**EXHIBIT 15.1**

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Table of Contents

BT is one of the world’s leading providers of communications solutions serving customers in Europe, the Americas and Asia Pacific. Itsprincipal activities include networked IT services, local, national and international telecommunications services, and higher-valuebroadband and internet products and services. In the UK, BT serves over 20 million business and residential customers, as well asproviding network services to other operators.

|    |   |   | **Contents**                                               |   |
|---------|--------|--------|------------------------------------------------------------|--------|
| **6**   |   |   | **Operating and financial review**                         |   |
| **6**   |   |   | **Business review**                                        |   |
| **23**  |   |   | **Five-year financial summary**                            |   |
| **25**  |   |   | **Financial review**                                       |   |
| **44**  |   |   | **Our commitment to society**                              |   |
| **46**  |   |   | **Board of directors and Operating Committee**             |   |
| **48**  |   |   | **Report of the directors**                                |   |
| **50**  |   |   | **Corporate governance**                                   |   |
| **56**  |   |   | **Report    on directors’ remuneration**              |   |
| **69**  |   |   | **Statement    of directors’ responsibility**         |   |
| **70**  |   |   | **Report of the independent auditors**                     |   |
| **71**  |   |   | **Consolidated financial statements**                      |   |
| **112** |   |   | **United States Generally Accepted Accounting Principles** |   |
| **122** |   |   | **Subsidiary undertakings, joint ventures and associates** |   |
| **123** |   |   | **Quarterly analysis of turnover and profit**              |   |
| **124** |   |   | **Financial statistics**                                   |   |
| **125** |   |   | **Operational statistics**                                 |   |
| **126** |   |   | **Risk factors**                                           |   |
| **127** |   |   | **Additional information for shareholders**                |   |
| **140** |   |   | **Glossary of terms and US equivalents**                   |   |
| **141** |   |   | **Cross reference to Form 20-F**                           |   |
| **144** |   |   | **Index**                                                  |   |
|    |   |   |                                                       |   |

 

|   | BT Group plc Annual Report and Form 20-F 2005 |
|--------|-----------------------------------------------|

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Table of Contents

**Operating and financial review****Business review**

| **7**  | **Introduction**                                                                  |
|--------|-----------------------------------------------------------------------------------|
| **8**  | **Group structure**                                                               |
| **9**  | **Group strategy**                                                                |
| **9**  | **Build on our networked IT services capability**                                 |
| **10** | **Deliver on broadband**                                                          |
| **11** | **Create convergent mobility solutions**                                          |
| **12** | **Defend our traditional business vigorously**                                    |
| **13** | **Drive for cost leadership**                                                     |
| **13** | **Keep a relentless focus on improving customer satisfaction**                    |
| **13** | **Transform our network for the twenty-first century**                            |
| **13** | **Motivate our people and live the BT values**                                    |
| **14** | **Research and development and IT support**                                       |
| **15** | **Property**                                                                      |
| **15** | **Regulation, competition and prices**                                            |
| **22** | **Relationship with HM Government**                                               |
| **22** | **Legal proceedings**                                                             |
|   |                                                                              |
|   | Please see cautionary statement regarding forward-looking statements on page 128. |

|   |                                                                         |
|--------|------------------------------------------------------------------------------|
|   | All customer numbers are given as at 31 March 2005, unless stated otherwise. |

|   |      The definition, reconciliation and reasons for disclosing EBITDA (earnings before interest, taxation, depreciation and amortisation) are discussed in the **Financial review**. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6     BT              Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------------------|

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Table of Contents

| **Introduction** |
|------------------|

| **In the UK** |
|---------------|

| **Globally** |
|--------------|

| **Governance** |
|----------------|

| **Corporate social responsibility** |
|-------------------------------------|

| **Ofcom’s Strategic Review of Telecommunications** |
|---------------------------------------------------------|

|  | withdrawal from regulation in favour of reliance on competition law; |
|--|----------------------------------------------------------------------|

|  | a market investigation reference to the Competition Commission under the Enterprise Act; or |
|--|---------------------------------------------------------------------------------------------|
|  | the delivery by BT to other industry participants of ‘real equality of access’.   |

 

|  Operating    and financial review  | BT          Group plc Annual Report and Form 20-F 2005     7 |
|-----------------------------------------------|---------------------------------------------------------------------------------------|

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Table of Contents

| **Group structure** |
|---------------------|
| **Background**      |

| **Acquisitions and disposals prior to the 2005 financial year** |
|-----------------------------------------------------------------|

| **Acquisitions and disposals in the 2005 financial year** |
|-----------------------------------------------------------|

| **Post balance sheet acquisitions** |
|-------------------------------------|

| **How BT operates** |
|---------------------|

 

| **Consumer customers** |
|------------------------|

 

| 8     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|------------------------------------------------------------------------------------|---------------------------------------|

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Table of Contents

| **Major corporate and business customers** |
|--------------------------------------------|

| **Wholesale customers** |
|-------------------------|

| **Report structure** |
|----------------------|

| **Group strategy** |
|--------------------|

|  | build on our networked IT services capability |
|--|-----------------------------------------------|
|  | deliver on broadband                          |
|  | create convergent mobility solutions          |
|  | defend our traditional business vigorously    |
|  | drive for cost leadership.                    |

|  | keep a relentless focus on improving customer satisfaction |
|--|------------------------------------------------------------|
|  | transform our network for the twenty-first century         |
|  | motivate our people and live the BT values.                |

|                                              |
|---------------------------------------------------|
| **Build on our networked IT services capability** |

| **Networked IT services for major corporate customers** |
|---------------------------------------------------------|

|  | Our highest profile success in the global market came in March 2005 when it was announced that BT will be Reuters’ supplier of network services under a contract expected to be worth up to £1.5 billion over eight and a half years. BT will provide and manage secure data networks for Reuters’ productsand services worldwide. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | We also signed a new voice and data communications deal with Barclays plc to provide enhanced communications infrastructure services for Barclays’ |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     9 |
|-----------------------------------------------|---------------------------------------------------------------------------------------|

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|                                                 | UK operations. The value of these services, including existing business, is expected to be in excess of £500 million over the seven-year term.                                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                      | A number of contract wins during the 2005 financial year helped to confirm BT’s European credentials and capability. For example, we signed an outsourcing contract with French company THALES Group, an international electronics and systems group serving the defence, aeronautics, security andservices markets. The five-year contract covers the management of fixed-voice and data network services for THALES and its subsidiaries in up to 42 countries. |
|                                                      | We signed a multi-year managed services agreement with Bristol-Myers Squibb to manage its LAN and WAN infrastructure globally. As part of the agreement, BT will migrate these services to a state-of-the-art, high-speed, IP-based global MPLS (multi-protocol label switching) infrastructure.                                                                                                                                                                       |
|                                                      | We were awarded a global network outsourcing contract with South Korea-based CyberLogitec, the IT subsidiary of Hanjin Shipping. With a sales order value of £18 million, this is one of the largest contracts won by BT in the Asia Pacific region.                                                                                                                                                                                                             |
|                                                      | National Air Traffic Service awarded us a £32 million contract to provide a system to carry all communications between its radar, communication and air traffic control centre sites and its IT network.                                                                                                                                                                                                                                                         |
|                                                      | In addition to the range of large deals, we secured more than 300 networked IT services contracts each worth between £1 million and £5 million during the 2005 financial year.                                                                                                                                                                                                                                                                             |
|                                                      | In April 2005, we won an extension to 2012 of a contract to deliver essential telecommunications services to the Ministry of Defence (MoD) and the UK’s armed forces. Between April 2005 and July 2012, the Defence Fixed Telecommunications Systems public/private partnership contract between theMoD and BT will be worth up to £1.5 billion, bringing the total value of the contract to more than £2.7 billion.                                  |
|                                                      | We underlined our position as a global networked IT services company with the launch of a major business-to-business advertising and marketing campaign in September 2004. The campaign ran in multiple languages in international and local media across Europe, the Americas and the Asia Pacificregion.                                                                                                                                                             |
|                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **Networked    IT services for wholesale customers** |

| **Deliver on broadband** |
|--------------------------|

| **Broadband for wholesale customers** |
|---------------------------------------|

 

|  | In February 2005, Northern Ireland became the first UK region outside London to have all its exchanges enabled for broadband. As at 1 March 2005 – as a result of a £10 million partnership between BT and One Northeast, the regional development agency for northeast England – all 181 exchanges inthe region had been upgraded. In April 2005, we won the £16.5 million public tender with the Scottish Executive to bring broadband to the most remote communities in the UK. We will enable 378 exchanges to deliver broadband to 51,000 households and 5,400 businesses. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | During the 2005 financial year, we removed the distance-related limits on our most popular broadband services, bringing around one million more UK homes and businesses within reach of broadband.                                                                                                                                                                                                                                                                                                                                                                                                    |
|  | As the broadband market has matured, new applications, including video and music downloads and videoconferencing, have driven a demand for increasing speed. Since April 2005, we have been testing speeds of between 2Mbit/s and 8Mbit/s with a                                                                                                                                                                                                                                                                                                                                                      |

| 10     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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|   | view to launching higher-speed wholesale services in the second half of 2005. In addition, we are trialling a variant of ADSL (asynchronous digital subscriber line) broadband, known as ADSL2+, whichmay support speeds of more than 20Mbit/s.                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        | With effect from April 2005, we reduced the wholesale cost to service providers of our BT IPStream and BT DataStream ADSL products by an average of 8% in areas of high demand.                                                                                                                                                                                                                                                                                                                         |
|        | We also announced details of the next 500 exchanges to be upgraded to provide SDSL (synchronous digital subscriber line) services. SDSL offers the same rate upstream and downstream and is particularly suitable for the SME market. By April 2006, we aim to SDSL-enable 1,300 exchanges, coveringmore than two thirds of UK businesses.                                                                                                                                                              |
|        | During the 2005 financial year, we redesigned and reduced the price for our LLU (local loop unbundling) product (see **Regulation, competition and prices – Local Loop Unbundling**) by up to 70% in a phased series of price cuts which will, we believe, make it easier for LLU operators to invest inbroadband infrastructure with confidence. As at 31 March 2005, LLU operators were providing service to 40,000 lines from more than 600 exchanges, many of which were multi-operator sites. |

|                        |
|-----------------------------|
| **Broadband for consumers** |

|  | We transformed our retail broadband offering, by announcing the transfer of our customers to a new super-fast standard, beginning in February 2005. Most consumer and business customers will have their broadband speed increased to up to 2Mbit/s – up to four times faster than previous speeds – atno extra cost. The introduction of 2Mbit/s as standard will enable customers to get more from their broadband link and paves the way for a range of new services. |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | BT will also use broadband to make new services, such as video on demand and interactive TV, available to customers.                                                                                                                                                                                                                                                                                                                                                               |
|  | In July 2004, we launched BT Communicator with Yahoo! Messenger. This integrated software package, downloadable from the internet, gives customers a truly convergent, multi-media communications experience, enabling them to manage all their home communications – phone calls, emails, texts,instant messaging and webcam – together in one place on their PC.                                                                                                       |

|                                 |
|--------------------------------------|
| **Broadband for business customers** |

|                                          | In January 2005, we created an online payments business by bringing together BT Click&Buy and our online card payment service, BT Buynet, which currently process almost 17 million transactions a year between them. The new business will offer an extensive range of payment solutions to the rapidlygrowing online retail market.           |
|------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | BT Business Broadband Voice, launched in November 2004, gives small businesses throughout the UK access to VOIP (voice over IP) services and enables them to use their broadband connections to reduce costs for multiple business lines. On average, BT Broadband Voice offers customers savings ofmore than 60% compared with second line rental. |
|                                     |
| **Create convergent mobility solutions** |

| **Mobility for consumers** |
|----------------------------|

|  | In January 2005, we launched BT Mobile as an MVNO with Vodafone in the consumer market. BT Mobile is cost-effective for families, offering up to five additional |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     11 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

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|   | handsets. Other benefits include free short calls from a BT Mobile phone to a designated home number and a single consolidated mobile bill. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

|                                |
|-------------------------------------|
| **Mobility for business customers** |

|  | In November 2004, we launched our BT Mobile MVNO business in the SME and corporate market, offering a range of mobile services including a mobile VPN service (BT Business Circle) and mobile conferencing.                                                                                                                                                              |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | We are a leading UK provider of Wi-Fi services. BT Openzone offers customers a high-speed, wireless broadband connection over which they can access the internet, send and receive emails with attachments and connect to a corporate network. As at 31 March 2005, our customers had access to morethan 7,500 hotspots throughout the UK and more than 20,000 globally. |

|                                 |
|--------------------------------------|
| **Mobility for wholesale customers** |

|  | For example, we launched Fixed Line Text – a fully managed service that enables the exchange of SMS messages between fixed line and fixed line, fixed line and mobile and mobile and fixed line. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | In March 2005 we launched a mobile managed bulk SMS, which enables customers to send and receive multiple text messages via the internet to and from their customers’ mobile telephones.         |

|                                           |
|------------------------------------------------|
| **Defend our traditional business vigorously** |

| **Traditional services for consumers** |
|----------------------------------------|

|  | On 1 July 2004, we abolished the standard rate and switched all existing standard rate customers to BT Together Option 1, offering them better value for money and making it easier for them to compare our prices with those of our competitors. We also reduced the price of Option 1 by £1 a month,offering savings to the five million customers who were already on this option.                                                                                                                                                                                                                                                                                                                                             |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | BT Together Option 2, which offers free UK evening and weekend calls, and BT Together Option 3, which offers free UK daytime, evening and weekend calls, were also significant elements in our revenue defence strategy in the 2005 financial year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|  | In September 2004, we introduced CallMobile, a discount package offering customers up to 40% savings on all fixed-to-mobile calls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|  | During the 2005 financial year, we developed two new products to help customers protect themselves against internet dialler problems. BT Modem Protection is a free software download, which will prevent a customer’s computer dialling high-cost, premium rate or international numbers. We have alsodeveloped an early warning alert – in the form of a text or voice message to their mobile or fixed-line phone – for customers whose bill rises significantly above the usual daily pattern. We can then put in place an immediate premium rate bar on the line and/or suggest other barring options. As at 31March 2005, around one million BT customers had signed up for one or more of these barring services. |
|  | We manage around 87,000 public payphones, including more than 1,300 multimedia kiosks and more than 1,400 textphones throughout the UK. Although we remain committed to ensuring that public payphones are available in communities throughout the UK, future growth opportunities will focuson maximising returns from existing sites and capabilities, including e-kiosks and content services, as well as hosting CCTV (closed circuit TV) facilities and mobile antennae.                                                                                                                                                                                                                                                           |
|  | Following our re-entry into the printed classified directory market, the Phone Book continued to be successful in the 2005 financial year, with all 171 editions now including a new classified section. A new milestone will be reached in mid-June 2005, from which date all editions will include classifiedadvertising in colour.                                                                                                                                                                                                                                                                                                                                                                                                   |

|                                            |
|-------------------------------------------------|
| **Traditional services for business customers** |

|  | In the 2005 financial year, we made a number of enhancements to our BT Business Plan. In May 2004, in response to EU enlargement, we extended the benefits of BT Business Plan by including ten new entrant countries in the 20 pence cap on calls to Europe lasting less than one hour. In August2004, we extended BT Business Plan to cover all business customers, irrespective of size or spend. And from September 2004, we cut the cost of fixed-to-mobile calls by 25% to 30% and offered BT Business Plan customers the chance to opt for a 30 pence cap on all fixed-to-mobile calls lasting lessthan one hour. At 31 March 2005, BT Business Plan had over 440,000 locations, up 67% on the 2004 financial year. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | Our BT Local Business initiative helped to secure BT’s position as a key player in the SME market. At the end of the 2005 financial year, BT Local Business was active in 83 locations around the country, managing £1.2 billion of annual billed turnover.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

|                                             |
|--------------------------------------------------|
| **Traditional services for wholesale customers** |

 

| 12     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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|  | We continued to develop our capability as a supplier of network facilities management. For example, we are providing maintenance support to the physical field and core switching elements of O2’s 3G network.                                                                                                                                                                                                                                                              |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | As at 31 March 2005, our wholesale line rental product had over one million end users, with revenues up £51 million in the 2005 financial year.                                                                                                                                                                                                                                                                                                                            |
|  | We have also enhanced our data connectivity portfolio with the launch of a range of Ethernet (LAN) products and higher bandwidth circuits. This has enabled us to grow revenues from the provision of infrastructure to other network providers.                                                                                                                                                                                                                                 |
|  | Product launches in the 2005 financial year included Wholesale Extension Service – a high-speed, point-to-point data circuit providing a secure link between a third party customer site and a communication provider’s networks – and BT Enterprise Ethernet – a low bandwidth variant of the MegaStreamEthernet product, offering many of the characteristics of a traditional private circuit, but with the added benefit of low-cost Ethernet interface. |

|                          |
|-------------------------------|
| **Drive for cost leadership** |

| **Keep a relentless focus on improving customer satisfaction** |
|----------------------------------------------------------------|

| **Transform our network for the twenty-first century** |
|--------------------------------------------------------|

| **Our UK network today** |
|--------------------------|

| **Our global reach** |
|----------------------|

| **Transforming our networks, systems and services for the twenty-first century** |
|----------------------------------------------------------------------------------|

|  | to enhance the service experience, flexibility and value we provide to all our customers; |
|--|-------------------------------------------------------------------------------------------|
|  | to accelerate the delivery of innovative new products and services to market; and         |
|  | to reduce costs radically.                                                                |

| **Motivate our people and live the BT values** |
|------------------------------------------------|

 

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     13 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

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| **Developing leaders** |
|------------------------|

| **Engaging and motivating our people** |
|----------------------------------------|

| **Rewarding and recognising achievement** |
|-------------------------------------------|

| **Pensions** |
|--------------|

| **Health and safety** |
|-----------------------|

| **Learning now and for the future** |
|-------------------------------------|

| **Embedding flexibility and diversity** |
|-----------------------------------------|

| **Research and development and IT support** |
|---------------------------------------------|

 

| 14     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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| **Property** |
|--------------|

| **Regulation, competition and prices** |
|----------------------------------------|

| **Regulation in the UK** |
|--------------------------|

| Ofcom |
|-------|

|  | the principal duty to further the interests of citizens in relation to communications matters and, secondly, to further the interests of consumers, where appropriate, by promoting competition. In doing so, Ofcom must secure, among other things, the availability of a wide range of electroniccommunications services in the UK; |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | the duty to have regard to the principles under which its regulatory activities should be transparent, accountable, proportionate, consistent and appropriately targeted;                                                                                                                                                             |
|  | the duty to review regulatory burdens on a regular basis and ensure that they do not involve the imposition or maintenance of unnecessary burdens; and                                                                                                                                                                                |
|  | the functions of setting conditions of entitlement (see **Regulatory conditions**), and enforcing those conditions (see **Enforcement**). Ofcom’s decisions are subject to appeal on the merits (see **Appeals**).                                                                                                               |

| Regulatory conditions |
|-----------------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     15 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

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|                                                                                   |
|----------------------------------------------------------------------------------------|
| Conditions applying to all providers of electronic communications networks or services |

| *General conditions* |
|----------------------|

| *Electronic Communications Code conditions* |
|---------------------------------------------|

| *Other general obligations* |
|-----------------------------|

|  | the payment of administrative charges (broadly the equivalent of licence fees under the old framework); and |
|--|-------------------------------------------------------------------------------------------------------------|
|  | the provision of information to Ofcom when required to do so.                                               |

|                                      |
|-------------------------------------------|
| Conditions applying to BT only            |
| *Universal Service Obligation conditions* |

| *Significant Market Power conditions* |
|---------------------------------------|

|  | Fixed narrowband retail markets in the UK:residential analogue lines, residential ISDN2 lines, business analogue lines, business ISDN2 lines, ISDN 30 lines, residential local calls, residential national calls, residential calls to mobile, residential operator assistance calls, residential international direct-dialled calls, business local calls, businessnational calls, business calls to mobile, business operator assistance calls.                                                                                |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | Fixed narrowband wholesale markets in the UK:residential analogue lines, residential ISDN2 lines, business analogue lines, business ISDN2 lines, ISDN 30 lines, call origination, local-tandem conveyance and transit, inter-tandem conveyance and transit, single transit.                                                                                                                                                                                                                                                      |
|  | Fixed geographic call termination markets in the UK:fixed geographic call termination provided by BT and other members of the BT group of companies.                                                                                                                                                                                                                                                                                                                                                                             |
|  | Wholesale international services markets:wholesale international services on 108 country routes.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  | Wholesale unmetered narrowband internet termination markets:BT was not found to have SMP in any market considered in this market review.                                                                                                                                                                                                                                                                                                                                                                                         |
|  | Retail leased lines, symmetric broadband origination and trunk segments markets:retail traditional interface leased lines at speeds up to and including 8Mbit/s; wholesale traditional interface symmetric broadband origination at speeds up to and including 8Mbit/s; wholesale traditional interface symmetric broadband origination at speeds above 8Mbit/s and up to and including155Mbit/s; wholesale alternative interface symmetric broadband origination at all bandwidths. Wholesale trunk segments at all bandwidths. |
|  | Wholesale broadband access markets in the UK:asymmetric broadband origination; broadband conveyance.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  | Wholesale local access markets in the UK:wholesale local access services.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

| 16     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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| Enforcement |
|-------------|

| Appeals |
|---------|

|  | the making of SMP, SMP apparatus and USO determinations/designations; |
|--|-----------------------------------------------------------------------|
|  | the setting, modification and revocation of conditions;               |
|  | enforcement actions, including the imposition of a penalty.           |

| **Competition** |
|-----------------|

| The competitive environment |
|-----------------------------|

| Competition and the UK economy |
|--------------------------------|

| Competition Law |
|-----------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     17 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

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| Enterprise Act |
|----------------|

| **Pricing regulation** |
|------------------------|

| Fixed network |
|---------------|

| Retail price controls |
|-----------------------|

| Price    Control (RPI-X)                     |   | Years commencing 1 August |   |
|----------------------------------------------|--------|---------------------------|--------|
|                                         |   |                           |   |
|                                         |   |                      | 2000   |   |   | 2001 |   |   | 2002 |   |   | 2003 |   |   | 2004 |   |
|                                              |   |
| % RPI movement for the  relevant period**a** |   |                      | 3.32   |   |   | 1.93 |   |   | 1.03 |   |   | 2.89 |   |   | 3.03 |   |
| X on price control formula**a,b**            |   |                      | 4.50   |   |   | 4.50 |   |   | 1.03 |   |   | 2.89 |   |   | 3.03 |   |
| % required change in base prices**c,d**      |   |                      | (1.09  | ) |   | (2.45 | ) |   | 0 |   |   | 0 |   |   | 0 |   |
| % change in base prices overall              |   |                      | (1.20  | ) |   | (2.50 | ) |   | (0.22 | ) |   | (0.19 | ) |   | 0.46 | **e** |
|                                              |   |

| **a** | Annual increase in RPI to previous June |
|-------|-----------------------------------------|

| **b** | From 1 August 1997, the RPI formula covers the main switched telephone services provided to the lowest 80% of BT’s residential customers by bill size |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | After permitted carry forward of any unused allowance or shortfall from previous years |
|-------|----------------------------------------------------------------------------------------|

| **d** | From 1 August 2002, the RPI formula covers the change in average prices (including residential discount packages) |
|-------|-------------------------------------------------------------------------------------------------------------------|

| **e** | Full year forecast based on price changes implemented up to January 2005 for residential customers. There is an unused allowance of 0.41% carried forward from the previous year which would allow prices to rise by this amount in 2005. Further price changes during this year could eliminate the current variance but if not, the amount may be carried forward. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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| Network Charge Control |
|------------------------|

| Basket                |   |   | X Factor inRPI – X formula |   |   | Duration     |   |
|-----------------------|--------|--------|---------------------------------|--------|--------|--------------|--------|
|                       |   |
| Call termination      |   |   | 10                              |   |   | 30 Sept 2005 |   |
| Call origination      |   |   | 10                              |   |   | 30 Sept 2005 |   |
| Tandem layer          |   |   | 13                              |   |   | 30 Sept 2005 |   |
| Safeguard cap         |   |   | 0                               |   |   | 30 Sept 2005 |   |
| Interconnect specific |   |   | 8.25                            |   |   | 30 Sept 2005 |   |
| Local exchange FRIACO |   |   | 7.5                             |   |   | 30 Sept 2005 |   |
|                       |   |

| Basket                                  |   |   | X Factor inRPI – X formula     |   |
|-----------------------------------------|--------|--------|-------------------------------------|--------|
|                                         |   |
| Call termination                        |   |   | 2.25 to 6.25                        |   |
| Call origination                        |   |   | 0.5 to 4.5                          |   |
| Single transit                          |   |   | 11 to 14                            |   |
| Local-tandem conveyance                 |   |   | 0 (safeguard)                       |   |
| Interconnection circuits                |   |   | 1.5 to 5.5                          |   |
| Product management, policy and planning |   |   | 2.5 to 6.5                          |   |
| Local exchange FRIACO                   |   |   | 7.5 to 11.25                        |   |
| Single tandem FRIACO                    |   |   | 8.5 to 12.25                        |   |
| Inter-tandem conveyance / transit       |   |   | No control (propose to de-regulate) |   |
|                                         |   |

| Number portability |
|--------------------|

| Wholesale access charge control |
|---------------------------------|

| Partial Private Circuit Charge Control |
|----------------------------------------|

|  | Low Bandwidth Basket (RPI-4%); |
|--|--------------------------------|

|  | High Bandwidth Basket (RPI-6.5%); and |
|--|---------------------------------------|

|  | Equipment Basket (RPI-8.9%). |
|--|------------------------------|

|  Operating    and financial review |  BT Group plc Annual Report and Form 20-F 2005     19 |
|-----------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

|                  |
|-----------------------|
| **Non-UK regulation** |

| European Union |
|----------------|

| Rest of the world |
|-------------------|

| **Other significant changes and issues** |
|------------------------------------------|

| Strategic Review of Telecommunications |
|----------------------------------------|

|  | Option 1 – full deregulation, with reliance on competition law to address competition concerns;                                                                                                                                                                                                                  |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | Option 2 – a market investigation reference to the Competition Commission under the Enterprise Act to determine whether any feature of the market prevents or distorts competition in the supply of communications services. One possible result of such an investigation could be enforced separation ofBT; and |
|  | Option 3 – delivery by BT to its competitors of ‘real equality of access’ to its networks, with the onus on BT to bring forward prompt and clear proposals.                                                                                                                                            |

|  | make significant organisational changes that demonstrated our commitment to transparency and exemplary governance, including the creation within BT of a new Access Services Division based on the assets and people associated with the access network, from the customer’s premises to the maindistribution frame in the local exchange; |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | create an Equality of Access Board to monitor the performance of the Access Services Division and to oversee delivery of equality of access by BT;                                                                                                                                                                                              |
|  | introduce equality of access in a phased and effective manner;                                                                                                                                                                                                                                                                                  |
|  | ensure that BT’s Wholesale Access product is demonstrably fit for purpose with effective operational performance and an increased margin enabling rapid consumer take-up;                                                                                                                                                                  |

 

| 20     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

|  | keep Local Loop Unbundling (LLU) at the heart of BT’s wholesale broadband portfolio, building on the work already done on industrialising LLU operations and taking forward our previous commitment to cut the price of fully unbundled loops; |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | make sure the rest of BT’s broadband products keep pace so that all service providers have a wide choice of offerings to suit their business models;                                                                                           |
|  | agree on the enduring economic bottlenecks (assets that are not replicable in the medium term) and work to ensure that regulation is focused around them; and                                                                                       |
|  | set out the ground rules that underpin the development of BT’s 21st Century Network.                                                                                                                                                           |

|  | commit to rapid, significant and ongoing deregulation in certain key markets;                                                                                                 |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | create a stable investment environment, with the Strategic Review and the associated studies concluded successfully, so that investors are able to invest with certainty; and |
|  | enable BT to compete on a level playing field with other operators in the market.                                                                                             |

|           |
|----------------|
| Cost of copper |

| Cost of capital |
|-----------------|

| Radio base station backhaul circuits and wholesale extension services |
|-----------------------------------------------------------------------|

|  | RBS (radio base station backhaul circuits) – these are circuits provided by BT to enable a mobile communications provider to connect a radio base station to its mobile switching centre; and         |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | WES (wholesale extension services) – these are circuits provided over fibre, typically using Ethernet technology, to enable a telecoms operator to connect a customer site to its own switching site. |

| Local Loop Unbundling |
|-----------------------|

|  | a fully unbundled line gives operators the exclusive use of the copper line; and                                                                                           |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | a shared access line only gives operators the use of the high-frequency channel used for broadband and will also be used by the customer’s fixed-line voice provider. |

|  | in July 2004 Ofcom appointed the independent Telecoms Adjudicator to handle process issues; and                |
|--|----------------------------------------------------------------------------------------------------------------|
|  | Ofcom completed its review of LLU prices in December 2004 as part of the wholesale local access market review. |

| Funds for liabilities |
|-----------------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     21 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

|                                |
|-------------------------------------|
| **Relationship with HM Government** |

| **Legal proceedings** |
|-----------------------|

| 22     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

**Five-year financial summary**

| **Profit and loss account** |
|-----------------------------|
|                        |

| Years ended 31 March                                                                                |   |   | 2001£m | a      |   | 2002£m | a      |   | 2003£m | a      |   | 2004£m | a      |   | **2005****£m** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|----------------------|--------|
|                                                                                                     |   |
| Total turnover:                                                                                     |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Continuing activities                                                                               |   |   | 21,068       |   |   | 21,815       |   |   | 20,182       |   |   | 18,914       |   |   | **19,031**           |   |
| Discontinued activities                                                                             |   |   | 8,598        |   |   | 2,827        |   |   | –       |   |   | –       |   |   | **–**           |   |
|                                                                                                |   |   | 29,666       |   |   | 24,642       |   |   | 20,182       |   |   | 18,914       |   |   | **19,031**           |   |
| Group’s share of associates’ and joint ventures’ turnover                            |   |   | (9,937       | )      |   | (4,764       | )      |   | (1,455       | )      |   | (395         | )      |   | **(408**             | **)**  |
| Trading between group and principal joint venture                                                   |   |   | 698          |   |   | 681          |   |   | –       |   |   | –       |   |   | **–**           |   |
|                                                                                                     |   |
| Group turnover:                                                                                     |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Continuing activities                                                                               |   |   | 17,141       |   |   | 18,447       |   |   | 18,727       |   |   | 18,519       |   |   | **18,623**           |   |
| Discontinued activities                                                                             |   |   | 3,286        |   |   | 2,112        |   |   | –       |   |   | –       |   |   | **–**           |   |
|                                                                                                |   |   | 20,427       |   |   | 20,559       |   |   | 18,727       |   |   | 18,519       |   |   | **18,623**           |   |
| Other operating income                                                                              |   |   | 359          |   |   | 362          |   |   | 215          |   |   | 177          |   |   | **171**              |   |
| Operating costs**bc**                                                                               |   |   | (20,764      | )      |   | (21,387      | )      |   | (16,366      | )      |   | (15,826      | )      |   | **(16,005**          | **)**  |
|                                                                                                     |   |
| Group operating profit (loss):                                                                      |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Before goodwill amortisation and exceptional items                                                  |   |   | 3,252        |   |   | 2,593        |   |   | 2,794        |   |   | 2,889        |   |   | **2,864**            |   |
| Goodwill amortisation and exceptional items                                                         |   |   | (3,230       | )      |   | (3,059       | )      |   | (218         | )      |   | (19          | )      |   | **(75**              | **)**  |
|                                                                                                |   |   | 22           |   |   | (466         | )      |   | 2,576        |   |   | 2,870        |   |   | **2,789**            |   |
| Group’s share of operating profit (loss) of associates and joint ventures**d**                 |   |   | (397         | )      |   | (1,381       | )      |   | 329          |   |   | (34          | )      |   | **(25**              | **)**  |
|                                                                                                     |   |
| Total operating profit (loss):                                                                      |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Continuing activities                                                                               |   |   | 2,451        |   |   | (1,476       | )      |   | 2,905        |   |   | 2,836        |   |   | **2,764**            |   |
| Discontinued activities                                                                             |   |   | (2,826       | )      |   | (371         | )      |   | –       |   |   | –       |   |   | **–**           |   |
|                                                                                                |   |   | (375         | )      |   | (1,847       | )      |   | 2,905        |   |   | 2,836        |   |   | **2,764**            |   |
|                                                                                                |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Profit on sale of fixed asset investments and group undertakings                                    |   |   | 619          |   |   | 4,389        |   |   | 1,696        |   |   | 36           |   |   | **358**              |   |
| Profit on sale of property fixed assets                                                             |   |   | 34           |   |   | 1,089        |   |   | 11           |   |   | 14           |   |   | **22**               |   |
| Amounts written off investments                                                                     |   |   | –       |   |   | (535         | )      |   | –       |   |   | –       |   |   | **–**           |   |
| Net interest payable**e**                                                                           |   |   | (1,314       | )      |   | (1,622       | )      |   | (1,439       | )      |   | (941         | )      |   | **(801**             | **)**  |
|                                                                                                     |   |
| Profit (loss) on ordinary activities before taxation:                                               |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Before goodwill amortisation and exceptional items                                                  |   |   | 2,067        |   |   | 1,126        |   |   | 1,840        |   |   | 2,013        |   |   | **2,085**            |   |
| Goodwill amortisation and exceptional items                                                         |   |   | (3,103       | )      |   | 348          |   |   | 1,333        |   |   | (68          | )      |   | **258**              |   |
|                                                                                                |   |   | (1,036       | )      |   | 1,474        |   |   | 3,173        |   |   | 1,945        |   |   | **2,343**            |   |
| Tax on profit (loss) on ordinary activities**f**                                                    |   |   | (712         | )      |   | (443         | )      |   | (459         | )      |   | (539         | )      |   | **(523**             | **)**  |
|                                                                                                     |   |
| Profit (loss) on ordinary activities after taxation                                                 |   |   | (1,748       | )      |   | 1,031        |   |   | 2,714        |   |   | 1,406        |   |   | **1,820**            |   |
| Minority interests                                                                                  |   |   | (127         | )      |   | (23          | )      |   | (12          | )      |   | 8            |   |   | **1**                |   |
|                                                                                                     |   |
| Profit (loss) for the financial year                                                                |   |   | (1,875       | )      |   | 1,008        |   |   | 2,702        |   |   | 1,414        |   |   | **1,821**            |   |
|                                                                                                     |   |
| Average number of shares used in basic earnings per share (millions)                                |   |   | 7,276        |   |   | 8,307        |   |   | 8,616        |   |   | 8,621        |   |   | **8,524**            |   |
| Basic earnings (loss) per share                                                                     |   |   | (25.8        | )p     |   | 12.1         | p      |   | 31.4         | p      |   | 16.4         | p      |   | **21.4**             | **p**  |
| Diluted earnings (loss) per share                                                                   |   |   | (25.8        | )p     |   | 12.0         | p      |   | 31.2         | p      |   | 16.3         | p      |   | **21.2**             | **p**  |
| Basic earnings (loss) per share from continuing activities                                          |   |   | 20.6         | p      |   | (34.6        | )p     |   | 31.4         | p      |   | 16.4         | p      |   | **21.4**             | **p**  |
| Diluted earnings (loss) per share from continuing activities                                        |   |   | 20.3         | p      |   | (34.6        | )p     |   | 31.2         | p      |   | 16.3         | p      |   | **21.2**             | **p**  |
| Dividends per share                                                                                 |   |   | 7.8          | p      |   | 2.0          | p      |   | 6.5          | p      |   | 8.5          | p      |   | **10.4**             | **p**  |
| Dividends per share, cents**g**                                                                     |   |   | 14.0         | c      |   | 3.1          | c      |   | 10.3         | c      |   | 15.3         | c      |   | **19.5**             | **c**  |
|                                                                                                     |   |
| Basic earnings per share before goodwill amortisation andexceptional items                          |   |   | 17.5         | p      |   | 6.2          | p      |   | 14.4         | p      |   | 16.9         | p      |   | **18.1**             | **p**  |
| Diluted earnings per share before goodwill amortisation andexceptional items                        |   |   | 17.2         | p      |   | 6.2          | p      |   | 14.3         | p      |   | 16.8         | p      |   | **18.0**             | **p**  |
| Basic earnings per share before goodwill amortisation andexceptional items on continuing activities |   |   | 19.2         | p      |   | 9.0          | p      |   | 14.4         | p      |   | 16.9         | p      |   | **18.1**             | **p**  |
|                                                                                                     |   |

| **a** | Restated following adoption of UITF17 and UITF38 (see note 1 on page 81)                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |       |   |
|-------|---------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|
| **b** | Operating costs include net exceptional costs                                                                       |   |   | 2,857  |   |   | 2,707  |   |   | 198    |   |   | 7      |   |   | **59**     |   |
| **c** | Includes redundancy and early leaver costs                                                                          |   |   | 118    |   |   | 252    |   |   | 276    |   |   | 202    |   |   | **166**    |   |
| **d** | Group’s share of operating profit (loss) of associates and joint ventures includes exceptional costs (release) |   |   | 332    |   |   | 1,294  |   |   | (150   | )      |   | 26     |   |   | **25**     |   |
| **e** | Net interest payable includes exceptional costs (credits)                                                           |   |   | (25    | )      |   | 162    |   |   | 293    |   |   | 55     |   |   | **–** |   |
| **f** | Includes exceptional tax charge (credit)                                                                            |   |   | 22     |   |   | (143   | )      |   | (139   | )      |   | (29    | )      |   | **(16**    | **)**  |
| **g** | Based on actual dividends paid and/or year end exchange rate on proposed dividends                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |       |   |

|  Operating    and financial review  | BT          Group plc Annual Report and Form 20-F 2005     23 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Cash flow statement** |
|-------------------------|
|                    |

| Years ended 31 March                                                      |   |   | 2001£m |   |   | 2002£m |   |   | 2003£m |   |   | 2004£m |   |   | **2005****£m** |   |
|---------------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|----------------------|--------|
|                                                                           |   |
| Net cash flow from operating activities                                   |   |   | 5,887        |   |   | 5,257        |   |   | 6,023        |   |   | 5,389        |   |   | **5,898**            |   |
| Dividends from associates and joint ventures                              |   |   | 10           |   |   | 2            |   |   | 6            |   |   | 3            |   |   | **2**                |   |
| Returns on investments and servicing of finance                           |   |   | (727         | )      |   | (1,695       | )      |   | (1,506       | )      |   | (527         | )      |   | **(878**             | **)**  |
| Taxation paid                                                             |   |   | (669         | )      |   | (562         | )      |   | (434         | )      |   | (317         | )      |   | **(332**             | **)**  |
| Capital expenditure and financial investment                              |   |   | (8,442       | )      |   | (1,354       | )      |   | (2,381       | )      |   | (2,477       | )      |   | **(2,408**           | **)**  |
| Acquisitions and disposals                                                |   |   | (13,754      | )      |   | 5,785        |   |   | 2,842        |   |   | (60          | )      |   | **(418**             | **)**  |
| Equity dividends paid                                                     |   |   | (1,432       | )      |   | –       |   |   | (367         | )      |   | (645         | )      |   | **(784**             | **)**  |
|                                                                           |   |
| Cash (outflow) inflow before management of liquid resources and financing |   |   | (19,127      | )      |   | 7,433        |   |   | 4,183        |   |   | 1,366        |   |   | **1,080**            |   |
| Management of liquid resources                                            |   |   | (480         | )      |   | (1,864       | )      |   | (1,729       | )      |   | 1,123        |   |   | **587**              |   |
| Financing                                                                 |   |   | 19,735       |   |   | (5,479       | )      |   | (2,473       | )      |   | (2,445       | )      |   | **(1,485**           | **)**  |
|                                                                           |   |
| Increase (decrease) in cash in the year                                   |   |   | 128          |   |   | 90           |   |   | (19          | )      |   | 44           |   |   | **182**              |   |
|                                                                           |   |
| (Increase) decrease in net debt in the year resulting from cash flows     |   |   | (18,942      | )      |   | 13,930       |   |   | 4,225        |   |   | 1,222        |   |   | **887**              |   |
|                                                                           |   |

|              |
|-------------------|
| **Balance sheet** |
|              |

| At 31 March                                           |   |   | 2001£m | a      |   | 2002£m | a      |   | 2003£m | a      |   | 2004£m | a      |   | **2005****£m** |   |
|-------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|----------------------|--------|
|                                                       |   |
| Intangible fixed assets                               |   |   | 18,380       |   |   | 252          |   |   | 218          |   |   | 204          |   |   | **623**              |   |
| Tangible fixed assets                                 |   |   | 21,625       |   |   | 16,078       |   |   | 15,888       |   |   | 15,487       |   |   | **15,916**           |   |
| Fixed asset investments                               |   |   | 5,107        |   |   | 1,044        |   |   | 457          |   |   | 324          |   |   | **115**              |   |
| Net current assets (liabilities)                      |   |   | (11,111      | )      |   | 757          |   |   | 1,913        |   |   | 2,027        |   |   | **(2,165**           | **)**  |
|                                                       |   |
| Total assets less current liabilities                 |   |   | 34,001       |   |   | 18,131       |   |   | 18,476       |   |   | 18,042       |   |   | **14,489**           |   |
| Loans and other borrowings falling due after one year |   |   | (18,775      | )      |   | (16,245      | )      |   | (13,456      | )      |   | (12,426      | )      |   | **(8,091**           | **)**  |
| Provisions for liabilities and charges                |   |   | (2,738       | )      |   | (2,324       | )      |   | (2,376       | )      |   | (2,504       | )      |   | **(2,497**           | **)**  |
| Minority interests                                    |   |   | (499         | )      |   | (72          | )      |   | (63          | )      |   | (46          | )      |   | **(50**              | **)**  |
|                                                       |   |
| Total assets less liabilities                         |   |   | 11,989       |   |   | (510         | )      |   | 2,581        |   |   | 3,066        |   |   | **3,851**            |   |
|                                                       |   |
| Called up share capital                               |   |   | 7,573        |   |   | 434          |   |   | 434          |   |   | 432          |   |   | **432**              |   |
| Share premium account                                 |   |   | –       |   |   | 2            |   |   | 2            |   |   | 2            |   |   | **3**                |   |
| Capital redemption reserve                            |   |   | –       |   |   | –       |   |   | –       |   |   | 2            |   |   | **2**                |   |
| Other reserves                                        |   |   | (2,848       | )      |   | 1,025        |   |   | 998          |   |   | 998          |   |   | **998**              |   |
| Profit and loss account                               |   |   | 7,264        |   |   | (1,971       | )      |   | 1,147        |   |   | 1,632        |   |   | **2,416**            |   |
|                                                       |   |
| Total equity shareholders’ funds (deficiency)    |   |   | 11,989       |   |   | (510         | )      |   | 2,581        |   |   | 3,066        |   |   | **3,851**            |   |
|                                                       |   |
| Total assets                                          |   |   | 54,702       |   |   | 27,496       |   |   | 28,119       |   |   | 26,565       |   |   | **26,950**           |   |
|                                                       |   |

| **a** | Restated following adoption of UITF17 and UITF38 (see note 1 on page 81) |
|-------|--------------------------------------------------------------------------|

| **US GAAP** |
|-------------|

| Years ended 31 March                                                    |   |   | 2001£m |   |   | 2002£m |   |   | 2003£m |   |   | 2004£m |   |   | **2005****£m** |   |
|-------------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|----------------------|--------|
|                                                                         |   |
| Group operating profit (loss)                                           |   |   | (633         | )      |   | (337         | )      |   | 2,693        |   |   | 2,420        |   |   | **2,779**            |   |
| Income (loss) before taxes                                              |   |   | (1,959       | )      |   | 1,025        |   |   | 3,653        |   |   | 1,188        |   |   | **1,576**            |   |
| Net income (loss):                                                      |   |   |         |   |   |         |   |   |         |   |   |         |   |   |                 |   |
| Continuing activities                                                   |   |   | 809          |   |   | (1,680       | )      |   | 4,134        |   |   | 883          |   |   | **1,297**            |   |
| Discontinued activities                                                 |   |   | (3,166       | )      |   | 948          |   |   | –       |   |   | –       |   |   | **–**           |   |
|                                                                    |   |   | (2,357       | )      |   | (732         | )      |   | 4,134        |   |   | 883          |   |   | **1,297**            |   |
|                                                                         |   |
| Basic earnings (loss) per ordinary share                                |   |   | (32.4        | )p     |   | (8.8         | )p     |   | 48.0         | p      |   | 10.2         | p      |   | **15.2**             | **p**  |
| Diluted earnings (loss) per ordinary share                              |   |   | (32.4        | )p     |   | (8.8         | )p     |   | 47.7         | p      |   | 10.2         | p      |   | **15.1**             | **p**  |
| Basic earnings (loss) per ordinary share from continuing activities     |   |   | 11.1         | p      |   | (20.2        | )p     |   | 48.0         | p      |   | 10.2         | p      |   | **15.2**             | **p**  |
| Diluted earnings (loss) per ordinary share from continuing activities   |   |   | 11.0         | p      |   | (20.2        | )p     |   | 47.7         | p      |   | 10.2         | p      |   | **15.1**             | **p**  |
| Basic (loss) earnings per ordinary share from discontinued activities   |   |   | (43.5        | )p     |   | 11.4         | p      |   | –       |   |   | –       |   |   | **–**           |   |
| Diluted (loss) earnings per ordinary share from discontinued activities |   |   | (43.5        | )p     |   | 11.3         | p      |   | –       |   |   | –       |   |   | **–**           |   |
| Average number of ADSs used in basic earnings per ADS (millions)        |   |   | 728          |   |   | 831          |   |   | 862          |   |   | 862          |   |   | **852**              |   |
| Basic earnings (loss) per ADS                                           |   |   | £(3.24 | )      |   | £(0.88 | )      |   | £4.80  |   |   | £1.02  |   |   | **£1.52**      |   |
| Diluted earnings (loss) per ADS                                         |   |   | £(3.24 | )      |   | £(0.88 | )      |   | £4.77  |   |   | £1.02  |   |   | **£1.51**      |   |
|                                                                         |   |
| Total assets as at 31 March                                             |   |   | 55,361       |   |   | 30,428       |   |   | 31,131       |   |   | 28,674       |   |   | **29,006**           |   |
| Ordinary shareholders’ equity (deficiency) as at 31 March          |   |   | 10,231       |   |   | (4,247       | )      |   | (2,258       | )      |   | (1,455       | )      |   | **(584**             | **)**  |
|                                                                         |   |

