the IFRS Transition Date are accounted for by applying the purchase method of accounting. Following this method, goodwill is initially recognised on consolidation, representing the difference between the cost of the business combination and the fair value of the identifiable assets, liabilities and contingent liabilities assumed. Where a business combination occurs in several stages, as a result of successive share purchases, the goodwill associated with each stage is calculated using fair value information at the date of each additional share purchase. Any movement in the fair value of the Group’s share of net assets held previously is recognised in a revaluation reserve.
			In respect of business combinations that occurred prior to the IFRS Transition Date, goodwill has been included at its deemed cost, as permitted by IFRS 1 “First-time Adoption of International Financial Reporting Standards”. Deemed cost represents the goodwill’s carrying value under the Group’s UK GAAP accounting policies on the IFRS Transition Date. On disposal of a subsidiary, associate or joint venture, the attributable amount of goodwill is included in the determination of profit or loss on disposal, except for goodwill written off to reserves under UK GAAP prior to the IFRS Transition Date, which is not reinstated and is not included in determining any subsequent gain or loss on disposal.
			Goodwill is stated at cost less any impairment losses and is tested at least annually for impairment. Any impairment identified is recognised immediately in the income statement and is not subsequently reversed. The carrying amount of goodwill in respect of associates and joint ventures is included in the carrying amount of the investment in the associate or joint venture.
	ii.		Intangible assets
			Research expenditure is recognised in the income statement as the expense is incurred. Costs incurred on development projects (relating to the application of research knowledge to plan or design new or substantially improved products for sale or use within the business) are recognised as intangible assets from the point at which it is probable that the Group has the intention and ability to generate future economic benefits for the Group from the development expenditure, that the development is technically feasible and that the subsequent expenditure can be measured reliably. Other development expenditure is recognised in the income statement as incurred.

			Other intangibles, which are acquired by the Group separately or through business combinations, are stated at cost less accumulated amortisation and impairment losses, other than those that are classified as held for sale, which are stated at the lower of carrying amount and fair value less costs to sell.
			Amortisation of an intangible asset begins when the asset is available for use, and is charged to the income statement through operating expenses on a straight-line basis over the estimated useful life of the intangible asset, being a period of no more than four years, unless the asset life is judged to be indefinite. If the useful life is indefinite or the asset is not yet available for use, no amortisation is charged and an impairment test is carried out at least annually. Other intangible assets are tested for impairment in line with accounting policy (k) below.

g)

Property, plant and equipment

	i.		Owned assets
			Property, plant and equipment are stated at cost net of accumulated depreciation and any impairment losses, (see accounting policy (k)), other than those that are classified as held for sale, which are stated at the lower of carrying amount and fair value less costs to sell.
			When an item of property, plant and equipment is comprised of major components having different useful lives, the components are accounted for as separate items of property, plant and equipment.
	ii.		Leased assets
			Assets held under finance leases, which confer rights and obligations similar to those attached to owned assets, are treated as property, plant and equipment (see accounting policy (p)).
	iii.		Depreciation
			Depreciation is provided to write off the cost, less estimated residual value, of property, plant and equipment on a straight-line basis over its estimated useful life. Land, and assets that are not yet available for use, are not depreciated. Principal annual rates used for this purpose are:

		Freehold buildings		4%
		Leasehold improvements		Lower of lease period or life of the asset
		Equipment, furniture and fixtures		10% — 331/3%
		Assets under finance leases		Lower of lease period or life of the asset

	iv.		Borrowing costs
			Borrowing costs are recognised in the income statement in the period in which they are incurred.

h)

Inventories

	i.		Acquired and commissioned television programme rights
			Programme rights are stated at the lower of cost and net realisable value (“NRV”), including, where applicable, estimated subscriber escalation payments, and net of the accumulated expense charged to the income statement to date.
			Contractual obligations for programme rights not yet available for transmission are not included in the cost of programme rights, but are disclosed as contractual commitments. Payments made upon receipt of commissioned and acquired programming, but in advance of the legal right to broadcast the programmes, are treated as prepayments. Programme rights are recorded in inventory when the programmes are available for transmission.
			The cost of programme rights is recognised in the operating expenses line of the income statement primarily as shown below:

Sports — 100% recognised on the first showing or, where contracts provide for sports rights for multiple seasons or competitions, such rights are principally recognised on a straight-line basis across the seasons or competitions.