 

| 24     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

**Financial review**

|   | The review is divided into the following sections: |
|--------|----------------------------------------------------|

| **26** | **Introduction**                                                     |
|--------|----------------------------------------------------------------------|
| **27** | **Summarised profit and loss account**                               |
| **28** | **Group results**                                                    |
| **30** | **Line of business results**                                         |
| **30** | **BT Retail**                                                        |
| **32** | **BT Wholesale**                                                     |
| **33** | **BT Global Services**                                               |
| **33** | **Other operating income**                                           |
| **33** | **Operating costs**                                                  |
| **34** | **Group operating profit (loss)**                                    |
| **34** | **Associates and joint ventures**                                    |
| **35** | **Total operating profit (loss)**                                    |
| **35** | **Profit on sale of group undertakings and fixed asset investments** |
| **35** | **Interest charge**                                                  |
| **36** | **Profit (loss) before taxation**                                    |
| **36** | **Taxation**                                                         |
| **36** | **Earnings (loss) per share**                                        |
| **36** | **Dividends**                                                        |
| **36** | **Financing**                                                        |
| **37** | **Treasury policy**                                                  |
| **38** | **Off-balance sheet arrangements**                                   |
| **38** | **Capital resources**                                                |
| **38** | **Foreign currency and interest rate exposure**                      |
| **38** | **Capital expenditure**                                              |
| **39** | **Acquisitions**                                                     |
| **39** | **Balance sheet**                                                    |
| **39** | **Return on capital employed**                                       |
| **39** | **Pensions**                                                         |
| **40** | **Geographical information**                                         |
| **40** | **Regulatory financial information**                                 |
| **40** | **Regulation, competition and prices**                               |
| **40** | **Competition and the UK economy**                                   |
| **40** | **Environment**                                                      |
| **40** | **Critical accounting policies**                                     |
| **41** | **Adoption of International Financial Reporting Standards (IFRS)**   |
| **43** | **US GAAP**                                                          |

|   |                                                                              |
|--------|-----------------------------------------------------------------------------------|
|   | Please see cautionary statement regarding forward-looking statements on page 128. |

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     25 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Introduction** |
|------------------|

| 26     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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Table of Contents

| **Summarised    profit and loss account**                                 |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|--------------------------------------------------------------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                                                                           |   |        |              |   |        |          |   |        |          |   |
|                                                                           |   |   | **£m** |   |   | £m | a      |   | £m | a      |
|                                                                                |   |
| **Total turnover**                                                             |   |   | **19,031**   |   |   | 18,914   |   |   | 20,182   |   |
| Group’s share of associates’ and joint ventures’ turnover       |   |   | **(408**     | **)**  |   | (395     | )      |   | (1,455   | )      |
|                                                                                |   |
| **Group turnover**                                                             |   |   | **18,623**   |   |   | 18,519   |   |   | 18,727   |   |
| Other operating income                                                         |   |   | **171**      |   |   | 177      |   |   | 215      |   |
| Operating costs                                                                |   |   | **(16,005**  | **)**  |   | (15,826  | )      |   | (16,366  | )      |
|                                                                                |   |
| Group operating profit (loss):                                                 |   |   |         |   |   |     |   |   |     |   |
| Before goodwill amortisation and exceptional items                             |   |   | **2,864**    |   |   | 2,889    |   |   | 2,794    |   |
| Goodwill amortisation                                                          |   |   | **(16**      | **)**  |   | (12      | )      |   | (20      | )      |
| Exceptional items                                                              |   |   | **(59**      | **)**  |   | (7       | )      |   | (198     | )      |
|                                                                           |   |   | **2,789**    |   |   | 2,870    |   |   | 2,576    |   |
| Group’s share of operating profit (loss) of associates and joint ventures |   |   | **(25**      | **)**  |   | (34      | )      |   | 329      |   |
|                                                                                |   |
| Total operating profit (loss):                                                 |   |   |         |   |   |     |   |   |     |   |
| Before goodwill amortisation and exceptional items                             |   |   | **2,864**    |   |   | 2,881    |   |   | 2,975    |   |
| Goodwill amortisation                                                          |   |   | **(16**      | **)**  |   | (12      | )      |   | (22      | )      |
| Exceptional items                                                              |   |   | **(84**      | **)**  |   | (33      | )      |   | (48      | )      |
|                                                                           |   |   | **2,764**    |   |   | 2,836    |   |   | 2,905    |   |
| Profit on sale of group undertakings and fixed asset investments               |   |   | **358**      |   |   | 36       |   |   | 1,696    |   |
| Profit on sale of property fixed assets                                        |   |   | **22**       |   |   | 14       |   |   | 11       |   |
| Net interest payable                                                           |   |   | **(801**     | **)**  |   | (941     | )      |   | (1,439   | )      |
|                                                                                |   |
| Profit (loss) on ordinary activities before taxation:                          |   |   |         |   |   |     |   |   |     |   |
| Before goodwill amortisation and exceptional items                             |   |   | **2,085**    |   |   | 2,013    |   |   | 1,840    |   |
| Goodwill amortisation                                                          |   |   | **(16**      | **)**  |   | (12      | )      |   | (22      | )      |
| Exceptional items                                                              |   |   | **274**      |   |   | (56      | )      |   | 1,355    |   |
|                                                                           |   |   | **2,343**    |   |   | 1,945    |   |   | 3,173    |   |
|                                                                           |   |   |         |   |   |     |   |   |     |   |
| Tax                                                                            |   |   | **(523**     | **)**  |   | (539     | )      |   | (459     | )      |
|                                                                                |   |
| **Profit after taxation**                                                      |   |   | **1,820**    |   |   | 1,406    |   |   | 2,714    |   |
| Minority interests                                                             |   |   | **1**        |   |   | 8        |   |   | (12      | )      |
|                                                                                |   |
| **Profit for the financial year**                                              |   |   | **1,821**    |   |   | 1,414    |   |   | 2,702    |   |
|                                                                                |   |
| Basic earnings (loss) per share:                                               |   |   |         |   |   |     |   |   |     |   |
| Before goodwill amortisation and exceptional items                             |   |   | **18.1**     | **p**  |   | 16.9     | p      |   | 14.4     | p      |
| Goodwill amortisation                                                          |   |   | **(0.2**     | **)p** |   | (0.1     | )p     |   | (0.3     | )p     |
| Exceptional items                                                              |   |   | **3.5**      | **p**  |   | (0.4     | )p     |   | 17.3     | p      |
|                                                                           |   |   | **21.4**     | **p**  |   | 16.4     | p      |   | 31.4     | p      |
|                                                                                |   |

| **a** | Restated following adoption of UITF17 and UITF38 (see note 1 on page 81) |
|-------|--------------------------------------------------------------------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     27 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Group results** |
|-------------------|

|                               |
|------------------------------------|
| Group turnover by customer segment |

|            |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-----------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                 |   |
| Consumer        |   |   | **5,637**            |   |   | 5,974        |   |   | 6,067        |   |
| Business        |   |   | **2,464**            |   |   | 2,600        |   |   | 2,716        |   |
| Major corporate |   |   | **6,101**            |   |   | 5,881        |   |   | 5,794        |   |
| Wholesale       |   |   | **4,396**            |   |   | 4,030        |   |   | 4,110        |   |
| Other           |   |   | **25**               |   |   | 34           |   |   | 40           |   |
|                 |   |
|            |   |   | **18,623**           |   |   | 18,519       |   |   | 18,727       |   |
|                 |   |

| 28     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

|  Operating    and financial review |  BT Group plc Annual Report and Form 20-F 2005     29 |
|-----------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

| Line of business summary |
|--------------------------|
|                     |

|               |   | Group    turnover |                 | Group operating profit (loss) |   | Goodwill amortisation |   | Exceptional charges (credits) |         |
|--------------------|--------|-------------------|----------------------|-------------------------------|--------|-----------------------|--------|-------------------------------|--------------|
|               |   |                   |                 |                               |   |                       |   |                               |         |
|               |   |              | **2005****£m** |                          |   | 2004£m          |   |                          | 2003£m |   |   | **2005****£m** |   |   | 2004£m | a |   | 2003£m | a |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|                    |   |
| BT Retail          |   |              | **12,562**           |                          |   | 12,940                |   |                          | 13,217       |   |   | **1,115** |   |   | 1,231 |   |   | 1,215 |   |   | **5** |   |   | 1 |   |   | 1 |   |   | **–** |   |   | – |   |   | – |   |
| BT Wholesale       |   |              | **8,979**            |                          |   | 8,883                 |   |                          | 9,251        |   |   | **1,940** |   |   | 1,884 |   |   | 2,070 |   |   | **–** |   |   | – |   |   | – |   |   | **–** |   |   | (1 | ) |   | – |   |
| BT Global Services |   |              | **6,381**            |                          |   | 5,782                 |   |                          | 5,417        |   |   | **(4** | **)** |   | (116 | ) |   | (394 | ) |   | **11** |   |   | 11 |   |   | 19 |   |   | **–** |   |   | – |   |   | – |   |
| Other              |   |              | **25**               |                          |   | 35                    |   |                          | 41           |   |   | **(262** | **)** |   | (129 | ) |   | (315 | ) |   | **–** |   |   | – |   |   | – |   |   | **59** |   |   | 8 |   |   | 198 |   |
| Intra-group        |   |              | **(9,324**           | **)**                         |   | (9,121                | )      |                          | (9,199       | ) |   | **–** |   |   | – |   |   | – |   |   | **–** |   |   | – |   |   | – |   |   | **–** |   |   | – |   |   | – |   |
|                    |   |
| Group totals       |   |              | **18,623**           |                          |   | 18,519                |   |                          | 18,727       |   |   | **2,789** |   |   | 2,870 |   |   | 2,576 |   |   | **16** |   |   | 12 |   |   | 20 |   |   | **59** |   |   | 7 |   |   | 198 |   |
|                    |   |

| **a** | Restated following adoption of UITF17 and UITF38 (see note 1 on page 81) |
|-------|--------------------------------------------------------------------------|

| **Line of business results** |
|------------------------------|

|                           |   | Internal cost recorded by: |             |
|--------------------------------|--------|----------------------------|------------------|
|                           |   |                            |             |
| Internal turnover recorded by: |   |                       | BTRetail£m |   |   | BTWholesale£m |   |   | BT Global Services£m |   |   | Other£m |   |   | Total£m |   |
|                                |   |
| BT Retail                      |   |                       | –           |   |   | 230 |   |   | 213 |   |   | 4 |   |   | 447 |   |
| BT Wholesale                   |   |                       | 4,689            |   |   | – |   |   | 475 |   |   | 3 |   |   | 5,167 |   |
| BT Global Services             |   |                       | 3,028            |   |   | 663 |   |   | – |   |   | 19 |   |   | 3,710 |   |
|                                |   |
| Total                          |   |                       | 7,717            |   |   | 893 |   |   | 688 |   |   | 26 |   |   | 9,324 |   |
|                                |   |

| **BT    Retail**                       |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|---------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                             |   |
| Group turnover                              |   |   | **12,562**           |   |   | 12,940       |   |   | 13,217       |   |
| Gross margin                                |   |   | **3,300**            |   |   | 3,517        |   |   | 3,621        |   |
| Sales, general andadministration costs**a** |   |   | **2,051**            |   |   | 2,123        |   |   | 2,204        |   |
| Group operating profit**a**                 |   |   | **1,120**            |   |   | 1,232        |   |   | 1,216        |   |
| EBITDA**a**                                 |   |   | **1,249**            |   |   | 1,394        |   |   | 1,417        |   |
| Capital expenditure                         |   |   | **154**              |   |   | 118          |   |   | 109          |   |
|                                             |   |

| **a**  | Before goodwill amortisation and exceptional items |
|--------|----------------------------------------------------|
|   |                                               |

| 30     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

| Group operating profit (loss)before goodwill amortisationand exceptional items |        | Depreciation |     | Amortisation ofintangible assets |     | EBITDA beforeexceptional items |         |   |       |
|--------------------------------------------------------------------------------|-------------|--------------|----------|----------------------------------|----------|--------------------------------|--------------|--------|------------|
|                                                                                |        |              |     |                                  |     |                                |         |   |       |
| **2005**                                                                       |        |         | 2004     | a                                |     | 2003                           | a            |   | **2005**   |   |   | 2004 |   |   | 2003 |   |   | **2005** |   |   | 2004 |   |   | 2003 |   |   | **2005** |   |   | 2004 | a |   | 2003 | a  |   |   |
| **£m**                                                                   |        |         | £m |                             | £m |                           | **£m** |   |       | £m |   |   | £m |   |   | **£m** |   |   | £m |   |   | £m |   |   | **£m** |   |   | £m |   | £m |   |   |
|                                                                                |
| **1,120**                                                                      |        |         | 1,232    |                             |     | 1,216                          |         |   | **129**    |   |   | 162 |   |   | 201 |   |   | **–** |   |   | – |   |   | – |   |   | **1,249** |   |   | 1,394 |   |   | 1,417 |   |   | BT Retail |
| **1,940**                                                                      |        |         | 1,883    |                             |     | 2,070                          |         |   | **1,909**  |   |   | 1,919 |   |   | 1,923 |   |   | **–** |   |   | – |   |   | – |   |   | **3,849** |   |   | 3,802 |   |   | 3,993 |   |   | BT Wholesale |
| **7**                                                                          |        |         | (105     | )                                |     | (375                           | )            |   | **567**    |   |   | 610 |   |   | 609 |   |   | **6** |   |   | 3 |   |   | 4 |   |   | **580** |   |   | 508 |   |   | 238 |   |   | BT Global Services |
| **(203**                                                                       | **)**  |         | (121     | )                                |     | (117                           | )            |   | **229**    |   |   | 230 |   |   | 278 |   |   | **–** |   |   | – |   |   | – |   |   | **26** |   |   | 109 |   |   | 161 |   |   | Other |
| **–**                                                                     |        |         | –   |                             |     | –                         |         |   | **–** |   |   | – |   |   | – |   |   | **–** |   |   | – |   |   | – |   |   | **–** |   |   | – |   |   | – |   |   | Intra-group |
|                                                                                |
| **2,864**                                                                      |        |         | 2,889    |                             |     | 2,794                          |         |   | **2,834**  |   |   | 2,921 |   |   | 3,011 |   |   | **6** |   |   | 3 |   |   | 4 |   |   | **5,704** |   |   | 5,813 |   |   | 5,809 |   |   | Group totals |
|                                                                                |

|               |   |
|--------------------|--------|
| BT Retail turnover |   |

|                  |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|-----------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                  |   |   | **£m** |   |   | £m |   |   | £m |   |
|                       |   |
| Voice services        |   |   | **8,054**    |   |   | 8,906    |   |   | 9,552    |   |
| Intermediate products |   |   | **1,728**    |   |   | 1,868    |   |   | 1,982    |   |
| **Traditional**       |   |   | **9,782**    |   |   | 10,774   |   |   | 11,534   |   |
| ICT                   |   |   | **1,978**    |   |   | 1,734    |   |   | 1,502    |   |
| Broadband             |   |   | **541**      |   |   | 307      |   |   | 131      |   |
| Mobility              |   |   | **184**      |   |   | 84       |   |   | 42       |   |
| Other                 |   |   | **77**       |   |   | 41       |   |   | 8        |   |
| **New wave**          |   |   | **2,780**    |   |   | 2,166    |   |   | 1,683    |   |
|                       |   |
| **Total**             |   |   | **12,562**   |   |   | 12,940   |   |   | 13,217   |   |
|                       |   |

|  Operating    and financial review |  BT Group plc Annual Report and Form 20-F 2005     31 |
|-----------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

|  **BT    Wholesale**   |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|-----------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                        |   |   | **£m** |   |   | £m |   |   | £m |   |
|                             |   |
| Group turnover              |   |   | **8,979**    |   |   | 8,883    |   |   | 9,251    |   |
| Gross variable profit**a**  |   |   | **6,817**    |   |   | 6,791    |   |   | 7,241    |   |
| Group operating profit**a** |   |   | **1,940**    |   |   | 1,883    |   |   | 2,070    |   |
| EBITDA**a**                 |   |   | **3,849**    |   |   | 3,802    |   |   | 3,993    |   |
| Capital expenditure         |   |   | **1,973**    |   |   | 1,809    |   |   | 1,652    |   |
|                             |   |

| **a** | Before goodwill amortisation and exceptional items |
|-------|----------------------------------------------------|

 

| 32     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

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Table of Contents

| **BT    Global Services**          |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|------------------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                               |   |   | **£m** |   |   | £m |   |   | £m |   |
|                                    |   |
| Group turnover                     |   |   | **6,381**    |   |   | 5,782    |   |   | 5,417    |   |
| Group operating profit (loss)**a** |   |   | **7**        |   |   | (105     | )      |   | (375     | )      |
| EBITDA**a**                        |   |   | **580**      |   |   | 508      |   |   | 238      |   |
| Capital expenditure                |   |   | **628**      |   |   | 479      |   |   | 445      |   |
|                                    |   |

| **a** | Before goodwill amortisation and exceptional items |
|-------|----------------------------------------------------|

| **Other operating income** |
|----------------------------|

| **Operating costs** |
|---------------------|

|  Operating    and financial review  | BT          Group plc Annual Report and Form 20-F 2005     33 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| Operating costs |   |
|-----------------|--------|

|                                           |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|------------------------------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                                           |   |   | **£m** |   |   | £m | a      |   | £m | a      |
|                                                |   |
| Staff costs                                    |   |   | **4,451**    |   |   | 4,415    |   |   | 4,250    |   |
| Own work capitalised                           |   |   | **(722**     | **)**  |   | (677     | )      |   | (583     | )      |
| Depreciation                                   |   |   | **2,834**    |   |   | 2,921    |   |   | 3,011    |   |
| Goodwill and other intangibles amortisation    |   |   | **22**       |   |   | 15       |   |   | 24       |   |
| Payments totelecommunications operators        |   |   | **3,725**    |   |   | 3,963    |   |   | 3,940    |   |
| Other operating costs                          |   |   | **5,636**    |   |   | 5,182    |   |   | 5,526    |   |
|                                                |   |
| Total operating costs before exceptional costs |   |   | **15,946**   |   |   | 15,819   |   |   | 16,168   |   |
| Net exceptional costs                          |   |   | **59**       |   |   | 7        |   |   | 198      |   |
|                                                |   |
| Total operating costs                          |   |   | **16,005**   |   |   | 15,826   |   |   | 16,366   |   |
|                                                |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

|                           |   |
|--------------------------------|--------|
| Exceptional    operating costs |   |

|                                  |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|----------------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                             |   |   | **£m** |   |   | £m |   |   | £m |   |
|                                  |   |
| Property rationalisation costs   |   |   | **59**       |   |   | –   |   |   | 198      |   |
| Rectification costs              |   |   | **–**   |   |   | 30       |   |   | –   |   |
| BT Wholesale bad debt release    |   |   | **–**   |   |   | (23      | )      |   | –   |   |
|                                  |   |
| Total exceptionaloperating costs |   |   | **59**       |   |   | 7        |   |   | 198      |   |
|                                  |   |

| **Group            operating profit (loss)** |
|----------------------------------------------|

| **Associates and joint ventures** |
|-----------------------------------|

|                                                                                |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                     |   |
| Share of turnover                                                                   |   |   | **408**              |   |   | 395          |   |   | 1,455        |   |
|                                                                                     |   |
| Share of operating (loss) profit before goodwill amortisation and exceptional items |   |   | **–**           |   |   | (8           | )      |   | 181          |   |
|                                                                                     |   |

 

| 34     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

Exceptional items within the operating (losses) profits from joint ventures and associates are as follows:

|                                            |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|--------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                            |   |
| Impairment of assets in joint ventures     |   |   | **25**               |   |   | –       |   |   | –       |   |
| Goodwill impairment                        |   |   | **–**           |   |   | 26           |   |   | –       |   |
| Release of exit costs                      |   |   | **–**           |   |   | –       |   |   | (150         | )      |
|                                            |   |
| Total exceptional operatingcosts (credits) |   |   | **25**               |   |   | 26           |   |   | (150         | )      |
|                                            |   |

| **Total operating profit (loss)** |
|-----------------------------------|

| **Profit on sale of group undertakings and fixed asset investments** |
|----------------------------------------------------------------------|

| **Interest charge** |
|---------------------|

 

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     35 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Profit (loss) before taxation** |
|-----------------------------------|

| **Taxation** |
|--------------|

| **Earnings (loss) per share** |
|-------------------------------|

|                                                                        |   |   | **2005****pence** |   |   | 2004pence | a      |   | 2003pence | a      |
|-----------------------------------------------------------------------------|--------|--------|-------------------|--------|--------|-----------|--------|--------|-----------|--------|
|                                                                             |   |
| Basic earnings per share before goodwill amortisation and exceptional items |   |   | **18.1**          |   |   | 16.9      |   |   | 14.4      |   |
| Exceptional items and goodwill amortisation                                 |   |   | **3.3**           |   |   | (0.5      | )      |   | 17.0      |   |
|                                                                             |   |
| Total basic earnings per share                                              |   |   | **21.4**          |   |   | 16.4      |   |   | 31.4      |   |
|                                                                             |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

| **Dividends** |
|---------------|

| **Financing** |
|---------------|

|                              |   |
|-----------------------------------|--------|
| Summarised    cash flow statement |   |

|                                                                 |   |   | **2005**     |   |   | 2004     |   |   | 2003     |   |
|----------------------------------------------------------------------|--------|--------|--------------|--------|--------|----------|--------|--------|----------|--------|
|                                                                      |   |   | **£m** |   |   | £m |   |   | £m |   |
|                                                                      |   |
| Net cash inflow from operating activities                            |   |   | **5,898**    |   |   | 5,389    |   |   | 6,023    |   |
| Dividends from associates and joint ventures                         |   |   | **2**        |   |   | 3        |   |   | 6        |   |
| Net cash outflow for returns on investments and servicing of finance |   |   | **(878**     | **)**  |   | (527     | )      |   | (1,506   | )      |
| Taxation paid                                                        |   |   | **(332**     | **)**  |   | (317     | )      |   | (434     | )      |
| Net cash outflow for capital expenditure and financial investment    |   |   | **(2,408**   | **)**  |   | (2,477   | )      |   | (2,381   | )      |
| Net cash (outflow) inflow for acquisitions and disposals             |   |   | **(418**     | **)**  |   | (60      | )      |   | 2,842    |   |
| Equity dividends paid                                                |   |   | **(784**     | **)**  |   | (645     | )      |   | (367     | )      |
|                                                                      |   |
| Cash inflow before management of liquid resources and financing      |   |   | **1,080**    |   |   | 1,366    |   |   | 4,183    |   |
| Management of liquid resources                                       |   |   | **587**      |   |   | 1,123    |   |   | (1,729   | )      |
| Net cash outflow from financing                                      |   |   | **(1,485**   | **)**  |   | (2,445   | )      |   | (2,473   | )      |
|                                                                      |   |
| Increase (decrease) in cash in the year                              |   |   | **182**      |   |   | 44       |   |   | (19      | )      |
|                                                                      |   |
| Decrease in net debt in the year resulting from cash flows           |   |   | **887**      |   |   | 1,222    |   |   | 4,225    |   |
|                                                                      |   |

 

| 36     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

| **Treasury policy** |
|---------------------|

 

|  Operating    and financial review |  BT Group plc Annual Report and Form 20-F 2005     37 |
|-----------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

| **Off-balance sheet arrangements** |
|------------------------------------|

|   | Operating leases (note 27) |
|--------|----------------------------|

|   | Capital commitments and guarantees (note 27) |
|--------|----------------------------------------------|

|   | Derivative contracts (note 33) |
|--------|--------------------------------|

|                  |
|-----------------------|
| **Capital resources** |

|                                    |   |                   |          |
|-----------------------------------------|--------|------------------------|---------------|
|                                    |   | Payments due by period |          |
|                                    |   |                        |          |
| Contractual obligations and commitments |   |                   | Total£m |   |   | Lessthan 1year£m |   |   | 1-3years£m |   |   | 3-5years£m |   |   | Morethan 5years£m |   |
|                                         |   |
| Loans and other borrowings              |   |                   | 11,596        |   |   | 4,197 |   |   | 1,071 |   |   | 352 |   |   | 5,976 |   |
| Finance lease obligations               |   |                   | 993           |   |   | 301 |   |   | 566 |   |   | 21 |   |   | 105 |   |
| Operating lease obligations             |   |                   | 10,457        |   |   | 375 |   |   | 752 |   |   | 743 |   |   | 8,587 |   |
| Capital commitments                     |   |                   | 735           |   |   | 532 |   |   | 105 |   |   | 44 |   |   | 54 |   |
|                                         |   |
| Total                                   |   |                   | 23,781        |   |   | 5,405 |   |   | 2,494 |   |   | 1,160 |   |   | 14,722 |   |
|                                         |   |

| **Foreign currency and interest rate exposure** |
|-------------------------------------------------|

| **Capital expenditure** |
|-------------------------|

 

| 38     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

| **Acquisitions** |
|------------------|

| **Balance sheet** |
|-------------------|

| **Return on capital employed** |
|--------------------------------|

| **Pensions** |
|--------------|

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     39 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Geographical information** |
|------------------------------|

| **Regulatory financial information** |
|--------------------------------------|

| **Regulation, competition and prices** |
|----------------------------------------|

| **Competition and the UK economy** |
|------------------------------------|

| **Environment** |
|-----------------|

| **Critical accounting policies** |
|----------------------------------|

| 40     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

| **Adoption of International Financial Reporting Standards (IFRS)** |
|--------------------------------------------------------------------|

| **Pensions** |
|--------------|

 

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     41 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Share-based payment** |
|-------------------------|

| **Goodwill and other intangible assets** |
|------------------------------------------|

| **Events after the balance sheet date** |
|-----------------------------------------|

| **Foreign exchange** |
|----------------------|

| **Lease accounting** |
|----------------------|

| **Other adjustments** |
|-----------------------|

| (i) | Computer software that is not an integral part of hardware is treated as an intangible asset. Under UK GAAP, the group’s policy was to categorise all capitalised software as tangible fixed assets. This will result in a balance sheet reclassification. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | Deferred tax assets and deferred tax liabilities are required to be shown separately on the face of the balance sheet. Under UK GAAP the net deferred tax liability was shown within provisions. This will result in £1,660 million being reclassified to deferred tax assets leaving £1,941 million as deferred taxliabilities. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | Liquid investments with maturities of less than three months at acquisition are included within cash and cash equivalents rather than current asset investments resulting in a reclassification. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv) | Cash flow statements under IFRS have a different presentational format although the underlying cash flows remain unchanged. |
|------|-----------------------------------------------------------------------------------------------------------------------------|

|                      |
|---------------------------|
| **Financial instruments** |

| 42     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

| **US GAAP** |
|-------------|

 

|  Operating    and financial review  | BT Group          plc Annual Report and Form 20-F 2005     43 |
|-----------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

**Our commitment to society**

| **Corporate social responsibility (CSR)** |
|-------------------------------------------|

| **CSR governance** |
|--------------------|

| **Social, environmental and ethical risks** |
|---------------------------------------------|

|  | supply chain working conditions; |
|--|----------------------------------|

|  | health and safety; |
|--|--------------------|

|  | climate change; |
|--|-----------------|

|  | diversity; |
|--|------------|

|  | offshoring or the ‘geography of jobs’; |
|--|--------------------------------------------------|

|  | breach of the code of business ethics; and |
|--|--------------------------------------------|

|  | privacy. |
|--|----------|

| **CSR business opportunities** |
|--------------------------------|

| **Environment** |
|-----------------|

| 44     BT Group plc Annual Report and Form 20-F 2005  | Operating and        financial review |
|-------------------------------------------------------------------------------------|---------------------------------------|

----

Table of Contents

|              |
|-------------------|
| **CO2 emissions** |
|              |

|                            |   |   | **2005** |   |   | 2004 |   |   | 2003 |   |   | 2002 |   |
|---------------------------------|--------|--------|----------|--------|--------|------|--------|--------|------|--------|--------|------|--------|
|                                 |   |
| Total (UK only; million tonnes) |   |   | **0.76** |   |   | 0.92 |   |   | 0.96 |   |   | 1.03 |   |
| % below 1996                    |   |   | **53%**  |   |   | 42%  |   |   | 40%  |   |   | 36%  |   |
| Tonnes per £1m turnover   |   |   | **41**   |   |   | 50   |   |   | 51   |   |   | 56   |   |
|                                 |   |

| **Waste** |
|-----------|
|      |

|                          |   |   | **2005**    |   |   | 2004    |   |   | 2003    |   |   | 2002    |   |
|-------------------------------|--------|--------|-------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                               |   |
| Total waste (tonnes)          |   |   | **110,622** |   |   | 107,303 |   |   | 117,688 |   |   | 114,999 |   |
| Total waste recycled (tonnes) |   |   | **37,421**  |   |   | 27,626  |   |   | 27,809  |   |   | 24,099  |   |
| % Recycled                    |   |   | **34%**     |   |   | 26%     |   |   | 24%     |   |   | 21%     |   |
|                               |   |

| **Transport** |
|---------------|
|          |

|                              |   |   | **2005**   |   |   | 2004   |   |   | 2003   |   |   | 2002   |   |
|-----------------------------------|--------|--------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                   |   |
| Number of vehicles (UK only)      |   |   | **31,969** |   |   | 32,663 |   |   | 33,979 |   |   | 37,509 |   |
| Fuel consumption (million litres) |   |   | **51.97**  |   |   | 53.85  |   |   | 56.12  |   |   | 62.76  |   |
|                                   |   |

| **Digital inclusion** |
|-----------------------|

| **Community** |
|---------------|

| **Tsunami response** |
|----------------------|

| **Disability services** |
|-------------------------|

|  Operating    and financial review |  BT Group plc Annual Report and Form 20-F 2005     45 |
|-----------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Board of directors and Operating Committee**

| **Board of directors** |
|------------------------|

| Sir Christopher Bland Chairman**d,e,f** |
|-----------------------------------------|

| **Executive directors** |
|-------------------------|

| Ben Verwaayen Chief Executive**a** |
|------------------------------------|

| Hanif Lalani Group Finance Director**a,f** |
|--------------------------------------------|

| Ian Livingston Chief Executive, BT Retail**a** |
|------------------------------------------------|

| Andy Green Chief Executive, BT Global Services**a** |
|-----------------------------------------------------|

| Dr Paul Reynolds Chief Executive, BT Wholesale**a** |
|-----------------------------------------------------|

| **Non-Executive directors** |
|-----------------------------|

| Clayton Brendish**b,e** |
|-------------------------|

| Sir Anthony Greener Deputy Chairman**b,c,d** |
|----------------------------------------------|

| Louis R Hughes**b,c** |
|-----------------------|

 

| 46     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

| The Rt Hon Baroness Jay of Paddington PC**c,e** |
|-------------------------------------------------|

| John Nelson**b,d,f** |
|----------------------|

| Carl G Symon**b,c** |
|---------------------|

| Maarten van den Bergh**b,c,d,f** |
|----------------------------------|

| **Operating Committee** |
|-------------------------|

| Ben Verwaayen Chief Executive |
|-------------------------------|

| Hanif Lalani Group Finance Director |
|-------------------------------------|

| Ian Livingston Chief Executive, BT Retail |
|-------------------------------------------|

| Andy Green Chief Executive, BT Global Services |
|------------------------------------------------|

| Dr Paul Reynolds Chief Executive, BT Wholesale |
|------------------------------------------------|

| Alison Ritchie**a,e** |
|-----------------------|

| **Company Secretary** |
|-----------------------|

|             |
|------------------|
| Larry Stone**e** |

| **a** | Operating |
|-------|-----------|

| **b** | Audit |
|-------|-------|

| **c** | Remuneration |
|-------|--------------|

| **d** | Nominating |
|-------|------------|

| **e** | Community Support |
|-------|-------------------|

| **f**  | Pension Scheme Performance Review Group |
|--------|-----------------------------------------|
|   |                                    |

|  Board of    directors and Operating Committee |  BT Group plc Annual Report and Form 20-F 2005     47 |
|-----------------------------------------------------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Report of the directors**

| **Directors** |
|---------------|

| **Substantial shareholdings** |
|-------------------------------|

| **Interest of management in certain transactions** |
|----------------------------------------------------|

During and at the end of the 2005    financial year, none of the company’s directors was materially interested in any material transaction in relation to the group’s    business and none is materially interested in any presently proposed material    transactions.

| 48    BT          Group plc Annual Report and Form 20-F 2005  |
|----------------------------------------------------------------------------------------|

----

Table of Contents

Registered office: 81 Newgate Street, London EC1A 7AJ Registered in England and Wales No. 4190816

|  Report of    the directors  | BT Group          plc Annual Report and Form 20-F 2005     49 |
|----------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

**Corporate governance**

| **The Board** |
|---------------|

| **Composition and role** |
|--------------------------|

| **BT’s non-executive directors** |
|---------------------------------------|

 

| 50     BT Group plc Annual Report and Form 20-F 2005  |   |
|-------------------------------------------------------------------------------------|--------|

----

Table of Contents

| **Election and re-election** |
|------------------------------|

| **Service agreements** |
|------------------------|

| **Independent advice** |
|------------------------|

| **Training and information** |
|------------------------------|

| **Board evaluation** |
|----------------------|

| **Directors’ and officers’ liability insurance and indemnity** |
|--------------------------------------------------------------------------|

| **Principal Board committees** |
|--------------------------------|

| **Audit Committee** |
|---------------------|

 

|  Corporate    governance  | BT Group          plc Annual Report and Form 20-F 2005     51 |
|-------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Remuneration Committee** |
|----------------------------|

| **Nominating Committee** |
|--------------------------|

 

| 52     BT Group plc Annual Report and Form 20-F 2005  | Corporate governance |
|-------------------------------------------------------------------------------------|----------------------|

----

Table of Contents

| **Meetings attendance** |
|-------------------------|

|                              |   |                                             | Board  |   |   | Audit Committee |   |   | Remuneration Committee |   |   | Nominating Committee |   |
|-----------------------------------|--------|--------------------------------------------------|--------|--------|--------|-----------------|--------|--------|------------------------|--------|--------|----------------------|--------|
|                                   |   |
|                              |   | (Attendance is shown only for a committeemember) |   |
| Number of meetings/      Director |   |                                             | 14     |   |   | 4               |   |   | 5                      |   |   | 4                    |   |
| Sir Christopher Bland             |   |                                             | 14     |   |   |            |   |   |                   |   |   | 4                    |   |
| Maarten van den Bergh             |   |                                             | 12     |   |   | 4               |   |   | 5                      |   |   | 4                    |   |
| Clay Brendish                     |   |                                             | 14     |   |   | 3               |   |   |                   |   |   |                 |   |
| Pierre Danon**a**                 |   |                                             | 11     |   |   |            |   |   |                   |   |   |                 |   |
| Andy Green                        |   |                                             | 14     |   |   |            |   |   |                   |   |   |                 |   |
| Sir Anthony Greener               |   |                                             | 13     |   |   | 4               |   |   | 5                      |   |   | 4                    |   |
| Lou Hughes**b**                   |   |                                             | 5      |   |   | 2               |   |   | 2                      |   |   |                 |   |
| Margaret Jay                      |   |                                             | 12     |   |   |            |   |   | 4                      |   |   |                 |   |
| Hanif Lalani**c**                 |   |                                             | 2      |   |   |            |   |   |                   |   |   |                 |   |
| Ian Livingston                    |   |                                             | 13     |   |   |            |   |   |                   |   |   |                 |   |
| John Nelson                       |   |                                             | 13     |   |   | 3               |   |   |                   |   |   | 3                    |   |
| Paul Reynolds                     |   |                                             | 13     |   |   |            |   |   |                   |   |   |                 |   |
| Carl Symon                        |   |                                             | 14     |   |   | 4               |   |   | 5                      |   |   |                 |   |
| Ben Verwaayen                     |   |                                             | 14     |   |   |            |   |   |                   |   |   |                 |   |
|                                   |   |

| **a** | Resigned as a director on 28 February 2005 |
|-------|--------------------------------------------|

| **b** | Granted unpaid leave of absence by the Board from 1 September 2004 to 30 June 2005 to lead the civil reconstruction effort for the US Government in Afghanistan |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | Appointed a director from 7 February 2005 |
|-------|-------------------------------------------|

|                    |
|-------------------------|
| **Operating Committee** |

| **Internal control and risk management** |
|------------------------------------------|

|  | senior executives, led by the Secretary, review the group’s key risks and have created a group risk register, describing the risks, owners and mitigation strategies. This is reviewed by the *Operating Committee* before being reviewed and approved by the Board. |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | the lines of business carry out risk assessments of their operations, have created registers relating to those risks, and ensure that the key risks are addressed. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | senior management report regularly to the Group Finance Director on the operation of internal controls in their area of responsibility. |
|--|-----------------------------------------------------------------------------------------------------------------------------------------|

|  | the Chief Executive receives annual reports from senior executives with responsibilities for major group operations with their opinion on the effectiveness of the operation of internal controls during the financial year. |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | the group’s internal auditors carry out continuing assessments of the quality of risk management and control. Internal Audit reports to the management and the *Audit Committee* on the status of specific areas identified for improvement. Internal audit also promotes effective risk management in the linesof business operations. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | the *Audit Committee*, on behalf of the Board, considers the effectiveness of the operation of internal control processes and procedures in the group during the financial year, including the review of reports from the internal auditors and from the external auditors, and reports its conclusions to the Board.The *Audit Committee* has carried out these actions for the 2005 financial year. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  Corporate    governance  | BT Group          plc Annual Report and Form 20-F 2005     53 |
|-------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Relations with shareholders** |
|---------------------------------|

| **Statement of business practice** |
|------------------------------------|

| **Pension funds** |
|-------------------|

| **Financial statements** |
|--------------------------|

| **US Sarbanes-Oxley Act of 2002** |
|-----------------------------------|

| 54     BT Group plc Annual Report and Form 20-F 2005  | Corporate governance |
|-------------------------------------------------------------------------------------|----------------------|

----

Table of Contents

| **The New York Stock Exchange** |
|---------------------------------|

|  Corporate    governance  | BT Group          plc Annual Report and Form 20-F 2005     55 |
|-------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

**Report on directors’ remuneration**

| **56** | **Remuneration    policy (Not audited)** |
|--------|------------------------------------------|
|   | (i)                                      | Constitution and process |

|   | (ii) | Packages |
|--------|------|----------|

|   | (iii) | Annual package – financial year 2005/06 |
|--------|-------|----------------------------------------------|

|   | (iv) | Other matters |
|--------|------|---------------|

|   |   | Executive share ownership |
|--------|--------|---------------------------|

|   |   | Pensions |
|--------|--------|----------|

|   |   | Other benefits |
|--------|--------|----------------|

|   |   | Service agreements |
|--------|--------|--------------------|

|   |   | Outside appointments |
|--------|--------|----------------------|

|   |   | Non-executive directors’ letters of appointment |
|--------|--------|------------------------------------------------------|

|   |   | Non-executive directors’ remuneration |
|--------|--------|--------------------------------------------|

|   |   | Directors’ service agreements and contracts of appointment |
|--------|--------|-----------------------------------------------------------------|

|   |   | Directors’ interests |
|--------|--------|---------------------------|

|   |   | Performance graph |
|--------|--------|-------------------|

|   |
|--------|

| **62** | **Remuneration    review (Audited)** |
|--------|--------------------------------------|
|   | Directors’ emoluments           |

|   | Former directors |
|--------|------------------|

|   | Loans |
|--------|-------|

|   | Pensions |
|--------|----------|

|   | Share options |
|--------|---------------|

|   | Share awards under long-term incentive schemes |
|--------|------------------------------------------------|

|   | Vesting of outstanding share awards and options |
|--------|-------------------------------------------------|

|   | Deferred Bonus Plan |
|--------|---------------------|

|   | Share awards under all-employee share ownership plans |
|--------|-------------------------------------------------------|

|   | Operating Committee |
|--------|---------------------|

| **Remuneration policy****This part of the Report on directors’ remuneration is not subject to audit.** |
|-------------------------------------------------------------------------------------------------------------|

| **(i)** | **Constitution and process** |
|---------|------------------------------|

|  | Maarten van den Bergh |
|--|-----------------------|

|  | Lou Hughes |
|--|------------|

|  | Margaret Jay |
|--|--------------|

|  | Carl Symon. |
|--|-------------|

| 56     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

| **(ii)** | **Packages** |
|----------|--------------|

| Basic salary |
|--------------|

| Performance-related remuneration |
|----------------------------------|

| *Annual bonus* |
|----------------|

| **Achievement against corporate targets in the financial year 2004/05:** |
|--------------------------------------------------------------------------|

|                                                  |   |
|--------------------------------------------------|--------|
| Earnings per  share –weighting40% of target |   |   | Free cash  flow –weighting40% of target |   |   | Customer  satisfaction –       weighting       20% oftarget |   |   | Total          % of target |   |
|                                                  |   |
| 37                                               |   |   | 20 |   |   | 18 |   |   | 75 |   |
|                                                  |   |

| (Note – threshold reflects 50% of target; target is 100% and stretch is 150%) |
|------------------------------------------------------------------------------------|

| *Long-term incentives* |
|------------------------|

| BT GroupCable & WirelessCosmote Mobile TelecommunicationsDeutsche TelekomFrance TelecomHellenic TelecommunicationsO2 (formerly mmO2)Portugal TelecomKPNSwisscom |   | TDCTele2Telecom ItaliaTelecom Italia MobileTelefonicaTelekom AustriaTelenorTeliaSoneraVodafone Group |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

| *Share options* |
|-----------------|

|  Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     57 |
|-------------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| *Incentive shares* |
|--------------------|

| *Retention shares* |
|--------------------|

| *Other share plans* |
|---------------------|

| **(iii)** | **Annual package – financial year 2005/06** |
|-----------|--------------------------------------------------|

| *Long-term reward* |
|--------------------|

|  | no further annual grants of options, balanced by; |
|--|---------------------------------------------------|

|  | an increase in the maximum award of incentive shares from two-thirds to 100% of base salary; and |
|--|--------------------------------------------------------------------------------------------------|

|  | an increase in annual bonus potential, payable in deferred shares. |
|--|--------------------------------------------------------------------|

| 58     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

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Table of Contents

| *Arrangements for BT Group Chief Executive and the Chief Executive BT Global Services* |
|----------------------------------------------------------------------------------------|

| *Annual bonus plan* |
|---------------------|

| *Proportion of fixed and variable remuneration* |
|-------------------------------------------------|

| **(iv)** | **Other matters** |
|----------|-------------------|

| **Executive share ownership** |
|-------------------------------|

| **Pensions** |
|--------------|

 

| Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     59 |
|-------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Other benefits** |
|--------------------|

| **Service agreements** |
|------------------------|

| **Outside appointments** |
|--------------------------|

| **Non-executive directors’ letters of appointment** |
|----------------------------------------------------------|

| **Non-executive directors’ remuneration** |
|------------------------------------------------|

| 60     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

----

Table of Contents

| **Directors’ service agreements and contracts of appointment** |
|---------------------------------------------------------------------|

|                                                                                                 |
|-------------------------------------------------------------------------------------------------|
| **Chairman and executive directors**                                                            |   |   | **Commencement date** |   |   | **Expiry date of current service agreement or letter of appointment** |
| Sir Christopher Bland                                                                           |   |   | 1 May 2001 |   |   | Sir Christopher Bland entered into a new service agreement on 29 August 2003 which terminates at theconclusion of the 2007 AGM, terminable on 12 months’ notice by either the company or the director beforethat date. |
|                                                                        |   |   |   |     |   |   |
| B Verwaayen      A GreenH LalaniI LivingstonDr P ReynoldsP Danon *(resigned**28 February 2005)* |   |   | 14 January 2002      19 November 20017 February 20058 April 200219 November 200119 November2001 |  |   | The contract is terminable by the company on 12 months’ notice and by the director on six months’ notice. |
|                                                                        |   |   |   |   |   |   |
| **Non-executive directors**                                                                     |   |   |   |   |   |   |
| Sir Anthony GreenerM van den BerghL R HughesBaroness JayJ NelsonC G Symon                       |   |   | 1 October 20001 September 20001 January 200014 January 200214 January 200214 January2002 |  |   | Letters of appointment were for an initial period of three years. Appointments were extended for a furtherthree years and are terminable by the company or the director on three months’ notice. |
|                                                                                            |   |   |   |   |   |   |
| C Brendish                                                                                      |   |   | 1 September2002 |  |   | Letter of appointment is for an initial period of three years and is terminable by the company or the directoron three months’ notice. The appointment is renewable by mutual agreement. |
|                                                                                                 |

| **Directors’ interests** |
|-------------------------------|

|                       |   | No. of shares |          |
|----------------------------|--------|---------------|---------------|
|                       |   |               |          |
| Beneficial holdings        |   |          | **2005**      |   |   | 2004 |   |
|                            |   |
| Sir Christopher Bland**c** |   |          | **674,183**   | **b** |   | 674,062 |   |
| B Verwaayen**c**           |   |          | **902,001**   |   |   | 387,876 |   |
| A Green**c**               |   |          | **120,002**   | **b** |   | 92,351 | **b** |
| H Lalani**cd**             |   |          | **5,733**     | **ab** |   | – |   |
| I Livingston**c**          |   |          | **313,054**   | **b** |   | 209,637 |   |
| Dr P Reynolds**c**         |   |          | **67,768**    | **ab** |   | 46,823 | **b** |
| Sir Anthony Greener        |   |          | **60,007**    |   |   | 34,607 |   |
| M van den Bergh            |   |          | **7,540**     |   |   | 4,800 |   |
| C Brendish                 |   |          | **23,920**    |   |   | 23,920 |   |
| L R Hughes                 |   |          | **6,800**     |   |   | 6,800 |   |
| Baroness Jay               |   |          | **5,572**     |   |   | 5,572 |   |
| J Nelson                   |   |          | **50,000**    |   |   | 50,000 |   |
| C G Symon                  |   |          | **10,069**    |   |   | 10,069 |   |
|                            |   |
| Total                      |   |          | **2,246,649** |   |   | 1,546,517 |   |
|                            |   |

| **a** | During the period from 1 April 2005 to 15 May 2005, Paul Reynolds and Hanif Lalani each purchased 125 shares under the BT Group Employee Share Investment Plan. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **b** | Includes free shares awarded under the Employee Share Investment Plan and/or Employee Share Ownership Scheme. |
|-------|---------------------------------------------------------------------------------------------------------------|

| **c** | At 31 March 2005, Sir Christopher Bland and each of the executive directors, as potential beneficiaries, had a non-beneficial interest in 27,733,138 shares (2004 – 30,463,435) held in trust by Ilford Trustees (Jersey) Limited for allocation to employees under the employee share schemes. They each also had a non-beneficial interest in 139,029 shares (2004 – 141,864) held in trust by Halifax Corporate Trustees Limited for participants in the EmployeeShare Investment Plan. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **d** | At date of appointment – 7 February 2005. |
|-------|------------------------------------------------|

| Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     61 |
|-------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Performance graph** |
|-----------------------|

| **Remuneration Review** |
|-------------------------|

| **This part of the Report on directors’ remuneration is subject to audit.** |
|----------------------------------------------------------------------------------|

|                           |
|--------------------------------|
| **Directors’ emoluments** |

|                       |   |   | Basicsalary andfees |   |   | Pensionallowance netof pensioncontributions | **a**  |   | Total        salaryand fees |   |   | Annualcash bonus |   |   | Expensesallowance |   |   | Otherbenefitsexcludingpension |   |   | Total2005      |   |   | Total2004  |   |
|----------------------------|--------|--------|---------------------|--------|--------|---------------------------------------------|--------|--------|-----------------------------|--------|--------|------------------|--------|--------|-------------------|--------|--------|-------------------------------|--------|--------|----------------|--------|--------|------------|--------|
|                       |   |        |                |
|                       |   |   | £000          |   |   | £000                                  |   |   | £000                  |   |   | £000       |   |   | £000        |   |   | £000                    |   |   | **£000** |   |   | £000 |   |
|                            |   |
| Sir Christopher Bland**d** |   |   | 500                 |   |   | –                                      |   |   | 500                         |   |   | –           |   |   | –            |   |   | 32                            |   |   | **532**        |   |   | 532        |   |
| B Verwaayen**cdf**         |   |   | 700                 |   |   | 127                                         |   |   | 827                         |   |   | 448              |   |   | 196               |   |   | 41                            |   |   | **1,512**      |   |   | 1,968      |   |
| A Green**df**              |   |   | 444                 |   |   | –                                      |   |   | 444                         |   |   | 204              |   |   | –            |   |   | 36                            |   |   | **684**        |   |   | 791        |   |
| H Lalani**def**            |   |   | 64                  |   |   | –                                      |   |   | 64                          |   |   | 136              |   |   | –            |   |   | 7                             |   |   | **207**        |   |   | –     |   |
| I Livingston**bdf**        |   |   | 469                 |   |   | 120                                         |   |   | 589                         |   |   | 198              |   |   | 19                |   |   | 10                            |   |   | **816**        |   |   | 913        |   |
| Dr P Reynolds**bdf**       |   |   | 400                 |   |   | –                                      |   |   | 400                         |   |   | 213              |   |   | 19                |   |   | 21                            |   |   | **653**        |   |   | 737        |   |
| Sir Anthony Greener        |   |   | 115                 |   |   | –                                      |   |   | 115                         |   |   | –           |   |   | –            |   |   | –                        |   |   | **115**        |   |   | 96         |   |
| M van den Bergh            |   |   | 55                  |   |   | –                                      |   |   | 55                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **55**         |   |   | 44         |   |
| C Brendish                 |   |   | 50                  |   |   | –                                      |   |   | 50                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **50**         |   |   | 39         |   |
| L R Hughes                 |   |   | 21                  |   |   | –                                      |   |   | 21                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **21**         |   |   | 40         |   |
| Baroness Jay               |   |   | 50                  |   |   | –                                      |   |   | 50                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **50**         |   |   | 39         |   |
| J Nelson                   |   |   | 50                  |   |   | –                                      |   |   | 50                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **50**         |   |   | 39         |   |
| C G Symon                  |   |   | 50                  |   |   | –                                      |   |   | 50                          |   |   | –           |   |   | –            |   |   | –                        |   |   | **50**         |   |   | 40         |   |
| P Danon**bdfh**            |   |   | 413                 |   |   | –                                      |   |   | 413                         |   |   | 250              |   |   | 17                |   |   | 21                            |   |   | **701**        |   |   | 750        |   |
|                            |   |
|                       |   |   | 3,381               |   |   | 247                                         |   |   | 3,628                       |   |   | 1,449            |   |   | 251               |   |   | 168                           |   |   | **5,496**      |   |   | 6,028      |   |
|                            |   |

| **a** | Balance or part of the pension allowance for the financial year 2004/05 – see ‘Pensions’ below. |
|-------|----------------------------------------------------------------------------------------------------------------|

| **b** | Ian Livingston, Paul Reynolds and Pierre Danon each received a monthly cash allowance in lieu of a company car equivalent to £18,500 per annum. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | Ben Verwaayen was entitled to a housing allowance of £250,000 per annum until 13 January 2005. In the financial year 2004/05, £196,000 was paid in respect of that year (2004 – £250,000). These amounts are included in the table above under Expenses allowance. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **d** | Other benefits includes some or all of the following: company car, fuel or driver, personal telecommunications facilities and home security, medical and dental cover for the director and immediate family, special life cover, professional subscriptions and personal tax planning and financial counselling. In addition, Paul Reynolds and Pierre Danon had interest free loans – see ‘Loans’ below. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **e** | Hanif Lalani joined the Board on 7 February 2005. |
|-------|---------------------------------------------------|

| **f**  | Deferred annual bonuses payable in shares in three years’ time, were awarded to Ben Verwaayen £224,000 (2004 – £429,500), Andy Green £102,000 (2004 – £168,000), Hanif Lalani £68,000 (2004 – £nil), Ian Livingston £99,000 (2004 – £162,500), Paul Reynolds £106,500 (2004 – £147,500) and Pierre Danon £nil (2004 – £129,500).                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | When added        to the amounts paid or payable for the 2004/05 financial year, in the        table above, the total emoluments of Ben Verwaayen were £1,736,000        (2004 - £2,397,500), Andy Green £786,000 (2004 – £959,000),        Hanif Lalani £275,000 (2004 – £nil), Ian Livingston £915,000        (2004 – £1,075,500), Paul Reynolds £759,500 (2004 – £884,500)    and Pierre Danon £701,000 (2004 – £879,500). |

| **g** | Retirement benefits are accruing to three directors (2004 – three) under defined contribution arrangements and to three directors (2004 – three) and one former director under a defined benefit scheme. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **h** | Pierre Danon resigned from the Board on 28 February 2005. |
|-------|-----------------------------------------------------------|

 

| 62     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

----

Table of Contents

| **Former directors** |
|----------------------|

| **Loans** |
|-----------|

| **Pensions**Sir Christopher Bland is not a member of any of the company pension schemes, but the company matches his contributions, up to 10% of the earnings cap, to a personal pension plan. Company contributions of £10,200 were payable in respect of the financial year 2004/05. The earnings cap is a restriction onthe amount of pay which can be used to calculate contributions and benefits due to a tax approved pension scheme. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     63 |
|-------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

|          |   | Accrued pension |           | Transfer value of accrued   benefits |   |       | Change    in transfer value c-d lessdirectors’ contributions |   |           | Additional accrued benefits earnedin the year |   |       | Transfer value of increase inaccrued benefits less directors’contributions |   |
|---------------|--------|-----------------|----------------|--------------------------------------|--------|------------|-------------------------------------------------------------------|--------|----------------|-----------------------------------------------|--------|------------|---------------------------------------------------------------------------------|--------|
|          |   |            |                |                                 |   |            |                                                              |   |                |                                          |   |            |                                                                            |   |  |   |
|          |   |            | **2005**       |                                 |   | 2004       |                                                              |   | **2005**       |                                          |   | 2004       |                                                                            |   | **2005** |   |   | **2005** |   |   | **2005** |   |
|          |   |            | **£000** | **a**                                |   | £000 | b                                                                 |   | **£000** | **c**                                         |   | £000 | d                                                                               |   | **£000** |   |   | **£000** | **e** |   | **£000** | **f** |
|               |   |
| P Danon**h**  |   |            | **66**         |                                 |   | 52         |                                                              |   | **696**        |                                          |   | 519        |                                                                            |   | **163** |   |   | **12** |   |   | **113** |   |
| A Green       |   |            | **131**        |                                 |   | 117        |                                                              |   | **1,848**      |                                          |   | 1,553      |                                                                            |   | **268** |   |   | **10** |   |   | **115** |   |
| H Lalani**i** |   |            | **73**         |                                 |   | 57         |                                                              |   | **668**        |                                          |   | 494        |                                                                            |   | **158** |   |   | **14** |   |   | **109** |   |
| P Reynolds    |   |            | **123**        |                                 |   | 116        |                                                              |   | **1,578**      |                                          |   | 1,405      |                                                                            |   | **149** |   |   | **3** |   |   | **12** |   |
|               |   |

| **a-d** | As required by the Companies Act 1985 Schedule 7A. |
|---------|----------------------------------------------------|

| **a-b** | These amounts represent the deferred pension to which the directors would have been entitled had they left the company on 31 March 2004 and 2005, respectively. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | Transfer value of the deferred pension in column (a) as at 31 March 2005 calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer value represents a liability of the company rather than any remuneration due to the individual and cannot be meaningfully aggregated with annual remuneration, as it is not money the individual is entitled to receive. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **d** | The equivalent transfer value but calculated as at 31 March 2004 on the assumption that the director left service at that date. |
|-------|---------------------------------------------------------------------------------------------------------------------------------|

| **e** | The increase in pension built up during the year, net of inflation. |
|-------|---------------------------------------------------------------------|

| **f** | The transfer value of the pension in column (e), less directors’ contributions. |
|-------|--------------------------------------------------------------------------------------|

| **g** | Directors’ contributions          in the financial year 2004/05 were as follows: Pierre Danon, £14,025          (2004 – £14,580); Andy Green, £26,625 (2004 – £25,500);          Hanif Lalani £16,300 (2004 – £13,350) and Paul Reynolds, £24,000    (2004 – £24,000). |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **h** | Pierre Danon resigned as a director on 28 February 2005. |
|-------|----------------------------------------------------------|

| **i** | Hanif Lalani joined the Board on 7 February 2005. |
|-------|---------------------------------------------------|

| 64     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

----

Table of Contents

| **Share options held during the year ended 31 March 2005** |
|------------------------------------------------------------|
|                                                       |

|                  |   | Number of shares under option |                                 |   |   |      |   |   |      |   |   |              |
|-----------------------|--------|-------------------------------|--------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|--------|-------------------|
|                  |   |                               |                                 |   |   |      |   |   |      |   |   |              |
|                  |   |                          | 1 April 2004 (or date ofappointment) |   |   | Granted   |   |   | Lapsed    |   |   | **31 March 2005** |   |   | Option price per share |   |   | Usual date from which exercisable |   |   | Usual expiry date |   |
|                       |   |
| Sir Christopher Bland |   |                          | 314,244                              | **a**  |   | –    |   |   | –    |   |   | **314,244**       |   |   | 318 | p |   | 01/05/2004 |   |   | 01/05/2011 |   |
|                       |   |
| B Verwaayen           |   |                          | 1,121,121                            | **b**  |   | –    |   |   | –    |   |   | **1,121,121**     |   |   | 250 | p |   | 11/02/2005 |   |   | 11/02/2012 |   |
|                  |   |                          | 935,830                              | **c**  |   | –    |   |   | –    |   |   | **935,830**       |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 561,500                              | **d**  |   | –    |   |   | 561,500   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 1,052,632                            | **e**  |   | –    |   |   | –    |   |   | **1,052,632**     |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | –                               |   |   | 546,875   | **f**  |   | –    |   |   | **546,875**       |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                       |   |
|                  |   |                          | 3,671,083                            |   |   | 546,875   |   |   | 561,500   |   |   | **3,656,458**     |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| A Green               |   |                          | 2,905                                | **g**  |   | –    |   |   | 2,905     |   |   | **–**        |   |   | 255 | p |   | 14/08/2005 |   |   | 13/02/2006 |   |
|                  |   |                          | 568,190                              | **c**  |   | –    |   |   | –    |   |   | **568,190**       |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 340,910                              | **d**  |   | –    |   |   | 340,910   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 639,098                              | **e**  |   | –    |   |   | –    |   |   | **639,098**       |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | –                               |   |   | 332,032   | **f**  |   | –    |   |   | **332,032**       |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                  |   |                          | –                               |   |   | 5,712     | **h**  |   | –    |   |   | **5,712**         |   |   | 165 | p |   | 14/08/2007 |   |   | 13/02/2008 |   |
|                       |   |
|                  |   |                          | 1,551,103                            |   |   | 337,744   |   |   | 343,815   |   |   | **1,545,032**     |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| H Lalani**l**         |   |                          | 5,346                                | **i**  |   | –    |   |   | –    |   |   | **5,346**         |   |   | 173 | p |   | 14/08/2006 |   |   | 13/02/2007 |   |
|                  |   |                          | 177,810                              | **c**  |   | –    |   |   | –    |   |   | **177,810**       |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 210,527                              | **e**  |   | –    |   |   | –    |   |   | **210,527**       |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | 105,264                              | **j**  |   | –    |   |   | –    |   |   | **105,264**       |   |   | 199.5 | p |   | 24/06/2004 |   |   | 24/06/2013 |   |
|                  |   |                          | 156,250                              | **f**  |   | –    |   |   | –    |   |   | **156,250**       |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                       |   |
|                  |   |                          | 655,197                              |   |   | –    |   |   | –    |   |   | **655,197**       |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| I Livingston          |   |                          | 7,290                                | **g**  |   | –    |   |   | –    |   |   | **7,290**         |   |   | 227 | p |   | 14/08/2007 |   |   | 13/02/2008 |   |
|                  |   |                          | 601,610                              | **c**  |   | –    |   |   | –    |   |   | **601,610**       |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 360,970                              | **d**  |   | –    |   |   | 360,970   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 676,692                              | **e**  |   | –    |   |   | –    |   |   | **676,692**       |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | –                               |   |   | 351,563   | **f**  |   | –    |   |   | **351,563**       |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                       |   |
|                  |   |                          | 1,646,562                            |   |   | 351,563   |   |   | 360,970   |   |   | **1,637,155**     |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| Dr P Reynolds         |   |                          | 4,555                                | **k**  |   | –    |   |   | –    |   |   | **4,555**         |   |   | 218 | p |   | 14/02/2007 |   |   | 13/08/2007 |   |
|                  |   |                          | 534,760                              | **c**  |   | –    |   |   | –    |   |   | **534,760**       |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 320,860                              | **d**  |   | –    |   |   | 320,860   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 601,504                              | **e**  |   | –    |   |   | –    |   |   | **601,504**       |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | –                               |   |   | 312,500   | **f**  |   | –    |   |   | **312,500**       |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                       |   |
|                  |   |                          | 1,461,679                            |   |   | 312,500   |   |   | 320,860   |   |   | **1,453,319**     |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| **Former director**   |   |
| P Danon               |   |                          | 601,610                              | **c**  |   | –    |   |   | 601,610   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 360,970                              | **d**  |   | –    |   |   | 360,970   |   |   | **–**        |   |   | 187 | p |   | 29/07/2005 |   |   | 29/07/2012 |   |
|                  |   |                          | 676,692                              | **e**  |   | –    |   |   | 676,692   |   |   | **–**        |   |   | 199.5 | p |   | 24/06/2006 |   |   | 24/06/2013 |   |
|                  |   |                          | –                               |   |   | 351,563   | **f**  |   | 351,563   |   |   | **–**        |   |   | 192 | p |   | 24/06/2007 |   |   | 24/06/2014 |   |
|                       |   |
|                  |   |                          | 1,639,272                            |   |   | 351,563   |   |   | 1,990,835 |   |   | **–**        |   |   |   |   |   |   |   |   |   |   |
|                       |   |
| Total                 |   |                          | 10,939,140                           |   |   | 1,900,245 |   |   | 3,577,980 |   |   | **9,261,405**     |   |   |   |   |   |   |   |   |   |   |
|                       |   |

|   | All of the above options were granted for nil consideration. No options were exercised during the year. |
|--------|---------------------------------------------------------------------------------------------------------|

| **a** | Options granted under the GSOP on 22 June 2001. The option is not subject to a performance measure. It was a term of Sir Christopher Bland’s initial service contract that (i) he purchased BT shares to the value of at least £1 million; and (ii) as soon as practicable after the purchase of the shares (‘invested shares’), the company would grant a share option over shares to the value of at least £1 million. Sir Christopher Bland was the legal and beneficialowner of the invested shares on 1 May 2004, so the option became exercisable on that date. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **b** | Options granted under the GSOP on 11 February 2002. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100. BT’s TSR must be in the upper quartile for all of the options to become exercisable. At median, 40% of the options will be exercisable. Below that point, none of the options may be exercised. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | Options granted under the GSOP on 29 July 2002. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100. BT’s TSR must be in the upper quartile for all of the options to become exercisable. At median, 30% of the options will be exercisable. Below that point, none of the options may be exercised. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **d** | Options granted under the GSOP on 29 July 2002. The vesting of the options was subject to a performance measure being met. The performance measure was earnings per share. The performance measure was not met and as a result, the options have lapsed. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **e** | Options granted under the GSOP on 24 June 2003. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with the FTSE 100 – see note c above. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **f** | Options granted under the GSOP on 24 June 2004. The exercise of options is subject to a performance measure being met. The performance measure is relative TSR compared with a group of companies from the European Telecom Sector. BT’s TSR must be in the upper quartile for all of the options to become exercisable. At median, 30% of the options will be exercisable. Below that point, none of the options may be exercised. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **g** | Options granted on 24 June 2002 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------|

| **h** | Options granted on 25 June 2004 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------|

| **i** | Options granted on 27 June 2003 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------|

| **j** | Options granted under the GSOP (Special Incentive Award) on 24 June 2003, prior to Mr Lalani’s appointment as a director. These options are not subject to a performance measure, as the grant was linked to performance. |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **k** | Options granted on 21 December 2001 under the Employee Sharesave Scheme, in which all employees of the company are eligible to participate. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------|

| **l** | Date of appointment – 7 February 2005. |
|-------|---------------------------------------------|

|  Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     65 |
|-------------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Share awards under long-term incentive schemes held during the year ended 31 March 2005** |
|---------------------------------------------------------------------------------------------|

|                  |   |   | 1 April 2004       (or date of              appointment) |   |   | Awarded**a** |   |   | Dividendsre-invested |   |   | Vestedf |   |   | Lapsed  |   |   | **Total       number of       awardshares 31 March 2005** |   |   | Expected     vesting date |   |   | Price on     grant |   |   | Market        Price    at vesting |   |   | Monetary       value of       vested award£000 |   |
|-----------------------|--------|--------|----------------------------------------------------------|--------|--------|--------------|--------|--------|----------------------|--------|--------|---------|--------|--------|---------|--------|--------|-----------------------------------------------------------|--------|--------|---------------------------|--------|--------|--------------------|--------|--------|-----------------------------------|--------|--------|------------------------------------------------------|--------|
|                       |   |
| Sir Christopher Bland |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |
| RSP 2003              |   |   | 286,100                                                  |   |   | –       |   |   | 13,653               |   |   | –  |   |   | –  |   |   | **299,753**                                               |   |   | 2007                      |   |   | 182p               |   |   | –                            |   |   | –                                               |   |
|                       |   |
| B Verwaayen           |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |
| ISP 2004              |   |   | –                                                   |   |   | 241,284      |   |   | 11,514               |   |   | –  |   |   | –  |   |   | **252,798**                                               |   |   | 31/03/07                  |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
| RSP 2001**b**         |   |   | 832,869                                                  |   |   | –       |   |   | 39,746               |   |   | 872,615 |   |   | –  |   |   | **–**                                                |   |   | –                    |   |   | 257.814p           |   |   | 207.75p                           |   |   | 1,813                                                |   |
|                       |   |
| A Green               |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |
| ISP 2004              |   |   | –                                                   |   |   | 146,494      |   |   | 6,990                |   |   | –  |   |   | –  |   |   | **153,484**                                               |   |   | 31/03/07                  |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
|                       |   |
| H Lalani**d**         |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |   |                                                 |   |
| ISP 2004              |   |   | 70,912                                                   |   |   | –       |   |   | 1,312                |   |   | –  |   |   | –  |   |   | **72,224**                                                |   |   | 31/03/07                  |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
|                       |   |
| I Livingston          |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |   |                                                 |   |
| ISP 2004              |   |   | –                                                   |   |   | 155,111      |   |   | 7,401                |   |   | –  |   |   | –  |   |   | **162,512**                                               |   |   | 31/03/07                  |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
| RSP 2002**c**         |   |   | 350,664                                                  |   |   | –       |   |   | 8,366                |   |   | 175,332 |   |   | –  |   |   | **183,698**                                               |   |   | 05/04/05                  |   |   | 273.5p             |   |   | 181.75p                           |   |   | 319                                                  |   |
| RSP 2002              |   |   | 117,691                                                  |   |   | –       |   |   | 5,616                |   |   | –  |   |   | –  |   |   | **123,307**                                               |   |   | 20/05/05                  |   |   | 202.0p             |   |   | –                            |   |   | –                                               |   |
|                       |   |
| Dr P Reynolds         |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |   |                                                 |   |
| ISP 2004              |   |   | –                                                   |   |   | 137,877      |   |   | 6,579                |   |   | –  |   |   | –  |   |   | **144,456**                                               |   |   | 31/03/07                  |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
|                       |   |
| **Former director**   |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |   |                                                 |   |
| Pierre Danon**e**     |   |   |                                                     |   |   |         |   |   |                 |   |   |    |   |   |    |   |   |                                                      |   |   |                      |   |   |               |   |   |                              |   |   |                                                 |   |
| ISP 2004              |   |   | –                                                   |   |   | 155,111      |   |   | 7,401                |   |   | –  |   |   | 162,512 |   |   | **–**                                                |   |   | –                    |   |   | 193.42p            |   |   | –                            |   |   | –                                               |   |
|                       |   |

|   | The size of awards granted during the financial year 2004/05 was calculated using the average middle market price of a BT share for the three days prior to the grant. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **a** | Awards under the ISP were made on 24 June 2004. The awards will vest subject to a performance condition being met. The performance measure is relative TSR compared with a group of companies from the European Telecom Sector.  BT’s TSR must be in the upper quartile for all of the awards to vest. At median, 25% of the awards will vest. Below that point, none of the awards will vest. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **b** | The RSP awards granted on 11 Februray 2002, vested on 11 February 2005. |
|-------|-------------------------------------------------------------------------|

| **c** | The second tranche of the RSP award granted on 30 May 2002 vested on 21 May 2004. |
|-------|-----------------------------------------------------------------------------------|

| **d** | Date of appointment, 7 February 2005. |
|-------|---------------------------------------|

| **e** | The award granted under the ISP on 24 June 2004 and the subsequent dividends re-invested, lapsed on 28 February 2005 when Pierre Danon resigned as a director. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **f** | Vesting of RSP awards is not subject to a performance condition being met. |
|-------|----------------------------------------------------------------------------|

|                                                |
|-----------------------------------------------------|
| **Vesting of outstanding share awards and options** |

|      |   |   |                          |   | 31 March 2005 |             | 31 March 2004 |   |
|-----------|--------|--------|-------------------------------|--------|---------------|------------------|---------------|--------|
|      |   |   |                          |   |               |             |               |   |
|      |   |   | **Expected     vesting date** |   |          | **TSR position** |          |   | **Percentage of shares vesting** |   |   | TSR position |   |   | Percentage of shares vesting |   |
|           |   |
| ISP 2004  |   |   | 31/03/07                      |   |          | **11**           |          |   | **–** |   |   | – |   |   | – |   |
| GSOP 2002 |   |   | 29/07/05                      |   |          | **74**           |          |   | **–** |   |   | 77 |   |   | – |   |
| GSOP 2003 |   |   | 24/06/06                      |   |          | **84**           |          |   | **–** |   |   | 93 |   |   | – |   |
| GSOP 2004 |   |   | 24/06/07                      |   |          | **11**           |          |   | **–** |   |   | – |   |   | – |   |
|           |   |

 

| 66     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

----

Table of Contents

| **Deferred Bonus Plan awards held during the year ended 31 March 2005** |
|-------------------------------------------------------------------------|

|                    |   |   | 1 April 2004(or at date ofappointment) |   |   | Awarded**a** |   |   | Vested**b** |   |   | Dividends     re-invested |   |   | Lapsed |   |   | **Total       number****of award****shares****31 March****2005** |   |   | Expected     vesting date |   |   | Price at     grant |   |   | Market        Price    at vesting |   |   | Monetary       value of       vestedaward£000 |   |
|-------------------------|--------|--------|----------------------------------------|--------|--------|--------------|--------|--------|-------------|--------|--------|---------------------------|--------|--------|--------|--------|--------|------------------------------------------------------------------|--------|--------|---------------------------|--------|--------|--------------------|--------|--------|-----------------------------------|--------|--------|-----------------------------------------------------|--------|
|                         |   |
| B Verwaayen             |   |   | 80,183                                 |   |   | –       |   |   | –      |   |   | 3,826                     |   |   | – |   |   | **84,009**                                                       |   |   | 01/08/05                  |   |   | 202.0              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 443,238                                |   |   | –       |   |   | –      |   |   | 21,152                    |   |   | – |   |   | **464,390**                                                      |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | –                                 |   |   | 222,030      |   |   | –      |   |   | 10,595                    |   |   | – |   |   | **232,625**                                                      |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| A Green                 |   |   | 46,723                                 |   |   | –       |   |   | 46,723      |   |   | –                    |   |   | – |   |   | **–**                                                       |   |   | –                    |   |   | 267.912            | p      |   | 187.7897                          | p      |   | 88                                                  |   |
|                    |   |   | 52,751                                 |   |   | –       |   |   | –      |   |   | 2,517                     |   |   | – |   |   | **55,268**                                                       |   |   | 01/08/05                  |   |   | 202.0              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 79,983                                 |   |   | –       |   |   | –      |   |   | 3,816                     |   |   | – |   |   | **83,799**                                                       |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | –                                 |   |   | 86,939       |   |   | –      |   |   | 4,148                     |   |   | – |   |   | **91,087**                                                       |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| H Lalani**c**           |   |   | 12,750                                 |   |   | –       |   |   | –      |   |   | 235                       |   |   | – |   |   | **12,985**                                                       |   |   | 01/08/05                  |   |   | 202.0              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 25,917                                 |   |   | –       |   |   | –      |   |   | 479                       |   |   | – |   |   | **26,396**                                                       |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 26,843                                 |   |   | –       |   |   | –      |   |   | 496                       |   |   | – |   |   | **27,339**                                                       |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| I Livingston            |   |   | 88,088                                 |   |   | –       |   |   | –      |   |   | 4,203                     |   |   | – |   |   | **92,291**                                                       |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | –                                 |   |   | 83,961       |   |   | –      |   |   | 4,006                     |   |   | – |   |   | **87,967**                                                       |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| Dr P Reynolds           |   |   | 33,934                                 |   |   | –       |   |   | 33,934      |   |   | –                    |   |   | – |   |   | **–**                                                       |   |   | –                    |   |   | 267.912            | p      |   | 187.7897                          | p      |   | 64                                                  |   |
|                    |   |   | 47,476                                 |   |   | –       |   |   | –      |   |   | 2,264                     |   |   | – |   |   | **49,740**                                                       |   |   | 01/08/05                  |   |   | 202.0              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 75,277                                 |   |   | –       |   |   | –      |   |   | 3,591                     |   |   | – |   |   | **78,868**                                                       |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | –                                 |   |   | 76,342       |   |   | –      |   |   | 3,643                     |   |   | – |   |   | **79,985**                                                       |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| **Former directors**    |   |   |                                   |   |   |         |   |   |        |   |   |                      |   |   |   |   |   |                                                             |   |   |                      |   |   |               |   |   |                              |   |
| P Danon**d**            |   |   | 23,054                                 |   |   | –       |   |   | 23,054      |   |   | –                    |   |   | – |   |   | **–**                                                       |   |   | –                    |   |   | 267.912            | p      |   | 187.7897                          | p      |   | 43                                                  |   |
|                    |   |   | 79,129                                 |   |   | –       |   |   | –      |   |   | 3,776                     |   |   | 82,905 |   |   | **–**                                                       |   |   | 01/08/05                  |   |   | 202.0              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | 88,088                                 |   |   | –       |   |   | –      |   |   | 4,203                     |   |   | 92,291 |   |   | **–**                                                       |   |   | 01/08/06                  |   |   | 199.5              | p      |   | –                            |   |   | –                                              |   |
|                    |   |   | –                                 |   |   | 66,970       |   |   | –      |   |   | 3,195                     |   |   | 70,165 |   |   | **–**                                                       |   |   | 01/08/07                  |   |   | 193.42             | p      |   | –                            |   |   | –                                              |   |
|                         |   |
| Sir Peter Bonfield**e** |   |   | 157,718                                |   |   | –       |   |   | 157,718     |   |   | –                    |   |   | – |   |   | **–**                                                       |   |   | 01/08/04                  |   |   | 267.912            | p      |   | 187.7897                          | p      |   | 296                                                 |   |
|                         |   |

| **a** | Awards granted on 24 June 2004. |
|-------|---------------------------------|

| **b** | Awards granted on 22 June 2001 vested on 2 August 2004. |
|-------|---------------------------------------------------------|

| **c** | Date of appointment – 7 February 2005. |
|-------|---------------------------------------------|

| **d** | All outstanding awards made under the DBP to P Danon lapsed on 28 February 2005 when he resigned as a director. |
|-------|-----------------------------------------------------------------------------------------------------------------|

| **e** | Under the terms of his service agreement, awards granted to Sir Peter Bonfield were preserved on his leaving until the normal vesting date. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------|

| Report on    directors’ remuneration  | BT Group          plc Annual Report and Form 20-F 2005     67 |
|-------------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **Share awards under all-employee share ownership plans held during the year ended 31 March 2005** |
|----------------------------------------------------------------------------------------------------|

|                  |   |   | 1 April 2004(or at date ofappointment) |   |   | Awarded |   |   | Vested |   |   | **Total          number       of award       shares       31March 2005** |   |   | Expected    vesting    date |   |
|-----------------------|--------|--------|----------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------|--------|--------|-----------------------------|--------|
|                       |
| Sir Christopher Bland |   |   |                                   |   |   |    |   |   |   |   |
| ESIP 2003             |   |   | 186                                    |   |   | –  |   |   | – |   |   | **186**                                                                  |   |   | 05/08/08                    |   |
| ESIP 2004             |   |   | –                                 |   |   | 116     | **a**  |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | 186                                    |   |   | 116     |   |   | – |   |   | **302**                                                                  |   |   |                        |   |
|                       |   |
| A Green               |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| ESOS 2001             |   |   | 66                                     |   |   | –  |   |   | 66     | **b**  |   | **–**                                                               |   |   | –                      |   |
| ESIP 2002             |   |   | 130                                    |   |   | –  |   |   | – |   |   | **130**                                                                  |   |   | 14/08/07                    |   |
| ESIP 2003             |   |   | 186                                    |   |   | –  |   |   | – |   |   | **186**                                                                  |   |   | 05/08/08                    |   |
| ESIP 2004             |   |   | –                                 |   |   | 116     | **a**  |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | 382                                    |   |   | 116     |   |   | 66     |   |   | **432**                                                                  |   |   |                        |   |
|                       |   |
| H Lalani**c**         |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| ESIP 2002             |   |   | 130                                    |   |   | –  |   |   | – |   |   | **130**                                                                  |   |   | 14/08/07                    |   |
| ESIP 2003             |   |   | 186                                    |   |   | –  |   |   | – |   |   | **186**                                                                  |   |   | 05/08/08                    |   |
| ESIP 2004             |   |   | 116                                    | **a**  |   | –  |   |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | 432                                    |   |   | –  |   |   | – |   |   | **432**                                                                  |   |   |                        |   |
|                       |   |
| I Livingston          |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| ESIP 2004             |   |   | –                                 |   |   | 116     | **a**  |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | –                                 |   |   | 116     |   |   | – |   |   | **116**                                                                  |   |   |                        |   |
|                       |   |
| P Reynolds            |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| ESOS 2001             |   |   | 66                                     |   |   | –  |   |   | 66     | **b**  |   | **–**                                                               |   |   | –                      |   |
| ESIP 2002             |   |   | 130                                    |   |   | –  |   |   | – |   |   | **130**                                                                  |   |   | 14/08/07                    |   |
| ESIP 2003             |   |   | 186                                    |   |   | –  |   |   | – |   |   | **186**                                                                  |   |   | 05/08/08                    |   |
| ESIP 2004             |   |   | –                                 |   |   | 116     | **a**  |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | 382                                    |   |   | 116     |   |   | 66     |   |   | **432**                                                                  |   |   |                        |   |
|                       |   |
| **Former director**   |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| P Danon               |   |   |                                   |   |   |    |   |   |   |   |   |                                                                     |   |   |                        |   |
| ESIP 2002             |   |   | 130                                    |   |   | –  |   |   | – |   |   | **130**                                                                  |   |   | 14/08/07                    |   |
| ESIP 2003             |   |   | 186                                    |   |   | –  |   |   | – |   |   | **186**                                                                  |   |   | 05/08/08                    |   |
| ESIP 2004             |   |   | –                                 |   |   | 116     | **a**  |   | – |   |   | **116**                                                                  |   |   | 04/08/09                    |   |
|                       |   |
|                  |   |   | 316                                    |   |   | 116     |   |   | – |   |   | **432**                                                                  |   |   |                        |   |
|                       |   |

| **a** | Awards granted under the BT Group Employee Share Investment Plan on 4 August 2004. On that date the market price of a BT Group share was 181p. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------|

| **b** | Awards granted under the BT Employee Share Ownership Scheme on 30 July 2001 vested on 30 July 2004. On 2 August 2004, the first dealing day after that date, the market price of a BT Group share was 190p. The market price on the date of award was 482p. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **c** | Date of appointment, 7 February 2005. |
|-------|---------------------------------------|

|                                     |   |   | **2005****£000** |   |   | 2004£000 |   |
|------------------------------------------|--------|--------|------------------------|--------|--------|----------------|--------|
|                                          |   |
| Salaries and benefits                    |   |   | **296**                |   |   | 296            |   |
| Annual bonuses                           |   |   | **104**                |   |   | 198            |   |
| Provision for long-term incentive awards |   |   | **346**                |   |   | 268            |   |
| Company pension fund contributions       |   |   | **34**                 |   |   | 34             |   |
|                                          |   |
| **Total**                                |   |   | **780**                |   |   | 796            |   |
|                                          |   |

| 68     BT Group plc Annual Report and Form 20-F 2005  | Report on directors’ remuneration |
|-------------------------------------------------------------------------------------|----------------------------------------|

----

Table of Contents

**Statement of directors’ responsibility****for preparing the financial statements**

|   |  BT Group plc Annual Report and Form 20-F 2005     69 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Report of the independent auditors**

| **Report of Independent Registered Public Accounting Firm to the board of directors and shareholders of BT Group plc** |
|------------------------------------------------------------------------------------------------------------------------|

 

| 70     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

**Consolidated financial statements**

|    |   | The consolidated financial statements are divided into the following sections:           |
|---------|--------|------------------------------------------------------------------------------------------|
| **72**  |   | **Accounting policies**                                                                  |
| **75**  |   | **Group profit and loss account**                                                        |
| **78**  |   | **Group statement of total recognised gains and losses**                                 |
| **79**  |   | **Group cash flow statement**                                                            |
| **80**  |   | **Group balance sheet**                                                                  |
| **81**  |   | **Notes to the financial statements**                                                    |
| **81**  |   | **Changes in accounting policy and presentation**                                        |
| **81**  |   | **Segmental analysis**                                                                   |
| **84**  |   | **Turnover**                                                                             |
| **84**  |   | **Operating costs**                                                                      |
| **85**  |   | **Group’s              share of operating profit of associates and joint ventures** |
| **85**  |   | **Profit on sale of fixed asset investments and group undertakings**                     |
| **85**  |   | **Interest receivable**                                                                  |
| **86**  |   | **Interest payable**                                                                     |
| **86**  |   | **Tax on profit (loss) on ordinary activities**                                          |
| **87**  |   | **Minority interests**                                                                   |
| **87**  |   | **Dividends**                                                                            |
| **87**  |   | **Earnings (loss) per share**                                                            |
| **88**  |   | **Reconciliation of operating profit (loss) to operating cash flows**                    |
| **88**  |   | **Management of liquid resources**                                                       |
| **88**  |   | **Acquisitions and disposals**                                                           |
| **91**  |   | **Net debt**                                                                             |
| **91**  |   | **Intangible assets**                                                                    |
| **92**  |   | **Tangible fixed assets**                                                                |
| **93**  |   | **Fixed asset investments**                                                              |
| **94**  |   | **Debtors**                                                                              |
| **94**  |   | **Current asset investments**                                                            |
| **94**  |   | **Loans and other borrowings**                                                           |
| **95**  |   | **Other creditors**                                                                      |
| **95**  |   | **Provisions for liabilities and charges**                                               |
| **96**  |   | **Reconciliation              of movement in shareholders’ funds**                  |
| **96**  |   | **Related party transactions**                                                           |
| **96**  |   | **Financial commitments and contingent liabilities**                                     |
| **97**  |   | **Pension costs**                                                                        |
| **102** |   | **Directors’ emoluments**                                                           |
| **102** |   | **People employed**                                                                      |
| **102** |   | **Employee share plans**                                                                 |
| **105** |   | **Auditors**                                                                             |
| **106** |   | **Financial instruments and risk management**                                            |
| **110** |   | **Company balance sheet**                                                                |
| **111** |   | **Post balance sheet events**                                                            |

|   |  BT Group plc Annual Report and Form 20-F 2005     71 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Accounting policies**

| **i** | **Basis of preparation of the financial statements** |
|-------|------------------------------------------------------|

| **ii** | **Turnover** |
|--------|--------------|

| **iii** | **Research and development** |
|---------|------------------------------|

| **iv** | **Leases** |
|--------|------------|

| **v** | **Interest** |
|-------|--------------|

| **vi** | **Foreign currencies** |
|--------|------------------------|

| **vii** | **Intangibles** |
|---------|-----------------|

| **(a)** | **Goodwill** |
|---------|--------------|

 

| 72     BT        Group plc Annual Report and Form 20-F 2005  |   |
|--------------------------------------------------------------------------------------------|--------|

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Table of Contents

| **(b)** | **Other intangibles** |
|---------|-----------------------|

| **viii** | **Tangible fixed assets** |
|----------|---------------------------|

| **(a)** | **Cost** |
|---------|----------|

| **(b)** | **Depreciation** |
|---------|------------------|

| Freehold buildings –                                                |   | 40 years                                                        |   |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
| Leasehold land and buildings –                                      |   | Unexpired portion of lease or 40years, whichever is the shorter |   |
| Transmission equipment:                                                  |   |                                                            |   |
|      duct –                                |   | 25 years                                                        |   |
|      cable –                               |   | 3 to 25 years                                                   |   |
|      radio and repeater equipment –        |   | 2 to 25 years                                                   |   |
| Exchange equipment –                                                |   | 2 to 13 years                                                   |   |
| Computers and office equipment –                                    |   | 3 to 6 years                                                    |   |
| Payphones, other network equipment, motor vehicles and cableships – |   | 2 to 20 years                                                   |   |
| Software –                                                          |   | 2 to 5 years                                                    |   |

|   |                        |
|--------|-----------------------------|
| **ix** | **Fixed asset investments** |

| **x** | **Asset impairment** |
|-------|----------------------|

| **xi** | **Stocks** |
|--------|------------|

| **xii** | **Debtors** |
|---------|-------------|

| **xiii** | **Redundancy costs** |
|----------|----------------------|

| **xiv** | **Pension schemes** |
|---------|---------------------|

 

| Accounting    policies  | BT Group          plc Annual Report and Form 20-F 2005     73 |
|------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **xv** | **Taxation** |
|--------|--------------|

| **xvi** | **Financial instruments** |
|---------|---------------------------|

| **(a)** | **Debt instruments** |
|---------|----------------------|

| **(b)** | **Derivative financial instruments** |
|---------|--------------------------------------|

| Criteria to qualify for hedge accounting |
|------------------------------------------|

| Accounting for derivative financial instruments |
|-------------------------------------------------|

| 74     BT Group plc Annual Report and Form 20-F 2005  | Accounting        policies |
|-------------------------------------------------------------------------------------|----------------------------|

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Table of Contents

**Group profit and loss accountfor the year ended 31 March 2005** 

|                                                   |   |   | Notes  |   |   | **Before goodwill****amortisation****and exceptional****items****£m** |   |   | **Goodwill****amortisation****and exceptional****items****£m** |   |   | **Total****£m** |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|-----------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|--------|-----------------------|--------|
|                                                        |        |        |        |   |
| **Total turnover**                                     |   |   | 2      |   |   | 19,031                                                                      |   |   | –                                                               |   |   | **19,031**            |   |
|                                                        |        |        |        |   |
| Group’s share of joint ventures’ turnover    |   |   | 3      |   |   | (355                                                                        | )      |   | –                                                               |   |   | **(355**              | **)**  |
| Group’s share of associates’ turnover        |   |   | 3      |   |   | (53                                                                         | )      |   | –                                                               |   |   | **(53**               | **)**  |
|                                                        |        |        |        |   |
| **Group turnover**                                     |   |   | 2      |   |   | 18,623                                                                      |   |   | –                                                               |   |   | **18,623**            |   |
| Other operating income                                 |   |   |   |   |   | 171                                                                         |   |   | –                                                               |   |   | **171**               |   |
| Operating costs                                        |   |   | 4      |   |   | (15,930                                                                     | )      |   | (75                                                                  | )      |   | **(16,005**           | **)**  |
|                                                        |        |        |        |   |
| Group operating profit (loss)                          |   |   |   |   |   | 2,864                                                                       |   |   | (75                                                                  | )      |   | **2,789**             |   |
| Group’s share of operating loss of joint ventures |   |   | 5      |   |   | (6                                                                          | )      |   | (25                                                                  | )      |   | **(31**               | **)**  |
| Group’s share of operating profit of associates   |   |   | 5      |   |   | 6                                                                           |   |   | –                                                               |   |   | **6**                 |   |
|                                                        |        |        |        |   |
| Total operating profit (loss)                          |   |   |   |   |   | 2,864                                                                       |   |   | (100                                                                 | )      |   | **2,764**             |   |
| Profit on sale of fixed asset investments              |   |   | 6      |   |   | –                                                                      |   |   | 358                                                                  |   |   | **358**               |   |
| Profit on sale of property fixed assets                |   |   |   |   |   | 22                                                                          |   |   | –                                                               |   |   | **22**                |   |
| Interest receivable                                    |   |   | 7      |   |   | 265                                                                         |   |   | –                                                               |   |   | **265**               |   |
| Interest payable                                       |   |   | 8      |   |   | (1,066                                                                      | )      |   | –                                                               |   |   | **(1,066**            | **)**  |
|                                                        |        |        |        |   |
| **Profit on ordinary activities before taxation**      |   |   |   |   |   | 2,085                                                                       |   |   | 258                                                                  |   |   | **2,343**             |   |
| Tax on profit on ordinary activities                   |   |   | 9      |   |   | (539                                                                        | )      |   | 16                                                                   |   |   | **(523**              | **)**  |
|                                                        |        |        |        |   |
| **Profit on ordinary activities after taxation**       |   |   |   |   |   | 1,546                                                                       |   |   | 274                                                                  |   |   | **1,820**             |   |
| Minority interests                                     |   |   | 10     |   |   | 1                                                                           |   |   | –                                                               |   |   | **1**                 |   |
|                                                        |        |        |        |   |
| Profit for the financial year                          |   |   |   |   |   | 1,547                                                                       |   |   | 274                                                                  |   |   | **1,821**             |   |
| Dividends                                              |   |   | 11     |   |   |                                                                        |   |   |                                                                 |   |   | **(883**              | **)**  |
|                                                        |        |        |        |   |
| **Retained profit for the financial year**             |   |   | 25     |   |   |                                                                        |   |   |                                                                 |   |   | **938**               |   |
|                                                        |        |        |        |   |
| **Basic earnings per share**                           |   |   | 12     |   |   | 18.1                                                                        | p      |   |                                                                 |   |   | **21.4**              | **p**  |
| **Diluted earnings per share**                         |   |   | 12     |   |   | 18.0                                                                        | p      |   |                                                                 |   |   | **21.2**              | **p**  |
|                                                        |        |        |        |   |
|                                                   |   |   |   |   |   |                                                                        |   |   |                                                                 |   |   |                  |   |

|   |  BT Group plc Annual Report and Form 20-F 2005     75 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

|                                                      |   |   | Notes  |   |   | Before goodwillamortisationand exceptionalitems£m |   |   | Goodwillamortisationand exceptionalitems£m |   |   | **Total****£m** |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|---------------------------------------------------------|--------|--------|--------------------------------------------------|--------|--------|-----------------------|--------|
|                                                           |        |        |        |   |
| **Total turnover**                                        |   |   | 2      |   |   | 18,914                                                  |   |   | –                                           |   |   | **18,914**            |   |
|                                                           |        |        |        |   |
| Group’s share of joint ventures’ turnover       |   |   | 3      |   |   | (352                                                    | )      |   | –                                           |   |   | **(352**              | **)**  |
| Group’s share of associates’ turnover           |   |   | 3      |   |   | (43                                                     | )      |   | –                                           |   |   | **(43**               | **)**  |
|                                                           |        |        |        |   |
| **Group turnover**                                        |   |   | 2      |   |   | 18,519                                                  |   |   | –                                           |   |   | **18,519**            |   |
| Other operating income                                    |   |   |   |   |   | 177                                                     |   |   | –                                           |   |   | **177**               |   |
| Operating costs                                           |   |   | 4      |   |   | (15,807                                                 | )      |   | (19                                              | )      |   | **(15,826**           | **)**  |
|                                                           |        |        |        |   |
| Group operating profit (loss)                             |   |   |   |   |   | 2,889                                                   |   |   | (19                                              | )      |   | **2,870**             |   |
| Group’s    share of operating loss of joint ventures |   |   | 5      |   |   | (12                                                     | )      |   | (26                                              | )      |   | **(38**               | **)**  |
| Group’s    share of operating profit of associates   |   |   | 5      |   |   | 4                                                       |   |   | –                                           |   |   | **4**                 |   |
|                                                           |        |        |        |   |
| Total operating profit (loss)                             |   |   |   |   |   | 2,881                                                   |   |   | (45                                              | )      |   | **2,836**             |   |
| Profit on sale of fixed asset investments                 |   |   | 6      |   |   | 4                                                       |   |   | 34                                               |   |   | **38**                |   |
| Loss on sale of group undertakings                        |   |   | 6      |   |   | –                                                  |   |   | (2                                               | )      |   | **(2**                | **)**  |
| Profit on sale of property fixed assets                   |   |   |   |   |   | 14                                                      |   |   | –                                           |   |   | **14**                |   |
| Interest receivable                                       |   |   | 7      |   |   | 264                                                     |   |   | 34                                               |   |   | **298**               |   |
| Interest payable                                          |   |   | 8      |   |   | (1,150                                                  | )      |   | (89                                              | )      |   | **(1,239**            | **)**  |
|                                                           |        |        |        |   |
| **Profit (loss) on ordinary activities before taxation**  |   |   |   |   |   | 2,013                                                   |   |   | (68                                              | )      |   | **1,945**             |   |
| Tax on profit (loss) on ordinary activities               |   |   | 9      |   |   | (568                                                    | )      |   | 29                                               |   |   | **(539**              | **)**  |
|                                                           |        |        |        |   |
| **Profit (loss) on ordinary activities after taxation**   |   |   |   |   |   | 1,445                                                   |   |   | (39                                              | )      |   | **1,406**             |   |
| Minority interests                                        |   |   | 10     |   |   | 8                                                       |   |   | –                                           |   |   | **8**                 |   |
|                                                           |        |        |        |   |
| Profit (loss) for the financial year                      |   |   |   |   |   | 1,453                                                   |   |   | (39                                              | )      |   | **1,414**             |   |
| Dividends                                                 |   |   | 11     |   |   |                                |   |   |                                             |   |   | **(732**              | **)**  |
|                                                           |        |        |        |   |
| **Retained profit for the financial year**                |   |   | 25     |   |   |                                |   |   |                                             |   |   | **682**               |   |
|                                                           |        |        |        |   |
| **Basic earnings per share**                              |   |   | 12     |   |   | 16.9                                                    | p      |   |                                             |   |   | **16.4**              | **p**  |
| **Diluted earnings per share**                            |   |   | 12     |   |   | 16.8                                                    | p      |   |                                             |   |   | **16.3**              | **p**  |
|                                                           |        |        |        |   |
|                                                      |   |   |   |   |   |                                                    |   |   |                                             |   |   |                  |   |