Current affairs — 100% recognised in the income statement on first showing,

General entertainment — Recognised through the income statement based on the number of transmissions, as follows:

– One showing planned — 100%

– Two showings planned — 60%; 40%

– Three showings planned — 50%; 30%; 20%

– Four showings planned — 40%; 30%; 20%; 10%

Movies – Acquired movie rights are recognised in the income statement on a straight-line basis over the period of transmission rights. Where acquired movie rights provide for a second availability window, 10% of the cost is allocated to that window.

Where programme rights are surplus to Group requirements, and no gain is anticipated through a disposal of the rights, or where the programming will not be broadcast for any other reason, a write-down to the income statement is made. Reversals of inventory write-downs are recognised as reductions in operating expenses.

	ii		Digiboxes and related equipment
			Digiboxes and related equipment includes digiboxes (including Sky+ boxes), Low Noise Blockers (“LNBs”) and mini-dishes. These inventories are valued at the lower of cost and NRV, the latter of which reflects the value the business expects to realise from the digiboxes and the related equipment in the hands of the customer, and recognised through the operating expenses line of the income statement. Any subsidy is expensed on enablement, which is the process of activating the viewing card once inserted in the digibox upon installation, so as to enable a viewer to view encrypted broadcast services, and effectively represents the completion of the installation process for new subscribers. The amount recognised in the income statement as the inventories are sold is recognised on a first-in first-out basis (“FIFO”).
	iii		Raw materials, consumables and goods held for resale
			Raw materials, consumables and goods held for resale are valued at the lower of cost and NRV. The cost of raw materials, consumables and goods held for resale is recognised through the operating expenses line of the income statement on a FIFO basis.

i)		Financial assets and liabilities
		Financial assets and liabilities are initially recognised at fair value plus any directly attributable transaction costs. At each balance sheet date, the Group assesses whether there is any objective evidence that any financial asset is impaired. Financial assets and liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the financial asset or liability.

	a.		Equity investments
			Equity investments intended to be held for an indefinite period of time are classified as available-for-sale investments. They are carried at fair value, where this can be reliably measured, with movements in fair value recognised directly in reserves. Where the fair value cannot be reliably measured, the investment is carried at cost. Any impairment losses in equity investments are recognised in the income statement and are not reversible under any circumstances. Available-for-sale investments are included within non-current assets unless management have the intention of holding the investment for less than twelve months from the balance sheet date, in which case they are included in current assets. On disposal, the difference between the carrying amount and the sum of the consideration received and any cumulative gain or loss that had previously been recognised directly in reserves is recognised in the income statement.
	b.		Trade and other receivables
			Trade and other receivables are non-derivative financial assets with fixed or determinable payments and are measured at amortised cost using the effective interest method. Trade and other receivables, with no stated interest rate, are measured at the original invoice amount if the effect of discounting is immaterial. An allowance account is maintained to reduce the carrying value of trade and other receivables for impairment losses identified from objective evidence, with movements in the allowance account, either from increased impairment losses or reversals of impairment losses, being recognised in the income statement.
	c.		Short term deposits
			This includes short term deposits and commercial paper which have maturity dates of more than 3 months from inception. These deposits are held at amortised cost, less any allowance for impairment losses.
	d.		Cash and cash equivalents
			Cash and cash equivalents include cash in hand, bank accounts, deposits receivable on demand and deposits with maturity dates of 3 months or less from the date of inception. Bank overdrafts that are repayable on demand and which form an integral part of the Group’s cash management are included as a component of cash and cash equivalents where offset conditions are met.
	e.		Trade and other payables
			Trade and other payables are non-derivative financial liabilities and are measured at amortised cost using the effective interest method. Trade and other payables, with no stated interest rate, are measured at the original invoice amount if the effect of discounting is immaterial.
	f.		Borrowings
			Borrowings are recorded at the proceeds received, net of direct issue costs. Finance charges, including any premium payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement using the effective interest method and are added to the carrying amount of the underlying instrument to which they relate, to the extent that they are not settled in the period in which they arise.