| Restated following adoption of UITF17 and UITF38 (see note 1) |
|---------------------------------------------------------------|

| 76     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

|                                                            |   |   | Notes  |   |   | Before goodwillamortisationand exceptionalitems£m |   |   | Goodwillamortisationand exceptionalitems£m |   |   | **Total****£m** |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|--------|---------------------------------------------------------|--------|--------|--------------------------------------------------|--------|--------|-----------------------|--------|
|                                                                 |        |        |        |   |
| **Total turnover**                                              |   |   | 2      |   |   | 20,182                                                  |   |   | –                                           |   |   | **20,182**            |   |
|                                                                 |        |        |        |   |
| Group’s share of joint ventures’ turnover             |   |   | 3      |   |   | (425                                                    | )      |   | –                                           |   |   | **(425**              | **)**  |
| Group’s share of associates’ turnover                 |   |   | 3      |   |   | (1,030                                                  | )      |   | –                                           |   |   | **(1,030**            | **)**  |
|                                                                 |        |        |        |   |
| **Group turnover**                                              |   |   | 2      |   |   | 18,727                                                  |   |   | –                                           |   |   | **18,727**            |   |
| Other operating income                                          |   |   |   |   |   | 215                                                     |   |   | –                                           |   |   | **215**               |   |
| Operating costs                                                 |   |   | 4      |   |   | (16,148                                                 | )      |   | (218                                             | )      |   | **(16,366**           | **)**  |
|                                                                 |        |        |        |   |
| Group operating profit (loss)                                   |   |   |   |   |   | 2,794                                                   |   |   | (218                                             | )      |   | **2,576**             |   |
| Group’s share of operating profit (loss) of joint ventures |   |   | 5      |   |   | (31                                                     | )      |   | 150                                              |   |   | **119**               |   |
| Group’s share of operating profit (loss) of associates     |   |   | 5      |   |   | 212                                                     |   |   | (2                                               | )      |   | **210**               |   |
|                                                                 |        |        |        |   |
| Total operating profit (loss)                                   |   |   |   |   |   | 2,975                                                   |   |   | (70                                              | )      |   | **2,905**             |   |
| Profit on sale of fixed asset investments                       |   |   | 6      |   |   | –                                                  |   |   | 1,705                                            |   |   | **1,705**             |   |
| Loss on sale of group undertakings                              |   |   | 6      |   |   | –                                                  |   |   | (9                                               | )      |   | **(9**                | **)**  |
| Profit on sale of property fixed assets                         |   |   |   |   |   | 11                                                      |   |   | –                                           |   |   | **11**                |   |
| Interest receivable                                             |   |   | 7      |   |   | 195                                                     |   |   | –                                           |   |   | **195**               |   |
| Interest payable                                                |   |   | 8      |   |   | (1,341                                                  | )      |   | (293                                             | )      |   | **(1,634**            | **)**  |
|                                                                 |        |        |        |   |
| **Profit on ordinary activities before taxation**               |   |   |   |   |   | 1,840                                                   |   |   | 1,333                                            |   |   | **3,173**             |   |
| Tax on profit on ordinary activities                            |   |   | 9      |   |   | (598                                                    | )      |   | 139                                              |   |   | **(459**              | **)**  |
|                                                                 |        |        |        |   |
| **Profit on ordinary activities after taxation**                |   |   |   |   |   | 1,242                                                   |   |   | 1,472                                            |   |   | **2,714**             |   |
| Minority interests                                              |   |   | 10     |   |   | (5                                                      | )      |   | (7                                               | )      |   | **(12**               | **)**  |
|                                                                 |        |        |        |   |
| Profit for the financial year                                   |   |   |   |   |   | 1,237                                                   |   |   | 1,465                                            |   |   | **2,702**             |   |
| Dividends                                                       |   |   | 11     |   |   |                                                    |   |   |                                             |   |   | **(560**              | **)**  |
|                                                                 |        |        |        |   |
| **Retained profit for the financial year**                      |   |   | 25     |   |   |                                                    |   |   |                                             |   |   | **2,142**             |   |
|                                                                 |        |        |        |        |        |                                                         |        |        |                                                  |        |        |                       |   |
| **Basic earnings per share**                                    |   |   | 12     |   |   | 14.4                                                    | p      |   |                                             |   |   | **31.4**              | **p**  |
| **Diluted earnings per share**                                  |   |   | 12     |   |   | 14.3                                                    | p      |   |                                             |   |   | **31.2**              | **p**  |
|                                                                 |        |        |        |   |

| Restated following adoption of UITF17 and UITF38 (see note 1) |
|---------------------------------------------------------------|

|   |  BT Group plc Annual Report and Form 20-F 2005     77 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Group statement of total recognised gains and losses****for the year ended 31 March 2005**

|                                                         |   |   | **2005****£m** |   |   | Restated2004£m |   |   | Restated2003£m |   |
|--------------------------------------------------------------|--------|--------|----------------------|--------|--------|----------------------|--------|--------|----------------------|--------|
|                                                              |   |
| Profit (loss) for the financial year:                        |   |   |                 |   |   |                 |   |   |                 |   |
| Group                                                        |   |   | **1,861**            |   |   | 1,465                |   |   | 2,499                |   |
| Joint ventures                                               |   |   | **(46**              | **)**  |   | (54                  | )      |   | 103                  |   |
| Associates                                                   |   |   | **6**                |   |   | 3                    |   |   | 100                  |   |
|                                                              |   |
| Total profit for the financial year                          |   |   | **1,821**            |   |   | 1,414                |   |   | 2,702                |   |
| Currency movements arising on consolidation of non-UK:       |   |   |                 |   |   |                 |   |   |                 |   |
| Subsidiaries                                                 |   |   | **24**               |   |   | (40                  | )      |   | (18                  | )      |
| Joint ventures                                               |   |   | **3**                |   |   | (1                   | )      |   | 5                    |   |
| Associates                                                   |   |   | **(1**               | **)**  |   | (1                   | )      |   | 2                    |   |
| Tax on foreign exchange gains taken to reserves              |   |   | **(7**               | **)**  |   | (47                  | )      |   | 16                   |   |
|                                                              |   |
| **Total recognised gains and losses for the financial year** |   |   | **1,840**            |   |   | 1,325                |   |   | 2,707                |   |
|                                                         |   |   |                 |   |        |                 |
| Prior year adjustment (note 1)                               |   |   | **21**               |   |   |                 |   |   |                 |   |
|                                                              |   |   |                 |   |   |                 |   |
| Total recognised gains and losses since last annual report   |   |   | **1,861**            |   |   |                 |   |   |                 |   |
|                                                              |   |   |                 |   |   |                 |   |

| 78     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

**Group cash flow statement****for the year ended 31 March 2005**

|                                                                                                                  |   |   | Notes                          |   |   | **2005****£m** |   |   | 2004£m                         |   |   | 2003£m |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------|--------|--------|----------------------|--------|--------|--------------------------------------|--------|--------|--------------|--------|
|                                                                                                                       |   |
| **Net cash inflow from operating activities**                                                                         |   |   | 13                             |   |   | **5,898**            |   |   | 5,389                                |   |   | 6,023        |   |
| **Dividends from associates and joint ventures**                                                                      |   |   |                           |   |   | **2**                |   |   | 3                                    |   |   | 6            |   |
| **Returns on investments and servicing of finance**                                                                   |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| Interest received                                                                                                     |   |   |                           |   |   | **374**              |   |   | 673                                  |   |   | 231          |   |
| Interest paid, including finance costs                                                                                |   |   |                           |   |   | **(1,252**           | **)**  |   | (1,200                               | )      |   | (1,737       | )      |
| **Net cash outflow for returns on investments and servicing of finance**                                              |   |   |                           |   |   | **(878**             | **)**  |   | (527                                 | )      |   | (1,506       | )      |
|                                                                                                                       |   |
| **Taxation**                                                                                                          |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| UK corporation tax paid                                                                                               |   |   |                           |   |   | **(319**             | **)**  |   |      (305   | )      |   | (425         | )      |
| Non-UK tax paid                                                                                                       |   |   |                           |   |   | **(13**              | **)**  |   |      (12    | )      |   | (9           | )      |
| **Taxation paid**                                                                                                     |   |   |                           |   |   | **(332**             | **)**  |   | (317                                 | )      |   | (434         | )      |
|                                                                                                                       |   |
| **Capital expenditure and financial investment**                                                                      |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| Purchase of tangible fixed assets                                                                                     |   |   |                           |   |   | **(3,056**           | **)**  |   |      (2,684 | )      |   | (2,580       | )      |
| Sale of tangible fixed assets                                                                                         |   |   |                           |   |   | **111**              |   |   |      76     |   |   | 94           |   |
| Purchase of fixed asset investments                                                                                   |   |   |                           |   |   | **(2**               | **)**  |   |      (1     | )      |   | (1           | )      |
| Disposal of fixed asset investments                                                                                   |   |   |                           |   |   | **539**              |   |   |      132    |   |   | 106          |   |
| **Net cash outflow for capital expenditure and financial investment**                                                 |   |   |                           |   |   | **(2,408**           | **)**  |   | (2,477                               | )      |   | (2,381       | )      |
|                                                                                                                       |   |
| Free cash flow before acquisitions, disposals and dividends                                                           |   |   |                           |   |   | **2,282**            |   |   | 2,071                                |   |   | 1,708        |   |
| **Acquisitions and disposals**                                                                                        |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| Purchase of subsidiary undertakings, net of £208m cash acquired (2004 – £1m, 2003 – £13m) |   |   |                           |   |   | **(426**             | **)**  |   |      (32    | )      |   | 56           |   |
| Investments in joint ventures                                                                                         |   |   |                           |   |   | **(27**              | **)**  |   |      (29    | )      |   | (133         | )      |
| Disposal of subsidiary undertakings                                                                                   |   |   |                           |   |   | **–**           |   |   |      – |   |   | 3            |   |
| Sale of investments in joint ventures and associates                                                                  |   |   |                           |   |   | **35**               |   |   |      1      |   |   | 2,916        |   |
| **Net cash (outflow) inflow for acquisitions and disposals**                                                          |   |   |                           |   |   | **(418**             | **)**  |   | (60                                  | )      |   | 2,842        |   |
|                                                                                              |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
|                                                                                              |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| **Equity dividends paid**                                                                                             |   |   |                           |   |   | **(784**             | **)**  |   | (645                                 | )      |   | (367         | )      |
|                                                                                                                       |   |
| **Cash inflow before management of liquid resources and financing**                                                   |   |   |                           |   |   | **1,080**            |   |   | 1,366                                |   |   | 4,183        |   |
| **Management of liquid resources**                                                                                    |   |   | 14                             |   |   | **587**              |   |   | 1,123                                |   |   | (1,729       | )      |
| **Financing**                                                                                                         |   |   |                           |   |   |                 |   |   |                                 |   |   |         |   |
| Issue of ordinary share capital                                                                                       |   |   |                           |   |   | **–**           |   |   |      – |   |   | 42           |   |
| Amounts received in respect of employee share plans                                                                   |   |   |                           |   |   | **2**                |   |   | –                               |   |   | –       |   |
| Repurchase of ordinary share capital                                                                                  |   |   |                           |   |   | **(195**             | **)**  |   | (144                                 | )      |   | –       |   |
| New loans                                                                                                             |   |   |                           |   |   | **5**                |   |   |      1,326  |   |   | 20           |   |
| Repayment of loans                                                                                                    |   |   |                           |   |   | **(1,297**           | **)**  |   |      (3,627 | )      |   | (2,471       | )      |
| Net decrease in short-term borrowings                                                                                 |   |   |                           |   |   | **–**           |   |   |      – |   |   | (64          | )      |
| **Net cash outflow from financing**                                                                                   |   |   |       |   |   | **(1,485**           | **)**  |   | (2,445                               | )      |   | (2,473       | )      |
|                                                                                                                       |   |
| **Increase (decrease) in cash in the year**                                                                           |   |   |                           |   |   | **182**              |   |   | 44                                   |   |   | (19          | )      |
|                                                                                                                       |   |
| **Decrease in net debt in the year resulting from cash flows**                                                        |   |   | 16                             |   |   | **887**              |   |   | 1,222                                |   |   | 4,225        |   |
|                                                                                                                       |   |

|   |  BT Group plc Annual Report and Form 20-F 2005     79 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

**Group balance sheet****as at 31 March 2005**

|                                                        |   |   | Notes  |   |   | **2005****£m** |   |   | Restated2004£m |   |
|-------------------------------------------------------------|--------|--------|--------|--------|--------|----------------------|--------|--------|----------------------|--------|
|                                                             |   |
| **Fixed assets**                                            |   |   |   |   |   |                 |   |   |                 |   |
| Intangible assets                                           |   |   | 17     |   |   | **623**              |   |   | 204                  |   |
| Tangible assets                                             |   |   | 18     |   |   | **15,916**           |   |   | 15,487               |   |
| Investments in joint ventures:                              |   |   | 19     |   |   |                 |   |   |                 |   |
| Share of gross assets and goodwill                          |   |   |   |   |   | **305**              |   |   | 496                  |   |
| Share of gross liabilities                                  |   |   |   |   |   | **(225**             | **)**  |   | (399                 | )      |
|                                                             |   |
| Total investments in joint ventures                         |   |   |   |   |   | **80**               |   |   | 97                   |   |
| Investments in associates                                   |   |   | 19     |   |   | **28**               |   |   | 24                   |   |
| Other investments                                           |   |   | 19     |   |   | **7**                |   |   | 203                  |   |
| Total investments                                           |   |   | 19     |   |   | **115**              |   |   | 324                  |   |
|                                                             |   |
| **Total fixed assets**                                      |   |   |   |   |   | **16,654**           |   |   | 16,015               |   |
|                                                        |   |   |   |   |   |                 |   |   |                 |   |
| **Current assets**                                          |   |   |   |   |   |                 |   |   |                 |   |
| Stocks                                                      |   |   |   |   |   | **106**              |   |   | 89                   |   |
| **Debtors:**                                                |   |   |   |   |   |                 |   |   |                 |   |
| Falling due within one year                                 |   |   |   |   |   | **4,269**            |   |   | 4,017                |   |
| Falling due after more than one year                        |   |   |   |   |   | **1,118**            |   |   | 1,172                |   |
|                                                             |        |        |        |        |        |                 |
| **Total debtors**                                           |   |   | 20     |   |   | **5,387**            |   |   | 5,189                |   |
| Investments                                                 |   |   | 21     |   |   | **4,597**            |   |   | 5,163                |   |
| Cash at bank and in hand                                    |   |   |   |   |   | **206**              |   |   | 109                  |   |
|                                                             |        |        |        |        |        |                 |
| **Total current assets**                                    |   |   |   |   |   | **10,296**           |   |   | 10,550               |   |
|                                                             |        |        |        |        |        |                 |
| **Creditors: amounts falling due within one year**          |   |   |   |   |   |                 |   |   |                 |   |
| Loans and other borrowings                                  |   |   | 22     |   |   | **4,498**            |   |   | 1,271                |   |
| Other creditors                                             |   |   | 23     |   |   | **7,963**            |   |   | 7,252                |   |
|                                                             |        |        |        |        |        |                 |
| **Total creditors: amounts falling due within one year**    |   |   |   |   |   | **12,461**           |   |   | 8,523                |   |
|                                                             |   |
| **Net current (liabilities) assets**                        |   |   |   |   |   | **(2,165**           | **)**  |   | 2,027                |   |
|                                                             |   |
| **Total assets less current liabilities**                   |   |   |   |   |   | **14,489**           |   |   | 18,042               |   |
|                                                             |   |
| **Creditors: amounts falling due after more than one year** |   |   |   |   |   |                 |   |   |                 |   |
| Loans and other borrowings                                  |   |   | 22     |   |   | **8,091**            |   |   | 12,426               |   |
| **Provisions for liabilities and charges**                  |   |   |   |   |   |                 |   |   |                 |   |
| Deferred taxation                                           |   |   | 24     |   |   | **2,174**            |   |   | 2,191                |   |
| Other                                                       |   |   | 24     |   |   | **323**              |   |   | 313                  |   |
| **Total provisions for liabilities and charges**            |   |   |   |   |   | **2,497**            |   |   | 2,504                |   |
| **Minority interests**                                      |   |   |   |   |   | **50**               |   |   | 46                   |   |
| **Capital and reserves**                                    |   |   |   |   |   |                 |   |   |                 |   |
| Called up share capital                                     |   |   | 25, 34 |   |   | **432**              |   |   | 432                  |   |
| Share premium account                                       |   |   | 25     |   |   | **3**                |   |   | 2                    |   |
| Capital redemption reserve                                  |   |   | 25     |   |   | **2**                |   |   | 2                    |   |
| Other reserves                                              |   |   | 25     |   |   | **998**              |   |   | 998                  |   |
| Profit and loss account                                     |   |   | 25     |   |   | **2,416**            |   |   | 1,632                |   |
| **Total equity shareholders’ funds**                   |   |   | 25     |   |   | **3,851**            |   |   | 3,066                |   |
|                                                             |   |
|                                                        |   |   |   |   |   | **14,489**           |   |   | 18,042               |   |
|                                                             |   |

| Restated          following adoption of UITF17 and UITF38 (see note 1) |
|------------------------------------------------------------------------|

The financial statements on pages 71 to 122 were approved by the board of directors on 18 May 2005 and were signed on its behalf by**Sir Christopher Bland****Chairman****Ben Verwaayen****Chief Executive****Hanif Lalani****Group Finance Director**

| 80     BT Group plc Annual Report and Form 20-F 2005  |
|-------------------------------------------------------------------------------------|

----

Table of Contents

**Notes to the financial statements**

| **1.** | **Changes in accounting policy and presentation** |
|--------|---------------------------------------------------|

| **2.**     **Segmental analysis** |
|------------------------------------------------------------|

|  | BT Retail derives its turnover from the supply of exchange lines and from the calls made over these lines, the provision of ICT products and services, the leasing of private circuits and other private services, the sale and rental of customer premises equipment to the group’s UK customers and other linesof business and from its narrowband and broadband internet access products. |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | BT Wholesale derives its turnover from providing network services and solutions to communications companies, including fixed and mobile network operators, ISPs (internet service providers) and other service providers, including other BT lines of business, and from carrying transit traffic betweentelecommunications operators. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | BT Global Services mainly generates its turnover from the provision of ICT products and services, outsourcing and systems integration work and from the fixed network operations of the group’s European subsidiaries. The business also derives revenues from providing web hosting facilities to endcustomers and through BT lines of business. |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                     |   | Turnover |       |   | Depreciation |       |   | Operatingprofit (loss) ofassociates |       |   | Total  |            |
|--------------------------|--------|----------|------------|--------|--------------|------------|--------|-------------------------------------|------------|--------|--------|-----------------|
|                     |   |     | External   |   |         | Internal   |   |                                | Grouptotal |   |   | andamortisation |   |   | and jointventures |   |   | operatingprofit (loss) |   |
| Year ended 31 March 2005 |   |     | £m   |   |         | £m   |   |                                | £m   |   |   | £m        |   |   | £m |   |   | £m |   |
|                          |   |
| BT Retail                |   |     | 12,115     |   |         | 447        |   |                                | 12,562     |   |   | 134             |   |   | 1 |   |   | 1,116 |   |
| BT Wholesale             |   |     | 3,812      |   |         | 5,167      |   |                                | 8,979      |   |   | 1,909           |   |   | – |   |   | 1,940 |   |
| BT Global Services       |   |     | 2,671      |   |         | 3,710      |   |                                | 6,381      |   |   | 584             |   |   | (31 | ) |   | (35 | ) |
| Other                    |   |     | 25         |   |         | –     |   |                                | 25         |   |   | 229             |   |   | 5 |   |   | (257 | ) |
| Intra-group              |   |     | –     |   |         | (9,324     | )      |                                | (9,324     | )      |   | –          |   |   | – |   |   | – |   |
|                          |   |
| **Group totals**         |   |     | **18,623** |   |         | **–** |   |                                | **18,623** |   |   | **2,856**       |   |   | **(25** | **)** |   | **2,764** |   |
|                          |   |
|                     |   |

|                     |   | Turnover |       |   | Depreciation |       |   | Operatingprofit (loss) ofassociates |       |   | Total  |            |
|--------------------------|--------|----------|------------|--------|--------------|------------|--------|-------------------------------------|------------|--------|--------|-----------------|
|                     |   |     | External   |   |         | Internal   |   |                                | Grouptotal |   |   | andamortisation |   |   | and jointventures |   |   | operatingprofit (loss) |   |
| Year ended 31 March 2004 |   |     | £m   |   |         | £m   |   |                                | £m   |   |   | £m        |   |   | £m |   |   | £m | **a** |
|                          |   |
| BT Retail                |   |     | 12,602     |   |         | 338        |   |                                | 12,940     |   |   | 163             |   |   | 1 |   |   | 1,232 |   |
| BT Wholesale             |   |     | 3,473      |   |         | 5,410      |   |                                | 8,883      |   |   | 1,919           |   |   | – |   |   | 1,884 |   |
| BT Global Services       |   |     | 2,410      |   |         | 3,372      |   |                                | 5,782      |   |   | 624             |   |   | (37 | ) |   | (153 | ) |
| Other                    |   |     | 34         |   |         | 1          |   |                                | 35         |   |   | 230             |   |   | 2 |   |   | (127 | ) |
| Intra-group              |   |     | –     |   |         | (9,121     | )      |                                | (9,121     | )      |   | –          |   |   | – |   |   | – |   |
|                          |   |
| **Group totals**         |   |     | **18,519** |   |         | **–** |   |                                | **18,519** |   |   | **2,936**       |   |   | **(34** | **)** |   | **2,836** |   |
|                          |   |

| **a**  | Restated – see note 1 |
|--------|----------------------------|
|   |                       |

|   |  BT Group plc Annual Report and Form 20-F 2005     81 |
|--------|-------------------------------------------------------------------------------------|

----

Table of Contents

| **2.** | **Segmental analysis**continued |
|--------|---------------------------------|
|   |                            |

|                     |   | Turnover |       |   | Depreciation |       |   | Operatingprofit (loss) ofassociates |       |   | Total  |            |
|--------------------------|--------|----------|------------|--------|--------------|------------|--------|-------------------------------------|------------|--------|--------|-----------------|
|                     |   |     | External   |   |         | Internal   |   |                                | Grouptotal |   |   | andamortisation |   |   | and jointventures |   |   | operatingprofit (loss) |   |
| Year ended 31 March 2003 |   |     | £m   |   |         | £m   |   |                                | £m   |   |   | £m        |   |   | £m |   |   | £m | **a** |
|                          |   |
| BT Retail                |   |     | 12,979     |   |         | 238        |   |                                | 13,217     |   |   | 202             |   |   | (3 | ) |   | 1,212 |   |
| BT Wholesale             |   |     | 3,525      |   |         | 5,726      |   |                                | 9,251      |   |   | 1,923           |   |   | (1 | ) |   | 2,069 |   |
| BT Global Services       |   |     | 2,183      |   |         | 3,234      |   |                                | 5,417      |   |   | 632             |   |   | 180 |   |   | (214 | ) |
| Other                    |   |     | 40         |   |         | 1          |   |                                | 41         |   |   | 278             |   |   | 153 |   |   | (162 | ) |
| Intra-group              |   |     | –     |   |         | (9,199     | )      |                                | (9,199     | )      |   | –          |   |   | – |   |   | – |   |
|                          |   |
| **Group totals**         |   |     | **18,727** |   |         | **–** |   |                                | **18,727** |   |   | **3,035**       |   |   | **329** |   |   | **2,905** |   |
|                          |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

| Year ended, or as at, 31 March 2005 |   |   | Capitalexpenditure£m |   |   | Net operatingassets(liabilities)£m |   |   | Interest inassociatesand jointventures£m |   |
|-------------------------------------|--------|--------|----------------------------|--------|--------|------------------------------------------|--------|--------|------------------------------------------------|--------|
|                                     |   |
| BT Retail                           |   |   | 154                        |   |   | (50                                      | )      |   | –                                         |   |
| BT Wholesale                        |   |   | 1,973                      |   |   | 11,827                                   |   |   | –                                         |   |
| BT Global Services                  |   |   | 628                        |   |   | 2,147                                    |   |   | 78                                             |   |
| Other                               |   |   | 256                        |   |   | (178                                     | )      |   | 30                                             |   |
|                                     |   |
| **Total**                           |   |   | **3,011**                  |   |   | **13,746**                               |   |   | **108**                                        |   |
|                                     |   |
|                                |   |

|                                |   |   |                       |   |   |                                     |   |   |                                           |   |
|-------------------------------------|--------|--------|----------------------------|--------|--------|------------------------------------------|--------|--------|------------------------------------------------|--------|
| Year ended, or as at, 31 March 2004 |   |   | Capitalexpenditure£m |   |   | Net operatingassets(liabilities)£m |   |   | Interest inassociatesand jointventures£m |   |
|                                     |   |
| BT Retail                           |   |   | 118                        |   |   | (40                                      | )      |   | (9                                             | )      |
| BT Wholesale                        |   |   | 1,809                      |   |   | 11,940                                   |   |   | –                                         |   |
| BT Global Services                  |   |   | 479                        |   |   | 1,291                                    |   |   | 89                                             |   |
| Other                               |   |   | 267                        |   |   | 213                                      |   |   | 41                                             |   |
|                                     |   |
| **Total**                           |   |   | **2,673**                  |   |   | **13,404**                               |   |   | **121**                                        |   |
|                                     |   |

|                                  |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|---------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                       |   |
| **Turnover with external customers**  |   |   |                 |   |   |         |   |   |         |   |
| Attributable to UK                    |   |   | **16,967**           |   |   | 17,190       |   |   | 17,536       |   |
| Attributable to non-UK countries**a** |   |   | **1,656**            |   |   | 1,329        |   |   | 1,191        |   |
|                                       |   |
| **Group turnover**                    |   |   | **18,623**           |   |   | 18,519       |   |   | 18,727       |   |
|                                       |   |

| **a**  | Turnover attributable to non-UK countries comprises the external turnover of group companies and branches operating outside the UK. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                |

| 82     BT Group plc Annual Report and Form 20-F 2005  | Notes to the        financial statements |
|-------------------------------------------------------------------------------------|------------------------------------------|

----

Table of Contents

| **2.** | **Segmental analysis**continued |
|--------|---------------------------------|

|                               |   |   | **2005****£m** |   |   | 2004 £m | **a**  |
|------------------------------------|--------|--------|----------------------|--------|--------|---------------|--------|
|                                    |   |
| **Group fixed assets are located** |   |   |                 |   |   |          |   |
| UK                                 |   |   | **14,734**           |   |   | 14,538        |   |
| Europe, excluding the UK           |   |   | **1,164**            |   |   | 1,029         |   |
| Americas                           |   |   | **633**              |   |   | 305           |   |
| Asia and Pacific                   |   |   | **123**              |   |   | 143           |   |
|                                    |   |
| **Total**                          |   |   | **16,654**           |   |   | 16,015        |   |
|                                    |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

|                                  |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|---------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                       |   |
| **Total turnover on basis of origin** |   |   |                 |   |   |         |   |   |         |   |
| UK                                    |   |   | **16,973**           |   |   | 17,198       |   |   | 17,544       |   |
| Europe, excluding the UK              |   |   | **1,480**            |   |   | 1,272        |   |   | 2,151        |   |
| Americas                              |   |   | **206**              |   |   | 151          |   |   | 155          |   |
| Asia and Pacific                      |   |   | **372**              |   |   | 293          |   |   | 332          |   |
|                                       |   |
| **Total**                             |   |   | **19,031**           |   |   | 18,914       |   |   | 20,182       |   |
|                                       |   |

|                                  |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|---------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                       |   |
| **Group turnover on basis of origin** |   |   |                 |   |   |         |   |   |         |   |
| UK                                    |   |   | **16,967**           |   |   | 17,190       |   |   | 17,536       |   |
| Europe, excluding the UK              |   |   | **1,396**            |   |   | 1,124        |   |   | 978          |   |
| Americas                              |   |   | **190**              |   |   | 151          |   |   | 153          |   |
| Asia and Pacific                      |   |   | **70**               |   |   | 54           |   |   | 60           |   |
|                                       |   |
| **Total**                             |   |   | **18,623**           |   |   | 18,519       |   |   | 18,727       |   |
|                                       |   |

|                              |   |   | **2005****£m** |   |   | 2004£m | **a**  |   | 2003£m | **a**  |
|-----------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                   |   |
| **Group operating profit (loss)** |   |   |                 |   |   |         |   |   |         |   |
| UK                                |   |   | **2,905**            |   |   | 2,996        |   |   | 3,224        |   |
| Europe, excluding the UK          |   |   | **(167**             | **)**  |   | (132         | )      |   | (627         | )      |
| Americas                          |   |   | **61**               |   |   | 9            |   |   | (28          | )      |
| Asia and Pacific                  |   |   | **(10**              | **)**  |   | (3           | )      |   | 7            |   |
|                                   |   |
| **Total**                         |   |   | **2,789**            |   |   | 2,870        |   |   | 2,576        |   |
|                                   |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

|                                                                                                         |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                              |   |
| **Share of operating (losses) profits of associates and joint ventures,****including goodwill amortisation** |   |   |                 |   |   |         |   |   |         |   |
| UK                                                                                                           |   |   | **–**           |   |   | (1           | )      |   | (2           | )      |
| Europe, excluding the UK                                                                                     |   |   | **(43**              | **)**  |   | (48          | )      |   | 305          |   |
| Americas                                                                                                     |   |   | **–**           |   |   | –       |   |   | (1           | )      |
| Asia and Pacific                                                                                             |   |   | **18**               |   |   | 15           |   |   | 27           |   |
|                                                                                                              |   |
| **Total**                                                                                                    |   |   | **(25**              | **)**  |   | (34          | )      |   | 329          |   |
|                                                                                                              |   |

| Notes to    the financial statements  | BT          Group plc Annual Report and Form 20-F 2005     83 |
|--------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **2.** | **Segmental analysis**continued |
|--------|---------------------------------|

|                     |   | **2005** |                                       | 2004   |   |
|--------------------------|--------|----------|--------------------------------------------|--------|--------|
|                     |   |          |                                       |        |   |
|                     |   |     | **Net****operating****assets****£m** |   |   | **Interest in****associates****and joint****ventures****£m** |   |   | **Total****£m** |   |   | Netoperatingassets£m |   |   | Interest inassociatesand jointventures£m |   |   | Total£m |   |
|                          |   |
| UK                       |   |     | **11,599**                                 |   |   | **3** |   |   | **11,602** |   |   | 11,444 |   |   | 7 |   |   | 11,451 |   |
| Europe, excluding the UK |   |     | **1,600**                                  |   |   | **–** |   |   | **1,600** |   |   | 1,742 |   |   | 24 |   |   | 1,766 |   |
| Americas                 |   |     | **532**                                    |   |   | **1** |   |   | **533** |   |   | 199 |   |   | – |   |   | 199 |   |
| Asia and Pacific         |   |     | **15**                                     |   |   | **104** |   |   | **119** |   |   | 19 |   |   | 90 |   |   | 109 |   |
|                          |   |
| **Total**                |   |     | **13,746**                                 |   |   | **108** |   |   | **13,854** |   |   | 13,404 |   |   | 121 |   |   | 13,525 |   |
|                          |   |

| **3.** | **Turnover** |
|--------|--------------|

|           |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|----------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                |   |
| Joint ventures |   |   | **355**              |   |   | 352          |   |   | 425          |   |
| Associates     |   |   | **53**               |   |   | 43           |   |   | 1,030        |   |
|                |   |
| **Total**      |   |   | **408**              |   |   | 395          |   |   | 1,455        |   |
|                |   |

|   |                |
|--------|---------------------|
| **4.** | **Operating costs** |

|                                                                                                                                                              |   |   | **2005****£m** |   |   | 2004£m | **a**  |   | 2003£m | **a**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                                                                                   |   |
| Staff costs:                                                                                                                                                      |   |   |                 |   |   |         |   |   |         |   |
| Wages and salaries                                                                                                                                                |   |   | **3,656**            |   |   | 3,675        |   |   | 3,617        |   |
| Social security costs                                                                                                                                             |   |   | **319**              |   |   | 316          |   |   | 275          |   |
| Pension costs (note 28)                                                                                                                                           |   |   | **465**              |   |   | 404          |   |   | 322          |   |
| Employee share ownership**b**                                                                                                                                     |   |   | **11**               |   |   | 20           |   |   | 36           |   |
|                                                                                                                                                                   |   |
| Total staff costs                                                                                                                                                 |   |   | **4,451**            |   |   | 4,415        |   |   | 4,250        |   |
| Own work capitalised                                                                                                                                              |   |   | **(722**             | **)**  |   | (677         | )      |   | (583         | )      |
| Depreciation (note 18)                                                                                                                                            |   |   | **2,834**            |   |   | 2,921        |   |   | 3,011        |   |
| Amortisation and impairment of goodwill and other intangibles (note 17)                                                                                           |   |   | **22**               |   |   | 15           |   |   | 24           |   |
| Payments to telecommunications operators                                                                                                                          |   |   | **3,725**            |   |   | 3,963        |   |   | 3,940        |   |
| Other operating costs                                                                                                                                             |   |   | **5,695**            |   |   | 5,189        |   |   | 5,724        |   |
|                                                                                                                                                                   |   |
| **Total operating costs**                                                                                                                                         |   |   | **16,005**           |   |   | 15,826       |   |   | 16,366       |   |
|                                                                                                                                                                   |   |
| Operating costs included the following:                                                                                                                           |   |   |                 |   |   |         |   |   |         |   |
| Early leaver costs                                                                                                                                                |   |   | **166**              |   |   | 202          |   |   | 276          |   |
| Research and development                                                                                                                                          |   |   | **257**              |   |   | 334          |   |   | 380          |   |
| Rental costs relating to operating leases, including plant and equipment hire of £14 million (2004 – £25 million, 2003 – £34 million) |   |   | **326**              |   |   | 370          |   |   | 395          |   |
| Foreign currency losses (gains)                                                                                                                                   |   |   | **3**                |   |   | (5           | )      |   | (12          | )      |
|                                                                                                                                                                   |   |
| Amortisation of goodwill and exceptional items comprising:                                                                                                        |   |   |                 |   |   |         |   |   |         |   |
| Property rationalisation provision                                                                                                                                |   |   | **59**               |   |   | –       |   |   | 198          |   |
| Rectification costs                                                                                                                                               |   |   | **–**           |   |   | 30           |   |   | –       |   |
| BT Wholesale bad debt release                                                                                                                                     |   |   | **–**           |   |   | (23          | )      |   | –       |   |
|                                                                                                                                                                   |   |
| Total exceptional items                                                                                                                                           |   |   | **59**               |   |   | 7            |   |   | 198          |   |
| Goodwill amortisation                                                                                                                                             |   |   | **16**               |   |   | 12           |   |   | 20           |   |
|                                                                                                                                                                   |   |
| **Total amortisation of goodwill and exceptional items**                                                                                                          |   |   | **75**               |   |   | 19           |   |   | 218          |   |
|                                                                                                                                                                   |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

| **b** | Amount set aside for the year for allocation of ordinary shares in the company to eligible employees |
|-------|------------------------------------------------------------------------------------------------------|

| 84     BT Group plc Annual Report and Form 20-F 2005  | Notes to the        financial statements |
|-------------------------------------------------------------------------------------|------------------------------------------|

----

Table of Contents

| **5.** | **Group’s share of operating (loss) profit of associates and joint ventures** |
|--------|------------------------------------------------------------------------------------|

|                                                                                |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                     |   |
| Joint ventures                                                                      |   |   | **(31**              | **)**  |   | (38          | )      |   | 119          |   |
| Associates                                                                          |   |   | **6**                |   |   | 4            |   |   | 210          |   |
|                                                                                     |   |
| **Group’s share of operating (loss) profit of associates and joint venturesa** |   |   | **(25**              | **)**  |   | (34          | )      |   | 329          |   |
|                                                                                     |   |

| **a** | Includes: |
|-------|-----------|

|   | Exceptional costs relating to impairment of assets in joint ventures |   |   | **25**     |   |   | – |   |   | – |   |
|--------|----------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|--------|--------|--------|--------|
|   | Exceptional costs relating to the impairment of goodwill             |   |   | **–** |   |   | 26     |   |   | – |   |
|   | Exceptional costs relating to the release of surplus exit costs      |   |   | **–** |   |   | – |   |   | (150   | )      |
|   | Amortisation of goodwill arising in joint ventures and associates    |   |   | **–** |   |   | – |   |   | 2      |   |
|        |                                                                 |

|   |                                                                 |
|--------|----------------------------------------------------------------------|
| **6.** | **Profit on sale of fixed asset investments and group undertakings** |

| **7.** | **Interest receivable** |
|--------|-------------------------|

|                           |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|--------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                |   |
| Income from listed investments |   |   | **47**               |   |   | 13           |   |   | 2            |   |
| Other interest receivable**a** |   |   | **209**              |   |   | 283          |   |   | 187          |   |
|                                |   |
| Group                          |   |   | **256**              |   |   | 296          |   |   | 189          |   |
| Joint ventures                 |   |   | **9**                |   |   | 2            |   |   | 1            |   |
| Associates                     |   |   | **–**           |   |   | –       |   |   | 5            |   |
|                                |   |
| **Total interest receivable**  |   |   | **265**              |   |   | 298          |   |   | 195          |   |
|                                |   |

| **a**  | Includes an exceptional credit of £34 million in the year ended 31 March 2004 being one off interest recognised on full repayment of loan notes received as part of the original consideration from the disposal of Yell. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |

| Notes to    the financial statements  | BT Group            plc Annual Report and Form 20-F 2005     85 |
|--------------------------------------------|------------------------------------------------------------------------------------------|

----

Table of Contents

| **8.** | **Interest payable** |
|--------|----------------------|

|                                                |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-----------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                     |   |
| Interest payable and similar charges in respect of: |   |   |                 |   |   |         |   |   |         |   |
| Bank loans and overdrafts                           |   |   | **71**               |   |   | 87           |   |   | 82           |   |
| Interest payable on finance leases                  |   |   | **58**               |   |   | 19           |   |   | –       |   |
| Other borrowings**ab**                              |   |   | **914**              |   |   | 1,114        |   |   | 1,527        |   |
|                                                     |   |
| Group                                               |   |   | **1,043**            |   |   | 1,220        |   |   | 1,609        |   |
| Joint ventures                                      |   |   | **23**               |   |   | 19           |   |   | 17           |   |
| Associates                                          |   |   | **–**           |   |   | –       |   |   | 8            |   |
|                                                     |   |
| **Total interest payable**                          |   |   | **1,066**            |   |   | 1,239        |   |   | 1,634        |   |
|                                                     |   |

| **a** | Includes an exceptional charge of £89 million in the year ended 31 March 2004 being the premium on repurchasing £813 million of the group’s issued bonds. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **b** | Includes an exceptional charge of £293 million in the year ended 31 March 2003 on the termination of interest rate swap agreements following the receipt of the Cegetel sale proceeds. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |                                            |
|--------|-------------------------------------------------|
| **9.** | **Tax on profit (loss) on ordinary activities** |

|                                                                                                         |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003 £m |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------------|--------|
|                                                                                                              |   |
| United Kingdom:                                                                                              |   |   |                 |   |   |         |   |   |               |   |
|      Corporation tax at 30%                                                         |   |   | **542**              |   |   | 328          |   |   | 447                |   |
|      Prior year adjustments                                                         |   |   | **4**                |   |   | –       |   |   | 12                 |   |
| Non-UK taxation:                                                                                             |   |   |                 |   |   |         |   |   |               |   |
|      Current                                                                        |   |   | **(4**               | **)**  |   | 37           |   |   | 47                 |   |
|      Taxation on the group’s share of results of associates and joint ventures |   |   | **1**                |   |   | –       |   |   | 81                 |   |
|      Prior year adjustments                                                         |   |   | **(3**               | **)**  |   | –       |   |   | (26                | )      |
|                                                                                                              |   |
| **Total current taxation**                                                                                   |   |   | **540**              |   |   | 365          |   |   | 561                |   |
| Deferred taxation (credit) charge at 30%                                                                     |   |   |                 |   |   |         |   |   |               |   |
|      Origination and reversal of timing differences                                 |   |   | **(18**              | **)**  |   | 184          |   |   | (29                | )      |
|      Prior year adjustments                                                         |   |   | **1**                |   |   | (10          | )      |   | (73                | )      |
|                                                                                                              |   |
| **Total deferred taxation**                                                                                  |   |   | **(17**              | **)**  |   | 174          |   |   | (102               | )      |
|                                                                                                              |   |
| **Total tax on profit (loss) on ordinary activities**                                                        |   |   | **523**              |   |   | 539          |   |   | 459                |   |
|                                                                                                              |   |

|                                                              |   |   | **2005%**  |   |   | 2004%  |   |   | 2003%  |   |
|-------------------------------------------------------------------|--------|--------|------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                   |   |
| UK corporation tax rate                                           |   |   | **30.0**   |   |   | 30.0   |   |   | 30.0   |   |
| Non-deductible depreciation, amortisation and impairment          |   |   | **0.2**    |   |   | 0.9    |   |   | 0.4    |   |
| Non-deductible non-UK losses                                      |   |   | **1.6**    |   |   | 1.6    |   |   | 3.3    |   |
| (Lower) higher taxes on non-UK profits                            |   |   | **(0.6**   | **)**  |   | 0.2    |   |   | 0.4    |   |
| Excess depreciation over capital allowances                       |   |   | **–** |   |   | 3.2    |   |   | 3.4    |   |
| Pension provisions and prepayments                                |   |   | **0.7**    |   |   | (9.9   | )      |   | (3.2   | )      |
| Other timing differences                                          |   |   | **0.1**    |   |   | (2.8   | )      |   | 0.7    |   |
| Lower effective tax on gain on disposal of fixed asset            |   |   |       |   |   |   |   |   |   |   |
| investments and group undertakings                                |   |   | **(4.6**   | **)**  |   | (1.3   | )      |   | (16.5  | )      |
| Higher effective tax on gain on disposal of non qualifying assets |   |   | **–** |   |   | – |   |   | 2.0    |   |
| Prior year adjustments                                            |   |   | **0.1**    |   |   | – |   |   | (2.0   | )      |
| Other                                                             |   |   | **(4.4**   | **)**  |   | (3.2   | )      |   | (0.8   | )      |
|                                                                   |   |
| **Current tax – effective corporation tax rate**             |   |   | **23.1**   |   |   | 18.7   |   |   | 17.7   |   |
| Deferred taxes on excess depreciation over capital allowances     |   |   | **–** |   |   | (3.2   | )      |   | (3.4   | )      |
| Pension provisions and prepayments                                |   |   | **(0.7**   | **)**  |   | 9.9    |   |   | 3.2    |   |
| Other timing differences                                          |   |   | **(0.1**   | **)**  |   | 2.8    |   |   | (0.7   | )      |
| Prior year adjustments                                            |   |   | **–** |   |   | (0.5   | )      |   | (2.3   | )      |
|                                                                   |   |
| **Total tax – effective corporation tax rate**               |   |   | **22.3**   |   |   | 27.7   |   |   | 14.5   |   |
|                                                                   |   |

|                                           |
|------------------------------------------------|
| **Factors that may affect future tax charges** |

 

| 86     BT Group plc Annual Report and Form 20-F 2005  | Notes to the        financial statements |
|-------------------------------------------------------------------------------------|------------------------------------------|

----

Table of Contents

| **10.** | **Minority interests** |
|---------|------------------------|

|                                    |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-----------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                         |   |
| Minority interests in (losses) profits: |   |   |                 |   |   |         |   |   |         |   |
| Group                                   |   |   | **(1**               | **)**  |   | (8           | )      |   | 4            |   |
| Associates                              |   |   | **–**           |   |   | –       |   |   | 8            |   |
|                                         |   |
| **Total minority interests**            |   |   | **(1**               | **)**  |   | (8           | )      |   | 12           |   |
|                                         |   |

|    |          |
|---------|---------------|
| **11.** | **Dividends** |

|                    |   |   | **2005****pence****per share** |   |   | 2004penceper share |   |   | 2003penceper share |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|-------------------------|--------|--------|--------------------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                         |   |
| Interim dividend paid   |   |   | **3.90**                       |   |   | 3.20               |   |   | 2.25               |   |   | **332**              |   |   | 278          |   |   | 194          |   |
| Proposed final dividend |   |   | **6.50**                       |   |   | 5.30               |   |   | 4.25               |   |   | **551**              |   |   | 454          |   |   | 366          |   |
|                         |   |
| **Total dividends**     |   |   | **10.40**                      |   |   | 8.50               |   |   | 6.50               |   |   | **883**              |   |   | 732          |   |   | 560          |   |
|                         |   |

|    |                          |
|---------|-------------------------------|
| **12.** | **Earnings (loss) per share** |

|                                                                             |   |   | **2005****millions****of shares** |   |   | 2004millionsof shares |   |   | 2003millionsof shares |   |
|----------------------------------------------------------------------------------|--------|--------|-----------------------------------|--------|--------|-----------------------|--------|--------|-----------------------|--------|
|                                                                                  |   |
| Basic                                                                            |   |   | **8,524**                         |   |   | 8,621                 |   |   | 8,616                 |   |
| Dilutive ordinary shares from share options outstanding and shares held in trust |   |   | **57**                            |   |   | 55                    |   |   | 52                    |   |
|                                                                                  |   |
| Total diluted                                                                    |   |   | **8,581**                         |   |   | 8,676                 |   |   | 8,668                 |   |
|                                                                                  |   |

|                                                                                                                                   |   |   | **2005****pence****per share** |   |   | 2004penceper share | a      |   | 2003penceper share | a      |   |  **2005****£m** |   |   |  2004£m | a  |   | 2003£m | a  |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|----------------------------|--------|--------|--------------------|---------|--------|--------------|---------|
|                                                                                                                                        |   |
| **Attributable to exceptional items and goodwill:**                                                                                    |   |   |                           |   |   |               |   |   |               |   |   |                       |   |   |               |    |   |         |    |
| Goodwill amortisation                                                                                                                  |   |   | **(0.2**                       | **)**  |   | (0.1               | )      |   | (0.3               | )      |   | **(16**                    | **)**  |   | (12                | )       |   | (22          | )       |
| Property rationalisation costs                                                                                                         |   |   | **(0.7**                       | **)**  |   | –             |   |   | (2.3               | )      |   | **(59**                    | **)**  |   | –             |    |   | (198         | )       |
| Rectification costs                                                                                                                    |   |   | **–**                     |   |   | (0.3               | )      |   | –             |   |   | **–**                 |   |   | (30                | )       |   | –       |    |
| BT Wholesale bad debts release                                                                                                         |   |   | **–**                     |   |   | 0.2                |   |   | –             |   |   | **–**                 |   |   | 23                 |    |   | –       |    |
| Goodwill impairment in associates and joint ventures                                                                                   |   |   | **–**                     |   |   | (0.3               | )      |   | –             |   |   | **–**                 |   |   | (26                | )       |   | –       |    |
| Impairment in associates and joint ventures                                                                                            |   |   | **(0.3**                       | **)**  |   | –             |   |   | –             |   |   | **(25**                    | **)**  |   | –             |    |   | –       |    |
| Release of surplus exit costs                                                                                                          |   |   | **–**                     |   |   | –             |   |   | 1.8                |   |   | **–**                 |   |   | –             |    |   | 150          |    |
| Profit on sale of fixed asset investments                                                                                              |   |   | **4.3**                        |   |   | 0.4                |   |   | 19.8               |   |   | **358**                    |   |   | 32                 |    |   | 1,705        |    |
| Loss on sale of group undertakings                                                                                                     |   |   | **–**                     |   |   | –             |   |   | (0.1               | )      |   | **–**                 |   |   | –             |    |   | (9           | )       |
| Finance cost of novating interest rate swaps                                                                                           |   |   | **–**                     |   |   | –             |   |   | (3.4               | )      |   | **–**                 |   |   | –             |    |   | (293         | )       |
| Interest receivable on Yell loan notes                                                                                                 |   |   | **–**                     |   |   | 0.4                |   |   | –             |   |   | **–**                 |   |   | 34                 |    |   | –       |    |
| Premium on repurchasing bonds                                                                                                          |   |   | **–**                     |   |   | (1.1               | )      |   | –             |   |   | **–**                 |   |   | (89                | )       |   | –       |    |
| Tax credit                                                                                                                             |   |   | **0.2**                        |   |   | 0.3                |   |   | 1.6                |   |   | **16**                     |   |   | 29                 |    |   | 139          |    |
| Minority interest                                                                                                                      |   |   | **–**                     |   |   | –             |   |   | (0.1               | )      |   | **–**                 |   |   | –             |    |   | (7           | )       |
|                                                                                                                                        |   |
| **Net credit (charge) attributable to exceptional items and goodwill amortisation**                                                    |   |   | **3.3**                        |   |   | (0.5               | )      |   | 17.0               |   |   | **274**                    |   |   | (39                | )       |   | 1,465        |    |
|                                                                                                                                        |   |
| **Basic earnings per share/profit for the financial year after goodwill amortisation and exceptional items**                           |   |   | **21.4**                       |   |   | 16.4               |   |   | 31.4               |   |   | **1,821**                  |   |   | 1,414              |    |   | 2,702        |    |
| Less: Basic earnings (loss) per share/profit (loss) for the financial year attributable to exceptional items and goodwill amortisation |   |   | **3.3**                        |   |   | (0.5               | )      |   | 17.0               |   |   | **274**                    |   |   | (39                | )       |   | 1,465        |    |
|                                                                                                                                        |   |
| **Basic earnings per share/profit for the financial year before goodwill amortisation and exceptional items**                          |   |   | **18.1**                       |   |   | 16.9               |   |   | 14.4               |   |   | **1,547**                  |   |   | 1,453              |    |   | 1,237        |    |
|                                                                                                                                        |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

| Notes to    the financial statements  | BT Group          plc Annual Report and Form 20-F 2005     87 |
|--------------------------------------------|----------------------------------------------------------------------------------------|

----

Table of Contents

| **13.** | **Reconciliation of operating profit to operating cash flows** |
|---------|----------------------------------------------------------------|

|                                                                                              |   |   | **2005****£m** |   |   | 2004£m | a      |   | 2003£m | a      |
|---------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                   |   |
| Group operating profit                                                                            |   |   | **2,789**            |   |   | 2,870        |   |   | 2,576        |   |
| Depreciation                                                                                      |   |   | **2,834**            |   |   | 2,921        |   |   | 3,011        |   |
| Amortisation and impairment                                                                       |   |   | **22**               |   |   | 15           |   |   | 24           |   |
| (Increase) decrease in stocks                                                                     |   |   | **(12**              | **)**  |   | (6           | )      |   | 31           |   |
| Decrease in debtors                                                                               |   |   | **206**              |   |   | 414          |   |   | 764          |   |
| Decrease in creditors                                                                             |   |   | **(39**              | **)**  |   | (159         | )      |   | (306         | )      |
| Decrease (increase)    in pension prepayment and increase (decrease) in pension liabilities  |   |   | **49**               |   |   | (655         | )      |   | (314         | )      |
| (Decrease) increase in provisions                                                                 |   |   | **(12**              | **)**  |   | (49          | )      |   | 171          |   |
| Other                                                                                             |   |   | **61**               |   |   | 38           |   |   | 66           |   |
|                                                                                                   |   |
| **Net cash inflow from operating activities**                                                     |   |   | **5,898**            |   |   | 5,389        |   |   | 6,023        |   |
|                                                                                                   |   |

| **a** | Restated – see note 1 |
|-------|----------------------------|

|    |                               |
|---------|------------------------------------|
| **14.** | **Management of liquid resources** |

|                                                                                                 |   |   | **2005****£m** |   |   | 2004£m |   |   | 2003£m |   |
|------------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                                                                                      |   |
| Purchase of short-term investments and payments into short-termdeposits over 3 months                |   |   | **(3,043**           | **)**  |   | (5,306       | )      |   | (3,990       | )      |
| Sale of short-term investments and withdrawals from short-termdeposits over 3 months                 |   |   | **3,754**            |   |   | 4,467        |   |   | 4,082        |   |
| Net movement of short-term investments and short-termdeposits under 3 months not repayable on demand |   |   | **(124**             | **)**  |   | 1,962        |   |   | (1,821       | )      |
|                                                                                                      |   |
| **Net cash inflow (outflow) from management of liquid resources**                                    |   |   | **587**              |   |   | 1,123        |   |   | (1,729       | )      |
|                                                                                                      |   |

| **15.** | **Acquisitions and disposals** |
|---------|--------------------------------|

|                          |   |   | Infonet  | a      |   | Albacom  | b      |   | Other    | c      |   | **Total**    |   |
|--------------------------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|--------|--------------|--------|
| Year ended 31 March 2005 |   |   | £m |   |   | £m |   |   | £m |   |   | **£m** |   |
|                          |   |
| Consideration:           |   |   |     |   |   |     |   |   |     |   |   |         |   |
| Cash                     |   |   | 315      |   |   | 93       |   |   | 18       |   |   | **426**      |   |
| Deferred                 |   |   | –   |   |   | 38       |   |   | 1        |   |   | **39**       |   |
|                          |   |
| **Total**                |   |   | **315**  |   |   | **131**  |   |   | **19**   |   |   | **465**      |   |
|                          |   |

|                        |   |   | **Total**    | **d**  |
|-----------------------------|--------|--------|--------------|--------|
| Year ended 31    March 2004 |   |   | **£m** |   |
|                        |   |   |         |   |
|                             |   |
| Consideration:              |   |   |         |   |
| Cash                        |   |   | **33**       |   |
| Deferred                    |   |   | **3**        |   |
|                             |   |
| **Total**                   |   |   | **36**       |   |
|                             |   |

|                                     |   |   | Concert  | e      |   | Other    | f      |   |  **Total** |   |
|------------------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|-----------------|--------|
| Year    ended 31 March 2003              |   |   | £m |   |   | £m |   |   | **£m**    |   |
|                                          |   |
| Consideration:                           |   |   |     |   |   |     |   |   |            |   |
| Cash                                     |   |   | –   |   |   | 13       |   |   | **13**          |   |
| Carrying value of Concert global venture |   |   | 338      |   |   | –   |   |   | **338**         |   |
|                                          |   |
| **Total**                                |   |   | **338**  |   |   | **13**   |   |   | **351**         |   |
|                                          |   |

| 88     BT Group plc Annual Report and Form 20-F 2005  | Notes to the        financial statements |
|-------------------------------------------------------------------------------------|------------------------------------------|

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Table of Contents

| **15.** | **Acquisitions and disposals**continued |
|---------|-----------------------------------------|

|   |                                                                                                                                                                                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **a**  | On 25 February 2005 the group acquired Infonet Services Corporation for total consideration of £520 million, including acquisition costs, (£315 million net of cash in the business). This gave rise to goodwill of £264 million. |
|   |                                                                                                                                                                                                                                                |

|                                                                        |   |   | Book value£m |   |   | Fair value adjustments£m |   |   | Fair value£m |   |
|------------------------------------------------------------------------|--------|--------|--------------------|--------|--------|--------------------------------|--------|--------|--------------------|--------|
|                                                                        |   |
| Fixed assets                                                           |   |   | 195                |   |   | (100                           | )      |   | 95                 |   |
| Current assets                                                         |   |   | 93                 |   |   | (19                            | )      |   | 74                 |   |
| Current liabilities                                                    |   |   | (99                | )      |   | 4                              |   |   | (95                | )      |
| Provisions for liabilities and charges                                 |   |   | (4                 | )      |   | (18                            | )      |   | (22                | )      |
| Minority interest                                                      |   |   | (1                 | )      |   | –                         |   |   | (1                 | )      |
|                                                                        |   |
| Group’s share of original book value and fair value of net assets |   |   | 184                |   |   | (133                           | )      |   | 51                 |   |
| Goodwill                                                               |   |   |               |   |   |                           |   |   | 264                |   |
|                                                                        |   |
| **Total            cost**                                              |   |   |               |   |   |                           |   |   | **315**            |   |
|                                                                        |   |

| **b** | In          December 2004 the group agreed to acquire the 74% interest in Albacom          SpA not already held, giving BT full ownership for total consideration          of £131 million, including deferred consideration of £38          million. The deferred consideration is dependent upon the financial          performance of Albacom in the  2009 financial year and the minimum          payable is £38 million. The transaction completed 4 February          2005. This gave rise to goodwill of £9 million. Prior to becoming          a subsidiary undertaking, Albacom SpA was accounted for as a joint          venture undertaking. In accordance with FRS 2 ‘Accounting for          SubsidiaryUndertakings’, and in order to give a true and fair view, purchased goodwillhas been calculated as the sum of the goodwill arising on each purchase of sharesin Albacom, being the difference at the date of each purchase between the fairvalue of the consideration given and the fair value of the identifiable assetsand liabilities attributable to the interest purchased. This represents a departurefrom the statutory method, under which goodwill is calculated as the differencebetween cost and fair value on the date that Albacom became a subsidiary undertaking.The statutory method would not give a true and fair view because it would resultin the group’s share of Albacom’s retained reserves, during the periodthat it was a joint venture undertaking, being recharacterised as goodwill. Theeffect of this departure is to reduce retained profits by £313 million,and to reduce purchased goodwill by £313 million. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                            |   |   | Book value£m |   |   | Fair value adjustments£m |   |   | Fair value£m |   |
|---------------------------------------------------------------------------------|--------|--------|--------------------|--------|--------|--------------------------------|--------|--------|--------------------|--------|
|                                                                                 |   |
| Fixed assets                                                                    |   |   | 378                |   |   | (11                            | )      |   | 367                |   |
| Current assets                                                                  |   |   | 211                |   |   | –                         |   |   | 211                |   |
| Current liabilities                                                             |   |   | (301               | )      |   | (14                            | )      |   | (315               | )      |
| Long-term debt                                                                  |   |   | (139               | )      |   | –                         |   |   | (139               | )      |
| Minority interest                                                               |   |   | (2                 | )      |   | –                         |   |   | (2                 | )      |
|                                                                                 |   |
| Group’s          share of original book value and fair value of net assets |   |   | 147                |   |   | (25                            | )      |   | 122                |   |
| Goodwill                                                                        |   |   |               |   |   |                           |   |   | 9                  |   |
|                                                                                 |   |
| **Total cost**                                                                  |   |   |               |   |   |                           |   |   | **131**            |   |
|                                                                                 |   |

|  Notes to    the financial statements  | BT Group          plc Annual Report and Form 20-F 2005     89 |
|--------------------------------------------------|----------------------------------------------------------------------------------------|

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Table of Contents

| **15.** | **Acquisitions and disposals**continued |
|---------|-----------------------------------------|

|   |                                                                                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **c**  | During the year ended 31 March 2005, the acquisition of other subsidiary companies and businesses was principally BIC Systems Group Ltd and the consideration given comprised: |
|   |                                                                                                                                                                           |

|                                                                        |   |   | Book value and fair value£m |   |
|------------------------------------------------------------------------|--------|--------|-----------------------------------|--------|
|                                                                        |   |
| Fixed assets                                                           |   |   | 1                                 |   |
| Current assets                                                         |   |   | 4                                 |   |
| Current liabilities                                                    |   |   | (2                                | )      |
|                                                                        |   |
| Group’s share of original book value and fair value of net assets |   |   | 3                                 |   |
| Goodwill                                                               |   |   | 16                                |   |
|                                                                        |   |
| **Total cost**                                                         |   |   | **19**                            |   |
|                                                                        |   |

| **d**  | On 5 January 2004 the group acquired the UK trade and assets of BT Expedite Limited (formerly NSB Retail plc) for consideration of £17 million (£2 million deferred). The net liabilities acquired amounted to £1 million giving rise to goodwill of £18 million which is being amortised over a period of 5years. On 15 March 2004 the group acquired controlling interest in Transcomm plc for consideration of £15 million. The group’s share of the net assets acquired was £2 million giving rise to goodwill of £13 million which is being amortised over a period of 13 years. On 13 January 2004 the group tookfull control of Siosistemi SpA for consideration of £4 million including deferred consideration of £1 million. Net assets of £1 million were acquired giving rise to goodwill of £4 million which is being amortised over a period of 10 years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

| **e** | On completion of the unwind of Concert on 1 April 2002, the former Concert businesses, customer accounts and networks were returned to the two parent companies with BT and AT&T each taking ownership of substantially those parts of the Concert global venture originally contributed by them. Aspart of the settlement with AT&T for the unwind of the Concert global venture BT received net cash of US$72 million (£56 million). This net settlement included the receipt of US$350 million reflecting the allocation of the businesses and the payment of US$278 million to achieve the equal division ofspecified working capital and other liability balances. The results of the acquired businesses, both pre and post acquisition, cannot be separately identified and, therefore, cannot be reported. |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                   |   |   | Book value andfair value£m |   |
|------------------------------------------------------------------------|--------|--------|----------------------------------|--------|
|                                                                        |   |
| Fixed assets                                                           |   |   | 398                              |   |
| Current assets                                                         |   |   | 301                              |   |
| Current liabilities                                                    |   |   | (405                             | )      |
| Provisions for liabilities and charges                                 |   |   | (2                               | )      |
| Long-term debt                                                         |   |   | (10                              | )      |
|                                                                        |   |
| Group’s share of original book value and fair value of net assets |   |   | 282                              |   |
| Net receivable from AT&T                                           |   |   | 56                               |   |
|                                                                        |   |
| Total net assets acquired                                              |   |   | 338                              |   |
| Goodwill                                                               |   |   | –                           |   |
|                                                                        |   |
| **Total cost**                                                         |   |   | **338**                          |   |
|                                                                        |   |

|   |                                                                                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| **f**  | During the year ended 31 March 2003, the acquisition of other subsidiary companies and businesses and the consideration given comprised: |
|   |                                                                                                                                     |

|                                                                   |   |   | Book value andfair value£m |   |
|------------------------------------------------------------------------|--------|--------|----------------------------------|--------|
|                                                                        |   |
| Fixed assets                                                           |   |   | 1                                |   |
| Current liabilities                                                    |   |   | (1                               | )      |
|                                                                        |   |
| Group’s share of original book value and fair value of net assets |   |   | –                           |   |
| Goodwill                                                               |   |   | 13                               |   |
|                                                                        |   |
| **Total cost**                                                         |   |   | **13**                           |   |
|                                                                        |   |

|                                             |
|--------------------------------------------------|
| **Acquisition of associates and joint ventures** |

| **Disposal of subsidiaries** |
|------------------------------|

| 90     BT Group plc Annual Report and Form 20-F 2005  | Notes to the        financial statements |
|-------------------------------------------------------------------------------------|------------------------------------------|

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Table of Contents

| **16.** | **Net debt** |
|---------|--------------|

|                                                                        |   |   | At            1 April      2004£m |   |   | Cash            flow£m |   |   | Acquisition      of subsidiary undertakings£m |   |   | Other      non-cash changes£m |   |   | Currency            movement£m |   |   | **At              31 March****2005****£m** |   |
|-----------------------------------------------------------------------------|--------|--------|-----------------------------------------|--------|--------|------------------------------|--------|--------|-----------------------------------------------------|--------|--------|-------------------------------------|--------|--------|--------------------------------------|--------|--------|--------------------------------------------------|--------|
|                                                                             |   |
| **Analysis                of net debt**                                     |   |   |                                    |   |   |                         |   |   |                                                |   |   |                                |   |   |                                 |   |   |                                             |   |
| Cash              in hand and at bank                                       |   |   | 109                                     |   |   | 97                           |   |   | –                                              |   |   | –                              |   |   | –                               |   |   | **206**                                          |   |
| Overnight              deposits                                             |   |   | 292                                     |   |   | 85                           |   |   | –                                              |   |   | –                              |   |   | –                               |   |   | **377**                                          |   |
| Bank              overdrafts                                                |   |   | (2                                      | )      |   | –                       |   |   | –                                              |   |   | –                              |   |   | –                               |   |   | **(2**                                           | **)**  |
|                                                                             |   |
|                                                                        |   |   | 399                                     |   |   | 182                          |   |   | –                                              |   |   | –                              |   |   | –                               |   |   | **581**                                          |   |
| Other              current asset investments                                |   |   | 4,871                                   |   |   | (587                         | )      |   | –                                              |   |   | (64                                 | )      |   | –                               |   |   | **4,220**                                        |   |
|                                                                             |   |
| **Short-term                investments and cash,****less bank overdrafts** |   |   | 5,270                                   |   |   | (405                         | )      |   | –                                              |   |   | (64                                 | )      |   | –                               |   |   | **4,801**                                        |   |
|                                                                             |   |
| Debt              due within one year, excluding bank overdrafts            |   |   | (1,269                                  | )      |   | 1,215                        |   |   | (20                                                 | )      |   | (4,422                              | )      |   | –                               |   |   | **(4,496**                                       | **)**  |
| Debt              due after one year                                        |   |   | (12,426                                 | )      |   | 77                           |   |   | (139                                                | )      |   | 4,399                               |   |   | (2                                   | )      |   | **(8,091**                                       | **)**  |
|                                                                             |   |
| **Total                debt, excluding bank overdrafts**                    |   |   | (13,695                                 | )      |   | 1,292                        |   |   | (159                                                | )      |   | (23                                 | )      |   | (2                                   | )      |   | **(12,587**                                      | **)**  |
|                                                                             |   |
| **Net                debt**                                                 |   |   | (8,425                                  | )      |   | 887                          |   |   | (159                                                | )      |   | (87                                 | )      |   | (2                                   | )      |   | **(7,786**                                       | **)**  |
|                                                                             |   |

|     **2005****£m**  2004£m  2003£m  **Reconciliation            of net cash flow to movement in net debt**          Increase          (decrease) in cash in the year  **182**  44  (19)Cash          outflow from decrease in debt  **1,292**  2,301  2,515 Cash          (outflow) inflow from increase in liquid resources  **(587****)** (1,123) 1,729  Decrease in net debt resulting from cash flows  **887**  1,222  4,225 Currency and translation movements  **(2****)** (4) (67)(Increase) decrease in net debt on acquisition or disposal of subsidiary undertakings  **(159****)** (1) 13 Other non-cash movements  **(87****)** (69) (43) Decrease in net debt in the year  **639**  1,148  4,128 Net debt at 1 April  **(8,425****)** (9,573) (13,701) **Net debt at 31 March**  **(7,786****)** (8,425) (9,573)   **17.****Intangible fixed assets**   Goodwill£m  Telecommunicationlicencesand other£m  Total£m  **Cost**          1 April 2004  2,585  9  2,594 Acquisitions  289  192  481 Disposals  (1) –  (1)Currency movements  (3) 1  (2) **Total cost at 31 March 2005**  **2,870**  **202**  **3,072**  **Amortisation**          1 April 2004  2,383  7  2,390 Acquisitions  –  38  38 Charge for the year  16  6  22 Disposals  (1) –  (1) **Total amortisation at 31 March 2005**  **2,398**  **51**  **2,449**  **Net book value at 31 March 2005**  **472**  **151**  **623**  Net book value at 31 March 2004  202  2  204    Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     91
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 **18.****Tangible fixed assets**   Land andbuildings£m a Plant andequipment£m    b Assetsin course of construction£m  Total£m  **Cost**             1 April 2004  929  35,579  820  37,328 Acquisitions of subsidiary undertakings  96  724  23  843 Additions**c**  9  601  2,394  3,004 Transfers  49  2,218  (2,267) – Disposals and adjustments  (120) (1,067) (15) (1,202)Currency movements  2  53  1  56  **Total cost at 31 March 2005**  **965**  **38,108**  **956**  **40,029**  **Depreciation**             1 April 2004  340  21,566  –  21,906 Acquisitions of subsidiary undertakings  41  489  –  530 Charge for the year  45  2,789  –  2,834 Disposals and adjustments  (66) (1,053) –  (1,119)Currency movements  1  33  –  34  **Total depreciation at 31 March 2005**  **361**  **23,824**  **–**  **24,185**  **Net book value at 31 March 2005**  **604**  **14,284**  **956**  **15,844** Engineering stores  –  –  72  72  **Total tangible fixed assets at 31 March 2005**  **604**  **14,284**  **1,028**  **15,916**  Net book value at 31 March 2004  589  14,013  820  15,422 Engineering stores  –  –  65  65  Total tangible fixed assets at 31 March 2004  589  14,013  885  15,487       **2005****£m**  2004£m  **a**The net book value of land    and buildings comprised:       Freehold  **373**  363 Long leases (over 50 years    unexpired)  **50**  13 Short leases  **181**  213  **Total net book value of land and buildings**  **604**  589  **b**The net book value of assets held under finance leases included within plant and equipment was £503 million at 31 March 2005 (2004 – £620 million). The depreciation charge for the year to 31 March 2005 on those assets was £154 million (2004 – £174 million).     **2005****£m**  2004£m  **c******Expenditure    on tangible fixed assets comprised:       Plant and equipment       Transmission equipment  **1,488**  1,324 Exchange equipment  **143**  150 Other network equipment  **648**  585 Computers and office equipment  **312**  205 Motor vehicles and other   **349**  316 Land and buildings  **64**  73     **3,004**  2,653 Increase in engineering stores  **7**  20  **Total expenditure on tangible fixed assets**  **3,011**  2,673    92     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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 **19.****Fixed asset investments**  Interests in associates and joint venturesb                  Shares£m  Loans£m  Share of postacquisitionlosses£m  Otherinvestments£m    c Total£m  **Cost**                1 April 2004 as previously stated  608  28  (302) 405  739 Prior period adjustment (note 1)  –  –  –  (53) (53) 1 April 2004 as restated  608  28  (302) 352  686 Additions  1  28  –  2  31 Disposals  (6) –  4  (228) (230)Transfer to subsidiaries  (276) (49) 310  –  (15)Share of losses for the year  –  –  (31) –  (31)Currency movements  2  1  –  1  4 Other movements  –  (2) 1  –  (1) **Total cost at 31 March 2005**  **329**  **6**  **(18****)** **127**  **444**  **Provisions and amounts written off**                1 April 2004  213  –  –  149  362 Disposals  (4) –  –  (29) (33) **Total provisions and amounts written off at****31 March 2005**  **209**  **–**  **–**  **120**  **329**  **Net book value at 31 March 2005**  **120**  **6**  **(18****)** **7**  **115**  Net book value at 31 March 2004  395  28  (302) 203  324  **a****Subsidiary undertakings, associates and joint ventures** Details of        the principal operating subsidiary undertakings, joint ventures and associates    are set out on page 122.  **b****Associates and joint ventures**   **2005****£m**  2004£m  Associates:       Goodwill  **–**  1 Share of other net assets  **28**  23 Total associates  **28**  24 Joint ventures:       Loans  **6**  28 Share of other net assets  **74**  69 Total joint ventures  **80**  97  **Net book value at 31 March**  **108**  121  The group’s proportionate share of its associates’ and joint ventures’ assets and liabilities, in aggregate, at 31 March was as follows:   **2005****£m**  2004£m  Fixed assets  **219**  347 Current assets  **118**  149 Current liabilities  **(137****)** (217)Net current liabilities  **(19****)** (68)Long-term liabilities  **(98****)** (187) **Share of net assets**  **102**  92  The group’s proportionate share of its associates’ and joint ventures’ losses less profits before taxation excluding minority interests totalled £39 million (losses less profits 2004 – £51 million, profits less losses 2003 – £310 million) and its share of their losses less profits attributable to shareholdersexcluding minority interests totalled £40 million for the year ended 31 March 2005 (losses less profits 2004 – £51 million, profits less losses 2003 – £229 million).**c****Other investments** In the group        balance sheet at 31 March 2005, listed investments were held with        a book value of £nil (2004 – £22 million) and a market    value of £nil (2004 – £20 million).  Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     93
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 **20.****Debtors**   **2005****£m**  2004£m  Trade debtors**a**  **1,927**  2,126 Amounts owed by joint ventures (trading)  **1**  5 Other debtors  **495**  327 Accrued income  **1,423**  1,392 Pension fund prepayment**b**  **1,118**  1,172 Other prepayments  **423**  167  **Total debtors**  **5,387**  5,189  **a**Trade debtors are stated after deducting £338 million (2004 – £345 million) for doubtful debts. The amount charged to the group profit and loss account for doubtful debts for the year ended 31 March 2005 was £150 million (2004 – £136 million net of an exceptional credit of £23 million, 2003 – £264 million).**b**Falling due after more than    one year.  **21.****Current    asset investments**   **2005****£m**  2004£m  Listed investments  **1,106**  1,247 Other short-term deposits and investments**a**  **3,491**  3,916  **Total current asset investments**  **4,597**  5,163  Market value of listed investments  **1,106**  1,247  **a**Included within other short-term deposits and investments in the 2004 financial year is £144 million invested with a swap counterparty. The counterparty had security over this investment in the event of BT defaulting on the swap.  **22.****Loans and other borrowings**   **2005****£m**  2004£m  US dollar 8.875% notes 2030 (minimum 8.625%**a**)  **1,604**  1,686 5.75% bonds 2028  **596**  596 3.5% indexed linked notes 2025  **278**  270 8.625% bonds 2020  **297**  297 7.75% notes 2016 (minimum 7.5%**a**)  **692**  691 Euro 7.125% notes 2011 (minimum 6.875%**a**)  **755**  734 US dollar 8.375% notes 2010 (minimum 8.125%**a**)  **1,754**  1,795 US dollar 8.765% bonds 2009  **123**  123 Euro 11.875% senior notes 2009  **–**  3 US dollar convertible 2008 (0.75%)  **88**  97 US dollar 7% notes 2007  **573**  596 12.25% bonds 2006  **229**  229 7.375% notes 2006 (minimum 7.125%**a**)  **399**  398 Euro 6.375% notes 2006 (minimum 6.125%**a**)  **1,923**  1,861 US dollar 7.875% notes 2005 (minimum 7.624%**a**)  **1,861**  1,902 US dollar 6.75% bonds 2004  **–**  597  Total listed bonds, debentures and notes  **11,172**  11,875 Lease finance  **993**  1,099 Bank loans due 2007-2009 (average effective interest rate 9.7%)  **240**  480 Floating rate note 2005-2009 (average effective interest rate 3.8%)  **90**  101 Floating rate loan 2006 (average effective interest rate 5.6%)  **92**  140 Bank overdrafts and other short-term borrowings  **2**  2  **Total loans and other borrowings**  **12,589**  13,697  **a**The interest rate payable on these notes will be subject to adjustment from time to time if either Moody’s or Standard and Poor’s (S&P) reduces the rating ascribed to the group’s senior unsecured debt below A3 in the case of Moody’s or below A minus in the case of S&P. In this event, the interest rate payable on the notes and the spread applicable to the floating notes will be increased by 0.25% for each ratings category adjustment by each ratingsagency. In addition, if Moody’s or S&P subsequently increase the rating ascribed to the group’s senior unsecured debt, then the interest rate then payable on notes and the spread applicable to the floating notes will be decreased by 0.25% for each rating category upgrade by each rating agency, but in no event will the interest rate be reduced below the minimum interest rate reflected in the table above.The interest rates payable on loans and borrowings disclosed above reflect the coupons on the underlying issued loans and borrowings and not the interest rates achieved through applying associated currency and interest rate swaps.94     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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**22.****Loans and other borrowings**continuedApart from the lease finance all borrowings at 31 March 2005 are unsecured. Lease finance is repayable by instalments.   **2005****£m**  2004£m  Repayments fall due as follows:       Within one year, or on demand  **4,498**  1,271 Between one and two years  **788**  4,361 Between two and three years  **849**  777 Between three and four years  **98**  854 Between four and five years  **275**  100 After five years  **6,081**  6,334 Total due for repayment after more than one year  **8,091**  12,426  **Total loans and other borrowings**  **12,589**  13,697    **23.****Other creditors**   **2005****£m**  2004 £ma Trade creditors  **2,921**  2,307 Amounts owed to joint ventures (trading)  **1**  1 Corporation taxes  **645**  441 Other taxation and social security  **468**  448 Other creditors  **1,041**  1,365 Accrued expenses  **719**  704 Deferred income  **1,617**  1,532 Dividends payable  **551**  454  **Total other creditors**  **7,963**  7,252  **a**Restated – see note 1  **24.****Provisions for liabilities and charges****Provisions for liabilities and charges excluding deferred taxation**   Property provisions
a
 Pension provisionsb Other provisionsc Total     £m  £m  £m  £m  Balances at 1 April 2004  193  36  84  313 Acquisition of subsidiaries  –  7  15  22 Charged against profit for the year  59  2  6  67 Unwind of discount  3  –  –  3 Utilised in the year  (63) (1) (18) (82) **Total provisions at 31 March 2005**  **192**  **44**  **87**  **323**  **a**Property provisions comprise amounts provided for obligations to complete nearly finished new properties and remedial work to be undertaken on properties and the onerous lease provision on rationalisation of the group’s London office portfolio. The provisions will be utilised over the remaining lease periods.**b**Provision for unfunded pension obligations which will be utilised over the remaining lives of the beneficiaries.**c**Other provisions include amounts provided for legal or constructive obligations arising from insurance claims and litigation which will be utilised as the obligations are settled. **Deferred taxation**Deferred tax is provided for in full on certain timing differences. BT does not discount the provision.   £m  Balance at 1 April 2004  2,191 Charge against profit for the year  (17) **Total deferred tax provisions at 31 March 2005**  **2,174**     **2005****£m**  2004£m  Tax effect of timing differences due to:       Excess capital allowances  **1,941**  1,960 Pension prepayment  **329**  335 Other  **(96****)** (104) **Total provision for deferred taxation**  **2,174**  2,191  
 
Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     95
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 **25.****Reconciliation of movement in shareholders’ funds**   Share capital £m  Share premium account £m  Capital redemption reserve £m  Other reserves £m  Profit and loss account £m  Total £m  Balances at 1 April 2002 as previously stated  434  2  –  1,025  (1,819) (358)Prior period adjustment (note 1)  –  –  –  –  (152) (152) 1 April 2002 as restated  434  2  –  1,025  (1,971) (510)Goodwill,          previously written off to reserves, taken back to the profit and loss          account**a**(note 6)  –  –  –  –  869  869 Employee share option schemes – 0.2 million shares issued (note 31)  –  –  –  –  –  – Transfer between reserves**b**  –  –  –  (27) 27  – Currency movements (including £106 million net movements in respect of foreign currency borrowings)**c**  –  –  –  –  5  5 Consideration received on employee share option plans  –  –  –  –  27  27 Amounts credited in respect of employee share plans  –  –  –  –  48  48 Profit for the year as restated  –  –  –  –  2,702  2,702 Dividends (6.5p per ordinary share)  –  –  –  –  (560) (560) Balances at 1 April 2003 as restated  434  2  –  998  1,147  2,581 Purchase of own shares:**d**                        – shares cancelled  (2) –  2  –  (64) (64)     – shares held as treasury shares  –  –  –  –  (80) (80)Currency movements (including £133 million net movements in respect of foreign currency borrowings)**c**  –  –  –  –  (89) (89)Amounts credited in respect of employee share plans  –  –  –  –  36  36 Profit for the year as restated  –  –  –  –  1,414  1,414 Dividends (8.5p per ordinary share)  –  –  –  –  (732) (732) Balances at 1 April 2004 as restated  432  2  2  998  1,632  3,066 Purchase of own shares held as treasury sharesd  –  –  –  –  (195) (195)Currency movements (including £27 million netmovements in respect of foreign currency borrowings)**c**  –  –  –  –  19  19 Arising on share issues  –  1  –  –  –  1 Amounts credited in respect of employee share plans  –  –  –  –  22  22 Profit for the year  –  –  –  –  1,821  1,821 Dividends (10.4p per ordinary share)  –  –  –  –  (883) (883) **Balances at 31 March 2005**  **432**  **3**  **2**  **998**  **2,416**  **3,851**  **a**Aggregate goodwill at 31 March 2005 in respect of acquisitions completed prior to 1 April 1998 of £385 million (2004 – £385 million, 2003 – £385 million) has been written off against retained earnings in accordance with the group’s accounting policy. The goodwill written off against retained earnings will be charged in the profit and loss account on the subsequent disposal of the business to which it related.**b**Release of statutory reserves in subsidiary undertakings on cessation of associated activities.**c**The cumulative foreign currency translation adjustment, which increased retained earnings at 31 March 2005, was £152 million (2004 – £133 million, 2003 – £222 million).**d**During the year ended 31 March        2005 the company repurchased 101,280,000 (2004 – 80,571,000) of        its own shares of 5p each, representing 1% (2004 – 1%) of the called-up        share capital, for an aggregate consideration of £195 million (2004 – £144        million). At 31 March 2005 134,497,000 shares (2004 – 44,349,000        shares) with an aggregate nominal value of £7 million are held        as treasury shares at cost. Of the total shares repurchased during the        year ended 31 March 2004 36,222,000 shares with an aggregate nominal    value of £2 million were cancelled immediately.  **26.****Related party transactions**In the year ended 31 March 2005, the group’s turnover with its associates and joint ventures amounted to £nil (2004 – £1 million, 2003 – £3 million) and the group purchased £7 million (2004 – £60 million, 2003 – £69 million) in services and products from these undertakings. The amount of debtoutstanding with these undertakings, at 31 March 2005, was £6 million (2004 – £28 million). The maximum debt outstanding during the year was £40 million (2004 – £43 million). As at the latest practicable date, 13 May 2005, the amount of debt outstanding was £6 million.     There were a number of transactions during the year between the company and its subsidiary undertakings, which are eliminated on consolidation and therefore not disclosed.**27.****Financial commitments and contingent liabilities**   **2005****£m**  2004£m  Contracts placed for capital expenditure not provided in the accounts  **735**  879  Operating lease payments payable within one year of the balance sheet date were in respect of leases expiring:       Within one year  **11**  8 Between one and five years  **43**  29 After five years  **321**  330  **Total payable within one year**  **375**  367    96     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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**27.****Financial commitments and contingent liabilities**continuedFuture minimum operating lease payments for the group at 31 March 2005 were as follows:   **2005****£m**  Payable in the year ending 31 March:    2006  **375** 2007  **376** 2008  **376** 2009  **373** 2010  **370** Thereafter  **8,587**  **Total future minimum operating lease payments**  **10,457**  Operating lease commitments were mainly in respect of leases of land and buildings.     At 31 March 2005, other than disclosed below there were no contingent liabilities or guarantees other than those arising in the ordinary course of the group’s business and on these no material losses are anticipated. The group has insurance cover to certain limits for major risks on property and majorclaims in connection with legal liabilities arising in the course of its operations. Otherwise, the group generally carries its own risks.     The group has provided guarantees relating to certain leases entered into by O2 UK Limited prior to its demerger with O2 on 19 November 2001. O2 plc has given BT a counterindemnity for these guarantees. The maximum likely exposure is US$76 million (£41 million) as at 31 March 2005, althoughthis could increase by a further US$563 million, (£298 million) in the event of credit default in respect of amounts used to defease future lease obligations. The guarantee lasts until O2 UK Ltd has discharged all its obligations, which is expected to be when the lease ends on 30 January 2017.     The company does not believe there are any pending legal proceedings which would have a material adverse effect on the financial position or results of operations of the group.     Proceedings have been initiated in Italy against 21 defendants, including a former BT employee, in connection with the Italian UMTS auction. Blu, in which BT held a minority interest, participated in that auction process. The hearings are continuing, in Rome. If the proceedings are successful, BT couldbe held liable, with others, for any damages. The company has concluded that it is not appropriate to make a provision in respect of any such potential claim.     The European Commission is formally investigating the way the UK Government has set BT’s property rates and those paid by Kingston Communications. The Commission is examining whether the Government has complied with EC Treaty rules on state aid in assessing BT’s rates. BT’s rates were set bythe Valuation Office after lengthy discussions based on well established principles, in a transparent process. In BT’s view, any allegation of state aid is groundless and BT is confident that the Government will demonstrate the fairness of the UK ratings system. A finding against HM Government could result inBT having to repay any amount of state aid it may be determined to have received. The company has concluded that it is not appropriate to make a provision in respect of any such potential finding.**28.****Pension costs****Background**The group continues to account for pension costs in accordance with UK Statement of Standard Accounting Practice No. 24 “Pension Costs” (SSAP 24). In addition, disclosures have been presented in accordance with Financial Reporting Standard No. 17 “Retirement Benefits” (FRS 17).     The groupoffers retirement plans to its employees. The group’s main scheme, the BTPension Scheme (BTPS), is a defined benefit scheme where the benefits are basedon employees’ length of service and final pensionable pay. The BTPS is fundedthrough a legally separate trustee administered fund.  This scheme has been closedto new entrants since 31 March 2001 and replaced by a defined contribution scheme.Under this defined contribution scheme the profit and loss charge representsthe contribution payable by the group based upon a fixed percentage of employees’ pay. Thetotal pension costs of the group expensed within staff costs in the year was £465million (2004 – £404 million, 2003 – £322 million), ofwhich £430 million (2004 – £376 million, 2003 – £306million) related to the group’s main defined benefit pension scheme, theBTPS. The increase in the pension cost  in the 2005 financial year reflects theintroduction of Smart Pensions, a salary sacrifice scheme under which employeeselect to stop making employee contributions and for the company to make additionalcontributions in return for a reduction in gross contractual pay. As a resultthere has been a switchbetween wages and salaries and pension costs of £99 million in the year.The increase in the pension cost in the 2004 financial year reflects the amortisationcharge for the pension deficit partly offset by a reduction in the number ofactive members of the BTPS and the interest credit relating to the balance  sheetprepayment. This total pension cost includes the cost of providing enhanced pensionbenefits to leavers, which amounted to £nil (2004 – £1 million,2003 – £60 million).     The pension cost applicable to the group’s main defined contribution schemes in the year ended 31 March 2005 was £11 million (2004 – £7 million, 2003 – £4 million) and £1.2 million (2004 – £0.7 million, 2003 – £0.4 million) of contributions to the schemes were outstanding at 31 March 2005.     The group occupies four properties owned by the scheme on which an annual rental of £7 million is payable. The BTPS assets are invested in UK and overseas equities, UK and overseas properties, fixed interest and index linked securities, deposits and short-term investments. At 31 March 2005, the UKequities included 17 million (2004 – 33 million, 2003 – 37 million) ordinary shares of the company with a market value of £36 million (2004 – £58 million, 2003 – £58 million).
 