j)

Transponder rental prepayments

Payments made in respect of future satellite capacity have been recorded as prepaid transponder lease costs. These payments are recognised in the income statement on a straight-line basis over the term of the lease.

k)

Impairment

At each balance sheet date, and in accordance with IAS 36 “Impairment of Assets”, the Group reviews the carrying amounts of all its assets excluding inventories (see accounting policy (h)), non-current assets classified as held for sale, financial assets (see accounting policy (i)) and deferred taxation (see accounting policy (q)) to determine whether there is any indication that any of those assets have suffered an impairment loss.

An impairment, other than an impairment of an investment in a joint venture or associate, is recognised in the income statement whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. An impairment of an investment in a joint venture or associate is recognised within the share of profit from joint ventures and associates. The

recoverable amount is the greater of net selling price, defined as the fair value less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to those units, and then to reduce the carrying amount of other assets in the unit on a pro-rata basis.

An impairment loss for an individual asset or cash generating unit shall be reversed if there has been a change in estimates used to determine the recoverable amount since the last impairment loss was recognised and is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Any impairment loss in respect of goodwill is irreversible.

l)

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation to make a probable transfer of economic benefits as a result of past events. The amounts recognised represent the Group’s best estimate of the transfer of benefits that will be required to settle the obligation as of the balance sheet date. Provisions are discounted if the effect of the time value of money is material.

m)

ESOP reserve

Where the Company or its subsidiaries purchase the Company’s own equity shares, the cost of those shares, including any attributable transaction costs, is presented within the ESOP reserve as a deduction in shareholders’ equity in the consolidated financial statements.

n)

Revenue recognition

Revenue, which excludes value added tax and sales between Group companies, represents the gross inflow of economic benefit from Sky’s operating activities. Revenue is measured at the fair value of the consideration received or receivable. The Group’s main sources of revenue are recognised as follows:

– Revenue from the provision of direct-to-home (“DTH”) subscription services is recognised as the services are provided, net of any discount given. 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 operators and is based on the number of subscribers taking the Sky channels, as reported to the Group by the cable operators, and the applicable rate.

– Advertising sales revenue is recognised when the advertising is broadcast. Revenue generated from airtime sales where Sky acts as an agent on behalf of third parties is recognised on a net commission basis.

– The Group accounts for betting and gaming revenues in accordance with IAS 39 Financial Instruments: Recognition and Measurement. Sky Bet revenues therefore represent income in the period for betting and gaming activities, defined as amounts staked by customers less betting payouts. Application of this accounting policy in the half year ended 31 December 2005 decreased revenue and operating expenses by £120 million (half year ended 31 December 2004: £102 million) compared to amounts previously published.

– Sky Active revenues include income from on-line advertising, e-mail, telephony income from the use of interactive services (e.g. voting), interconnect, text services and digibox subsidy recovery revenues earned through conditional access and access control charges made to broadcasters and interactive service providers on the Sky digital platform. All Sky Active revenues are recognised in the income statement when the goods or services are delivered.

– Other revenue principally includes income from installations, digibox sales revenues (including the sales of Sky+ and Multiroom digiboxes), Sky Talk revenues, service call revenue, warranty revenue, customer management service fees, conditional access fees and access control fees. Other revenues are recognised, net of any discount given, when the relevant goods or service are provided.

o)

Employee benefits

Wages, salaries and social security contributions

Wages, salaries, social security contributions, bonuses payable and non-monetary benefits for current employees, are recognised in the income statement as the employees’ services are rendered.