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**28.****Pension costs**continued**BT Pension Scheme**Funding valuationA triennial valuation is carried out for the independent scheme trustees by a professionally qualified independent actuary, using the projected unit method. The purpose of the valuation is to design a funding plan to ensure that present and future contributions should be sufficient to meet future liabilities.The triennial valuation as at 31 December 2002 forms the basis of determining the group’s pension fund contributions for the year ending 31 March 2005 and future periods until the next valuation is completed. The funding valuation is performed at 31 December because this is the financial year end of theBTPS. The valuation basis for funding    purposes is broadly as follows:scheme assets are valued at    market value at the valuation date; andscheme liabilities are measured        using a projected unit method and discounted at the estimated rate of        return reflecting the assets of the scheme.The      last three triennial valuations were determined using the following long-term    assumptions:  Real rates (per annum) Nominal rates (per annum)        2002valuation%  1999valuation%  1996valuation%  2002valuation%  1999valuation%  1996valuation%  Return          on existing assets, relative to market values   4.52  2.38  3.80  7.13  5.45  7.95         (after          allowing for an annual increase in dividends of)  1.00  1.00  0.75  3.53  4.03  4.78 Return on future investments  4.00  4.00  4.25  6.60  7.12  8.42 Average increase in retail price index  –  –  –  2.50  3.00  4.00 Average future increases in wages and salaries  1.50* 1.75  1.75  4.04* 4.80  5.82 Average increase in pensions  –  –  –  2.50  3.00  3.75-4.00  *There is a short term reduction in the real salary growth assumption to 1.25% for the first three years.The mortality assumption reflects improvements in life expectancy since the 1999 valuation and incorporates further future improvements.     The assumed rate of investment return, salary increases and mortality all have a significant effect on the funding valuation. A 0.25 percentage point change in these assumptions would have the following effects on the funding deficit:  Impact on funding deficit       Increase£bn  Decrease£bn  0.25 percentage point change in:       Investment return  (0.9) 0.9 Wage and salary increases  0.2  (0.2) An additional year of life expectancy would result in a £0.7 billion increase in the deficit.     At 31 December 2002, the assets of the BTPS had a market value of £22.8 billion (1999 – £29.7 billion) and were sufficient to cover 91.6% (1999 – 96.8%) of the benefits accrued by that date, after allowing for expected future increases in wages and salaries but not taking into account the costs ofproviding incremental pension benefits for employees leaving under release schemes since that date. This represents a funding deficit of £2.1 billion compared to £1.0 billion at 31 December 1999. The funding valuation uses conservative assumptions whereas, had the valuation been based on the actuary’sview of the median estimate basis, the funding deficit would have been reduced to £0.4 billion. Although the market value of equity investments had fallen, the investment income and contributions received by the scheme exceeded the benefits paid by £0.3 billion in the year ended 31 December 2002. As aresult of the triennial funding valuation the group agreed to make employer’s contributions at a rate of 12.2% of pensionable pay from April 2003 and annual deficiency payments of £232 million. This compared to the employer’s contribution rate of 11.6% and annual deficiency payments of £200 millionthat were determined under the 1999 funding valuation. In the year ended 31 March 2005, the group made regular contributions of £376 million (2004 – £284 million, 2003 – £278 million) and additional special contributions for enhanced pension benefits to leavers in the year ended 31 December 2003 of£6 million (2004 – £130 million, 2003 – £129 million) and deficiency contributions of £nil (2004 – £612 million, 2003 – £200 million) as a result of the early payment of £380 million made in the 2004 financial year that was scheduled for payment in subsequent years.     Under the terms of the trust deed that governs the BTPS the group is required to have a funding plan that should address the deficit over a maximum period of 20 years whilst the agreed funding plan addresses the deficit over a period of 15 years. The group will continue to make deficiency paymentsuntil the deficit is made good.     The BTPS was closed to new entrants on 31 March 2001 and the age profile of active members will consequently increase. Under the projected unit method, the current service cost, as a proportion of the active members’ pensionable salaries, is expected to increase as the members of the schemeapproach retirement. Despite the scheme being closed to new entrants, the projected payment profile extends over more than 60 years.98     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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**28.****Pension costs**continuedSSAP 24 accounting valuationThe SSAP 24 valuation is broadly on the following basis:scheme assets are valued at market value; andscheme liabilities are measured using the projected unit method and discounted at the estimated rate of return reflecting the assets of the scheme.     The pension cost for the 2003 financial year was based on the SSAP 24 valuation at 31 March 2000. At 31 March 2000 there was a SSAP 24 deficit of £0.2 billion and the regular cost for the 2003 and 2002 financial years was 11.6% of pensionable salaries. The SSAP 24 valuation at 31 March 2000 wasbased on the same assumptions as the December 1999 funding valuation, with the exception that, over the long term, it has been assumed that the return on the existing assets of the scheme, relative to market values, would be a nominal 5.6% per annum which equates to a real return of 2.5% per annum.     The pension costs for the 2005 and 2004 financial years were based upon the SSAP 24 valuation at 31 March 2003. At 31 March 2003 there was a SSAP 24 deficit of £1.4 billion, before taking account of the balance sheet prepayment and the regular cost is 11.3% of pensionable salaries. The SSAP 24valuation at 31 March 2003 is based on the 31 December 2002 funding valuation rolled forward, and uses the same assumptions as set out above, with the following exceptions:return on existing assets is assumed to be a nominal 7.1% per annum, which equates to a real return of 4.7%;average increase in retail price index is assumed to be 2.25% per annum; andthe average future increases in wages and salaries is assumed to include a short term reduction in the real salary growth assumption to 0.75% for the first three years, before returning to 1.5%.     The cumulative difference since the adoption of SSAP 24 between the cash contributions paid by the group to the pension scheme and the profit and loss charge is reflected on the balance sheet. The cumulative cash contributions exceed the profit and loss charge and the resulting difference is shown asa prepayment on the balance sheet. At 31 March 2005 the prepayment was £1,118 million (2004 – £1,172 million).     The pension charge to the profit and loss account will also include the amortisation of the combined pension fund position and pension prepayment over the average remaining service lives of scheme members, which amounts to 13 years, and the cost of enhanced pension benefits provided to leavers.FRS 17 – Retirement benefitsThe group continues to account for pensions in accordance with SSAP 24. Full implementation of FRS 17 has been deferred by the Accounting Standards Board and would have applied to the group for the 2006 financial year. However, in the 2006 financial year the group will adopt International  Financial Reporting Standards (IFRS). The requirements for disclosure under FRS 17 remain in force between its issue and adoption of IFRS, and the required information is set out below. FRS 17 specifies how key assumptions should be derived and applied. These assumptions are often different to the  assumptions adopted by the pension scheme actuary and trustees in determining the funding position of pension schemes. The accounting requirements under FRS 17 are broadly as follows:scheme assets are valued at market value at the balance sheet date;scheme liabilities are measured using a projected unit method and discounted at the current rate of return on high quality corporate bonds of equivalent term to the liability; andmovement in the scheme surplus/deficit is split between operating charges and financing items in the profit and loss account and, in the statement of total recognised gains and losses, actuarial gains and losses. The financial assumptions used to calculate the BTPS liabilities under FRS 17 at 31 March 2005 are:   Real rates (per annum) Nominal rates (per annum)        **2005****%**  2004%  2003%  **2005****%**  2004%  2003%  Average future increases in wages and salaries  **1.00******* 1.00* 1.50* **3.73******* 3.63* 3.78*Average increase in pensions in payment and deferred pensions  **–**  –  –  **2.70**  2.60  2.25 Rate used to discount scheme liabilities  **2.63**  2.83  3.08  **5.40**  5.50  5.40 Inflation – average increase in retail price index  **–**  –  –  **2.70**  2.60  2.25  *There is a short term reduction in the real salary growth assumption to 0.75% for the first year (2004 – two years, 2003 – three years).   Notes to    the financial statements BT          Group plc Annual Report and Form 20-F 2005     99
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**28.****Pension costs**continuedThe expected nominal rate of return and fair values of the assets of the BTPS at 31 March were:           **31 March 2005** 31 March 2004 31 March 2003        **Expected long-****term rate of return****(per annum)** **Asset fair value     ** Expected long-term rate of return (per annum) Asset fair value      Expected long-      term rate of       return (per annum) Asset fair value        **%** **£bn** **%** % £bn % % £bn %  UK equities **8.0** **9.6** **32** 8.2 9.2 34 8.2 7.4 34 Non-UK equities **8.0** **9.0** **30** 8.2 8.1 30 8.2 6.4 30 Fixed-interest securities **5.4** **4.6** **16** 5.3 4.0 15 5.2 3.1 14 Index-linked securities **4.4** **2.8** **10** 4.4 2.3 9 4.3 1.7 8 Property **6.8** **3.6** **12** 6.8 3.3 12 7.0 3.3 15 Cash and other **4.0** **–** **–** 4.0 – – 4.0 (0.4)(1) **Total** **7.1** **29.6** **100** 7.3 26.9 100 7.4 21.5 100  The long-term expected rate of return on investments does not affect the level of the deficit but does affect the level of the expected return on assets within the net finance cost charged to the profit and loss account under FRS 17.     The net pension deficit set out below under FRS 17 is as if this standard was fully applied. The fair value of the BTPS assets, the present value of the BTPS liabilities based on the financial assumptions set out above, and the resulting deficit, together with those of unfunded pension liabilities at 31 March2005 and 31 March 2004 are shown below. The fair value of the BTPS assets is not intended to be realised in the short term and may be subject to significant change before it is realised. The present value of the liabilities is derived from long-term cash flow projections and is thus inherently uncertain.  **31 March 2005** 31 March 2004        **Assets****£m**  **Present value****of liabilities****£m**  **Deficit****£m**  Assets£m  Present valueof liabilities£m  Deficit£m  BTPS  **29,550**  **34,270**  **4,720**  26,900  32,000  5,100 Other liabilities  **26**  **87**  **61**  –  36  36  Total deficit        **4,781**        5,136 Deferred tax asset at 30%        **(1,434****)**       (1,541) **Net pension liability**        **3,347**        3,595  If the above amounts had been recognised in the financial statements, the group’s net assets and profit and loss reserve at 31 March would be as follows:   **2005****£m**  2004£ma **Net assets (deficiency)**       Net assets as reported  **3,851**  3,066 SSAP 24 pension prepayment (net of deferred tax)  **(776****)** (820)SSAP 24 pension provision (net of deferred tax)  **31**  25 Net pension liability under FRS 17  **(3,347****)** (3,595) **Net deficiency including net pension liability**  **(241****)** (1,324)    **2005****£m**  2004£m  **Profit and loss reserve**       Profit and loss reserve, as reported  **2,416**  1,632 SSAP 24 pension prepayment (net of deferred tax)  **(776****)** (820)SSAP 24 pension provision (net of deferred tax)  **31**  25 Net pension liability under FRS 17  **(3,347****)** (3,595) **Profit and loss reserve including net pension liability**  **(1,676****)** (2,758) **a**Restated – see note 1  100     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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 **28.****Pension costs**continuedOn the basis of the above assumptions and in compliance with FRS 17 the amounts that would have been charged to the consolidated profit and loss account and the statement of total recognised gains and losses for the year ended 31 March 2005 would be as follows:   **2005****£m**  2004£m  **Analysis of amounts that would be charged to operating profit on an FRS 17 basis**       Current service cost  **540**  438 Past service cost  **–**  1  **Total operating charge**  **540**  439  **Amount that would be charged (credited) to net interest payable on an FRS 17 basis**       Expected return on pension scheme assets  **(1,918****)** (1,560)Interest on pension scheme liabilities  **1,720**  1,615  **Net finance (income) expense**  **(198****)** 55  **Amount that would be charged to profit before taxation on an FRS 17 basis**  **342**  494  **Analysis of the amount that would be recognised in the consolidated statement of total recognised gains and losses on an FRS 17 basis**       Actual return less expected return on pension scheme assets  **1,664**  4,130 Experience losses arising on pension scheme liabilities  **(437****)** (290)Changes in assumptions underlying the present value of the pension scheme liabilities  **(933****)** (500) **Actuarial gain recognised**  **294**  3,340  The net pension cost of £342 million for the year ended 31 March 2005 (2004 – £494 million) under FRS 17 is £123 million lower (2004 – £90 million higher) than the profit and loss charge recognised under SSAP 24.     The movements in the net pension liability, on an FRS 17 basis, during the year were:   **2005****£m**  2004£m  Deficit at 1 April  **5,136**  9,033 Current service cost  **540**  438 Contributions  **(413****)** (1,051)Past service costs  **–**  1 Other finance (income) expense  **(198****)** 55 Acquisitions  **10**  – Actuarial gain recognised  **(294****)** (3,340) **Deficit at 31 March**  **4,781**  5,136  **Net pension liability, post tax, at 31 March**  **3,347**  3,595  The history of experience gains (losses) which would have been recognised under FRS 17 were:   **2005**  2004  2003  **Difference between expected and actual return on scheme assets:**          Amount (£m)  **1,664**  4,130  (6,995)Percentage of scheme assets  **5.6%**  15.4%  32.5% **Experience gains and losses on scheme liabilities:**          Amount (£m)  **(437****)** (290) 1,056 Percentage of the present value of scheme liabilities  **1.3%**  0.9%  3.5% **Total amount recognised in statement of total recognised gains and losses:**          Amount (£m)  **294**  3,340  (7,599)Percentage of the present value of scheme liabilities  **0.9%**  10.4%  24.9%     Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     101
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**29.****Directors’ emoluments**The emoluments of the directors for the year ended 31 March 2005 and the benefits received under the long-term incentive plans were, in summary, as follows:   **2005****£000**  2004£000  2003£000             Salaries  **3,237**  3,150  3,212 Performance-related and special bonus  **1,449**  2,074  2,309 Deferred bonus in shares  **600**  1,037  1,484 Other benefits  **419**  467  644     **5,705**  6,728  7,649 Payments to non-executive directors  **391**  337  294  **Total emoluments**  **6,096**  7,065  7,943  Gain on the exercise of share options  **–**  –  – Value of shares vested under the Retention Share Plan  **2,132**  412  411  More detailed information concerning directors’ remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the audited part of the report on directors’ remuneration on pages 62 to 68.**30.****People employed**  **2005** 2004 2003                             **Year end****’000**  **Average****’000**  Year end’000  Average’000  Year end’000  Average’000  Number of employees in the group:                   UK  **90.8**  **90.7**  91.6  94.8  96.3  98.4 Non-UK  **11.3**  **8.9**  8.3  8.3  8.4  9.0  **Total employees**  **102.1**  **99.6**  99.9  103.1  104.7  107.4    **31.****Employee share plans**The company has an employee share investment plan, and savings-related share option plans for its employees and those of participating subsidiaries, further share option plans for selected group employees and an employee stock purchase plan for employees in the United States. It also has several shareplans for executives.**Share option schemes**On the demerger of O2, BT’s share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave plans and the BT Group Global Share Option Plan.     The BT Group Legacy Option Plan was operated on 17 December 2001 following the scheme of arrangement and demerger in November 2001. Replacement unapproved options over BT Group shares were granted to all participants in the executive option plans who had released their options overBritish Telecommunications plc shares. The value of the replacement options was determined by averaging the combined prices of BT Group plc and O2 plc shares over the 20 dealing days following the demerger on 19 November 2001. This resulted in a factor of 1.3198 being applied to the former optionover British Telecommunications plc shares in order to give the number of BT Group shares under the new option. The option prices of the original options were also adjusted to take account of the different number of shares under option.102     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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**31.****Employee share plans**continuedIn the year ended 31 March 2005, options over 31 million shares were granted under the BT Group Global Share Option Plan. The options will be exercisable subject to continued employment and meeting corporate performance targets, on the third anniversary of the date of grant.     Options outstanding under these share option plans at 31 March 2005 and 2004, together with their exercise prices and dates, were as follows:Normal dates of exercise  **2005****Option price****per share**  **2005****millions**  2004Option priceper share  2004millions  **BT Group Employee Sharesave plans**             2005  **218p–255p**  **20**  218p–255p  26 2006  **154p–173p**  **22**  154p–173p  30 2007  **146p–227p**  **57**  218p–227p  54 2008  **154p**  **92**  154p  123 2009  **146p**  **71**  –  –  Total     **262**     233  **BT Group Legacy Option Plana**             2001-2011  **318p–602p**  **15**  318p–602p  16  Total     **15**     16  **BT Group Global Share Option Plan**             2004-2014  **176p–199.5p**  **59**  176p–199.5p  63 2005-2012  **163p–263p**  **51**  163p–263p  61 2006-2014  **176p–199.5p**  **51**  176p–199.5p  54 2007-2015  **179p–215p**  **30**  –  –                Total     **191**     178  Total outstanding options     **468**     427  **a**The option prices of shares under the BT Group Legacy Option Plan were adjusted at the time of the demerger as detailed on page 102.The weighted average fair value of share options granted during the year ended 31 March 2005 has been estimated on the date of grant using a binomial option pricing model. The following weighted average assumptions were used in that model: an expected life extending one month later than thefirst exercise date; estimated annualised dividend yield of approximately 5% (2004 – 5%, 2003 – 5%); risk free interest rates of approximately 5% (2004 – 4%, 2003 – 5%); and expected volatility of approximately 25% (2004 – 25%, 2003 – 40%).     The weighted average fair value of the share options granted in the year ended 31 March 2005 was 41p(2004 – 42p, 2003 – 55p) for Sharesave options exercisable three years after the date of grant and 52p(2004 – 51p, 2003 – 72p) for Sharesave options exercisable five years after the date of grant. The BT Group Global Share Option Plan and the BT Group Incentive Share Plan (an executive share plan) were valued using Monte Carlo simulations. The weighted average fair value of options granted under the BTGroup Global Share Option Plan has been estimated as 36p. The weighted average fair value of awards of shares granted under the Incentive Share Plan has been estimated as 98p. The total value of share options granted by BT in the year ended 31 March 2005 was £77 million (2004 – £136 million, 2003 –£41 million).     In accordance with UK accounting practices, no compensation expense is recognised for options granted where the exercise price equals the market price at date of grant, or options granted under approved Sharesave plans. See United States Generally Accepted Accounting Principles – IV Accounting forshare options for the treatment under US GAAP.     Options granted, exercised and lapsed under these share option plans during the years ended 31 March 2003, 2004 and 2005 and options exercisable at 31 March 2003, 2004 and 2005 were as follows:   Savingsrelatedschemesmillions  Executiveoptionplansmillions  Totalmillions  Exercisepricerange  Weightedaverageexerciseprice                  Outstanding, 31 March 2003  164  85  249  163p–727p  231p Granted  165  119  284  154p–199.5p  175p Lapsed  (96) (10) (106) 154p–716p  220p Outstanding, 31 March 2004  233  194  427  154p–727p  196p Granted  91  31  122  146p–215p  160p Lapsed  (62) (19) (81) 146p–602p  189p **Outstanding, 31 March 2005**  **262**  **206**  **468**  **146p–602p**  **188p** Exercisable, 31 March 2003  –  11  11  255p–727p  491p Exercisable, 31 March 2004  –  13  13  255p–727p  476p **Exercisable, 31 March 2005**  **16**  **34**  **50**  **199.5p–602p**  **288p**                   Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     103
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**31.****Employee share plans**continued**Incentive Share Plan and Retention Share Plan**The BT Incentive Share Plan (ISP) and the BT Retention Share Plan (RSP) were introduced for employees of the group in 2000. Under the plans, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants. Under the ISP participants are normally onlyentitled to these shares in full at the end of a three-year period if the company has met the relevant pre-determined corporate performance measure and if the participants are still employed by the group. If the company has exceeded the pre-determined corporate performance measure the participants maybe awarded up to double the shares conditionally awarded. The corporate performance measure is BT’s total shareholder return (TSR) measured against a group of companies from the European Telecom Sector at the beginning of the relevant performance period. The ISP was operated in the 2005 financialyear with 1,406 participants receiving awards over 12,654,013 shares. The ISP was not operated in the 2004 financial year. Under the RSP the length of retention period before awards vest is flexible. Awards may vest in annual tranches. The shares are transferred at the end of a specified period, only ifthe individual is still employed by the group. During the 2005 financial year 1,340,256 (2004 – 720,472) shares vested in 11 (2004 – 7) participants in the RSP.**Deferred Bonus Plan**The BT Deferred Bonus Plan (DBP) was established in 1998 and awards are granted annually to employees of the group. Under this plan, shares in the company are acquired by an employee share ownership trust and transferred to participants at the end of three years if he or she has continued to beemployed by the group throughout that period. On 2 August 2004, 1,280,934 shares (1 August 2003 – 653,899) were transferred to 219 participants (1 August 2003 – 225) at the end of the three-year deferred period.     At 31 March 2005, 27.8 million shares (2004 – 30.5 million shares) in the company were held in trust for employee share plans, of which 12.7 million shares (2004 – no shares) were held for the ISP, 2.8 million shares (2004 – 3.0 million shares) were held for the RSP and 7.9 million shares (2004 – 6.5 million shares)were held for the DBP. Dividends or dividend equivalents earned on the shares during the conditional periods are reinvested in company shares for the potential benefit of the participants.     Additional information relating to the plans is as follows:Year ended 31 March 2005  ISP£m  RSP£m  DBP£m  **Total****£m**  Value of range of possible future transfers: nil to  26.1  5.7  16.1  **47.9** Provision for the costs of the plans charged to the profitand loss account in year  3.2  2.1  5.3  **10.6** Nominal value of shares held in trust  0.6  0.1  0.4  **1.1** Market value of shares held in trust  26.1  5.7  16.1  **47.9**    Year ended 31 March 2004  ISP£m  RSP£m  DBP£m  Total£m  Value of range of possible future transfers: nil to  –  5.3  11.4  16.7 Provision for the costs of the plans charged to the profitand loss account in year  –  9.3  8.2  17.5 Nominal value of shares held in trust  –  0.2  0.3  0.5 Market value of shares held in trust  –  5.3  11.4  16.7  Of the total BT Group plc shares held, 4.5 million shares were held at 31 March 2005 in trust for future awards under employee share plans. These shares had a nominal value of £0.2 million and a market value of £9.3 million at 31 March 2005.     The values of possible future transfers of shares under the plans were based on the BT Group plc share price at 31 March 2005 of 205.5p (2004 – 177p). The provisions for the costs of the ISP and RSP were based on best estimates of the company’s performance over the plans’ conditional periods,relating to those portions of the plan conditional periods from commencement up to the financial year end.104     BT Group plc Annual Report and Form 20-F 2005 Notes to the        financial statements
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**31.****Employee share plans**continued**Employee Share Investment Plan**From December 2001 the BT Group Employee Share Investment Plan (ESIP) has been in operation. The ESIP, which has been approved by HM Revenue & Customs, gives UK employees an opportunity to purchase shares (partnership shares) monthly out of pre-tax salary up to a maximum value of £1,500 peryear. During the 2005 financial year, 6.1 million shares (2004 – 6.0 million shares), including 0.2 million shares purchased by dividend reinvestment, were purchased by the Trustee of the ESIP on behalf of 13,017 (2004 – 13,974) employees at a total cost of £11.7 million (2004 – £11.1 million). The freeshares element of the ESIP allows BT to provide free shares to UK employees which are held in trust for at least three years. A phantom plan, which delivers cash awards equivalent to the value of the free shares, operates for employees outside the UK. In 2005, 0.5% of pre-tax profits, amounting to£11 million, was allocated to the ESIP and the phantom plan for employees outside the UK (2004 – £20 million). Up to 2% of pre tax profits would have been available subject to meeting two corporate performance targets; one of increasing earnings per share before goodwill amortisation and exceptionalitems by 8% and the other of reducing customer dissatisfaction by 25% on a compound annual basis over the past three years. Although these targets were not met, a discretionary payment was made. The ESIP replaced the BT Employee Share Ownership Scheme which operated for employee profit sharinguntil 2001.**Employee Stock Purchase Plan**The BT Group Employee Stock Purchase Plan (ESPP) for employees in the US enables participants to purchase ADSs quarterly at a price (the Base Option Price) which is 85% of the market price of an ADS at the start of the offer (or, in the case of employees who join the ESPP after the start of the offer, 85%of the market price on their eligibility date, whichever is higher). Up to 15 May 2005, 934,782 shares (93,478 ADSs) have been transferred to participants out of treasury under the ESPP (up to 15 May 2004, 69,164 new shares were issued and 226,218 shares were transferred out of treasury). The secondoffer, with a Base Option Price of US$25.61 ended in December 2004. A third offer was launched in December 2004 with a Base Option Price of US$31.52 and will run until December 2005.**32.****Auditors**The auditors’ remuneration for the year ended 31 March 2005 for the group was £4,396,000 (2004 – £3,790,000, 2003 – £2,943,000). The audit fees payable to the company’s auditors, PricewaterhouseCoopers LLP, for the company and UK subsidiary undertakings’ statutory accounts were £2,454,000(2004 – £2,482,000, 2003 – £1,910,000). The audit fee of the company was £35,000 (2004 – £32,000, 2003 – £31,000). The following fees for audit and non-audit services were paid or are payable to the company’s auditors, PricewaterhouseCoopers LLP, for the years ended 31 March 2005, 31 March2004 and 31 March 2003:   **2005****£000**  2004£000  2003£000  **Audit services**          Statutory audit  **4,148**  3,767  2,916 Regulatory audit  **1,423**  1,950  1,690    **5,571**  5,717  4,606 **Further assurance services**          Corporate finance advice  **989**  462  265 Other  **110**  82  829     **1,099**  544  1,094 **Tax services**  **2,912**  2,656  2,245            **Other services**          Systems advice  **–**  –  3,765 Other  **434**  110  766     **434**  110  4,531  **Total**  **10,016**  9,027  12,476  Total fees paid or payable to PricewaterhouseCoopers LLP in the UK for non audit services in the year ended 31 March 2005 were £5,171,000 (2004 – £4,545,000, 2003 – £8,980,000).     In order to maintain the independence of the external auditors, the Board has determined policies as to what non audit services can be provided by the company’s external auditors and the approval processes related to them. Under those policies work of a consultancy nature will not be offered to theexternal auditors unless there are clear efficiencies and value added benefits to the company.     BT’s regulatory obligations require it to publish audited regulatory financial statements. The fees for regulatory work principally reflect the audit fees associated with those regulatory financial statements. The fees for tax services include tax compliance and tax advisory services. The fees for systemsadvice in the year ended 31 March 2003 related to advisory services provided in connection with the implementation of certain billing systems. These services, which were provided by PwC Consulting, the consulting business of PricewaterhouseCoopers that was sold to IBM in October 2002, commenced in2002 and were completed in 2003. Notes to    the financial statements BT Group plc Annual Report and Form 20-F 2005     105
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**33.****Financial instruments and risk management**The group holds or issues financial instruments mainly to finance its operations; for the temporary investment of short-term funds; and to manage the currency and interest rate risks arising from its operations and from its sources of finance. In addition, various financial instruments – for example tradedebtors and trade creditors – arise directly from the group’s operations.     The group finances its operations primarily by a mixture of issued share capital, retained profits, deferred taxation, long-term loans and short-term loans, principally by issuing commercial paper and medium-term notes. The group borrows in the major long-term debt markets in major currencies.Typically, but not exclusively, the bond markets provide the most cost-effective means of long-term borrowing. The group uses derivative financial instruments primarily to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose areprincipally interest rate swaps, gilt locks, currency swaps and forward currency contracts.     The types of financial instrument used for investment of short-term funds are prescribed in group treasury policies with limits on the exposure to any one organisation. Short-term investing in financial instruments is undertaken on behalf of the group by substantial external fund managers who are limitedto dealing in debt instruments and certain defined derivative instruments and are given strict guidelines on credit, diversification and maturity profiles.     During the year ended 31 March 2005, the group’s net debt reduced from £8.4 billion to £7.8 billion mainly from working capital inflows and proceeds from the sale of investments. During the 2005 financial year, the group restructured some of its swaps portfolio. As a result, the group terminated £2.9billion of cross-currency and sterling interest rate swaps with some swaps being replaced with new swaps which had the same economic hedging effect. This resulted in the group paying £107 million in reducing gross debt and receiving a net £14 million of interest receipts. The interest receipts and paymentson restructuring have been included within deferred income and other debtors respectively and will be amortised to the profit and loss account over the term of the underlying hedged debt. The group’s fixed:floating interest rate profile on net debt is 95:5 at 31 March 2005.     During the year ended 31 March 2004, the group’s net debt reduced from £9.6 billion to £8.4 billion mainly from working capital inflows. During the 2004 financial year, the group restructured some of its swaps portfolio to mitigate credit risk to certain counter parties. 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. The interest receipt has been included in deferred income and will beamortised to the profit and loss account over the term of the underlying debt. The group’s fixed:floating interest rate profile on net debt was 76:24 at 31 March 2004.     During the year ended 31 March 2003, the group’s net debt reduced from £13.7 billion to £9.6 billion. £2.6 billion was realised from the disposal of the group’s interest in Cegetel Groupe SA in the year, and the group has closed out £2.6 billion of associated fixed interest rate swaps. The group’sfixed:floating interest rate profile on net debt therefore remained at 88:12 at 31 March 2003.     The group uses financial instruments to hedge some of its currency exposures arising from its non-UK assets, liabilities and forward purchase commitments. The group also hedges some of its interest liabilities. The financial instruments used comprise borrowings in foreign currencies, forward foreigncurrency exchange contracts, gilt locks and interest and currency swaps.     There has been no change in the nature of the group’s risk profile between 31 March 2005 and the date of these financial statements.     The notional amounts of derivatives summarised below do not necessarily represent amounts exchanged by the parties and, thus, are not necessarily a measure of the exposure of the group through its use of derivatives. The amounts exchanged are calculated on the notional amounts and other terms ofthe derivatives which relate to interest and exchange rates.**(a)****Interest rate risk management**The group has entered into interest rate swap agreements with banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. Under interest rate swaps, the group agrees with other parties to exchange, at specified intervals, the differences between fixed rateand floating rate interest amounts calculated by reference to an agreed notional principal amount. Under gilt locks, forward sales of UK government long-dated treasury stock were entered into for periods of up to one year. This hedge effectively fixed in the interest on part of the group’s then futureborrowings, all of which have now been taken on.     At 31 March 2005, the group had outstanding interest rate swap agreements having a total notional principal amount of £5,297 million (2004 – £5,210 million).**(b)****Foreign exchange risk management**Cross currency swaps and forward foreign exchange contracts have been entered into to reduce the foreign currency exposure on the group’s operations and the group’s net assets. The group also enters into forward foreign exchange contracts to hedge investments, interest expense and purchase and salecommitments denominated in foreign currencies (principally US dollars and the euro). The remaining terms of the currency swaps are up to 26 years and the terms of currency forward exchange contracts are typically less than one year.     The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that the eventual net inflows and net outflows will be adversely affected by changes in exchange rates.     At 31 March 2005, the group had outstanding foreign currency swap agreements and forward exchange contracts having a total notional principal amount of £9,819 million (2004 – £11,367 million).106     BT Group plc Annual Report and Form 20-F 2005 Notes        to the financial statements
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 **33.****Financial instruments and risk management**continuedThe values of forward foreign currency contracts at 31 March 2005 were £427 million (2004 – £301 million) for purchases of currency and £782 million (2004 – £1,223 million) for sales of currency. These values have been estimated by calculating their present values using the market discount rates,appropriate to the terms of the contracts, in effect at the balance sheet dates.     At 31 March 2005, the group had deferred unrealised gains of £2 million (2004 – £nil) and losses of £nil (2004 – £5 million), based on dealer-quoted prices, from hedging purchase and sale commitments, and in addition had deferred realised net losses of £5 million (2004 – £3 million gains). These areincluded in the profit and loss account as part of the hedged purchase or sale transaction when it is recognised, or as gains or losses when a hedged transaction is no longer expected to occur.**(c)****Concentrations of credit risk and credit exposures of financial instruments**The group considers that it is not exposed to major concentrations of credit risk. The group, however, is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations. The group limits theamount of credit exposure to any one counterparty. The group does not normally see the need to seek collateral or other security.     The long-term debt instruments issued in December 2000 and February 2001 both contained covenants that if the group credit rating was downgraded below A3 in the case of Moody’s or below A minus in the case of S&P, additional interest would accrue from the next interest coupon period at the rateof 0.25 percentage points for each ratings category adjustment by each ratings agency. In May 2001, Moody’s downgraded BT’s credit rating to Baa1, which increased BT’s interest charge by approximately £32 million per annum. BT’s current credit rating from S&P is A minus. Based upon the total debt of£9 billion outstanding on these instruments at 31 March 2005, BT’s annual interest charge would increase by approximately £26 million if BT’s credit ratings were to be downgraded by one credit rating category by both agencies below a long-term debt rating of Baa1/A minus. If BT’s credit rating withMoody’s was to be upgraded by one credit rating category the annual interest charge would be reduced by approximately £13 million.**(d)****Fair value of financial instruments**The following table shows the carrying amounts and fair values of the group’s financial instruments at 31 March 2005 and 2004. The carrying amounts are included in the group balance sheet under the indicated headings, with the exception of derivative amounts, which are included in debtors or othercreditors or as part of net debt as appropriate. The fair values of the financial instruments are the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in forced or liquidation sale.  Carrying amount Fair value        **2005****£m**  2004£m  **2005****£m**  2004£m  Non-derivatives:             Assets             Cash at bank and in hand  **206**  109  **206**  109 Short-term investments**a**  **4,592**  5,117  **4,592**  5,117 Fixed asset investments**b**  **13**  231  **13**  229 Liabilities             Short-term borrowings  **2**  2  **2**  2 Long-term borrowings, excluding finance leases**c**  **10,904**  11,800  **12,246**  13,506 Derivatives relating to investments and borrowings (net)**d**:             Assets  **–**  –  **–**  – Liabilities  **685**  748  **1,435**  1,182 Derivative financial instruments held or issued to hedge the current exposure on expected future transactions (net):             Assets  **–**  –  **–**  – Liabilities  **–**  –  **2**  –  **a**The fair values of listed short-term investments were estimated based on quoted market prices for those investments. The carrying amount of the other short-term deposits and investments approximated to their fair values due to the short maturity of the instruments held.**b**The fair values of listed fixed asset investments were estimated based on quoted market prices for those investments.**c**The fair value of the group’s bonds, debentures, notes and other long-term borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same maturities where they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in effect at the balance sheet dates, where market prices of similar issues did not exist.**d**The fair value of the group’s outstanding foreign currency and interest rate swap agreements was estimated by calculating the present value, using appropriate discount rates in effect at the balance sheet dates, of affected future cash flows translated, where appropriate, into pounds sterling at the market rates in effect at the balance sheet dates.  Notes to    the financial statements BT Group          plc Annual Report and Form 20-F 2005     107
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**33.****Financial instruments and risk management**continuedThe following information is provided in accordance with the requirements of FRS 13 – “Derivatives and other financial instruments: disclosures”. Except for disclosures under *currency exposures* below, the financial information excludes all of the group’s short-term debtors and creditors.**Financial liabilities**After taking into account the various interest rate swaps and forward foreign currency contracts entered into by the group, the interest rate profile of the group’s financial liabilities at 31 March was: **2005** 2004      **Fixed rate financial liabilities**  **Floating rate financial liabilities**  **Financial          liabilities on which no    interest is paid**  **Total**  Fixed rate financial liabilities   Floating rate financial liabilities   Financial        liabilities on which no    interest is paid   Total Currency: **£m**  **£m**  **£m**  **£m**  £m  £m  £m  £m  **Total (Sterling)** **7,488**  **5,101**  **–**  **12,589**  7,747  5,950  –  13,697    For the fixed rate financial liabilities, the average interest rates and the average periods for which the rates are fixed are:  **2005** 2004        **Weighted average interest****rate**  **Weighted average period forwhich rate****is fixed**  Weighted average interestrate  Weighted average period forwhich rateis fixed  Currency:  **%**  **Years**  %  Years  Sterling  **8.8**** **** ****11**  8.7  13    The floating rate financial liabilities bear interest at rates fixed in advance for periods ranging from one day to one year by reference to LIBOR.     The maturity profile of financial liabilities is as given in note 22.**Financial assets**After taking into account the various interest rate swaps and forward foreign currency contracts entered into by the group, the interest rate profile of the group’s financial assets at 31 March was:  **2005** 2004        **Fixed          rate financial assets**  **Floating          rate Financial assets**  **Financial          assets on    which no interest is paid**     Fixed ratefinancialassets  Floating        rate financial assets  Financial        assets on which no interest        is paid                                 **Total**        Total Currency:  **£m**  **£m**  **£m**  **£m**  £m  £m  £m  £m  Sterling  **106**  **4,697**  **8**  **4,811**  1,310  3,962  167  5,439 Euro  **–**  **–**  **1**  **1**  –  –  23  23 Other  **–**  **–**  **4**  **4**  –  –  41  41  **Total**  **106**  **4,697**  **13**  **4,816**  1,310  3,962  231  5,503    The sterling fixed rate financial assets yield interest at a weighted average of 4.4% (2004 – 4.5%) for a weighted average period of 22 months (2004 – 22 months).     The floating rate financial assets bear interest at rates fixed in advance for periods up to one year by reference to LIBOR.108     BT Group plc Annual Report and Form 20-F 2005 Notes        to the financial statements
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**33.****Financial instruments and risk management**continued**Currency exposures**The table below shows the currency exposures of the group’s net monetary assets (liabilities), in terms of those transactional exposures that give rise to net currency gains and losses recognised in the profit and loss account. Such exposures comprise the monetary assets and monetary liabilities of the groupthat are not denominated in the operating (or “functional”) currency of the operating unit involved, other than certain non-sterling borrowings treated as hedges of net investments in non-UK operations. At 31 March, these exposures were as follows:  **2005** 2004        **Sterling****£m**  **US dollar****£m**  **Euro****£m**  **Other****£m**  **Total****£m**  Sterling£m  US dollar£m  Euro£m  Other£m  Total£m  Functional currency ofgroup operation:                               Sterling  **–**  **(53****)** **6**  **(1****)** **(48****)** –  43  7  1  51 Euro  **2**  **–**  **–**  **–**  **2**  –  2  –  2  4  **Total**  **2**  **(53****)** **6**  **(1****)** **(46****)** –  45  7  3  55    The amounts shown in the table above take into account the effect of any currency swaps, forward contracts and other derivatives entered into to manage those currency exposures.     At 31 March 2005, the group also held various forward currency contracts that the group had taken out to hedge expected future foreign currency purchases and sales.**Fair values of financial assets held for trading**    **2005****£m**  2004£m  Net gain included in profit and loss account  **18**  61 Fair value of financial assets held for trading at 31 March  **546**  785  The net gain was derived from government bonds, commercial paper and similar debt instruments. The average fair value of financial assets held during the year ended 31 March 2005 did not differ materially from the year end position.**Hedges**Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised and deferred gains and losses on instruments used for hedging and those recognised in the years ended 31 March 2005 and 31 March 2004 are as follows:  **2005** 2004        **Gains****£m**  **Losses****£m**  Gains£m  Losses£m  Gains and losses:             recognised in the year but arising in previous years**a**  **124**  **59**  104  106 unrecognised at the balance sheet date  **47**  **799**  306  740 carried forward in the year    end balance sheet, pending recognition in the profit and loss account**a******  **545**  **165**  564  122 expected to be recognised in the following year:             unrecognised at balance sheet date  **36**  **51**  9  – carried forward in the year end balance sheet, pending recognition in             the profit and loss account**a**  **136**  **39**  124  59  **a**Excluding gains and losses on hedges accounted for by adjusting the carrying amount of a fixed asset. **Unused committed lines of credit**Unused committed lines of credit for short-term financing available at 31 March 2005 totalled approximately £145 million (2004 – £145 million), which was in support of a commercial paper programme or other borrowings. These lines of credit are available for up to one year. 
 Notes    to the financial statements 
BT Group          plc Annual Report and Form 20-F 2005     109
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**34.****Company balance sheet**   **2005****£m**  2004£m  **Fixed assets**       Investment in subsidiary undertaking  **9,971**  9,971  **Total fixed assets**  **9,971**  9,971 **Current assets**       Debtors**a**  **22**  456 Investments**b**  **1**  2 Cash at bank and in hand  **118**  62  **Total current assets**  **141**  520 Creditors: amounts falling due within one year**c**  **579**  470  **Net current (liabilities) assets**  **(438****)** 50  **Total assets less current liabilities**  **9,533**  10,021  **Capital and reservesd**       Called up share capital  **432**  432 Share premium account  **3**  2 Capital redemption reserve  **2**  2 Profit and loss account  **9,096**  9,585  **Total equity shareholders’ funds**  **9,533**  10,021  **a**Debtors consists of amounts owed by subsidiary undertakings of £22 million (2004 – £456 million).**b**The company invested in a listed investment, with a book value and market value of £1 million (2004 – £1 million), and short term loans to subsidiary undertakings of £nil    (2004 – £1 million).**c**Creditors consists of dividends payable of £551 million (2004 – £454 million), amounts owed to subsidiary undertakings of £17 million (2004 – £9 million) and other creditors of £11 million (2004 – £7 million).**d**Capital and reserves are shown on page 111.
The financial statements of the company on pages 110 to 111 were approved by the board of directors on 18 May 2005 and were signed on its behalf by**Sir Christopher Bland****Chairman****Ben Verwaayen****Chief Executive****Hanif Lalani****Group Finance Director**
110     BT Group plc Annual Report and Form 20-F 2005 Notes        to the financial statements
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**34.****Company balance sheet**continued   Sharecapital£me Share premium account£mf Capitalredemptionreserve£m  Profitand lossaccount£m  Total£m  Balances at 1 April 2002  434  2  –  9,537  9,973 Profit for the financial year  –  –  –  560  560 Dividends (6.5p per ordinary share)  –  –  –  (560) (560) Balances at 31 March 2003  434  2  –  9,537  9,973  Purchase of own shares**h**                – shares cancelled  (2) –  2  (64) (64)– treasury shares  –  –  –  (80) (80)Profit for the financial year**g**  –  –  –  924  924 Dividends (8.5p per ordinary share)  –  –  –  (732) (732) Balances at 31 March 2004  432  2  2  9,585  10,021  Purchase of own shares held as treasury shares**h**  –  –  –  (195) (195)Arising on share issues  –  1  –  –  1 Shares distributed under employee share plans  –  –  –  19  19 Profit for the financial year**g**  –  –  –  570  570 Dividends (10.4p per ordinary share)  –  –  –  (883) (883)                  **Balances at 31 March 2005**  **432**  **3**  **2**  **9,096**  **9,533**  **e**The authorised share capital of the company throughout the years ended 31 March 2005 and 31 March 2004 was £13,463 million representing 269,260,253,648 ordinary shares of 5p each. The allotted, called up and fully paid ordinary share capital of the company at 31 March 2005 was £432 million (2004 – £432 million), representing 8,634,629,038 ordinary shares of 5p each (2004 – 8,634,629,038). Of the authorised but unissued share capital at 31 March 2005, 26 million ordinary shares (2004 – 26 million) were reserved to meet options granted under employee share option schemes described in note 31.**f**The share premium account, representing the premium on allotment of shares is not available for distribution.**g**The profit for the financial year, dealt with in the profit and loss account of the company and after taking into account dividends from subsidiary undertakings, was £570 million (2004 – £924 million). As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the company is presented.**h**During the year ended 31 March 2005 the company repurchased 101,280,000 (2004 – 80,571,000) of its own shares of 5p each, representing 1% (2004 – 1%) of the called-up share capital, for an aggregate consideration of £195 million (2004 – £144 million). At 31 March 2005 134,497,000 shares (2004 – 44,349,000 shares) with an aggregate nominal value of £7 million are held as treasury shares at cost. Of the total shares repurchased during theyear ended 31 March 2004 36,222,000 shares with an aggregate nominal value of £2 million were cancelled immediately.  **35.****Post balance sheet events**In March 2005 the group agreed to acquire Radianz, the leading financial services extranet provider, from Reuters for consideration of £107 million for the business plus any cash remaining on the balance sheet, net of working capital adjustments, at completion date. Regulatory clearance was received inApril and the transaction completed on 29 April 2005. Notes to    the financial statements BT Group plc Annual Report and Form 20-F 2005     111
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**United States Generally Accepted Accounting Principles**

 
 The United States Generally Accepted Accounting Principles are divided into the following sections:**113****Differences between United Kingdom and United States generally accepted accounting principles****116****Net              income and shareholders’ equity reconciliation statements****116****Minority interests****117****Accounting for share options****117****Consolidated statements of cash flows****117****Current asset investments****118****Pension costs****120****Income statement in US GAAP format****120****US GAAP developments****121****Supplemental unaudited pro forma information relating to businesses acquired during the year ended 31 March 2005** 112     BT        Group plc Annual Report and Form 20-F 2005  
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The group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain respects from those applicable in the US (US GAAP).**i****Differences between United Kingdom and United States generally accepted accounting principles**The following are the main differences between UK and US GAAP which are relevant to the group’s financial statements.**(a)****Sale and leaseback of properties**Under UK GAAP, the sale of BT’s property portfolio is treated as a fixed asset disposal and the subsequent leaseback is an operating lease. Under US GAAP, the transaction is regarded as financing and the land and buildings are recorded on the balance sheet at their net book value, an obligation equivalentto the cash proceeds is recognised and the gain on disposal is deferred until the properties are vacated by BT. Rental payments made by BT are reversed and replaced by a finance lease interest charge and a depreciation charge.**(b)****Pension costs**Under UK GAAP, pension costs are accounted for in accordance with UK Statement of Standard Accounting Practice No. 24, with costs being charged against profits over employees’ working lives. Under US GAAP, pension costs are determined in accordance with the requirements of US Statements ofFinancial Accounting Standards (SFAS) Nos. 87 and 88. Differences between the UK and US GAAP figures arise from the requirement to use different actuarial methods and assumptions and a different method of amortising surpluses or deficits.**(c)****Accounting for redundancies**Under UK GAAP, the cost of providing incremental pension benefits in respect of workforce reductions is taken into account when determining current and future pension costs, unless the most recent actuarial valuation, combined with the provision for pension costs in the group balance sheet, under UKactuarial conventions, shows a deficit. In this case, the cost of providing incremental pension benefits is included in redundancy charges in the year in which the employees agree to leave the group.     Under US GAAP, the associated costs of providing incremental pension benefits are charged against profits in the period in which the termination terms are agreed with the employees. The fair value of termination benefits for employees who are to be retained beyond their minimum contractualretention period is recognised on a straight line basis over the future service period.**(d)****Capitalisation of interest**Under UK GAAP, the group does not capitalise interest. To comply with US GAAP, the estimated amount of interest incurred whilst constructing major capital projects is included in fixed assets, and depreciated over the lives of the related assets. The amount of interest capitalised is determined by referenceto the average interest rates on outstanding borrowings. At 31 March 2005 under US GAAP, gross capitalised interest of £349 million (2004 – £358 million) with regard to the company and its subsidiary companies was subject to depreciation generally over periods of 3 to 25 years.**(e)****Goodwill**Under UK GAAP, in respect of acquisitions completed prior to 1 April 1998, the group wrote off goodwill arising from the purchase of subsidiary undertakings, associates and joint ventures on acquisition against retained earnings. The goodwill is reflected in the net income of the period of disposal, as part ofthe calculation of the gain or loss on divestment. Following the implementation of UK Financial Reporting Standard No. 10 (FRS 10), goodwill arising on acquisitions completed after 1 April 1998 is capitalised and amortised on a straight line basis over its useful economic life. All unamortised and pre-April1998 goodwill will be brought back to the profit and loss account on disposal.     Under US GAAP up to 31 March 2002, goodwill arising on the acquisition of subsidiaries, associates and joint ventures was capitalised as an intangible asset and amortised over its useful life. BT adopted SFAS No. 142 on 1 April 2002 and goodwill is no longer amortised but tested annually forimpairment. In connection with the adoption of SFAS No. 142 transitional and annual impairment reviews were performed. There was no transitional impairment charge recorded. As a result of the annual impairment review, no goodwill impairment charge was recognised in the year ended 31 March 2005(2004 – nil, 2003 – £54 million). Goodwill of £16 million (2004 – £12 million, 2003 – £20 million) amortised under UK GAAP is written back through the income statement.**(f)****Intangible assets**Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed within goodwill under UK GAAP. The intangible assets acquired in the 2005 financial year comprise customer relationships and brand relating to Infonet – see note 15. Under US GAAP theseseparately identified intangible assets are valued and amortised over their useful lives which range from 5 to 15 years.**(g)****Financial instruments**Under UK GAAP, investments are held on the balance sheet at historical cost. Gains and losses on instruments used for hedges are not recognised until the exposure being hedged is recognised. Under US GAAP, trading securities and available-for-sale securities are carried at market value with appropriatevaluation adjustments recorded in profit and loss and shareholders’ equity, respectively.
 
  United States    Generally Accepted Accounting Principles BT Group          plc Annual Report and Form 20-F 2005     113
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**i****Differences between United Kingdom and United States generally accepted accounting principles**continuedCertain derivative financial instruments which qualify for hedge accounting under UK GAAP do not qualify for hedge accounting under US GAAP. Under US GAAP, financial instruments do not qualify for hedge accounting due to the extensive documentation requirements. These financial instruments, underUS GAAP, are carried at market value with valuation adjustments recorded in the income statement. The reassessment and purchase of derivatives in the year ended 31 March 2005 gave rise to an adjustment reducing net income by £299 million net of tax (2004 – reduction £133 million, 2003 reduction£610 million). The net unrealised holding gain on equity investments held as available-for-sale securities for the year ended 31 March 2005 was £19 million (2004 – £5 million, 2003 – £22 million).**(h)****Employee share plans**Certain share options have been granted under BT save-as-you-earn plans at a 20% discount. Under UK GAAP, the share issues are recorded at their discounted price when the options are exercised. Under US GAAP, a plan is considered compensatory when the discount to market price is in excess of 15%.Compensation cost is recognised for the difference between the exercise price of the share options granted and the quoted market price of the shares at the date of grant or measurement date and accrued over the vesting period of the options.**(i)****Investments in associates**Under UK GAAP, the economic interest in the associates’ operating profits before minority interest is reported as part of the total operating profit. For those associates in which a minority interest is recognised in their respective statements of profit and loss, such minority interest is reported as minorityinterest in the consolidated profit and loss account. Under US GAAP, the minority interest in the associates is reclassified from minority interest and reported within the share of results of associates.**(j)****Deferred taxation**Under UK GAAP, provision is made for deferred tax in so far as a liability or asset arose as a result of transactions that had occurred by the balance sheet date and give rise to an obligation to pay more tax in the future, or a right to pay less tax in the future. Under US GAAP, deferred taxation is provided foron a full liability basis. Future tax benefits are recognised as deferred tax assets to the extent that their realisation is more likely than not. At 31 March 2005 total deferred tax liabilities were £2,715 million primarily in respect of accelerated capital allowances and total deferred tax assets were £2,221 million,primarily in respect of pension obligations.     The total valuation allowance recognised for deferred tax assets was as follows:   **2005**  2004  Movement in year    **£m**  £m  £m  Capital losses  **4,436**  4,843  (407)Overseas losses not utilised  **860**  572  288 Other  **705**  419  286     **6,001**  5,834  167  At 31 March 2005 the group had operating losses and capital losses carried forward. The group’s capital losses have no expiry date restrictions. The expiry date of operating losses carried forward is dependent upon the tax law of the various territories in which the losses arise. A summary of expiry dates forlosses in territories in which restrictions do apply is set out below:Territory  Valuation allowance  Expiry of losses    £m     **Restricted losses:**       Americas  79  2015-2025 Europe  222  2006-2020     Total restricted losses  301            **Unrestricted losses:**       Operating losses  559  No expiry Capital losses  4,436  No expiry     **Total unrestricted losses**  **4,995**        **Total**  **5,296**         114     BT Group plc Annual Report and Form 20-F 2005 United States        Generally Accepted Accounting Principles
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**i****Differences between United Kingdom and United States generally accepted accounting principles**continued     The following is a reconciliation from UK to US GAAP of BT’s deferred tax assets and liabilities net of related valuation allowance.  2005 2004    **Deferred tax assets**  **Deferred tax liabilities**  Deferred tax assets  Deferred tax liabilities    **£m**  **£m**  £m  £m  UK GAAP  **106**  **2,280**  113  2,304 Tax effect of US GAAP Adjustments:             Pension  **1,566**  **–**  1,714  – Property  **438**  **326**  413  337 Financial instruments  **111**  **–**  –  14 Capitalised interest  **–**  **53**  –  59 Other  **–**  **–**  –  7 Rollover relief in respect of re-invested gains  **–**  **56**  –  59 Deferred tax balances under US GAAP net of related valuation allowance  **2,221**  **2,715**  2,240  2,780    **(k)****Dividends**Under UK GAAP, dividends are recorded in the year in respect of which they are declared (in the case of interim or any special dividends) or proposed by the board of directors to the shareholders (in the case of final dividends). Under US GAAP, dividends are recorded in the period in which dividends aredeclared.**(l)****Impairment**Under UK GAAP, if there is an indication of impairment the assets should be tested for impairment and, if necessary written down to the value in use, calculated based on discounted future pre-tax cash flows related to the asset or the income generating unit to which the asset belongs.     US GAAP requires that an entity assess whether impairment has occurred based on the undiscounted future cash flows. An impairment loss exists if the sum of these cash flows is less than the carrying amount of the asset. The impairment loss recognised in the income statement is based on the asset’sfair value, being either market value or the sum of discounted future cash flows. Tangible assets that were not impaired under US GAAP are depreciated over their remaining useful lives.**(m)****Disposals of businesses**There are timing differences between UK GAAP and US GAAP for recognition of gains on the sale of certain businesses. Foreign exchange movements taken to reserves under UK GAAP are reported in the income statement under US GAAP. Historical GAAP differences on disposed businesses are also shownunder this line item.**(n)****Property rationalisation provision**Under UK GAAP in the 2003 financial year, a provision in connection with the rationalisation of the group’s London office property portfolio was recorded. Under US GAAP, in accordance with SFAS No 146, these costs are not recognised until the group fully exits and therefore ceases to use the affectedproperties. All these properties were exited by 31 December 2004.**(o)****Revenue**Under UK GAAP long-term contracts to design, build and operate software solutions are accounted for under SSAP 9 “Stocks and long-term contracts” and FRS 5 “Reporting the substance of transactions”, under which turnover is recognised as earned over the contract period.     Under US GAAP revenue of £162 million under these contracts is deferred in the 2005 financial year under SOP 97-2 “Software revenue recognition” and SAB 104, as vendor specific objective evidence to support the fair value of the separate elements to be delivered is unavailable. There was noimpact on net income. Total deferred revenue and costs not recorded in UK GAAP at 31 March 2005 was £239 million (2004 – £77 million).  United States    Generally Accepted Accounting Principles BT Group          plc Annual Report and Form 20-F 2005     115
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**ii****Net income and shareholders’ equity reconciliation statements**The following statements summarise the material estimated adjustments, gross of their tax effect, which reconcile net income and shareholders’ equity from that reported under UK GAAP to that which would have been reported had US GAAP been applied.**Net income**Years ended 31 March  **2005****£m**  2004£m  2003£m  Net income applicable to shareholders under UK GAAP  **1,821**  1,414  2,702 Restatement under UITF 38 and UITF 17 – See note 1  **–**  3  (16) Net income applicable to shareholders under UK GAAP as previously reported  **1,821**  1,417  2,686 Adjustment for:          Sale and leaseback of properties  **(83****)** (85) (114)Pension costs  **(212****)** (428) (177)Redundancy charges  **(20****)** 20  – Capitalisation of interest, net of related depreciation  **(13****)** (23) (17)Goodwill  **16**  12  (35)Intangible asset amortisation  **–**  –  (26)Financial instruments  **(411****)** (82) 731 Impairment  **(24****)** (24) (24)Employee share plans  **(15****)** (8) (11)Property rationalisation provision  **(5****)** (142) 147 Disposals of businesses  **–**  –  130 Deferred taxation  **3**  4  976     **1,057**  661  4,266 Tax effect of US GAAP adjustments  **240**  222  (132) **Net income as adjusted for US GAAP**  **1,297**  883  4,134  Basic earnings per American Depositary Share as adjusted for US GAAP**a**  **£1.52**  £1.02  £4.80 Diluted earnings per American Depositary Share as adjusted for US GAAP**a**  **£1.51**  £1.02  £4.77  **a**Each American Depositary Share is equivalent to ten ordinary shares. **Shareholders’ equity**At 31 March  **2005****£m**  2004£m  Shareholders’ equity under UK GAAP  **3,851**  3,066 Re-statement under UITF 38 and UITF 17 – see note 1  **–**  28  Shareholders’ equity under UK GAAP as previously reported  **3,851**  3,094 Adjustment for:       Sale and leaseback of properties  **(1,460****)** (1,377)Pension costs  **(5,219****)** (5,714)Redundancy charges  **–**  20 Capitalisation of interest, net of related depreciation  **178**  195 Goodwill  **51**  124 Intangible assets  **78**  – Financial instruments  **(371****)** (8)Impairment  **77**  100 Property rationalisation provision  **–**  5 Deferred taxation  **(56****)** (59)Dividend declared after the financial year end  **551**  454     **(2,320****)** (3,166)Tax effect of US GAAP adjustments  **1,736**  1,711  **Shareholders’ equity as adjusted for US GAAP**  **(584****)** (1,455)  **iii****Minority interests**Under US GAAP, the income to minority interests would have been unchanged (2004 – unchanged, 2003 – £27 million reduction) after adjusting for goodwill amortisation and accounting for associates and joint ventures. Net assets attributable to minority interests would have been unchanged (2004 –unchanged) after adjusting for financial instruments. 116     BT Group plc Annual Report and Form 20-F 2005 United        States Generally Accepted Accounting Principles
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**iv****Accounting for share options**Under UK GAAP, the company does not recognise compensation expense for the fair value, at the date of grant, of share options granted under the employee share option schemes. Under US GAAP, the company adopted the disclosure-only provisions in SFAS No. 123 “Accounting for Stock-BasedCompensation”. Accordingly, the company accounts for share options in accordance with APB Opinion No. 25 “Accounting for Stock Issued to Employees”, under which no compensation expense on fixed plans, other than SAYE plans, is recognised. Had the group recognised compensation cost for optionsgranted in accordance with SFAS No. 123, the group’s pro forma net income (loss), basic earnings (loss) per share and diluted earnings (loss) per share under US GAAP would have been £1,289 million (2004 – £862 million, 2003 – £4,127 million), 15.1p (2004 – 10.0p, 2003 – 47.9p) and 15.0p (2004 –9.9p, 2003 – 47.6p), respectively. See note 31 for the SFAS No. 123 disclosures of the fair value of options granted under employee schemes at date of grant.**v****Consolidated statements of cash flows**Under UK GAAP, the Consolidated Statements of Cash Flows are presented in accordance with UK Financial Reporting Standard No. 1 (FRS 1). The statements prepared under FRS 1 present substantially the same information as that required under SFAS No. 95.     Under SFAS No. 95, cash and cash equivalents include cash and short-term investments with maturities of three months or less at the date of purchase. Under FRS 1 cash comprises cash in hand and at bank and overnight deposits, net of bank overdrafts.     Under FRS 1, cash flows are presented for operating activities; returns on investments and servicing of finance; taxation; capital expenditure and financial investments; acquisitions and disposals; dividends paid to the company’s shareholders; management of liquid resources and financing. SFAS No. 95requires a classification of cash flows as resulting from operating, investing and financing activities.     Cash flows under FRS 1 in respect of interest received, interest paid (net of that capitalised under US GAAP) and taxation would be included within operating activities under SFAS No. 95. Cash flows from purchases, sales and maturities of trading securities, while not separately identified under UKGAAP, would be included within operating activities under US GAAP. Capitalised interest, while not recognised under UK GAAP, is included in investing activities under US GAAP. Dividends paid are included within financing activities under US GAAP.     The following statements summarise the statements of cash flows as if they had been presented in accordance with US GAAP, and include the adjustments which reconcile cash and cash equivalents under US GAAP to cash at bank and in hand reported under UK GAAP.              **2005****£m**  2004£m  2003£m  Net cash provided by operating activities  **4,586**  4,632  3,395 Net cash (used) provided by investing activities  **(2,012****)** (3,460) 1,253 Net cash used in financing activities  **(2,269****)** (3,093) (2,852) Net (decrease) increase in cash and cash equivalents  **305**  (1,921) 1,796 Effect of exchange rate changes on cash  **–**  (5) 13 Cash and cash equivalents under US GAAP at beginning of year  **1,007**  2,933  1,124  Cash and cash equivalents under US GAAP at end of year  **1,312**  1,007  2,933 Short-term investments with original maturities of less than three months  **(1,106****)** (898) (2,842) **Cash at bank and in hand under UK GAAP at end of year**  **206**  109  91    **vi****Current asset investments**Under US GAAP, investments in debt securities would be classified as either trading, available-for-sale or held-to-maturity. Trading investments would be stated at fair values and the unrealised gains and losses would be included in income. Securities classified as available-for-sale would be stated at fair values, withunrealised gains and losses, net of deferred taxes, reported in shareholders’ equity. Debt securities classified as held-to-maturity would be stated at amortised cost. The following analyses do not include securities with original maturities of less than three months.     At 31 March 2005, the group held trading investments (as defined by US GAAP) with fair values totalling £339 million (2004 – £423 million). Held-to-maturity securities at 31 March 2005 and 2004 consisted of the following:   Amortisedcost£m  Estimatedfair value£m  **Commercial paper, medium-term notes and other investments at 31 March 2005**  **2,003**  **2,003**  Commercial paper, medium-term notes and other investments at 31 March 2004  3,629  3,629  The contractual maturities of the held-to-maturity debt securities at 31 March 2005 were as follows:   Amortisedcost£m  Estimatedfair value£m  Maturing on or before 31 March 2006  1,999  1,999 Maturing after 1 year through 5 years  4  4  **Total at 31 March 2005**  **2,003**  **2,003**  
 
  United States    Generally Accepted Accounting Principles BT Group          plc Annual Report and Form 20-F 2005     117
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**vi****Current asset investments**continuedAvailable for sale investments at 31 March 2005 and 2004 consisted of the following:   Amortisedcost£m  Estimatedfair value£m  **Commercial paper, medium-term notes and other investments at 31 March 2005**  **1,149**  **1,149**  Commercial paper, medium-term notes and other investments at 31 March 2004  214  214  The contractual maturities of the available for sale investments at 31 March 2005 were as follows:   Amortisedcost£m  Estimatedfair value£m  Maturing on or before 31 March 2006  1,149  1,149 Maturing after 1 year through 5 years  –  –  **Total at 31 March 2005**  **1,149**  **1,149**    **vii****Pension costs**The following position for the main pension scheme is computed in accordance with US GAAP pension accounting rules under SFAS No. 87 and SFAS No. 88, the effect of which is shown in the above reconciliation statements.     The pension cost determined under SFAS No. 87 was calculated by reference to an expected long-term rate of return on scheme assets of 7.27% (2004 – 7.35%, 2003 – 6.90%). The components of the pension cost for the main pension scheme comprised:   **2005****£m**  2004£m  2003£m  Service cost  **507**  388  453 Interest cost  **1,745**  1,657  1,707 Expected return on scheme assets  **(1,897****)** (1,646) (1,813)Amortisation of prior service costs  **24**  24  24 Amortisation of net obligation at date of limited application of SFAS No. 87  **–**  2  52 Amortisation of loss (gain)  **263**  378  (22)Additional cost of termination benefits  **–**  1  60  **Pension cost for the year under US GAAP**  **642**  804  461  The information required to be disclosed in accordance with SFAS No. 132(R) concerning the funded status of the main scheme at 31 March 2004 and 31 March 2005, based on the valuations at 1 January 2004 and 1 January 2005, respectively, is given below.**Minimum liability, intangible asset and other comprehensive income**  **2005****£m**  2004£m  Plan assets at fair value  **29,169**  26,675 Accumulated benefit obligation  **33,160**  31,137  Minimum liability  **3,991**  4,462 Net amount recognised at end of year  **(2,535****)** (2,275) Minimum additional liability  **1,456**  2,187 Intangible asset as at 31 March 2004:       Unrecognised prior service cost  **(55****)** (79) **Accumulated other comprehensive income**  **1,401**  2,108    **Changes in benefit obligation**  **2005****£m**  2004£m  Benefit obligation at the beginning of the year  **32,448**  30,277 Service cost  **507**  388 Interest cost  **1,745**  1,657 Employees’ contributions  **50**  148 Additional cost of termination benefits  **–**  1 Actuarial movement  **943**  1,428 Other changes  **7**  5 Benefits paid or payable  **(1,364****)** (1,456) **Benefit obligation at the end of the year**  **34,336**  32,448  118     BT Group plc Annual Report and Form 20-F 2005 United        States Generally Accepted Accounting Principles
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 **vii****Pension costs**continuedThe benefit obligation and pension cost for the main pension scheme were determined using the following assumptions at 1 January 2003, 2004 and 2005:   **2005****per annum****%**  2004per annum%  2003per annum%  Discount rate  **5.3**  5.5  5.6 Rate of future pay increases  **3.6**  3.6  3.8 Rate of future pension increases  **2.6**  2.6  2.25  Contributions expected to be paid to the plan during the next fiscal year are estimated at £459 million.Estimated future benefit payments areas follows:   **£m**  Year ending 31 March 2006  1,392 Year ending 31 March 2007  1,432 Year ending 31 March 2008  1,477 Year ending 31 March 2009  1,532 Year ending 31 March 2010  1,598 1 April 2010 to 31 March 2015  9,039      **Changes in scheme assets**  **2005**  2004    **£m**  £m  Fair value of scheme assets at the beginning of the year  **26,675**  22,757 Actual return on scheme assets  **3,419**  4,195 Employer’s contributions**a**  **382**  1,026 Employees’ contributions  **50**  148 Other changes  **7**  5 Benefits paid or payable  **(1,364****)** (1,456) **Fair value of scheme assets at the end of the year**  **29,169**  26,675  **Funded status under US GAAP**  **2005**  2004    **£m**  £m  Projected benefit obligation in excess of scheme assets  **(5,167****)** (5,773)Unrecognised prior service costs**b**  **55**  79 Other unrecognised net actuarial losses  **2,577**  3,419  **Net amount recognised under US GAAP**  **(2,535****)** (2,275) **a**The employer’s contributions for the year ended 31 March 2005 includes special contributions of £6 million paid in June 2004 (2004 – £362 million paid in December 2003 and £380 million paid in March 2004).**b**Unrecognised prior service costs on scheme benefit improvements are being amortised over periods of 15 or 16 years commencing in the years of the introduction of the improvements. **Asset allocation**The Trustees of the main pension scheme approve the target asset allocation as well as deviation limits. The objective of the investment activities is to maximise investment return within an acceptable level of risk, taking into consideration the liabilities of the main pension scheme.   **Year ended 31 December 2004**    **Fair value****£bn**  **%**  **Target****%**  Equities  **20.2**  **69**  **63** Fixed interest bonds  **4.4**  **15**  **16** Index linked securities  **2.7**  **9**  **9** Property  **1.9**  **7**  **12**         **29.2**  **100**  **100**    Year ended 31 December 2003    Fair value£bn  %  Target%  Equities  17.1  65  65 Fixed interest bonds  3.9  15  15 Index linked securities  2.1  8  8 Property  3.2  12  12     **26.3**  **100**  **100**   United States    Generally Accepted Accounting Principles BT Group plc Annual Report and Form 20-F 2005     119
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**vii****Pension costs**continuedThe assumption for the expected return in scheme assets is a weighted average based on an assumed expected return for each asset class and the proportions held of each asset class at the beginning of the year. The expected returns on bonds are based on the gross redemption yields at the start of theyear. Expected returns on equities and property are based on a combination of an estimate of the risk premium above, yields on government bonds and consensus economic forecasts of future returns. The expected return of 7.27% per annum used for the calculation of pension costs for the year ending 31March 2005 is consistent with that adopted for FRS 17. **viii****Income statement in US GAAP format**The group profit and loss accounts on pages 75 to 77 comply with UK GAAP and the directors believe they are in the most appropriate format for shareholders to understand the results of our business. We believe that it is important to show our results before deducting goodwill amortisation and exceptionalitems because these items predominantly relate to corporate transactions rather than the trading activities of the group. For SEC reporting purposes this presentation would be considered “non GAAP” and therefore the group has also prepared the following income statement which meets the SEC reportingformat set forth in Item 10 of Regulation S-X. The financial numbers disclosed in the following income statement are prepared under UK GAAP.   **2005****£m**  2004£ma 2003£ma Revenue  **18,623**  18,519  18,727 Operating expenses:          Payroll costs  **3,729**  3,738  3,667 Depreciation and amortisation  **2,856**  2,936  3,035 Payments to telecommunication operators  **3,725**  3,963  3,940 Other operating expenses  **5,695**  5,189  5,724  Total operating expenses  **16,005**  15,826  16,366  Net operating income  **2,618**  2,693  2,361 Other income, net  **551**  227  1,922 Net interest expense  **(801****)** (941) (1,439)Income taxes  **(523****)** (539) (459)Minority interests  **1**  8  (12)Equity in losses (earnings) of investees  **(25****)** (34) 329  Net income  **1,821**  1,414  2,702  Earnings per share – basic  **21.4****p** 16.4p 31.4pEarnings per share – diluted  **21.2****p** 16.3p 31.2p**a**Restated following the adoption of UITF17 and UITF38 (see note 1 on page 81).**ix****US GAAP developments**     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS 123R) “Share-Based Payment” which revises SFAS 123 and supersedes APB 25. SFAS 123R requires that the cost of all share-based payment transactions be recognised in the financial statements. SFAS123R also establishes fair value as the measurement method in accounting for share-based payments to employees. BT adopted SFAS 123R on 1 April 2005 using the modified prospective transition method. BT estimates the application of the expensing provisions of SFAS 123R will result in a pre-taxexpense of approximately £45 million in the 2006 financial year subject to additional grants and awards.     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153) “Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29” SFAS 153 addresses the measurement of exchanges of non-monetary assets. It eliminates the exception from fair valuemeasurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 “Accounting for Non-monetary Transactions” and replaces it with an exception for exchanges that do not have commercial substance. A non-monetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as a result of the exchange. As required by SFAS 153, we will adopt this new accounting standard effective 1 July 2005. The adoption of SFAS 153 is not expected to have a material impact on our financial position, results of operations orcash flows.     In November 2004, the FASB issued Statement of Financial Accounting Standards No.151 (SFAS 151), “Inventory Costs – an amendment of ARB No. 43, Chapter 4”, which clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should berecognised as a current period expense. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after 15 June 2005. BT does not believe that theimplementation of this standard will have a material impact on its financial position, results of operations or cash flows. 120     BT Group plc Annual Report and Form 20-F 2005 United        States Generally Accepted Accounting Principles
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**ix****US GAAP developments**continuedIn September 2004, the EITF reached a consensus on EITF Issue No. 02-14 ‘Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock’, in which the Task Force reached the consensus that an investor that has the ability to exercise significant influenceover the operating and financial policies of the investee should apply the equity method of accounting when it has an investment in common stock and/or an investment that is in-substance common stock. The consensus of this EITF is to be applied in reporting periods beginning after September 15, 2004.We do not believe the adoption of this standard will have a material impact on our financial position, results of operations or cash flows.     In October 2004, the EITF reached a consensus on Issue No. 04-1 ‘Accounting for Pre-existing Relationships between the Parties to a Business Combination’ (EITF 04-1). EITF 04-1 addresses the accounting treatment of pre-existing relationships between the parties of a business combination. Theconsensus of EITF 04-1 should be applied to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after the FASB ratified the consensus at its October 13, 2004 meeting. The group will adopt the provisions of EITF 04-1 as of April 1, 2005. If it isdetermined that assets of an acquired entity are related to a pre-existing contractual relationship, thus requiring accounting separate from the business combination, BT will evaluate whether the acquiring entity of the group should recognise contractual relationships as assets separate from goodwill in thatbusiness combination.     In March 2004, the EITF reached a consensus on EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’ (EITF 03-1). The guidance prescribed a three-step model for determining whether an investment is other-than-temporarily impaired andrequires disclosure for unrealized losses on investments. In September 2004, the FASB issued FASB Staff Position EITF 03-1-1 ‘Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1’ (FSP EITF 03-1-1). FSP EITF 03-1-1 delays the effective date for the measurement and recognition guidance contained inparagraphs 10-20 of EITF 03-1. The disclosure requirements of EITF 03-1 remain effective for fiscal years ending after June 15, 2004. No effective date for the measurement and recognition guidance has been established in FSP EITF 03-1-1. During the period of delay, FSP EITF 03-1-1 states that companiesshould continue to apply current guidance to determine if an impairment is other-than-temporary. The adoption of EITF 03-1, excluding paragraphs 10-20, did not impact the group’s consolidated position, results of operations or cash flows. The group will assess the impact of paragraphs 10-20 of EITF 03-1once the guidance has been finalised.**x****Supplemental unaudited pro forma information relating to businesses acquired during the year ended 31 March 2005**The following US GAAP pro forma information summarises the results of operations for the years indicated as if the Infonet and Albacom acquisitions had been completed as of the beginning of the years presented. The pro forma amounts do not purport to be indicative of the results that would have actuallybeen obtained if the acquisitions had occurred as of the beginning of the years presented or that may be obtained in the future.   **2005****£m**  2004£m         Turnover  **19,069**  19,262 Profit for the financial year  **1,187**  698 Earnings per share  **13.9****p** 8.1p         United    States Generally Accepted Accounting Principles BT Group          plc Annual Report and Form 20-F 2005     121
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**Subsidiary undertakings, joint ventures and associates**

 
BT Group plc is the parent company of the group. Brief details of its principal operating subsidiary undertakings, joint ventures and associates at 31 March 2005, other than the company, all of which were unlisted unless otherwise stated, were as follows:   Activity  Group interest in allotted capitalb  Countryof operationsc **Subsidiary undertakings**          Albacom SpA**de**  Communication related services and products provider  100% ordinary  Italy British Telecommunications plc**d**  Communication related services and products provider  100% ordinary  UK  BT Americas Inc.**d**  Communication related services and products provider  100% common  USA  BT Australasia Pty Limited**d**  Communication related services and products provider  100% ordinary100% preference  Australia  BT Cableships Limited**d**  Cableship owner  100% ordinary  International  BT Centre Nominee 2 Limited**d**  Property holding company  100% ordinary  UK  BT CommunicationsManagement Limited**d**  Telecommunication services provider  100% ordinary  UK  BT ESPANA, Compania de Servicios Globales de Telecommunicaciones, S.A.**d**  Communication related services and products provider  100% ordinary  Spain  BT Fleet Limited**d**  Fleet management company  100% ordinary  UK  BT (Germany) GmbH & Co. oHG**d**  Communication related services and products provider  100% ordinary  Germany  BT Global Services Limited**d**  International telecommunication network systems provider  100% ordinary  UK  BT Holdings Limited**d**  Investment holding company  100% ordinary  UK  BT Hong Kong Limited**d**  Communication related services and products provider  100% ordinary100% preference  Hong Kong  BT Limited**d**  International telecommunication    network systems provider   100% ordinary  International  BT Nederland NV**d**  Communication related services and products provider  100% ordinary  Netherlands  BT Subsea Cables Limited**d**  Cable maintenance and repair  100% ordinary  UK  BT US Investments LLC**d**  Investment holding company  100% ordinary  USA  Communications Networking Services (UK)**d**  Communication related services and products provider  100% ordinary  UK  Communications Global NetworkServices Limited**d**  Communication related services and products provider  100% ordinary  Bermuda  Esat Telecommunications Limited**dg**  Telecommunication services provider  100% ordinary  Ireland  Farland BV**cd**  Provider of trans-border fibre network across BT’s partners in Europe  100% ordinary  International  Infonet Services Corporation**df**  Global managed network service provider  100% common  USA  Infonet USA Corporation**df**  Global managed network service provider  100% common  USA  Syntegra Limited**d**  Systems integration and application development  100% ordinary  UK  Syntegra Groep BV**d**  Systems integration and application development  100% ordinary  Netherlands  Syntegra SA**d**  Systems integration and application development  100% ordinary  France  Syntegra (USA) Inc.**cd**  Systems integration and electronic business outsourcing services  100% common  International  **a**The group comprises a large number of companies and it is not practical to include all of them in this list. The list, therefore, only includes those companies that have a more significant impact on the profit or assets of the group. A full list of subsidiaries, joint ventures and associates will be annexed to the company’s next annual return filed with the Registrar of Companies.**b**The proportion of voting rights held corresponds to the aggregate interest percentage held by the holding company and subsidiary undertakings.**c**All overseas undertakings are incorporated in their country of operations. Subsidiary undertakings operating internationally are all incorporated in England and Wales, except Farland BV and Syntegra (USA) Inc. which are incorporated in the Netherlands and USA, respectively.**d**Held through intermediate holding company.**e**In February 2005, BT acquired the remaining 74% economic interest in Albacom SpA, and is now 100% owned.**f**In February 2005, BT acquired the Infonet group of companies.**g**In April 2005, Esat Telecommunications Limited changed its name to BT Communications Ireland Limited.      Share capital             bn = billions        Percentage  Country of m = millions  Activity  Issueda owned  operationsb **Joint Ventures**             LG Telecom  Mobile cellular telephone system provider and operator  Won 1,386bn 16.586%**c** Republic of South Korea  **a**Issued share capital comprises ordinary or common shares, unless otherwise stated. All investments are held through intermediate holding companies.**b**Incorporated in the country of operations.**c**Held through intermediate holding company. 122     BT Group plc Annual Report and Form 20-F 2005  
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**Quarterly analysis of turnover and profit**

 
**Year ended 31 March 2005** Unaudited          Quarters  1st£m  2nd£m  3rd£m  4th£m  **Total****£m**  **Total turnover**  4,622  4,768  4,692  4,949  **19,031** Group’s share of associates’ and joint ventures’ turnover  (55) (166) (108) (79) **(408****)** **Group turnover**  4,567  4,602  4,584  4,870  **18,623** Other operating income  41  43  48  39  **171**  Group operating profit  622  731  730  706  **2,789** Group’s share of operating (loss) profit of associates and joint ventures  (5) 3  (31) 8  **(25****)** Total operating profit  617  734  699  714  **2,764** Profit on sale of fixed asset investments and group undertakings  3  25  284  46  **358** Profit on sale of property fixed assets  –  15  7  –  **22** Net interest payable  (204) (207) (200) (190) **(801****)** **Profit on ordinary activities before taxation**  416  567  790  570  **2,343** Tax on profit on ordinary activities  (111) (140) (137) (135) **(523****)** **Profit on ordinary activities after taxation**  305  427  653  435  **1,820** Minority interests  –  1  –  –  **1**  **Profit for the financial period**  305  428  653  435  **1,821**  Basic earnings per share  3.6p 5.0p 7.7p 5.1p **21.4****p**Diluted earnings per share  3.5p 5.0p 7.6p 5.1p **21.2****p** Profit before goodwill amortisation, exceptional items and taxation  434  549  545  557  **2,085** Basic earnings per share before goodwill amortisation and exceptional items  3.7p 4.8p 4.8p 4.9p **18.1****p**Diluted earnings per share before goodwill amortisation and exceptional items  3.7p 4.8p 4.7p 4.8p **18.0****p**  Year ended 31 March 2004 Unaudited             1st  2nd  3rd  4th  Total**a**Quarters  £m  £m  £m  £m  £m    ****                  **Total turnover**  4,693  4,667  4,676  4,878  18,914 Group’s share of associates’ and joint ventures’ turnover  (107) (99) (98) (91) (395) **Group turnover**  4,586  4,568  4,578  4,787  18,519 Other operating income  52  44  37  44  177  Group operating profit  726  744  739  661  2,870 Group’s share of operating (loss) profit of associates and joint ventures  (3) (4) 5  (32) (34) Total operating profit  723  740  744  629  2,836 Profit (loss) on sale of fixed asset investments and group undertakings  (1) –  33  4  36 Profit on sale of property fixed assets  –  1  1  12  14 Net interest payable  (225) (234) (260) (222) (941) **Profit on ordinary activities before taxation**  497  507  518  423  1,945 Tax on profit on ordinary activities  (153) (132) (133) (121) (539) **Profit on ordinary activities after taxation**  344  375  385  302  1,406 Minority interests  6  1  –  1  8  **Profit for the financial period**  350  376  385  303  1,414  Basic earnings per share  4.1p 4.3p 4.5p 3.5p 16.4pDiluted earnings per share  4.0p 4.3p 4.4p 3.5p 16.3p Profit before goodwill amortisation, exceptional items and taxation  501  528  525  459  2,013 Basic earnings per share before goodwill amortisation and exceptional items  4.1p 4.4p 4.4p 3.9p 16.9pDiluted earnings per share before goodwill amortisation and exceptional items  4.1p 4.4p 4.4p 3.9p 16.8p **a**Restated – see note 1   BT Group plc Annual Report and Form 20-F 2005     123
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**Financial statistics****Years ended 31 March**

 
   2001  2002  2003  2004  **2005**  **Financial ratios**                Basic earnings per share on continuing activities before goodwill amortisation and exceptional items – pence**a**  19.2  9.0  14.4  16.9  **18.1** Basic earnings (loss) per share on continuing activities – pence**a**  20.6  (34.6) 31.4  16.4  **21.4** Basic earnings (loss) per share – pence**a**  (25.8) 12.1  31.4  16.4  **21.4** Return on capital employed %**bc**  14.9  6.6  15.5  15.1**d** **15.5****d**Interest cover**e**  2.6  0.6  2.0  3.0**f** **3.5****f** **a**Restated following adoption of UITF 17 and UITF 38 (see note 1 on page 81).**b**The ratio is based on profit before tax, goodwill amortisation and interest on long-term borrowings, to average capital employed. Capital employed is represented by total assets, excluding goodwill, less current liabilities, excluding corporate taxes and dividends payable, and provisions other than those for deferred taxation. Year-end figures are used in the computation of the average, except in the case of short-term investments and borrowings whereaverage daily balances are used in their place.**c**Return on capital employed is based upon the continuing activities.**d**Return on capital employed before goodwill amortisation and exceptional items was 16.0% (2004 – 15.3%).**e**The number of times net interest payable is covered by total operating profit before goodwill amortisation.**f**Interest cover before goodwill amortisation and exceptional items was 3.6 times (2004 – 3.3 times).    2001£m  2002£m  2003£m  2004£m  **2005****£m**  **Expenditure on research and development**                Total expenditure  364  362  380  334  **257**     2001£m  2002£m  2003£m  2004£m  **2005****£m**  **Expenditure on tangible fixed assets**                Plant and equipment                Transmission equipment  1,655  1,373  1,277  1,324  **1,488** Exchange equipment  478  428  228  150  **143** Other network equipment  918  694  466  585  **648** Computers and office equipment  407  273  281  205  **312** Motor vehicles and other  231  189  162  316  **349** Land and buildings  171  153  40  73  **64**     3,860  3,110  2,454  2,653  **3,004** Increase (decrease) in engineering stores  (3) (10) (9) 20  **7**  **Total continuing activities**  3,857  3,100  2,445  2,673  **3,011** **Total discontinued activities**  1,129  808  –  –  **–**  **Total expenditure on tangible fixed assets**  4,986  3,908  2,445  2,673  **3,011** (Increase) decrease in creditors  (230) 161  135  11  **45**  **Cash outflow on purchase of tangible fixed assets**  4,756  4,069  2,580  2,684  **3,056**    Financial statistics have been restated where necessary to provide consistency with the presentation of the 2005 financial year figures. 124     BT Group plc Annual Report and Form 20-F 2005 
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**Operational statistics****Years ended 31 March**

 
   2001  2002  2003  2004  **2005**  **Call growth (decline)**                % growth (decline) in UK fixed-network call volumes (minutes) over the previous year  18  19  13  (2) **(18****)** Growth is estimated by reference to growth in absolute call minutes.   2001  2002  2003  2004  **2005**  **UK exchange line connections**                Business (’000)  8,918  9,072  9,198  9,071  **8,705** % growth (decline) over previous year  5.5  1.7  1.4  (1.4) **(4.0****)**Residential (’000)  19,981  20,093  20,357  20,550  **20,850** % growth (decline) over previous year  (0.3) 0.6  1.3  0.9  **1.5** Service providers (’000)  67  56  91  377  **1,012** % growth (decline) over previous year  (29.5) (16.4) 62.5  314  **168**  Total exchange line connections (’000)  28,966  29,221  29,646  29,998  **30,567**  % growth over previous year  1.4  0.9  1.5  1.2  **1.9**  Included above:                Wholesale DSL connections (’000)  49  170  800  2,215  **4,932** % growth over previous year  n/a  247  371  177  **123**       2001  2002  2003  2004  **2005**  **People employed**                Continuing activities (’000)  116.8  108.6  104.7  99.9  **102.1** Discontinued activities (’000)  20.2  –  –  –  **–**  Total employees (’000)  137.0  108.6  104.7  99.9  **102.1**     BT Group plc Annual Report and Form 20-F 2005     125
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**Risk factors**

 
The business of BT is affected by a number of factors, not all of which are wholly within BT’s control. Although many of the factors influencing BT’s performance are macro economic and likely to affect the performance of businesses generally, some aspects of BT’s business make it particularly sensitive to certain areas of business risk. Thissection highlights some of those specific areas. However, it does not purport to be an extensive analysis of the factors affecting the business and some risks may be unknown to us and other risks, currently believed to be immaterial, could turn out to be material. All of these could materially adversely affect our business, turnover, profits,assets, liquidity and capital resources. They should also be considered in connection with the forward looking statements in this document and the cautionary statement regarding forward-looking statements on page 128 of this document.**If BT’s activities are subject to significant price and other regulatory controls, its market share, competitive position and future profitability may be affected**Most of BT’s fixed network activities in the UK are subject to significant regulatory controls. The controls regulate, among other things, the prices BT may charge for many of its services and the extent to which it has to provide services to its competitors. In recent years, the effect of these controls has been to cause BT to reduce its prices.BT cannot assure its shareholders that the regulatory authorities will not increase the severity of the price controls, nor extend the services to which controls apply (including any new services that BT may offer in the future), nor extend the services which it has to provide its competitors. These controls may adversely affect BT’s market share,the severity of competition and its future profitability. During 2004 and 2005 Ofcom has been undertaking a strategic review of the UK telecommunications market in order to formulate the principles on which it can base its regulatory decisions in the future. This review is scheduled to be completed in 2005. It is not possible to predict theultimate outcome or implications for BT of Ofcom’s review. Further details on the regulatory framework in which BT operates can be found in “Business Review – regulation, competition and prices” on pages 15 to 22 of this document.**BT faces strong competition in UK fixed network services**BT continues to have a significant market share in some aspects of UK fixed network services. In particular, in the 2005 financial year we estimate we had a market share of 64% of consumer calls and 42% of business calls in the UK. Regulators have promoted competition in this area by allowing BT’s competitors to site equipment in oradjacent to its exchanges (local loop unbundling), to make it easier for BT’s customers to route some or all of their calls over competitors’ networks (carrier pre-selection) and by the introduction of a wholesale access product (wholesale line rental). Reduction in BT’s market share in the fixed network may lead to a fall in BT’s turnover and anadverse effect on profitability. Unlike its competitors, BT continues to be obliged by the current regulatory regime to serve customers in the UK, whether or not such provision of service is economic, and the competitive measures described above may have the effect of accelerating the diversion of its more profitable existing customerswithout it being able to reduce its costs commensurately. There is also competition for voice and data traffic volumes between fixed network operators and those operators offering VoIP (Voice over IP) and mobile services. These changes in the regulatory environment and ensuing increased competition on BT’s fixed network may causeadverse effects on its business, results of operations, financial condition and prospects.**BT’s business is dependent on the ability to exploit technological advances quickly and successfully**BT operates in an industry with a recent history of fast technological changes. It expects that new products and technologies will continue to emerge and that existing products and technologies will develop further. BT needs to continually develop its services and products to exploit those next generation technologies. However, BT cannotpredict the actual effect of these technological changes on its business or on its ability to provide competitive services. For example there is evidence of substitution by customers using mobile phones for day-to-day voice calls in place of making such calls over the fixed network. Additionally, some calls are now being routed over the internet inplace of the traditional switched network. If these trends accelerate, BT’s fixed network assets may be used uneconomically and its investment in these assets may not be recovered through profits on fixed-network calls and line rentals. The complexity of the 21st Century Network may also result in delays to the delivery of expected benefits.Impairment write-downs may be incurred and margins may decline if fixed costs cannot be reduced in line with falling turnover.**BT is carrying out a transformation strategy, including the targeting of significant growth in new wave business areas**BT has a strategy to transform its business. This may result in changes to its products, services, markets and culture. If the group’s transformation strategy is unsuccessful there is a risk that the future turnover and profitability will decline. In particular BT has targeted significant growth in new business areas, such as broadband, mobility andInformation and Communications Technology (ICT) solutions. In view of the likely level of competition and uncertainties regarding the level of economic activity, there can be no certainty that BT will meet its growth targets in these areas, with a consequential impact on future turnover and profitability.**BT’s businesses may be adversely affected if they fail to perform on major contracts**BT has entered into a number of complex and high value services contracts with customers. Failure to manage and meet BT’s commitments under these contracts may lead to a reduction in BT’s future turnover, profitability and cash generation.**BT’s businesses may be adversely affected if their networks or systems experience any significant failures or interruptions**BT’s businesses are dependent on their ability to transfer substantial volumes of data speedily and without interruption. Any significant failure or interruption of such data transfer due to factors outside their control could have a material adverse effect on the businesses and their results from operations. BT has a business continuity strategydesigned to deal with such catastrophic events, including for example major terrorist action, industrial action, extreme virus attack, hurricane or flooding, that may impact the ability to maintain an effective service to customers. A failure to deliver that strategy may result in a material loss and there can be no assurance that material adverseevents will not occur.**Declining investment returns and longer life expectancy may result in the funding cost of the defined benefit pension scheme becoming a significant burden on the financial resources of BT**The defined benefit pension scheme, the BT Pension Scheme (BTPS), was closed to new members on 31 March 2001 and has been replaced by a defined contribution scheme (BTRP). The latest full triennial actuarial valuation of the BTPS was completed as at 31 December 2002. As a result, BT agreed to make normal contributions of 12.2%of pensionable pay and annual deficiency payments of £232 million. This will apply until the next triennial actuarial valuation is completed as at 31 December 2005. In March 2004 a £380 million prepayment of deficiency contributions was made, representing most of the deficiency contributions for the 2005 and 2006 financial years. Theresults of future scheme valuations will be impacted by the future investment market performance, interest and inflation rates and the general trend towards longer life expectancy, all of which are outside the control of BT. In the event that investment returns decline or life expectancy increases, the cash funding cost to BT may increase andmay have a significant effect on the financial resources of BT. 126     BT Group plc Annual Report and Form 20-F 2005 
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**Additional information for shareholders**

 
**128****Cautionary statement regarding forward-looking statements****129****Listings****129****Share and ADS prices****129****Capital gains tax (CGT)****Rights issue****Demerger of O2****130****Analysis of shareholdings****130****Dividends****130****Dividend mandate****131****Dividend investment plan****131****Global Invest Direct****131****Total shareholder return****131****Results announcements****132****Individual savings accounts (ISAs)****132****ShareGift****132****Unclaimed Assets Register****132****Exchange rates****132****Share buy back****132****Memorandum and Articles of Association****Memorandum****Articles****135****Material contracts****135****Taxation (US Holders)****Taxation of dividends****Taxation of capital gains****Passive foreign investment company status****US information reporting and backup withholding****UK stamp duty****UK inheritance and gift taxes in connection with ordinary shares and/or ADSs****138****Exchange controls and other limitations affecting security holders****138****Documents on display****138****Publications****138****Electronic communication****139****Shareholder              communication****Private shareholders****Institutional investors and analysts**   BT Group plc Annual Report and Form 20-F 2005     127
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 **Cautionary statement regarding forward-looking statements**Certain statements in this annual report are forward-looking and are made in reliance on the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amountsnot yet determinable. These statements include, without limitation, those concerning: BT’s transformation strategy and its ability to achieve it; expected cost savings; growth of, and opportunities available in, the communications industry and BT’s positioning to take advantage of those opportunities;expectations regarding competition, market shares, prices and growth; expectations regarding the convergence of technologies; growth and opportunities in new wave business (such as networked IT services, broadband and mobility); BT’s network development and plans for the 21st century network; plansfor the launch of new products and services; network performance and quality; the impact of regulatory initiatives on operations, including the regulation of the UK fixed wholesale and retail businesses; BT’s possible or assumed future results of operations and/or those of its associates and joint ventures;BT’s future dividend policy; capital expenditure and investment plans; adequacy of capital; financing plans; demand for and access to broadband and the promotion of broadband by third-party service providers; and those preceded by, followed by, or that include the words ‘believes’, ‘expects’, ‘anticipates’,‘intends’ or similar expressions.     Due to a number of new and revised Standards included within the body of Standards that comprise IFRS (International Financial Reporting Standards), there is not yet a significant body of established practice on which to draw in forming opinions regarding interpretation and application. Accordingly,practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the group’s first IFRS financial statements cannot be determined with certainty and may be subject to change.     Although BT believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed orimplied by these forward-looking statements.     Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to: material adverse changes in economic conditions in the markets served by BT and its lines of business; future regulatory actions and conditions in its operatingareas, including competition from others in the UK and other international communications markets; selection by BT and its lines of business of the appropriate trading and marketing models for its products and services; technological innovations, including the cost of developing new products and the needto increase expenditures for improving the quality of service; the anticipated benefits and advantages of new technologies not being realised; developments in the convergence of technologies; prolonged adverse weather conditions resulting in a material increase in overtime, staff or other costs; the timing ofentry and profitability of BT and its lines of business in certain communications markets; significant changes in market shares for BT and its principal products and services; fluctuations in foreign currency exchange rates and interest rates; and general financial market conditions affecting BT’s performance.Certain of these factors are discussed in more detail elsewhere in this annual report including, without limitation, in **Risk factors**. BT undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. 128     BT Group plc Annual Report and Form 20-F 2005 Additional        information for shareholders****
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**Listings**The principal listing of BT Group’s ordinary shares is on the London Stock Exchange. American Depositary Shares (ADSs), each representing 10 ordinary shares, have been issued by JPMorgan Chase Bank, as Depositary for the American Depositary Receipts (ADRs) evidencing the ADSs, and are listed on theNew York Stock Exchange. ADSs also trade, but are not listed, on the London Stock Exchange. Trading on the New York Stock Exchange is under the symbol ‘BT’.**Share and ADS pricesa**      Pence per ordinary share     US$ per ADS        High pence  Low pence  High $  Low $  **Years ended 31 March**             2001  821.78  328.85  139.25  51.47 2002  420.71  215.75  67.19  30.60 2003  286.25  141.00  41.95  23.16 2004  206.75  162.00  34.97  25.65 2005  216.25  169.25  40.93  30.34  **Year ended 31 March 2004**             1 April – 30 June 2003  206.00  162.00  34.97  25.65 1 July – 30 September 2003  206.75  180.00  33.70  28.90 1 October – 31 December 2003  190.50  171.25  34.22  29.76 1 January – 31 March 2004  189.75  173.25  34.80  32.40  **Year ended 31 March 2005**             1 April – 30 June 2004  198.50  169.25  36.60  30.34 1 July – 30 September 2004  197.50  177.50  36.80  32.66 1 October – 31 December 2004  206.00  180.50  40.07  32.61 1 January – 31 March 2005  216.25  196.50  40.93  37.71  **Month**             November 2004  199.25  185.50  37.40  34.37 December 2004  206.00  196.50  40.07  38.22 January 2005  213.75  204.25  40.00  38.57 February 2005  216.25  203.50  40.93  38.59 March 2005  210.75  196.50  40.82  37.71 April 2005  209.50  196.50  39.51  37.85 1 May to 13 May 2005  202.25  197.25  38.75  36.83  **a**The pre-19 November 2001 prices shown have been adjusted for the rights issue and demerger that occurred in the 2002 financial year.  The prices are the highest and lowest closing middle market prices for BT ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the highest and lowest closing sales prices of ADSs, as reported on the New York Stock Exchange composite tape.     Fluctuations in the exchange rate between the pound sterling and the US dollar affect the dollar equivalent of the pound sterling price of the company’s ordinary shares on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs on the New York Stock Exchange.**Capital gains tax (CGT)**The rights issue in June 2001 and the demerger of O2 in November 2001 adjusted the value for capital gains tax purposes of BT shares.**Rights issue**An explanatory note on the effects of the rights issue on the CGT position relating to BT shareholdings is available from the Shareholder Helpline (see page 139).**Demerger of O2 – capital gains tax calculation**The confirmed official opening prices for BT Group and O2 shares on 19 November 2001 following the demerger were 285.75p and 82.75p, respectively. This means that, of the total (combined) value of 368.50p, 77.544% is attributable to BT Group and 22.456% to O2. Accordingly, for CGT calculations,the base cost of BT Group shares and O2 shares is calculated by multiplying the acquisition cost of a BT shareholding by 77.544% and 22.456%, respectively.  Additional    information for shareholders BT Group          plc Annual Report and Form 20-F 2005     129
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**Analysis of shareholdings**         Ordinary sharesof 5p each          Range  Number ofholdings  Percentageof total  Number of shares held(millions)  Percentageof total  1 – 399  603,955  40.1  129  1.5 400 – 799  441,583  29.4  245  2.8 800 – 1,599  275,372  18.3  307  3.5 1,600 – 9,999  175,825  11.7  506  5.9 10,000 – 99,999  5,539  0.4  108  1.3 100,000 – 999,999  940  0.1  346  4.0 1,000,000 – 4,999,999  428  0.0  961  11.1 5,000,000 and above**a,b,c,d**  213  0.0  6,032  69.9  **Total**  1,503,855  100.0  8,634  100.0  **a**28 million shares were held in trust by Ilford Trustees (Jersey) Limited for allocation to employees under the employee share plans.**b**Under the BT Group Employee Share Investment Plan, 52 million shares were held in trust on behalf of 84,803 participants who were beneficially entitled to the shares. 136 million shares were held in the corporate nominee BT Group EasyShare on behalf of 127,161 beneficial owners.**c**250 million shares were represented by ADSs. Analysis by size of holding is not available for this holding.**d**134 million shares were held as treasury shares.**e**13.7% of the shares were in 1,474,873 individual holdings, of which 124,457 were joint holdings, and 86.3% of the shares were in 28,982 institutional holdings.  So far as the company is aware, the company is not directly or indirectly owned or controlled by another corporation or by the UK Government or any other foreign government or by any other natural or legal person severally or jointly. There are no arrangements known to the company the operation of whichmay at a subsequent date result in a change in control of the company.     At 13 May 2005, there were 8,634,629,038 ordinary shares outstanding including 134,277,107 shares held as treasury shares. At the same date, approximately 25 million ADSs (equivalent to 250 million ordinary shares, or approximately 2.9% of the total number of ordinary shares outstanding onthat date) were outstanding and were held by 2,579 record holders of ADRs. At 31 March 2005, there were 3,593 shareholders with a US address on the register of shareholders.**Dividends**Since shortly after its incorporation in 1984, British Telecommunications plc paid interim dividends annually in February and final dividends in September. However, as part of BT’s debt reduction and restructuring plans, neither a final dividend for the year ended 31 March 2001 nor an interim dividend forthe year ended 31 March 2002 was paid to shareholders.     A final dividend in respect of the year ended 31 March 2004, was paid on 6 September 2004 to shareholders on the register on 6 August 2004, and an interim dividend in respect of the year ended 31 March 2005 was paid on 7 February 2005 to shareholders on the register on 31 December 2004.     The dividends paid or payable on BT shares and ADSs for the last five years are shown in the following table. The dividends on the ordinary shares exclude the associated tax credit. The amounts shown are not those that were actually paid to holders of ADSs. For the tax treatment of dividends paid see**Taxation of dividends** below. Dividends have been translated from pounds sterling into US dollars using exchange rates prevailing on the date the ordinary dividends were paid.   Per ordinary share Per ADS Per ADS      Years ended 31 March  Interimpence  Finalpence  Totalpence  Interim£  Final£  Total£  InterimUS$  FinalUS$  TotalUS$  2001  8.70  –  8.70  0.870  –  0.870  1.397  –  1.397 2002  –  2.00  2.00  –  0.200  0.200  –  0.311  0.311 2003  2.25  4.25  6.50  0.225  0.425  0.650  0.366  0.673  1.039 2004  3.20  5.30  8.50  0.320  0.530  0.850  0.590  0.938  1.528 **2005**  **3.90**  **6.50**  **10.40**  **0.390**  **0.650**  **1.040**  **0.724**  **–****a** **–****a** **a**Qualifying holders of ADSs on record as of 5 August 2005 are entitled to receive the final dividend which will be paid on 12 September 2005, subject to approval at the annual general meeting. The US dollar amount of the final dividend of 65 pence per ADS to be paid to holders of ADSs will be based on the exchange rate in effect on 5 September 2005, the date of payment to holders of ordinary shares.  As dividends paid by the company are in pounds sterling, exchange rate fluctuations will affect the US dollar amounts received by holders of ADSs on conversion by the Depositary of such cash dividends.**Dividend mandate**Any shareholder wishing dividends to be paid directly into a bank or building society account should contact the Shareholder Helpline (see page 139). Dividends paid in this way will be paid through the Bankers Automated Clearing System (BACS). Alternatively, a form may be downloaded from the internet at**www.bt.com/sharesandperformance**
 