Pension obligations

The Group provides pensions to eligible employees through the BSkyB Pension Plan which is a defined contribution scheme. The amount charged to the income statement in the year represents the cost of contributions payable by the Group to the scheme in exchange for employee services rendered in that year. The assets of the BSkyB Pension Plan are held independently of the Group.

Termination benefits

Termination benefits are recognised as a liability when, and only when, the Group has a demonstrable commitment to terminate the employment of an employee or group of employees before the normal retirement date or as the result of an offer to encourage voluntary redundancy.

Equity compensation benefits

The Group issues equity-settled share-based payments to certain employees which must be measured at fair value and recognised as an expense in the income statement with a corresponding increase in equity. The fair values of these payments are measured at the dates of grant using option-pricing models, taking into account the terms and conditions upon which the awards are granted. The fair value is recognised over the period during which employees become unconditionally entitled to the

awards, subject to the Group’s estimate of the number of awards which will lapse, either due to employees leaving the Group prior to vesting or due to non-market based performance conditions not being met. Where an award has market-based performance conditions, the fair value of the award is adjusted at the date of grant for the probability of achieving these via the option pricing model. The total amount recognised in the income statement as an expense is adjusted to reflect the actual number of awards that vest, except where forfeiture is due to the failure to meet market-based performance measures.

In accordance with the transitional provisions in IFRS 1, and IFRS 2 “Share-based payment”, the recognition and measurement principles in IFRS 2 have only been applied to options and awards granted after 7 November 2002 that had not vested by 1 January 2005.

p)

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the asset to the lessee. All other leases are classified as operating leases.

The Group as lessor

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to reflect a constant periodic rate of return on the Group’s net investment outstanding.

The lease income receivable from operating leases is recognised on a straight-line basis over the term of the lease.

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value on the date of acquisition, or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.

The lease expense arising from operating leases is charged to the income statement on a straight line basis over the term of the lease, unless another systematic basis is more appropriate. Benefits received and receivable as incentives to enter into operating leases are recorded on a straight line basis over the lease term.

q)

Taxes, including deferred taxes

The Group’s liability for current tax is based on taxable profits for the year, and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

Deferred tax assets and liabilities are recognised using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used in the computation of taxable profit. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affect neither accounting profit nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is not probable that they will reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that have been enacted or substantially enacted at the balance sheet date.

A deferred tax asset is only recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is charged or credited in the income statement, except where it relates to items charged or credited directly to equity, in which case the deferred tax is also included within equity.

r)

Dividends

Dividends are recognised in the profit and loss reserve in the period in which they are declared or paid.

s)

Earnings per share

Basic earnings per share represents the profit attributable to the equity shareholders, divided by the weighted average number of Ordinary Shares in issue during the year, excluding the weighted average number of Ordinary Shares purchased by the Group and held in the Group’s ESOP Trust during the year to satisfy employee share awards.

Diluted earnings per share represents the profit attributable to the equity shareholders, divided by the weighted average number of Ordinary Shares in issue during the year, excluding the weighted average number of Ordinary Shares purchased by the Group and held in the Group’s ESOP Trust during the year to satisfy employee share awards, plus the weighted average number of dilutive shares resulting from share options and other potential Ordinary Shares outstanding during the year.

t)

Reportable segments

A reportable segment, as defined by IAS 14 “Segmental Reporting”, is a distinguishable business or geographical component of the Group, that provides products or services, that are subject to risks and rewards that are different from those of other segments. The Group has no reportable segments within its business.

2

Revenue

		2005/06				2004/05
		Half year				Half year
		£m				£m
		(unaudited)				(unaudited)
DTH subscribers			1,554				1,426
Cable subscribers			112				109
Advertising			171				159
Sky Bet			16				16
Sky Active			46				46
Other			117				99
			2,016				1,855

3

Operating expenses

		2005/06				2004/05
		Half year				Half year
		£m				£m
		(unaudited)				(unaudited)
Programming			810				806
Transmission and related functions			87				87
Marketing			332				264
Subscriber management			219				197
Administration			154				145
			1,602				1,499