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**Dividend investment plan**The dividend investment plan replaced the share dividend plan for shareholders following the 1999 interim dividend. Under the dividend investment plan, cash from participants’ dividends is used to buy further BT Group shares in the market.     Shareholders could elect to receive additional shares in lieu of a cash dividend for the following dividends:   Date paid  Price per share pence  2000 final  18 September 2000  809.6 2001 interim  12 February 2001  621.8 2002 final  9 September 2002  191.19 2003 interim  10 February 2003  178.23 2003 final  8 September 2003  184.41 2004 interim  9 February 2004  175.98 2004 final  6 September 2004  183.69 **2005 interim**  **7 February 2005**  **209.95**   **Global Invest Direct**Details of the direct purchase plan run by the ADR Depositary, JPMorgan Chase Bank, Global Invest Direct, including reinvestment of dividends, are available from JPMorgan Chase Bank on 1 800 428 4237 (toll free within the USA) or +1 781 575 4328 (from outside the USA), or on written request to theADR Depositary.**Total shareholder return**Total shareholder return (TSR) is the measure of the returns that a company has provided for its shareholders, reflecting share price movements and assuming reinvestment of dividends. It is, therefore, a good indicator of a company’s overall performance.     Over the past five years (as shown in the TSR chart below), BT Group’s TSR (as adjusted for the rights issue and demerger) was negative 70% compared to a FTSE 100 TSR of negative 12%. This was primarily due to a fall in BT’s share price which, like many stocks in the telecoms, media and technology(TMT) sector, declined in the first two years of the period.     In the period between the demerger on 19 November 2001 and 31 March 2005, BT’s TSR was negative 17%, almost in line with the FTSEurofirst 300 Telco Index (negative 16%). However, in the last 12 months, BT’s TSR has outperformed both the FTSE 100 and FTSEurofirst 300 Telco Index with a21.8% return compared to a 15.4% return for each of those indices.BT’s            total shareholder return (TSR) performance vs the        FTSE 100 over five            financial years to 31 March 2005 BT’s            TSR performance vs the FTSEurofirst 300 Telco Index since demerger     1          April 2000 = 100. Source: Datastream      The graph shows the relative TSR          performance (adjusted for the rights issue      and demerger of our mobile          business in the 2002 financial year) of BT and the FTSE 100. 19 November 2001 = 100. Source: DatastreamThe graph shows the relative TSR performance of BT and the FTSEurofirst300 Telco    Index since demerger. **Results announcements**Expected announcements of results: 1st quarter  28 July 2005 2nd quarter and half year  10 November 2005 3rd quarter and nine months  February 2006 4th quarter and full year  May 2006 2006 annual report and accounts published  June 2006  
 
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**Individual savings accounts (ISAs)**Information about investing in BT shares through an ISA may be obtained from Halifax Share Dealing Limited, Trinity Road, Halifax, W.Yorkshire HX1 2RG (telephone 0870 242 5588). ISAs are also offered by other organisations.**ShareGift**The Orr Mackintosh Foundation operates a charity share donation scheme for shareholders with small parcels of shares whose value makes it uneconomic to sell them. Details of the scheme are available from ShareGift at **www.sharegift.org** or telephone 020 7337 0501, or can be obtained from theShareholder Helpline.**Unclaimed Assets Register**BT is among a growing number of companies which subscribe to the Unclaimed Assets Register, which provides a search facility for financial assets, such as shareholdings and dividends which have become separated from their owners. The Register donates a proportion of its public search fees to charity viaShareGift. For further information on the Unclaimed Assets Register, visit **www.uar.co.uk** or telephone 0870 241 1713. **Exchange rates**BT publishes its consolidated financial statements expressed in pounds sterling. The following tables detail certain information concerning the exchange rates between pounds sterling and US dollars based on the noon buying rate in New York City for cable transfers in pounds sterling as certified for customspurposes by the Federal Reserve Bank of New York (the Noon Buying Rate).                 Years ended 31 March  2001  2002  2003  2004  2005  Period end  1.42  1.43  1.57  1.84  **1.89** Average**a**  1.47  1.43  1.55  1.71  **1.85** High  1.60  1.48  1.65  1.90  **1.95** Low  1.40  1.37  1.43  1.55  **1.75**    Month                           November2004  December2004  January2005  February2005  March2005  **April****2005**  High  1.91  1.95  1.91  1.92  1.93  **1.92** Low  1.83  1.91  1.86  1.86  1.87  **1.87**  **a**The average of the Noon Buying Rates in effect on the last day of each month during the relevant period.  On 13 May 2005, the most recent practicable date for this annual report, the Noon Buying Rate was US$1.85 to £1.00.**Share buy back**The following table gives details of the purchase by BT of its own shares during the 2005 financial year.Calendar month  Total number of shares purchased  Average price paid per share (pence – net of dealingcosts)  Total number ofshares purchased as part of publicly announcedplans or programmes  Maximum number of shares that may yet bepurchased under the plans or programmes               April 2004  Nil  N/A  Nil  786,429,000 May  4,500,000  182.28  4,500,000  781,929,000 June  12,030,000  188.80  12,030,000  769,899,000 July  Nil  N/A  Nil  859,000,000 August  26,750,000  180.61  26,750,000  832,250,000 September  11,200,000  181.65  11,200,000  821,050,000 October  500,000  185.61  500,000  820,550,000 November  6,200,000  195.25  6,200,000  814,350,000 December  10,800,000  201.31  10,800,000  803,550,000 January 2005  Nil  N/A  Nil  803,550,000 February  7,750,000  208.85  7,750,000  795,800,000 March  21,550,000  202.12  21,550,000  774,250,000  Total  101,280,000  191.64  101,280,000  774,250,000  **a**Purchases from April to June 2004 were made in accordance with a resolution passed at the AGM held on 16 July 2003. Purchases from August 2004 to March 2005 were made in accordance with a resolution passed at the AGM on 14 July 2004.**b**Authority was given to purchase up to 867 million shares on 16 July 2003 and 859 million shares on 14 July 2004. These authorities expire at the close of the following AGM, or 15 months following the date of approval if earlier. The authority given in July 2003 expired on 14 July 2004.**c**There are no plans or programmes BT has determined to terminate prior to expiration, or under which BT does not intend to make further purchases. **Memorandum and Articles of Association**The following is a summary of the principal provisions of BT’s memorandum and articles of association (‘Memorandum’ and ‘Articles’), a copy of which has been filed with the Registrar of Companies.
 
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**Memorandum**The Memorandum provides that the company’s principal objects are, among other things, to carry on any business of running, operating, managing and supplying telecommunication systems and systems of any kind for conveying, receiving, storing, processing or transmitting sounds, visual images, signals,messages and communications of any kind.**Articles**In the following description of the rights attaching to the shares in the company, a ‘holder of shares’ and a ‘shareholder’ is, in either case, the person entered on the company’s register of members as the holder of the relevant shares. Shareholders can choose whether their shares are to be evidenced byshare certificates (i.e. in certificated form) or held in electronic (i.e. uncertificated) form in CREST (the electronic settlement system in the UK).(a)Voting rightsSubject to the restrictions described below, on a show of hands, every shareholder present in person or by proxy at any general meeting has one vote and, on a poll, every shareholder present in person or by proxy has one vote for each share which they hold.     Voting at any meeting of shareholders is by a show of hands unless a poll is demanded by the chairman of the meeting or by at least five shareholders at the meeting who are entitled to vote (or their proxies), or by one or more shareholders at the meeting who are entitled to vote (or their proxies) andwho have, between them, at least 10% of the total votes of all shareholders who have the right to vote at the meeting.     No person is, unless the Board decide otherwise, entitled to attend or vote at any general meeting or to exercise any other right conferred by being a shareholder if he or any person appearing to be interested in those shares has been sent a notice under section 212 of the Companies Act 1985 (whichconfers upon public companies the power to require information with respect to interests in their voting shares) and he or any interested person has failed to supply to the company the information requested within 14 days after delivery of that notice. These restrictions end seven days after the earlier of thedate the shareholder complies with the request satisfactorily or the company receives notice that there has been an approved transfer of the shares.(b)Variation of rightsWhenever the share capital of the company is split into different classes of shares, the special rights attached to any of those classes can be varied or withdrawn either:(i)with the sanction of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class; or(ii)with the consent in writing of the holders of at least 75% in nominal value of the issued shares of that class.     At any separate meeting, the necessary quorum is two persons holding or representing by proxy not less than one-third in nominal amount of the issued shares of the class in question (but at any adjourned meeting, any person holding shares of the class or his proxy is a quorum).     The company can issue new shares and attach any rights and restrictions to them, as long as this is not restricted by special rights previously given to holders of any existing shares. Subject to this, the rights of new shares can take priority over the rights of existing shares, or existing shares can take priorityover them, or the new shares and the existing shares can rank equally.(c)Changes in capitalThe company may by ordinary resolution:(i)consolidate and divide all or any of its share capital into shares of a larger amount;(ii)divide all or part of its share capital into shares of a smaller amount;(iii)cancel any shares which have not, at the date of the ordinary resolution, been taken or agreed to be taken by any person and reduce the amount of its share capital by the amount of the shares cancelled; and(iv)increase its share capital.The company may also:(i)buy back its own shares; and(ii)by special resolution reduce its share capital, any capital redemption reserve and any share premium account.  (d)DividendsThe company’s shareholders can declare dividends by passing an ordinary resolution provided that no dividend can exceed the amount recommended by the directors. Dividends must be paid out of profits available for distribution. If the directors consider that the profits of the company justify suchpayments, they can pay interim dividends on any class of shares of the amounts and on the dates and for the periods they decide. Fixed dividends will be paid on any class of shares on the dates stated for the payments of those dividends.     The directors can offer ordinary shareholders the right to choose to receive new ordinary shares, which are credited as fully paid, instead of some or all of their cash dividend. Before they can do this, the company’s shareholders must have passed an ordinary resolution authorising the directors to makethis offer.     Any dividend which has not been claimed for ten years after it was declared or became due for payment will be forfeited and will belong to the company unless the directors decide otherwise.
 
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(e)Distribution of assets on winding upIf the company is wound up (whether the liquidation is voluntary, under supervision of the court or by the court) the liquidator can, with the authority of an extraordinary resolution passed by the shareholders, divide among the shareholders all or any part of the assets of the company. This applies whether theassets consist of property of one kind or different kinds. For this purpose, the liquidator can place whatever value the liquidator considers fair on any property and decide how the division is carried out between shareholders or different groups of shareholders. The liquidator can also, with the same authority,transfer any assets to trustees upon any trusts for the benefit of shareholders which the liquidator decides. The liquidation of the company can then be finalised and the company dissolved. No past or present shareholder can be compelled to accept any shares or other property under the Articles which couldgive that shareholder a liability.(f)Transfer of sharesCertificated shares of the company may be transferred in writing either by an instrument of transfer in the usual standard form or in another form approved by the Board. The transfer form must be signed or made effective by or on behalf of the person making the transfer. The person making the transfer willbe treated as continuing to be the holder of the shares transferred until the name of the person to whom the shares are being transferred is entered in the register of members of the company.     The Board may refuse to register any transfer of any share held in certificated form:which is in favour of more than four joint holders; orunless the transfer form to be registered is properly stamped to show payment of any applicable stamp duty and delivered to the company’s registered office or any other place the Board decide. The transfer must have with it the share certificate for the shares to be transferred; any other evidencewhich the Board ask for to prove that the person wanting to make the transfer is entitled to do this; and if the transfer form is executed by another person on behalf of the person making the transfer, evidence of the authority of that person to do so.     Transfers of uncertificated shares must be carried out using a relevant system (as defined in the Uncertificated Securities Regulations 1995 (the Regulations)). The Board can refuse to register a transfer of an uncertificated share in the circumstances stated in the Regulations.     If the Board decide not to register a transfer of a share, the Board must notify the person to whom that share was to be transferred no later than two months after the company receives the transfer or instruction from the operator of the relevant system.     The Board can decide to suspend the registration of transfers, for up to 30 days a year, by closing the register of shareholders. The register must not be closed without the consent of the operator of a relevant system (as defined in the Regulations) in the case of uncertificated shares.(g)Untraced shareholdersBT may sell any shares after advertising its intention and waiting for three months if the shares have been in issue for at least ten years, during that period at least three dividends have become payable on them and have not been claimed and BT has not heard from the shareholder or any person entitled tothe dividends by transmission. The net sale proceeds belong to BT, but it must pay those proceeds to the former shareholder or the person entitled to them by transmission if that shareholder, or that other person, asks for them.(h)General meetings of shareholdersEvery year the company must hold an annual general meeting. The Board can call an extraordinary general meeting at any time and, under general law, must call one on a shareholders’ requisition.(i)Limitations on rights of non-resident or foreign shareholdersThe only limitation imposed by the Articles on the rights of non-resident or foreign shareholders is that a shareholder whose registered address is outside the UK and who wishes to receive notices of meetings of shareholders or documents from BT must give the company an address within the UK to whichthey may be sent.(j)DirectorsDirectors’ remunerationExcluding remuneration referred to below, each director will be paid such fee for his services as the Board decide, not exceeding £50,000 a year and increasing by the percentage increase of the UK Retail Prices Index (as defined by Section 833(2) Income and Corporation Taxes Act 1988) for any 12-monthperiod beginning 1 April 1999 or an anniversary of that date. The company may by ordinary resolution decide on a higher sum. This resolution can increase the fee paid to all or any directors either permanently or for a particular period. The directors may be paid their expenses properly incurred inconnection with the business of the company.     The Board can award extra fees to a director who holds an executive position; acts as chairman or deputy chairman; serves on a Board committee at the request of the Board; or performs any other services which the Board consider extend beyond the ordinary duties of a director.     The directors may grant pensions or other benefits to, among others, any director or former director or persons connected with them. However, BT can only provide these benefits to any director or former director who has not been an employee or held any other office or executive position in thecompany or any of its subsidiary undertakings, or to relations or dependants of, or people connected to, those directors or former directors, if the shareholders approve this by passing an ordinary resolution.
 
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Directors’ votesA director need not be a shareholder, but a director who is not a shareholder can still attend and speak at shareholders’ meetings.     Unless the Articles say otherwise, a director cannot vote on a resolution about a contract in which the director has a material interest (this will also apply to interests of a person connected with the director). The director can vote if the interest is only an interest in BT shares, debentures or othersecurities. A director can, however, vote and be counted in a quorum in respect of certain matters in which he is interested as set out in the Articles.     Subject to the relevant legislation, the shareholders can by passing an ordinary resolution suspend or relax, among other things, the provisions relating to the interest of a director in any contract or arrangement or relating to a director’s right to vote and be counted in a quorum on resolutions in whichhe is interested to any extent or ratify any particular contract carried out in breach of those provisions. Directors’ interestsIf the legislation allows and the director has disclosed the nature and extent of the interest to the Board, the director can:(i)have any kind of interest in a contract with or involving BT (or in which BT has an interest or with or involving another company in which BT has an interest);(ii)have any kind of interest in a company in which BT has an interest (including holding a position in that company or being a shareholder of that company);(iii)hold a position (other than auditor) in BT or another company in which BT has an interest on terms and conditions decided by the Board; and(iv)alone (or through some firm with which the director is associated) do paid professional work (other than as auditor) for BT or another company in which BT has an interest on terms and conditions decided by the Board.     A director does not have to hand over to BT any benefit received or profit made as a result of anything permitted to be done under the Articles.     When a director knows that they are interested in a contract with BT they must tell the other directors.Retirement of directorsProvisions of the legislation which, read with the Articles, would prevent a person from being or becoming a director because that person has reached the age of 70 do not apply to the company.     At every annual general meeting, any director who was elected or last re-elected a director at or before the annual general meeting held in the third year before the current year, shall retire by rotation. Any director appointed by the directors automatically retires at the next following annual generalmeeting. A retiring director is eligible for re-election.Directors’ borrowing powersTo the extent that the legislation and the Articles allow, the Board can exercise all the powers of the company to borrow money, to mortgage or charge its business, property and assets (present and future) and to issue debentures and other securities, and give security either outright or as collateral securityfor any debt, liability or obligation of the company or another person. The Board must limit the borrowings of the company and exercise all the company’s voting and other rights or powers of control exercisable by the company in relation to its subsidiary undertakings so as to ensure that the aggregateamount of all borrowings by the group outstanding, net of amounts borrowed intra-group among other things, at any time does not exceed £35 billion.**Material contracts**Excluding contracts entered into in the ordinary course of business, no contracts have been entered into in the two years preceding the date of this document by BT or another member of the group which are, or may be, material to the group or contain a provision under which a member of the group has anobligation or entitlement which is, or may be, material to BT or such other member of the group.**Taxation (US Holders)**This is a summary only of the principal US federal income tax and UK tax consequences of the ownership and disposition of ordinary shares or ADSs by US Holders (as defined below) who hold their ordinary shares or ADSs as capital assets. It does not address all aspects of US federal income taxation and doesnot address aspects that may be relevant to persons who are subject to special provisions of US federal income tax law, including US expatriates, insurance companies, tax-exempt organisations, banks, regulated investment companies, financial institutions, securities broker-dealers, traders in securities whoelect a mark-to-market method of accounting, persons subject to alternative minimum tax, investors that directly, indirectly or by attribution own 10% or more of the outstanding share capital or voting power of BT, persons holding their ordinary shares or ADSs as part of a straddle, hedging transaction orconversion transaction, persons who acquired their ordinary shares or ADSs pursuant to the exercise of options or otherwise as compensation, or persons whose functional currency is not the US dollar, amongst others. Those holders may be subject to US federal income tax consequences different from thoseset forth below.     For purposes of this summary, a ‘US Holder’ is a beneficial owner of ordinary shares or ADSs that, for US federal income tax purposes, is: a citizen or individual resident of the United States, a corporation (or other entity taxable as a corporation for US federal income tax purposes) created or organised inor under the laws of the United States or any state thereof, an estate the income of which is subject to US federal income taxation regardless of its source, or a trust if a US court can exercise primary supervision over the administration of the trust and one or more US persons are  Additional    information for shareholders BT Group          plc Annual Report and Form 20-F 2005     135
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authorised to control all substantial decisions of the trust. If a partnership holds ordinary shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activitiesof the partnership. A partner in a partnership that holds ordinary shares or ADSs is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the ordinary sharesor ADSs.     In particular, this summary is based on (i) current UK tax law and UK Inland Revenue practice and US law and US Internal Revenue Service (‘IRS’) practice, including the Internal Revenue Code of 1986, as amended, Treasury regulations, rulings, judicial decisions and administrative practice, all ascurrently in effect, (ii) the United Kingdom–United States Income Tax Convention that entered into force on 25 April 1980 and the protocols thereto in effect until 31 March 2003 (the ‘1980 Convention’), (iii) the United Kingdom–United States Convention relating to estate and gift taxes, and (iv) the newUnited Kingdom–United States Tax Convention that entered into force on 31 March 2003 and the protocol thereto (the ‘New Convention’), all as in effect on the date of this Annual Report, all of which are subject to change or changes in interpretation, possibly with retroactive effect.     US Holders should be aware that the New Convention generally will have effect in respect of dividends paid in 2004 and all subsequent years. However, a US Holder entitled to benefits under the 1980 Convention could have elected to have the provisions of the 1980 Convention continue until 1 May2004 if the election to apply the 1980 Convention would have resulted in greater benefits to the Holder. If a US Holder made a valid election in 2003, the discussion below with respect to dividend payments made pursuant to the 1980 Convention would apply to dividends paid by BT prior to 1 May 2004.The discussion below notes instances where the relevant provisions of the New Convention will produce a materially different result for a validly electing US Holder. US Holders should note that certain articles in the New Convention limit or restrict the ability of a US Holder to claim benefits under the NewConvention and that similar provisions were not contained in the 1980 Convention.     US Holders should consult their own tax advisors as to the applicability of the Conventions and the consequences under UK, US federal, state and local, and other laws, of the ownership and disposition of ordinary shares or ADSs.**Taxation of dividends**The UK currently does not apply a withholding tax on dividends under its internal tax laws.     For US federal income tax purposes, a distribution (including any additional dividend income arising from a foreign tax credit claim as described below) will be treated as ordinary dividend income. The amount of the distribution includible in gross income of a US Holder will be the US dollar value of thedistribution calculated by reference to the spot rate in effect on the date the distribution is actually or constructively received by a US Holder of ordinary shares, or by the Depositary, in the case of ADSs. A US Holder who converts the British pounds into US dollars on the date of receipt generally should notrecognise any exchange gain or loss. A US Holder who does not convert the British pounds into US dollars on the date of receipt generally will have a tax basis in the British pounds equal to its US dollar value on such date. Foreign currency gain or loss, if any, recognised by the US Holder on a subsequentconversion or other disposition of the British pounds generally will be US source ordinary income or loss. Dividends paid by BT to a corporate US Holder will not be eligible for the US dividends received deduction.     For dividend payments subject to the 1980 Convention as described above, a US Holder of ordinary shares or ADSs who is a resident of the US (and is not a resident of the UK) for the purposes of the 1980 Convention generally is entitled to receive, in addition to any dividend that BT pays, a paymentfrom the UK Inland Revenue in respect of such dividend equal to the tax credit to which an individual resident in the UK for UK tax purposes would have been entitled had that individual received the dividend (which is currently equal to one-ninth of the dividend received) reduced by a UK withholding taxequal to the amount not exceeding 15% of the sum of the dividend paid and the UK tax credit payment. At current rates, the withholding tax entirely eliminates the tax credit payment but no withholding in excess of the tax credit payment will be imposed upon the US Holder. Thus, for example, a US Holderwho receives a £90 dividend will also be treated as receiving from the UK Inland Revenue a tax credit payment of £10 (one-ninth of the dividend received) but the entire £10 payment will be eliminated by UK withholding tax, resulting in a net receipt of £90. The effect on each US Holder will depend oncircumstances that are particular to that Holder.     The foreign tax deemed paid generally will be available as a US credit or deduction. A US Holder validly electing under the 1980 Convention could elect to receive a foreign tax credit or deduction with respect to any UK withholding tax on IRS Form 8833 (Treaty-Based Return Position Disclosure UnderSection 6114 or 7701(b)). For purposes of calculating the foreign tax credit, dividends paid on the ordinary shares or ADSs will be treated as income from sources outside the United States and generally will constitute ‘passive income’ or, for certain Holders, ‘financial services income’. The rules relating tothe determination of the foreign tax credit are very complex. US Holders who do not elect to claim a credit with respect to any foreign taxes paid in a given taxable year may instead claim a deduction for foreign taxes paid. A deduction does not reduce US federal income tax on a dollar for dollar basis like atax credit. The deduction, however, is not subject to the limitations applicable to foreign credits.     There will be no right to any payment from the UK Inland Revenue and no notional UK withholding tax applied to a dividend payment made under the New Convention. Therefore, it will not be possible for US Holders to claim a foreign tax credit in respect of any dividend payment made by BT in 2004 (orfrom 1 May 2004 in the case of a US Holder who effectively elected to extend the applicability of the 1980 Convention).     US Holders should consult their own tax advisors to determine whether the US Holder is eligible for benefits under the 1980 Convention and the New Convention, and whether, and to what extent, a foreign tax credit will be available with respect to dividends received from BT. The US Treasury hasexpressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for US Holders of ADSs. Accordingly, the analysis of the creditability of British withholding taxes in the case of the US Holder who properly elected to apply the 1980Convention could be affected by future actions that may be taken by the US Treasury.
 
 136     BT Group plc Annual Report and Form 20-F 2005 Additional        information for shareholders
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Certain US Holders (including individuals) are eligible for reduced rates of US federal income tax (currently at a maximum rate of 15%) in respect of ‘qualified dividend income’ received in taxable years beginning before 1 January 2009. For this purpose, qualified dividend income generally includes dividendspaid by a non-US corporation if, among other things, the US Holders meet certain minimum holding periods and the non-US corporation satisfies certain requirements, including that either (i) the shares (or ADSs) with respect to which the dividend has been paid are readily tradeable on an establishedsecurities market in the United States, or (ii) the non-US corporation is eligible for the benefits of a comprehensive US income tax treaty (such as both Conventions) which provides for the exchange of information. BT currently believes that dividends paid with respect to its ordinary shares and ADSs shouldconstitute qualified dividend income for US federal income tax purposes. The US Treasury and the IRS have announced their intention to promulgate rules pursuant to which holders of ADSs or ordinary shares, among others, will be permitted to rely on certifications from issuers to establish that dividends aretreated as qualified dividend income. Each individual US Holder of ordinary shares or ADSs is urged to consult his own tax advisor regarding the availability to him of the reduced dividend tax rate in light of his own particular situation and regarding the computations of his foreign tax credit limitation withrespect to any qualified dividend income paid by BT to him, as applicable.**Taxation of capital gains**Unless a US resident carries on a trade through a branch or agency (if an individual), or through a permanent establishment (if a company) in the UK, and the disposal of ordinary shares and/or ADSs is related to the activities of that trade, neither UK capital gains tax nor corporation tax is normally charged onUS residents who dispose of ordinary shares and/or ADSs.     For US federal income tax purposes, a US Holder generally will recognise capital gain or loss on the sale, exchange or other disposition of ordinary shares or ADSs in an amount equal to the difference between the US dollar value of the amount realised on the disposition and the US Holder’s adjusted taxbasis (determined in US dollars) in the ordinary shares or ADSs. Such gain or loss generally will be US source gain or loss, and will be treated as long-term capital gain or loss if the ordinary shares have been held for more than one year at the time of disposition. Capital gains recognised by an individual USHolder generally are subject to US federal income tax at preferential rates if specified holdings periods are met. The deductibility of capital losses is subject to significant limitations.**Passive foreign investment company status**A non-US corporation will be classified as a Passive Foreign Investment Company (a ‘PFIC’) for any taxable year if at least 75% of its gross income consists of passive income or at least 50% of the average value of its assets consist of assets that produce, or are held for the production of, passive income. BTcurrently believes that it did not qualify as a PFIC for the taxable year ending 31 March 2004 for US federal income tax purposes. If BT were to become a PFIC for any taxable year, US Holders would suffer adverse tax consequences. These consequences may include having gains realised on the disposition ofordinary shares or ADSs treated as ordinary income rather than capital gains and being subject to punitive interest charges on certain dividends and on the proceeds of the sale or other disposition of the ordinary shares or ADSs. Furthermore, dividends paid by BT would not be ‘qualified dividend income’ andwould be subject to the higher rates applicable to other items of ordinary income. US Holders should consult their own tax advisors regarding the potential application of the PFIC rules to BT.**US information reporting and backup withholding**Dividends paid on and proceeds received from the sale, exchange or other disposition of ordinary shares or ADSs may be subject to information reporting to the IRS and backup withholding at a current rate of 28%. Certain exempt recipients (such as corporations) are not subject to these informationreporting requirements. Backup withholding will not apply, however, to a Holder who provides a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt. US persons who are required to establish their exempt status generallymust furnish IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-US Holders generally will not be subject to US information reporting or backup withholding. However, such Holders may be required to provide certification of non-US status in connection with payments receivedin the United States or through certain US-related financial intermediaries.     Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a Holder’s US federal income tax liability. A Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund withthe IRS and furnishing any required information.**UK stamp duty**A transfer of an ordinary share will generally be subject to UK stamp duty or UK stamp duty reserve tax at 0.5% of the amount or value of any consideration provided. A transfer of an ordinary share into a clearance service or American depositary system gives rise to a 1.5% charge of either the amount of theconsideration provided or the value of the share issued. No UK stamp duty will be payable on the transfer of an ADS (assuming it is not registered in the UK), provided that the transfer documents are executed and always retained outside the UK. **UK inheritance and gift taxes in connection with ordinary shares and/or ADSs**Where an individual holder, who is not a UK national, of ordinary shares and/or ADSs falls within the scope of the UK/US Estate and Gift Tax Convention, US-domiciled holders of ordinary shares and/or ADSs will not generally be subject to UK inheritance tax on a gift of ordinary shares and/or ADSs if the giftis subject to US federal gift tax. Similarly,  Additional    information for shareholders BT Group          plc Annual Report and Form 20-F 2005     137
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ordinary shares and/or ADSs passing on the death of a US-domiciled shareholder, who is not a UK national, will not generally be subject to UK inheritance tax if the estate is subject to US estate tax. Therules and scope of domicile are complex and action should not be taken without advice specific to the individual’s circumstances.**Exchange controls and other limitations affecting security holders**There are currently no government laws, decrees or regulations in the United Kingdom that restrict the export or import of capital, including, but not limited to, UK foreign exchange control restrictions, or that affect the remittances of dividends or other payments to non-resident holders of the company’sordinary shares, except as otherwise described in **Taxation (US Holders)**above. There are no limitations under the laws of the United Kingdom restricting the right of non-residents to hold or to vote shares in the company.**Documents on display**All reports and other information that BT files with the US Securities and Exchange Commission (SEC) may be inspected at the SEC’s public reference facilities at Room 1200, 450 Fifth Street, Washington, DC, USA. These reports may be accessed via the SEC’s website at **www.sec.gov****Publications**BT produces a series of reports on the company’s financial, economic, social and environmental performance. Most of these reports, which are available to shareholders on request, can be accessed on the internet at **www.bt.com/aboutbt**. More detailed disclosures on BT’s implementation of social, ethicaland environmental policies and procedures are available online through our fully and independently verified social and environment report at **www.bt.com/betterworld****Document**  **Publication date**       Annual Review including summary financial statement  June Annual Report and Form 20-F  June Quarterly results releases  July, November, February and May Current Cost Financial Statements for the Businesses  and Activities and Statement of Standard Services (as required by Ofcom)  August Social and Environment Report  June Statement of Business Practice  July 2004       For printed copies, when available, contact the Shareholder Helpline on Freefone 0808 **100 4141**or, alternatively, contact the Registrar in the UK, at the address on page 139.**Electronic communication**Shareholders can now choose to receive their shareholder documents electronically rather than by post. Shareholders may elect to receive documents in this way by going to **www.bt.com/signup** and following the online instructions, or by calling the Shareholder Helpline. 138     BT Group plc Annual Report and Form 20-F 2005 Additional        information for shareholders
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**Shareholder communication**BT is committed to communicating openly with each of its stakeholder audiences in the manner most appropriate to their requirements.     All investors can visit our website at **www.bt.com/sharesandperformance** for more information about BT. There are direct links from this page to sites providing information particularly tailored for shareholders, institutional investors and analysts, industry analysts and journalists.An electronic copy of this document is available at **www.bt.com/sharesandperformance****Private shareholders**If private shareholders have any enquiries about their shareholding, they should contact the Registrar (the address can be found below).     Lloyds TSB Registrars maintain BT Group’s share register and the separate BT Group EasyShare register. They also provide a Shareholder Helpline service on Freefone 0808 **100 4141**.**Institutional investors and analysts**Institutional investors and equity research analysts may contact Investor Relations on:Tel 020 7356 4909Fax 020 7356 5270e-mail: investorrelations@bt.comIndustryanalysts may contact:Tel 020 7356 5378Fax 01332 577434e-mail: industryenquiry@bt.com  **Shareholder Helpline**    Tel Freefone 0808 **100 4141**Fax 01903 833371Textphone Freefone 0800 **169 6907**From outside the UK:Tel +44 121 433 4404Fax +44 1903 833371Textphone +44 121 415 7028e-mail: bt@lloydstsb-registrars.co.uk         **The Registrar**  **ADR Depositary** Lloyds TSB Registrars (2450)The CausewayWorthing, West SussexBN99 6DAUnited KingdomWebsite:**www.lloydstsb-registrars.co.uk**  JPMorgan Chase BankJPMorgan Service CentreP.O. Box 43013Providence, RI 02940-3013United StatesTel 1 800 428 4237 (toll free)or +1 781 575 4328 (from outside the USA)e-mail: adr@jpmorgan.comWebsite:**www.adr.com** **General enquiries**BT Group plcBT Centre81 Newgate StreetLondon EC1A 7AJUnited KingdomTel (020) 7356 5000Fax (020) 7356 5520From overseas:Tel +44 20 7356 5000Fax +44 20 7356 5520      Additional    information for shareholders BT Group          plc Annual Report and Form 20-F 2005     139
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**Glossary of terms and US equivalents**

 
A full list of BT contacts, and an electronic feedback facility, is available at **www.bt.com/talk**   **Term used in          UK annual report** **US equivalent or definition**   Accounts  Financial statements   Associates  Equity investees   Capital allowances  Tax depreciation   Capital redemption reserve     Other additional capital   Creditors  Accounts payable and accrued    liabilities   Creditors: amounts falling        due within one year Current liabilities   Creditors: amounts falling        due after more than one year Long-term liabilities   Debtors: amounts falling due        after more than one year Other non-current assets   Employee share plans  Employee stock benefit plans   Finance lease  Capital lease   Financial year  Fiscal year   Fixed asset investments  Non-current investments   Freehold  Ownership with absolute rights    in perpetuity   Gearing  Leverage   Inland calls  Local and long-distance calls   Interests in associates and        joint ventures Securities of equity investees   Investment in own shares  Treasury shares   Loans to associates and joint        ventures Indebtedness of equity investees    not current   Net book value  Book value   Operating profit  Net operating income   Other debtors  Other current assets   Own work capitalised  Costs of group’s employees    engaged in the construction of plant and equipment for internal use   Profit  Income   Profit and loss account (statement)     Income statement   Profit and loss account  Retained earnings(under “capital and reserves” in    balance sheet)     Profit for the        financial year     Net income   Profit on sale of fixed assets     Gain on disposal of non-current    assets   Provision for doubtful debts     Allowance for bad and doubtful    accounts receivable   Provisions  Long-term liabilities other    than debt and specific accounts payable   Recognised gains and losses        (statement) Comprehensive income   Reserves  Shareholders’ equity other    than paid-up capital   Share based payment  Stock compensation   Share premium account  Additional paid-in capital    or paid-in surplus (not distributable)   Shareholders’ funds  Shareholders’ equity   Stocks  Inventories   Tangible fixed assets  Property, plant and equipment   Trade debtors  Accounts receivable (net)   Turnover  Revenues       140     BT Group plc Annual Report and Form 20-F 2005 
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**Cross reference to Form 20-F**

 
The information in this document that is referred to in the following table shall be deemed to be filed with the Securities and Exchange Commission for all purposes: **Required Item in Form 20-F** **Where information can be found in this Annual Report**   Item    Section Page 1  **Identity of directors, senior management and advisors** Not applicable            2  **Offer statistics and expected timetable** Not applicable            3  **Key information**     3A  Selected financial data Five-year financial summary 23      Additional information for shareholdersExchange rates 132 3B  Capitalisation and indebtedness Not applicable   3C  Reasons for the offer and use of proceeds Not applicable   3D  Risk factors Risk factors 126          4  **Information on the company**     4A  History and development of the company Contents pageBusiness review             Introduction 7           Group structure                  Background 8                Acquisitions and disposals prior to the 2005  financial year 8                Acquisitions and disposals in the 2005 financial  year 8                Post-balance sheet acquisitions 8      Financial review             Capital expenditure 38           Acquisitions 39 4B  Business overview Business review 6      Financial review             Line of business results 30           Geographical information 40      Our commitment to society 44      Operational statistics 125      Additional information for shareholders             Cautionary statement regarding forward-looking statements 128 4C  Organisational structure Business review             Introduction 7      Subsidiary undertakings, joint ventures and associates 122 4D  Property, plant and equipment Business review              Property 15      Financial statistics 124          5  **Operating and financial review and prospects**     5A  Operating results Financial review 25      Consolidated financial statements      Accounting        policies 72      Additional information for shareholders             Cautionary statement regarding forward-looking  statements 128 5B  Liquidity and capital resources Financial review 25      Additional information for shareholders             Cautionary statement regarding forward-looking statements 128      Consolidated financial statements             Notes to the financial statements                  Loans and other borrowings 94                Financial commitments and contingent liabilities 96                Financial instruments and risk management 106 5C  Research and development, patents and licences Business review             Group strategy                  Build on our networked IT services capability 9                Research and development and IT support 14      Financial statistics 124 5D  Trend information Financial review 25      Additional information for shareholders             Cautionary statement regarding forward-looking  statements 128 5E  Off-balance sheet arrangements Financial review             Off-balance sheet arrangements 38 5F  Tabular disclosure of contractual obligations Financial review             Capital resources 38 
 
   BT Group plc Annual Report and Form 20-F 2005     141
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 **Required Item in Form 20-F** **Where information can be found in this Annual Report**   Item    Section Page 6  **Directors, senior management and employees**     6A  Directors and senior management Board of directors and Operating Committee 46 6B  Compensation Report on directors’ remuneration 56      Consolidated financial statements             Notes to the financial statements                  Pension costs 97                Directors’ emoluments 102                Employee share plans 102 6C  Board practices Board of directors and Operating Committee 46      Report of the directors             Directors 48      Corporate governance 50      Report on directors’ remuneration 56 6D  Employees Financial review             Group results 28      Consolidated financial statements             Notes to the financial statements                  People employed 102      Operational statistics 125 6E  Share ownership Report on directors’ remuneration 56      Consolidated financial statements             Notes to the financial statements                  Employee share plans 102          7  **Major shareholders and related party transactions**     7A  Major shareholders Report of the directors             Substantial shareholdings 48      Additional information for shareholders             Analysis of shareholdings 130 7B  Related party transactions Report of the directors             Interest of management in certain transactions 48      Report on directors’ remuneration 56      Consolidated financial statements             Notes to the financial statements                  Related party transactions 96 7C  Interests of experts and counsel Not applicable            8  **Financial information**     8A  Consolidated statements and other financial information See Item 18 below.        Business review             Legal proceedings 22      Financial review             Dividends 36      Consolidated financial statements             Notes to the financial statements                  Financial commitments and contingent liabilities 96      Additional information for shareholders             Dividends 130           Dividend investment plan 131           Memorandum and Articles of Association                  Articles                       Dividends 133 8B  Significant changes Financial review             Capital resources 38          9  **The offer and listing**     9A  Offer and listing details Additional information for shareholders             Share and ADS prices 129 9B  Plan of distribution Not applicable   9C  Markets Additional information for shareholders             Listings 129 9D  Selling shareholders Not applicable   9E  Dilution Not applicable   9F  Expenses of the issue Not applicable            10  **Additional information**     10A  Share capital Not applicable   10B  Memorandum and articles of association Additional information for shareholders             Memorandum and Articles of Association 132 10C  Material contracts Additional information for shareholders             Material contracts 135  142     BT Group plc Annual Report and Form 20-F 2005 Cross        reference to Form 20-F
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 **Required Item in Form 20-F** **Where information can be found in this Annual Report**   Item    Section Page 10D  Exchange controls Additional information for shareholders             Exchange controls and other limitations affectingsecurity     holders 138 10E  Taxation Additional information for shareholders             Taxation (US Holders) 135 10F  Dividends and paying agents Not applicable   10G  Statement by experts Not applicable   10H  Documents on display Additional information for shareholders             Documents on display 138 10I  Subsidiary information Not applicable            11  **Quantitative and qualitative** Financial review      **disclosures about market risk**      Treasury policy 37           Foreign currency and interest rate exposure 38      Consolidated financial statements             Notes to the financial statements                  Accounting Policies Financial instruments 74                Financial instruments and risk management 106          12  **Description of securities other than equity securities** Not applicable            13  **Defaults, dividend arrearages and delinquencies** Not applicable            14  **Material modifications to the rights of security holders and use of proceeds** Not applicable            15  **Controls and procedures** Corporate governanceUS Sarbanes-Oxley Act of 2002 54          16A  **Audit committee financial expert** Corporate governanceUS Sarbanes-Oxley Act of 2002 54          16B  **Code of ethics** Corporate governanceUS Sarbanes-Oxley Act of 2002 54          16C  **Principal accountants fees and services** Consolidated financial statements               Notes        to the financial statements            Auditors 105      Corporate governanceAudit Committee 51          16E  **Purchases of equity securities by the issuer and****affiliated purchasers** Additional information for shareholdersShare buy back 132          17  **Financial statements** Not applicable            18  **Financial statements** Report of the independent auditors 70      Consolidated financial statements 71      United States Generally Accepted Accounting Principles 112      Quarterly analysis of turnover and profit 123    BT Group plc Annual Report and Form 20-F 2005     143
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**Index**

 
21st        century network**13,        21, 126**Accounting    and presentation changes**81**Accounting    policies**40-41, 72-74**Additional    information for shareholders**127-139**Auditors’ remuneration**105**Auditors’ report    to shareholders**70**Background**8**Balance sheet**24,    39, 80**Broadband**9,          10, 11, 16, 21, 28-33**BT Exact**14**BT Global Services**8,    28-31, 33, 81-82**BT Retail**8,    28, 30-32, 81-82**BT Wholesale**8,    10, 30-33, 81-82, 87**Business practice,    statementof**54**Business review**6-22**Call volume    growth**125**Capital commitments**96**Capital expenditure**24,    30, 32, 33, 38-39, 79, 82**Capital gains    tax**129**Cash flow statement**24,    36, 79, 88**Cautionary    statement**128**Community**44-45**Company balance    sheet**110-111**Competition    and the UK economy**17**Contact details**139**Contingent    liabilities**96**Corporate governance**50-55**Creditors**80,    95, 110**Cross reference    to Form 20-F**141-143**Customer satisfaction**13,    44**Debtors**73,    80, 94, 110**Depreciation**31,    34, 73, 84, 92**Disposals**8,    24, 35-36, 85, 88-90**Directors     Biographies**46-47**     Emoluments**102**     Interests    in shares**61**     Remuneration,    report on**56-68**     Report**48**     Responsibility    statement**69**Dividend investment    plan**131**Dividends**23,    24, 36, 75-77, 79, 87, 95, 96, 111, 115, 130-131, 133**Earnings (loss)    per share**23, 27, 36, 75-77, 87, 117, 120, 123, 124**Electronic    communication**138**Employee share    plans**102-105**Employees**13-14,    102, 125**Environment**40,    44-45**Exchange controls**138**Exchange lines**9,    17, 125**Financial calendar**138**Financial commitments**96-97**Financial instruments**74,    106-109**Financial ratios**124**Financial review**25-43**Financial statistics**124**Financing**36-37**Five-year financial    summary**23-24**Foreign currencies**72,    106**Going concern**38,    54, 69**Goodwill**27,    30, 39, 42, 72, 84, 85, 87, 89, 91, 93, 113**Glossary of    terms and US equivalents**140-143**ICT**9,    29, 31, 33** Intangible    assets**72-73, 80, 91**Interest**23,    27, 35, 38, 72, 75-77, 79, 85-86, 106, 108**Interest cover**35,    124**Internal control    and risk management**53-54**International    Financial Reporting Standards**41-43**Investments**8,    35, 73, 80, 85, 93**Joint ventures    and associates**34-35, 73, 75-77, 82, 83, 84**Legal proceedings**22,    97**Licence**15,    20, 40, 73, 91**Listings**129**Loans and other    borrowings**24, 38, 80, 94-95**Management    of liquid resources**88**Material contracts**135**Memorandum    and Articles of Association**132-135**Minority interests**75-77,    80, 87, 93, 116**Mobility**7,          9, 11-12, 28, 31**Net debt**24,          36, 38, 91, 106**Networked IT    Services**9-10**New wave**9,          28**O2**8, 13,    18, 57, 97, 102, 129**Ofcom**7,    15-22**Other operating    income**23, 33, 75-77, 123**Operating and    Financial Review**6-43**Operating Committee**47,    53**Operating costs**23,    29, 33-34, 75-77, 84**Operating profit    (loss)**34-35, 83, 88**Operational    statistics**125**Our commitment    to society**44-45**Pensions**14,    39, 59, 63, 73, 97-101**Post balance    sheet events**111**Price control**18**Profit (loss)    before/after tax**23,    36, 75-77**Provisions    for liabilities and charges**80, 95**Publications**138**Purchase of    own shares**96,    111, 132**Quarterly analysis    of turnover and profit**123**Reconciliation    of movement in shareholders’ funds**96**Reconciliation    of operating profit to operating cash flows **88**Redundancy    costs**23, 29, 34, 73, 84**Regulation**7,          15-22, 40**Research and    development**14-15, 72, 84, 124**Restructuring**8,    26**Return on capital    employed**39, 124**Rights issue**8,    129**Risk factors**126**Risk management**53,    106-110**Sarbanes-Oxley    Act**54-55**Segmental analysis**81-84**Share and ADS    prices**129**Share capital**24,    80, 96, 110, 111, 133**Share option    schemes**102**Shareholder    communication**139**Shareholdings    analysis**130**Staff costs**29,    34, 84**Statement of    total recognised gains and losses**78**Stocks**73,    80**Strategy**9**Subsidiary    undertakings**7, 122**Substantial    shareholdings**48**Tangible fixed    assets**73, 92, 124**Taxation**36,    74, 75-77, 86**Taxation (US    Holders)**135-138**Total shareholder    return**57, 62, 131**Treasury policy**37**Turnover**8,          23, 27, 28, 30, 72, 75-77, 81-84, 123**US GAAP**24,    43, 112-121**144     BT Group plc Annual Report and Form 20-F 2005  |
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