4

Taxation

Taxation recognised in the income statement

		2005/06				2004/05
		Half year				Half year
		charge				charge
		£m				£m
		(unaudited)				(unaudited)
Current tax expense
Current year			93				73
Adjustment in respect of prior years			—				(8	)
Total current tax			93				65
Deferred tax expense
Origination and reversal of temporary differences			23				32
Adjustment in respect of prior years			—				1
Total deferred tax			23				33
Taxation			116				98

At 31 December 2005 a deferred tax asset of £14 million (30 June 2005: £14 million) principally arising from UK losses in the Group has not been recognised as these losses can be offset only against taxable profits generated in the entities concerned. There is currently insufficient evidence to support recognition of a deferred tax asset relating to these losses.

A deferred tax asset of £64 million (30 June 2005: £64 million) has not been recognised in respect of trading losses in the Group’s German holding companies of KirchPayTV on the basis that it is not probable that these temporary differences will reverse.

A deferred tax asset of £330 million (30 June 2005: £330 million) has not been recognised in respect of potential capital losses related to the Group’s holding of KirchPayTV, on the basis that these temporary differences do not meet the criteria of a reversal being probable. The Group has realised and unrealised capital losses in respect of football club and other investments estimated to be in excess of £24 million (30 June 2005: £24 million) which have not been recognised as a deferred tax asset, on the basis that it is not probable that they will be utilised.

5

Earnings per share

Basic earnings per share represents profit for the period, divided by the weighted average number of Ordinary Shares in issue during the period, less the weighted average number of shares held in the Group’s ESOP trust during the period.

Diluted earnings per share represents the profit for the period, divided by the weighted average number of Ordinary Shares in issue during the period, less the weighted average number of shares held in the Group’s ESOP trust during the period, plus the

weighted average number of dilutive shares resulting from share options and other potential Ordinary Shares outstanding during the period.

The weighted average number of shares was:

		2005/06				2004/05
		Half year				Half year
		Millions of shares				Millions of shares
		(unaudited)				(unaudited)
Ordinary Shares			1,849				1,939
ESOP trust Ordinary Shares			(4	)			(4	)
Basic shares			1,845				1,935
Dilutive Ordinary Shares from share options			2				2
Diluted shares			1,847				1,937

The calculation of diluted earnings per share excludes 34 million share options (half year ended 31 December 2004: 41 million), which could potentially dilute earnings per share in the future, because they were anti-dilutive for the period since the expected future proceeds from the options exceeded the average fair value of shares during the period.

6

Equity dividends

		2005/06			2004/05
		Half year			Half year
		£m			£m
		(unaudited)			(unaudited)
2004/05 Final dividend paid: 5.0p per Ordinary Share (2003/04: 3.25p)			92				63
			92				63

The proposed interim dividend for the half year ended 31 December 2005 of 5.5 pence per Ordinary Share, was approved by the Directors, and was recognised as a £100 million liability, on 31 January 2006. It was paid on 25 April 2006 to shareholders of record on 31 March 2006.

The ESOP has waived its rights to dividends.

7

Reconciliation of movement in shareholders’ equity

										Capital																								Total
		Share				Share				redemption				Special				ESOP				Merger				Hedging				Retained				shareholders’
		capital				Premium				reserve				reserve				reserve				reserve				reserve				earnings				equity
		£m				£m				£m				£m				£m				£m				£m				£m				£m
At 1 July 2004			971				1,437				—				14				(30	)			222				(1	)			(2,447	)			166
Share buyback			(11	)			—				11				—				—				—				—				(128	)			(128	)
Recognition and transfer of cash flow hedges			—				—				—				—				—				—				(24	)			—				(24	)
Share-based payments			—				—				—				—				7				—				—				7				14
Tax on items taken directly to equity			—				—				—				—				—				—				7				(4	)			3
Profit for the period			—				—				—				—				—				—				—				245				245
Dividends			—				—				—				—				—				—				—				(63	)			(63	)
At 31 December 2004			960				1,437				11				14				(23	)			222				(18	)			(2,390	)			213